Small Self Storage Deal - Thoughts/Feedback Appreciated

[Steve Cheslock]

I'm looking at purchasing a small mom/pop storage facility with a ton of value add opportunity and a little stuck on what to tackle first.   Looking to purchase 1.85 total acres with 4 existing buildings up front.  I guesstimate roughly 1 acre of possible expansion land on the back end that is currently flat forest.  The current facility is at 0% occupancy due to mismanagement and total neglect.  The seller just wants out, and our initial talks have been around $40K for everything. I'd say the overall structures are in decent shape and the majority of the rehab will be around replacing the doors and the insides.    

4 Existing Buildings (A,B,C,D) of 6,673 sf non climate control (82 Units total)

1. A and B: 44 Units (22 each building) of 6.5x6.5 sf (1859 Total SF)
2. C: 20 Units of 10x12 sf (2400 Total SF)
3. D: 16 Units 10x12 sf, 8 Units 9.5x6.5 sf (2414 Total SF)

This is in a small tertiary market (pop 14,000) with this facility on a major thoroughfare about 1/4 from a college (5,000 students).  There is some competition (40,000 sf) about 4 miles away, but in the corner of town surrounded by farm land.  Doing some initial research I'd say the average market rent per sf is $9.60 ($.80/mo).  

Some of my initial thoughts:

1. Unit Mix/Dimensions are a mess.  Ideally I'd like to make all the units in buildings A and B 5x5sf (instead of current 6.5x6.5), but existing building structure is solid and already fitted to these weird dimensions. Should I just bite the bullet and totally redo buildings A and B with the proper unit sizes or just go the cheaper route of just fixing the inside partitions and keep the weird dimensions.  *We plan to split the 10x12sf units in building D into 6x10sf units, which will add an additional 16 units.

2. Expansion, the back acre:  I know the goal is expansion so I'll need to clear the back acre.  My thought was to clear the back acre, cover it with gravel (or millings)  and offer machine/equipment storage until the proper time to build the expansion.  I got some initial estimates of around $60-75K to clear the land, top soil and cover it with gravel.  

I guess my main struggle is figuring out which path to take. *This project will be privately financed

1. Initially go cheap as possible.  Just acquire land and existing facilities, rehab them as cheap as possible (keep existing unit sizes), don't touch the back acre and bring project to stabilization.  At that point (around 12 months) take a look at options.  This would probably be around $100K give or take some.  

2. Raise enough to acquire land and existing facilities, rehab to fix dimensions and maximize efficiency of unit mix, clear away the back acre and bring the facility to stabilization (while adding machine/equipment storage).  This could push the project cost to roughly $200-$250K and adds time/risk and capital raising.  

Crunching the numbers I'd like to get it to 12-15K sf rentable as soon as possible because right now with only 6,600 sf a lot of the potential profit is being eaten away by the expenses.  Any thoughts, feedback or new ideas anyone has is greatly appreciated.  Thanks.  

[Adam Johnson]

Mike has offered some great thoughts and is far more experienced in self storage than I am.  I wanted to chime in with a few thoughts as well.  All of my projects so far involve some form of distress, many have started with 0% occupancy, so that is where I am coming from when I comment.

First and foremost, stabilize before you spend ANY money on growth.  If you spend $ 50-110K to work with the back acre, you have just increased the amount of space that you DON'T have rented yet.  Bad move.  Fix what is there and broken now, then use the cash flow that work creates to help fund expansion.  Remember, projections and penciling out numbers all sounds great, but until you have rent checks in your hand, they have zero real value.

I 100% agree with Mike, don't change the size of the existing units.  Couple of reasons - 1)as Mike said, your customers need a space to put their things, that's why they call.  They don't care if there stuff fits through the door and they aren't renting way more than they need, then they will buy.  2)You have no idea what size unit the market wants from your building, so why change what's there until you know?  The 2nd point also goes to your thought about putting up another building.  On paper, it sounds great to have all 5x5 units because the rent per sq. ft. is higher.  BUT, if your market needs 10x10's, you will likely lose potential leases.  People won't necessarily rent (2) 5x5 units instead of a 10x10, paying more per month overall, if they can go somewhere else and get a single 10x10 and pay a more fair rent for their needs.  So, if you have all 5x5's, your choice may become to rent them at a discount if the market needs larger units OR accept a higher vacancy rate.  Either way, reality doesn't match up with your pencil predictions.  

While I don't think the parking area is bad, I think rushing to do it right away is not a good idea, primarily because you have 0% occupancy with what already exists.  I would put 100% effort into fixing and leasing up the existing space before I spent money developing more vacant space.

"Crunching the numbers I'd like to get it to 12-15K sf rentable as soon as possible because right now with only 6,600 sf a lot of the potential profit is being eaten away by the expenses. Any thoughts, feedback or new ideas anyone has is greatly appreciated." - This concerns me a little bit.  Your immediate problem after acquisition is not the fact that the expenses are inefficient in relation to the income, the problem is that you don't have any income at all.  Inefficiency will be a problem after you stabilize the property and you can deal with that problem then.

Use the existing building to learn the market and learn the business.  Let that success/challenge help guide you through future growth.  Pay attention to what people are calling and asking for, that is the market telling you what the need is.