Some Myth about Self Storage - Asking from someone never bough self storage YET

[Arya Chen]

Hello BP! My very first post here!

I am an investor, realtor, and property manager for SFH for years, but I've never tapped into the commercial world. I've been looking to buy a small self-storage facility, but there are some myths I've encountered that I just don't know if they are true or false.

1. DON'T FIND A BUYER AGENT

Someone who used to be a CBRE agent and now owns a team doing large-scale commercial investments told me to never find a buyer agent, because the seller agent would not want to entertain your offer. Without a buyer agent, the seller agent gets to be dual and doubles the commission. But as a first-time buyer, there are so many things in the process I am just not familiar with, including how to structure the offer, being able to view listings on Costar, doing due diligence, etc. So is it true that even for beginners, you don't need an agent?

2. UNDER $1M IS TOO SMALL

I talked to a few commercial brokers, and I am under the impression that it's very hard to find anything valuable in self-storage for under $1 million. As I am planning to get an SBA loan, I assume the down payment would mostly need to be somewhere between 15-25%. My comfortable price range would be between $500k-$1M.

I know that under $1M, you probably won't find something new, climate-controlled, or in great condition, but is it true that there's almost nothing worth looking at in this $500k-$1M range?

3. NO GREAT DEAL ONLINE

I keep hearing that "only off-market deals are great deals." I understand why this is the case and truly respect those who spend the time and effort into calling, contacting, and convincing owners or already have strong broker relationships. But as someone trying to get their first deal, I am not hoping to get a great deal but just an okay deal, which means a cap rate around 6-7% with at least neutral cash flow to start off. Is it possible to find something like that online (Costar, Crexi, broker websites, etc.)?

4. LARGE BANK IS BETTER FOR SBA

From what I understand, SBA loans are tight with the actual property. So you can't just get a pre-approval for all properties like in residential real estate, but a pre-approval for the exact property you are going to make an offer on (Is that correct)? And I heard smaller bank usually has more issues in the underwriting process, is that true too?

[Henry Clark]

What town or market are you nearby?

[Henry Clark]

1 above.  I always like having a Buyers Agent.  "But" if a small location in a small town, I would just go with the listing agent.  If you plan to Scale.  Pick a buyers agent that deals in your type of investments.  By giving them "Free" commissions and doing a deal with them, you gain more credence.  How to make an offer and due diligence, they won't be that helpful.  Very few agents unless they are one of the National Self Storage firms will understand Self Storage, although it is very similar to large MFH.  You need to develop your own deal analysis and due diligence.  Just use the lookup function above.

[Henry Clark]

2 above.  If you plan to scale, then below $1mm is actually a great learning platform.  Will be your worst investment compared to your future deals.  But it will be the one you remember because it helped you set your operations up.  If you fail.  You fail small.

If it has extra land, then it can be a great deal, if the market needs more.  Or you can add parking.

[Henry Clark]

3.  Great Deals.  Always go for positive cash flow with potential for appreciation or don't do the deal.  Construction costs have almost doubled in the last 4 to 5 years.  We just sold 3 locations in a C market.  Little debt, 100% occupancy, great cash flow, market needs more units.  Why did we sale?  Couldn't add units and make enough return.  Wanted to take funds out so we could invest in an A market.  Rates are too high, so didn't want to take a loan against, although we will have a loan on the next property, but the returns are significantly higher there.

Do an analysis on your market.  C market- if your 10x20 drive up non climate controlled is say $80 or less, the return isn't high enough for new construction.  I would want my 10 x 20 rate to be $110 or higher to do new build.  Same thought on buying an existing location.

We use a Wagon Wheel and or Linked approach to competition.  If you're operating in C markets and can control the market, then buy the next locations down the road.  Then you can raise prices, above your original Deal analysis.

[Henry Clark]

SBA loans take to long for a location that is for sale.  Get a Construction or Working Capital loan with your local bank.  Make the purchase then convert to SBA loan.  Let your bank know that up front.  Do interest only on the local loan.  Make sure the deal will go thru.  You don't want to get caught with an increased down payment %.  Say 10% for SBA loan.  But if it falls thru and your bank requires 25%.  

Larger banks are normally better for SBA loans, because they have more personnel and can have someone specialize.  I would go for a midsize regional bank, with a Federal lending Cap limit of say $10mm or higher.  That should cover your scaling needs.

[Arya Chen]

Quote from @Henry Clark:

What town or market are you nearby?

A million thanks for your answers!!!! They truly help clarify many questions I had before. Whenever I reached out to someone I know who has done self-storage deals, they only gave super vague responses, often just a sentence or two.

