How can I make this work?

[Craig Garrow]

Looking at a small 24 unit self storage business on 2.5 acres in our local industrial park. It’s 16 10x10 units and 8 5x10 units. They’re below market on their rents ($32.50 for a 5x10 - should be between $35 and $40) and $45 for a 10x10 which should be between $50 and $55. 22 of 24 units are full, so I doubt anyone would move even with a $10/month increase. Owner and I negotiated two years ago and was left off at a $55,000 purchase price, $15,000 down, 6.5% interest, and a balloon payment in 8 years. Just for kicks, assuming the facility was full with no vacancy, after the rent increase, you’re looking at $1,080 per month, which after mortgage, taxes, and insurance leaves about $480 per month, before any maintenance, lawn care, snow removal, and vacancy. I think there is upside here if I can add more units. The plan would be to build 12 10x20 units that I could rent for about $90 per month and double the total income of the facility, but that will obviously come at an expense. So, my question is, how do I sell the owner on either dropping the price, or try to do a no (or very low) money down deal? The owners are an older couple who aren’t necessarily real estate investors, I think they just owned this for a tax write off. Any help is greatly appreciated!

[Michael Wagner]

Originally posted by @Craig Garrow:

I called every storage place around town, and that’s in line with what they’re charging (after a rent increase.) Most places didn’t have much for vacancy. This site happens to be on the opposite end of the town as the competitors, which might work out to be an advantage.

 You'll want to look at who is closer to the most densely populated areas in town.  If you are offering similar amenities at similar prices, it is very hard to convince a customer to drive farther from home to store their stuff.  SO if you are closer than them, yes its an advantage. If you are further, you'll have to work hard to entice folks to drive the extra mile. 

I think the viability of this deal hinges on whether or not you can expand (and at what cost).  The existing finances, even with a rent raise, seem pretty tight to me.  Hard to get excited about $480 per month minus operating expenses (assuming I understood correctly)...unless of course you know you can expand as many of your expenses will stay flat while you revenue will clearly go up.  The cost to build will also be a determining factor.  If you are sitting on land with an empty gravel lot and can just pop up a building for $20/sq. ft. then you could make a go at it.  If you have to level ground, box out soil, add 10" of stone, etc, your costs will push up toward $30 per square foot and at $0.45-50 per square foot in rent, I don't see that as too favorable. I try to have my build outs cost no more 2-3 years Gross rent.  Just some things to think about (and perhaps more importantly) use as educational info for the sellers.  $55K isn't a ton of money in the commercial realm but in my opinion its still too much for this particular income stream.

PS- If you can build out a 30 or 40 foot wide building, your price per square foot for the building will drop substantially.