Self Storage opportunity

[Serge S.]

I ran across an interesting little self storage opportunity. 

This facility consists of a paved lot with 80 concrete block storage units and a 160x200 open gravel lot (about 100 spaces) for autos, boats and RVs. 10’ tall concrete block walls surround the 5 acre premises with wrought iron around the front. Built in 2001.  Each unit has concrete flooring, with lockable metal roll-up security doors. The inside is drywall finished and has a security alarm system wired to each unit. Updated in 2007 with new stucco and paint, new roof and asphalt.  Owner is out of state and cannot manage it. Zoning: Light Industrial.  There is potential to run other types of businesses with this compound on 5 acres. Only 10 units are rented right now as there is no management here anymore and owner is out of state.

UNIT SIZES:

1-10, and 17-26 are 9x14

69-56, 54-49, and 34-47 are 9x9

the two corner units 48 and 55 are 19x9x11

27-32, are 4x9

11-16, are 14x4

It is located in an area close to where I have substantial real estate holdings and the area is in the midst of escalating population and economic growth. Price right now is $295k but the owner is pretty desperate and will take closer to $200k. The area is somewhat rural and I cannot project what occupancy would look like so it would have to be underwritten to low occupancy. 

@Brian Burke I know you own self storage, thoughts on how you would underwrite something like this? 

When I look at this, I wonder how such a small facility could support payroll and what the exit strategy would look like. Maybe it needs to be expanded to a larger facility but no telling if demand is there. I like the low purchase price and using this experience to learn self storage but not sure how viable it is financially.

Would love to hear thoughts from some of the expers.

[Brian Burke]

Well, @Serge S., one thing to consider is that in this property's history the only way it has traded has been via foreclosure.  That should tell you something.  :)

Nevertheless, you are right that it is a challenging size.  I have a 302 unit facility that I built brand-new around ten years ago.  It too was in a small town and it was cheap land that I thought would make me enough passive income to convince me to start buying self storages everywhere.  My balloon was quickly deflated, however.  My problem was that I built it...had I bought a facility using capitalized trailing income I would have been fine.  Unfortunately development comes with a lot of risks like rising construction costs, onerous unforeseen design requirements by the city, etc.  So without going into my woes as it related to the development, let's instead talk about how this relates to your deal.

The concern here is twofold.  Let's start with the big one.  The facility is 10% occupied.  I know how serious this disease is because when I built my facility it was 0% occupied to start.  The appraisal and market study forecasted that it would take 18 months to achieve stabilized lease-up, which was considered to be somewhere around 80% occupancy.  Instead, it took closer to seven years to get there.  Ouch.  Moral:  Don't trust paid studies.  Other moral:  Don't build self storage in small towns, the absorption just takes too long. 

Concern 2: A facility of this size can't afford payroll.  You might be able to pay a neighbor to go over and check on it for you once in a while, but how much can you really spend on that?  Not much, and not at all until you achieve a high enough occupancy. 

If you live down the street and want to check on it yourself, then no problem.  If you want to rent out units by advertising on Craigslist and meeting tenants out there, you might be able to make this work but your lease-up will be slow-going.  Another option is that you can get automated kiosks that tenants can use to make payments and even rent out units.  I don't have one of those so I'm not sure how they work but I'm sure you can research it and find out.  To underwrite, use a pretty high vacancy, long absorption period, and a fairly high uncollectable debt loss.

Don't get me wrong, I'm not a downer on self storage.  Now that my facility is 93% occupied and my delinquents are minimal it's a great business.  But the word "business" is important--it's not a passive real estate investment.  It's nothing like renting out houses.  It's a little bit like managing a 300 unit apartment building with just as many tenants to manage and phone calls to take and collection calls to make, just without all of the maintenance tickets.  But you do have to have advertising, a phone line, office equipment, files, management software, a website, etc.  For my facility, I have all of the above plus one full time employee and two part-time employees.  I'd hardly call that passive!