I am in both Houston and Las Vegas, so I’ll probably look within a 3-4 hour driving range for my first deal.

[Arya Chen]

Quote from @Henry Clark:

1 above.  I always like having a Buyers Agent.  "But" if a small location in a small town, I would just go with the listing agent.  If you plan to Scale.  Pick a buyers agent that deals in your type of investments.  By giving them "Free" commissions and doing a deal with them, you gain more credence.  How to make an offer and due diligence, they won't be that helpful.  Very few agents unless they are one of the National Self Storage firms will understand Self Storage, although it is very similar to large MFH.  You need to develop your own deal analysis and due diligence.  Just use the lookup function above.

If a buyer agent won’t be very helpful even for writing offers or doing due diligence, would it make a difference if I use a "residential" agent instead of a "commercial" agent? One of the commercial agents I contacted has only one cash deal transaction experience in self-storage. 

What kind of help you would expect from an agent when you are using one.

[Arya Chen]

Quote from @Henry Clark:

2 above.  If you plan to scale, then below $1mm is actually a great learning platform.  Will be your worst investment compared to your future deals.  But it will be the one you remember because it helped you set your operations up.  If you fail.  You fail small.

If it has extra land, then it can be a great deal, if the market needs more.  Or you can add parking.

Thank you! Now I know I am not crazy haha.
That's exactly what I thought, and yes, it’s so true that "It will be your worst investment compared to your future deals. But it will be the one you remember because it helped you set up your operations. If you fail, you fail small."

[Arya Chen]

Quote from @Henry Clark:

3.  Great Deals.  Always go for positive cash flow with potential for appreciation or don't do the deal.  Construction costs have almost doubled in the last 4 to 5 years.  We just sold 3 locations in a C market.  Little debt, 100% occupancy, great cash flow, market needs more units.  Why did we sale?  Couldn't add units and make enough return.  Wanted to take funds out so we could invest in an A market.  Rates are too high, so didn't want to take a loan against, although we will have a loan on the next property, but the returns are significantly higher there.

Do an analysis on your market.  C market- if your 10x20 drive up non climate controlled is say $80 or less, the return isn't high enough for new construction.  I would want my 10 x 20 rate to be $110 or higher to do new build.  Same thought on buying an existing location.

We use a Wagon Wheel and or Linked approach to competition.  If you're operating in C markets and can control the market, then buy the next locations down the road.  Then you can raise prices, above your original Deal analysis.

I am not planning to build but just buy for the first one. I would even be content with neutral or just a small positive cash flow to get it rolling. Honestly, making the right decision to sell and allocate it somewhere with higher returns is even more difficult than buying. I’ve been holding some SFH in different states but have never made the move to sell and reinvest.
Also need to look into this Wagon Wheel and Linked Approach you mentioned. Thx

[Arya Chen]

Quote from @Henry Clark:

SBA loans take to long for a location that is for sale.  Get a Construction or Working Capital loan with your local bank.  Make the purchase then convert to SBA loan.  Let your bank know that up front.  Do interest only on the local loan.  Make sure the deal will go thru.  You don't want to get caught with an increased down payment %.  Say 10% for SBA loan.  But if it falls thru and your bank requires 25%.  

Larger banks are normally better for SBA loans, because they have more personnel and can have someone specialize.  I would go for a midsize regional bank, with a Federal lending Cap limit of say $10mm or higher.  That should cover your scaling needs.

If I am only buying, does the construction or working capital loan still apply? I talked to Chase, but they don’t offer SBA loans for self-storage; they require the owner to occupy a certain percentage of the building/storage, which is not the case with self-storage. I also spoke with another smaller bank, but they require too much down payment and the rates are around 10% now. My family has a chunk of unused HELOC; would it be a smart move to use the HELOC to buy in cash and then pursue an SBA loan after owning it?

[Henry Clark]

SBA requires owner occupancy of 51% minimum.   Self storage is considered 100% owner occupied.  

I would do a small deal and not tap into a heloc.

[Henry Clark]

You want to use a commercial broker.  If you scale you want them on your team.  They will bring you deals. 

[Henry Clark]

You’re in Texas.  Recommend you @Start small and Make Your Big Mistakes Early.”

Recommend you develop a location.  Pick a county and look up Property tax sales.  Only do a land sale.  Not at the auction. Look at the unlisted properties and make an offer.  Pick 1 acre or more.  

Google and find a cargo container group that sales One Trip or new containers. 20 foot.  Buy 10 to start with.  Read my post.  

Use this low cost, low risk approach to learn.  Do your deal analysis on paper.  This will teach you almost everything you need to know. Check out zoning and road entrances. 

Use the lookup and read all of my posts that include Self Storage in the title.