Please Help - Self Storage Deal Analyze

[Arya Chen]

I’m working on analyzing the following self-storage properties and wanted to see if my approach makes sense. I'm still learning the ropes, so any suggestions or advice would be greatly appreciated!

For these properties, I've calculated the Net Operating Income (NOI) based on 100% occupancy, then subtracted approximately 33% for expenses.

Storage 1

• Unit Number: 105
• Size of Land: Litter under 1acre, probably not expandable
• Population: about 34K within 3 miles,
• Population Growth: 2-5% per year
• Traffic Count: about 4K
• Rent at 100%: $110K
• Projected NOI after deducting 33%: $73.7K
• Asking: $900K
• Offer price: $730-780K?

Storage 2

• Unit Number: 145
• Size of Land: about 0.6acre, not expandable
• Population: about 900K within 3 miles
• Population Growth: declining
• Rent at 100%: 98K
• Projected NOI: 65K
• Asking: 750K
• Offer price: 650-680K?

Storage 3

• Unit Number: 158
• Size of Land: 1.3acre
• Location: close to home, can actually manage from time to time
• Population: about 38K within 3 miles
• Population Growth: Neutral
• Rent at 100%: don’t have exact layout but nearby 5x5 is $25, 5x10 is $45, 10x10 is $65
• Projected NOI: guessing 100K to 120K?
• Capita: 23
• Asking: unpriced
• Offer price: 10 times the 100k-120k? But the capita is high in this location though, how to balance this?

Am I crazy or most of the time the asking price is wayyyy too high? 

[Peter P.]

Hi Arya, some feedback on some of your assumptions in your analysis. Your target occupancy of 100% and expense ratio of 33% is a bit optimistic. The national average for occupancy has fallen to 87% (2023). If you're new to this asset class you might want to use 85%. Expense ratios vary dramatically depending on project size, age and other factors, but basic rule of thumb is the smaller the project the higher the expense ratio's, using a 33% expense ratio for a small facility (less than 150 units) is optimistic, smaller facilities are probably closer to 40%. You are not crazy :) cap rates on storage got pretty crazy in the last decade as the space has become crowded and money was cheap, starting to see some reversal of that now, but its tough to find deals at a true 10 cap (10 x NOI or NOI / .10). Hope this helps!

[Arya Chen]

Quote from @Peter P.:

Hi Arya, some feedback on some of your assumptions in your analysis. Your target occupancy of 100% and expense ratio of 33% is a bit optimistic. The national average for occupancy has fallen to 87% (2023). If you're new to this asset class you might want to use 85%. Expense ratios vary dramatically depending on project size, age and other factors, but basic rule of thumb is the smaller the project the higher the expense ratio's, using a 33% expense ratio for a small facility (less than 150 units) is optimistic, smaller facilities are probably closer to 40%. You are not crazy :) cap rates on storage got pretty crazy in the last decade as the space has become crowded and money was cheap, starting to see some reversal of that now, but its tough to find deals at a true 10 cap (10 x NOI or NOI / .10). Hope this helps!

Really appreciate the feedback! I wasn’t aware that a smaller facility could have expenses close to 40%. Is that a number that typically stays consistent every year, or is it only that high during the first 1-2 years before stabilizing?

[Peter P.]

Really appreciate the feedback! I wasn’t aware that a smaller facility could have expenses close to 40%. Is that a number that typically stays consistent every year, or is it only that high during the first 1-2 years before stabilizing?

So as with anything it all depends. There are fixed costs you won't be able to get away from utilities, insurance, etc and are typically stable year to year or with some measured growth. The variable costs can fluctuate more year to year. Smaller facilities have smaller operating budgets so any one bigger repair or required maintenance item can blow your annual budget. Whereas larger facilities have a larger budget and staff on hand that can handle some of the surprises. 

[Kyle Miller]

Quote from @Arya Chen:

I’m working on analyzing the following self-storage properties and wanted to see if my approach makes sense. I'm still learning the ropes, so any suggestions or advice would be greatly appreciated!

For these properties, I've calculated the Net Operating Income (NOI) based on 100% occupancy, then subtracted approximately 33% for expenses.

Storage 1

• Unit Number: 105
• Size of Land: Litter under 1acre, probably not expandable
• Population: about 34K within 3 miles,
• Population Growth: 2-5% per year
• Traffic Count: about 4K
• Rent at 100%: $110K
• Projected NOI after deducting 33%: $73.7K
• Asking: $900K
• Offer price: $730-780K?

