Self Storage- Deal 4

[Henry Clark]

Start Small and make your big mistakes Early.

Deal breakers- market, finance, zoning, footings, road type, water/sewer availability, Storm sewers, Storm retention ponds. Everything else you can mess up and not get too hammered.

Some of these stories will be ambiguous because they are still "live" items. I am intentionally not telling you all of the details and am obfuscating some of the detail, just telling you the Deal story.

I had just started in Self Storage and had two locations.  About 70 units total.  We have since grown to 200 units in this local, not counting parking.  A neighboring location 220 units came up for sale for $1.1mm.  Just about 3 miles from me.  

Setup:

a.  Visited with them.

b.  Went through the financials and management reports. 

c.  Clean operation.  No room for expansion, totally built out.

d.  Location was on the opposite end of town, near higher income neighborhoods.

e.  If we had bought this, we would have had the three primary road ways covered.

f.  Would have had about 70% of the market covered with room to grow at our existing facilities.  If we are out in one place, we would send them to the other.

g.  At the time $1.1mm was a bigger number than I had worked with.  Only had about 2 years in the business.  Wanted a "Great" deal for around $850k.  Did not make them an offer.  Wanted to wait 6 months, to let it stay on the market and soften their expectations.

Was visiting with someone about 6 months later and they said that location had sold for $875k.  Whatever the emoji is for a sad face, put here.

Deal breakers- don't get too greedy, when there is a deal on the table make an offer so they know to come back to you.  Although this didn't happen I will add to Deal Breakers- Don't get too greedy and also don't Over Analyze.

Following forums like this, you will see the comments, not a good time to get into the market,  there are no great deals, why can't I find a situation like that?, etc.  I will ask you from the scenario above "did you see" the great deal, that I missed?  Do you see the great deal that is within 60 miles of you?  I can see it now, because I'm looking backwards, and can see more business angles.

Setup:

1.  In a small town.  To small for REITS.  Secures your investment.

2.  About 18 miles from the next Storage market.

3.  All storage  locations are full at about 98% occupancy.

4.  The above deal was good at $1.1mm; it was great at $875k.

5.  Lets make the above deal better.  Buy at either $1.1mm or $875k.  Unit Size 20/15/10;   Unit price $65/$55/$45 (small town USA);  We will use the $55 as the average price.

Do an across  the board price increase of $10.  $10/$55= 18% profit improvement, with no cost impact.  Your business just became 18% more profitable/valuable based on one decision.

Wrong-  Lets say you have an all in operating cost, including depreciation of 40%.  Thus on a $55 unit, your profit is $33 or 60%.  Now add $10 to the revenue end with no added cost impact (keep it simple without tax discussion).    $65 (55 + 10)unit less $22 cost= $43 or 78% profit increase over the original base of $55.  Or 66% over the new base of $65.

Lets make the above Wonderful scenario even better (1).  Sorry I'm greedy and didnt see how good the deal was at the time.  That's why I missed this deal.

Don't buy the business.

Buy the assets. 

Talk with your tax person.  

When you go to buy the assets ask your tax person the implications of segregating the following contract items. Get them to explain the tax implications and immediate write off potential of each item.  Also potential for challenging Property taxes.

1.  Of the $1.1mm slice out $300,000 value as a noncompete agreement.

2.  Electrical/lighting   $10,000

3.  Security   $10,000

4.  Roads  $200,000

5.  Land  $100,000

6.  Fence/Signs/etc.  $50,000

7.  Building  $430,000

I will re-iterate.  Talk with your Tax professional.

Lets make the above Wonderful scenario even better (2).
Lets use a simple example.  I'll give you a choice of buying two bonds.

a.  12% return with Aaa rating (highest)

b.  12% return with C rating (lowest)

Which one do you buy, if these are your two options?  Now this is a simple exercise because it is simplified. 

Now lets use this on evaluating Storage locations.  Exact same facility, exact same everything.  Would you rather be within 3 miles of 4 National and 3 Regional Storage companies in an overbuilt climate.  Or be where there are none, and there never will be?

I'm not saying in the middle of Wyoming, but within 60 miles of you, the above climate and environment exists for you.  Don't let anyone say, there not a great deal out there for you.  You might ask why I am doing all of these Discussions and noting all of this.  I'm not looking for any benefit.  I've found my next great investment and lifestyle.  Don't plan to build or buy anymore storage locations.  And you won't be a competitor of mine.  When we build our last Phase in 2 years, I will start to forget all of this and start concentrating on our next investment segment.

Good luck.  Go get rich.

And; Start Small and make your Big Mistakes early.

You guys are so lucky based on the weather.  Yesterday, it got to hot to do landscaping so I came and banged out some of these.  Today it started raining, we were re-laying out our latest location, with most of the dirt work done.  Had the contractor put flags on the corners of the buildings. Going to add more units to each building where possible.  Take out some units to make the busy corners easier.  Hopefully go from 330 to about 360 units.  Might switch to some 12 versus 10 wide; and instead of 8 tall to 10 tall; to add some mix variety.  We built one of these at one of our locations last November and it is almost rented out now.  More car and boat type people, with normal storage needs also.  Doesn't bring as much money per sq ft, but helps with Occupancy and competition.