Underwriting Self Storage?? How?

Question

On an off chance meeting in a Starbucks was presented a self storage deal.  It is 4 properties with 930 units total.  They are separate locations all located close to a major US Interstate.  They are willing to do seller financing package deal with a down payment (which negotiable).  NOI is $869k, occupancy is high, close to 99%, which tells me there are room for rate increases.

I know how to evaluate and underwrite multi-family, but not sure on self storage.  Is it the same, roughly?  Anyone who can provide direction would be greatly appreciated.  Im currently modeling like I do multi-family just leaving out some things.  Just do not want to miss anything.

Michael Wagner · Answer

This type of property/portfolio is a bit out of my wheelhouse as I specialize in turning around under performing mom and pop shops usually in the $200-$2 Million range.  With that, others can probably provide you with a better answer.  That said, I do think a 6 CAP is reasonable for a property like the one you describe.  Personally it wouldn't get me too excited but again, thats just because of my investment objectives and risk tolerances.  You've also got the added value of Seller financing!  Plus, if the rates can be increased, you don't have to move the needle very far for the equity to add up pretty quickly.  My concern would be that larger properties like this have more exposure to the market at large than do the small mom and pop shops.  All your equity could evaporate pretty quickly with a change of .5 to 1 in the market cap rates...which I don't think is too far fetched given the current economic environment.  Just some things to think about...playing devil's advocate a little bit for no other reason than to encourage you to look at the deal from EVERY angle!  Hope you find it helpful and wish you the best on it.  Please do keep the BP community updated if you decide to pursue it!!

Greg Dickerson · Answer

@Justin Staten yes it's just like any other property in terms of income - operating costs. You just need to drill down on the operating costs. Get copies of T-12 and further back if possible, tax returns, rental agreements, software subscriptions, retail components and inventory if any like moving supplies and rental division. There are some great 3rd party self storage companies out there that you can run your numbers by to make sure you have everything accounted for.

Kris Bennett · Answer

Hi Justin. That's a good size portfolio. Here are a few things to consider:

Are the facilities located in suburban areas?

If so, how far away are the comps from each of these facilities?

Are all the comps pushing 90% occupancy?

What is the population density around each location?

Can you build more storage at any of locations?

Can your comps build more storage at their locations?

Can you ask to see the management summary that shows the economic occupancy and revenue trends monthly and year-to-date?

What are the 10x10s renting for? Above $1.00/sqft or below? Do they charge tenant insurance?

Who is managing the portfolio?

Who showed you the deal? A broker? There are a lot of questions to answer when looking at storage. I like multifamily and I started there, but now I focus on self-storage, and I'm happy to help however I can.

However, you're right that at 90%+ physical occupancy and at least 85% economic you can push rents. There may be more upside, but it's hard to know from my perspective.

I hope these questions have given you some ideas as to what to look for.

Julian Sanchez · Answer

So Justin, how's your acquisition going?

Michael Wagner · Answer

Very generically, you will look at Income minus expenses to get your NOI.  Then simply multiply that NOI x anywhere from 10 to 15 (representing a rough cap rate range of 6 to 10).  I know that is a huge range but hard to narrow it down without knowing more.  I could guess that a portfolio of that size is likely to comp out in the lower end of the cap rate range...Probably 6-7....

Justin Staten · Answer

@George Fitz thanks for the insight I will IM you.

Thanks @Michael Wagner, it is sitting at a 6 cap rate.  So is 6 to 10 normal for self storage?  I felt ok with a 6 cap.

@Kris Bennett thanks for all those additional questions.  It definitely helps. This is an off market deal, met the owner on an off chance at a Starbucks.  They self manage.  Each is in a different suburb, but all are good sub markets with good population density.  Two of the four have room for expansion, and the other two have options to adjacent land, so they could be expanded as well.   None have space for RV or boat parking, so there could be some value add there too.

Kris Bennett · Answer

I should add, you should see a "Cost of Goods Sold" line item in the revenue. That's the boxes and packing items sold in the office. That should be offset by sales of those items and should be a net positive and add to Effective Gross Income. Also, there is no "loss to lease" in storage like there is in multifamily. Technically, it could be there if someone wanted to make a line item for it, but 99% of the time it doesn't exist. Usually, management fees range from 4-6% of Effective Gross Income. If they are charging tenant insurance you should see line items for that as well. If you don't there is some upside for you by charging customers for it.

George Fitz · Answer

Good advice from Greg. First thing I'd do is start calling 3rd party management companies (assuming you're not going to try and manage something this big yourself). They'll be able to give you pretty solid numbers on the expenses and be a great resource for when all the other questions come up. DM me if you want any names of third party management. I know a few.

Justin Staten · Answer

@Greg Dickerson thank you.  That’s what I figured.  I actually have all of it.  So I’ll just drill down operating cost (which are minimal) and underwrite like I normally do.  Appreciate it!

Underwriting Self Storage?? How?

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