Storage 2

• Unit Number: 145
• Size of Land: about 0.6acre, not expandable
• Population: about 900K within 3 miles
• Population Growth: declining
• Rent at 100%: 98K
• Projected NOI: 65K
• Asking: 750K
• Offer price: 650-680K?

Storage 3

• Unit Number: 158
• Size of Land: 1.3acre
• Location: close to home, can actually manage from time to time
• Population: about 38K within 3 miles
• Population Growth: Neutral
• Rent at 100%: don’t have exact layout but nearby 5x5 is $25, 5x10 is $45, 10x10 is $65
• Projected NOI: guessing 100K to 120K?
• Capita: 23
• Asking: unpriced
• Offer price: 10 times the 100k-120k? But the capita is high in this location though, how to balance this?

Am I crazy or most of the time the asking price is wayyyy too high? 

Hi Arya,

To appropriately model this, in my opinion I would add a minimum of 10% vacancy due to the commercial nature of the building. Calculate the mill rate plus 3% for conservative purposes. I would use the assessor's database, search for the property to get the assessed value. Divide by 1000 and review what the town/city are charging for commercial properties for an accurate calculation. Insurance you could easily get a quote but you may be looking at $50/unit? Utilities could be 10% of effective gross income (EGI) which is probably high but I'm thinking of heated units in mind. You could easily ask for a utility bill to see what the previous owner is paying. What about repairs, supplies, and other expenses? I would make each of these 5% of EGI too but this all depends on how well-maintained the building is.

Your cap rates of ~8% is slightly high, I would also pay attention to your debt yield. A debt yield of 10% or higher is something a lender wants to see as it shows risk but the loan isn't severely leveraged. I've provided a link below to get you started on the subject matter (if applicable). I hope this is helpful.

2014-02-19-crej-debtyield.pdf (essexfg.com)

[Zane Cress]

How old are these properties? Are they owned out right by a single person or a family? Would they seller finance you for a few years while you improved the numbers? If someone just bought these in the last 5 years I would not be interested. If it's a long time owner I think that works in your favor for negotiating. You should enlist a good commercial agent to help with this. Maybe look at other storage units for sale or that sold in the last few years and enlist the help of those agents to guide you. 

[Chad Greenleaf]

Also, what is demand and competition like in these areas? Is SF/Capita high (over 10), and if so, does the demand of that market justify it? What are the VPD counts for these locations? Storage is both retail business and commercial property. How do you plan to out perform the competition? You'll want to know the answer to these questions or you can get into a tough situation, especially if you are using commercial lending with DSCR requirements and covenants that you have to perform to.

[Gabriel Graumann]

@Arya Chen despite limited reversal in a few select markets with oversupply, the general demand for this product type is very high, leading to lower cap rates that likely won't change much in the near term. Compared to other commercial asset classes, storage remains one of the strongest performers in the market. If you can find one with a true net 10% cap rate, you should be asking "why" is there such a large discount. Likely tied to supply/demand issues, aging facility with high cap ex, and operating costs increases. As you're new to this space, I would recommend partnering with an experienced investor/operator in this space that has several facilities under management create a strategy for investing in this space.

[Henry Clark]

Option 2 is the deal you want to do.  Recheck your population count of 900k.  Or is it 90k?  How far away is it from you?

Show current rent rates versus other drive up competition.  For further discussion.  

[Arya Chen]

Quote from @Gabriel Graumann:

@Arya Chen despite limited reversal in a few select markets with oversupply, the general demand for this product type is very high, leading to lower cap rates that likely won't change much in the near term. Compared to other commercial asset classes, storage remains one of the strongest performers in the market. If you can find one with a true net 10% cap rate, you should be asking "why" is there such a large discount. Likely tied to supply/demand issues, aging facility with high cap ex, and operating costs increases. As you're new to this space, I would recommend partnering with an experienced investor/operator in this space that has several facilities under management create a strategy for investing in this space.

I was working with an experienced agent to negotiate a deal. He actually recommended that I go with an even lower price than I was initially willing to, to ensure I wouldn't lose money on my SBA loan estimate. However, this price is much lower than the listing, and the seller is unlikely to accept it. Unfortunately, my agent dropped me yesterday, and now I feel more lost than ever.
If someone knows any TX agent specializing in Self Storage, please reach out!

 

[Justin Crow]

Look up Lindsey Self Storage brokers. They are generational in the biz. I would walk away from all these. You dont want to be in a deal with high price, declining population, or high capita. 90-92% is considered full occupancy. Unless this has been mismanaged with rental rates and increases, It may be hard to justify.