Making an offer on a self storage business

[Nicholas Ludwiczak]

I have a self storage owner come to me with an off market deal for his 84 unit business with room to expand. It as has a newer model home onsite a business is renting as an office. His rates are well below market, even for the small town he is in. The only other operator within 3 miles would be $5 below the price I would move the rates to and he has been full for the past year.

Has anyone had experience taking over a self storage business and raising rates $5-20 per month? My rates would be at market but I don't want to have a bunch of people moving out at the beginning.

I am going to try getting the owner to finance 100% of the down payment on an 8 year note.

After accounting for all expenses including the note, it comes to about $500 in cash flow at 87.5% occupancy.

As I move purchase price and terms around as we negotiate, at what cash flow amount would you pass on the deal?

[Henry Clark]

@Nicholas Ludwiczak

See the post I did on Self Storage valuation.

Cash flow at 65% occupancy should be zero, including interest and principal; for Phase 1 build.  That's on a 20 to 25 year term loan.  If your at $500 per month on 87.5% occupancy, I would walk away.

Do a cost to build on the Storage units.  I'm going with a 2 to 3 acre lot out in the suburbs or countryside.  $3,200 erected per unit; 3 acres at $??,???, Fence 2 acres $20,000; Gate system $15,000;  Electric $7,000;  Security $7,000; road rock $20,000; driveway entrance $??,???; No water/sewer/storm pond or drain.

Segregate the analysis of the house and the storage.  Especially if the house can be subdivided from the storage and sold and managed separately.  Analyze the house like you would normally do.  Then isolate on the storage.

This is a good size location to start with.  Determine if Self Storage is something you want to do.  I like to stay in my "lane" and not have several different types of businesses going at once.  Or if your market is small there, then you might need more "Lanes".

Find out why he is only 87.5% full.  Either the market is not big enough.  Or he is not marketing correctly.  Or he just added new units.  87.5% full from a unit, economic or sq foot standpoint?  If it is from a unit standpoint and most of the vacants are 5 x10's; but the economic occupancy it 95% then different questions arise.

Changing rates is not that big of an issue.  As people noted above, where are they going to go?  Its the middle of winter, also.  If you are sensitive to the potential for people leaving, then do it in segments.  Example: Do it by unit size, every 2 months a different size increase.  Or do it on all new contracts.  Or do it based on Lowest rates first or long term renters first.

This could be a great deal, but analyze your market.  What is the population size and how many units are in the immediate area?  Raising rents even $10 per unit has a large impact on the analysis.  If your market can support it, do a Phase 2.  This will only take a 35% occupancy to breakeven/payoff.  Added to Phase 1, this makes the total deal more attractive.

Check with your bank if they are willing to take a Second position on the property, if the owner does a loan on the down payment.  Don't ask the owner for a loan.  Just have the balance due 5 years out with zero % interest as part of the sale.

Don't buy the "business".  Buy the assets.  Have the assets listed separately on the contract.  House/roads/buildings/fence/electrical/security/signage/landscaping/etc.  That way it is easier to do year one writeoffs and not have to do a Cost Segregation study.  You determine the figures, tell him the figures to use for each of the above. Don't ask, unless he just built all of this and it is fresh on his mind.  Try to put as much value as possible away from the house and the storage buildings, to get faster write off.  Ask if you can put in a section for a Non Compete agreement so you can move more money away from the house and buildings.  You can write it off quicker.

Try for a 10% SBA loan.  To hold the deal since SBA can take a while, do a $10,000 earnest money deposit for 6 months.

Great first step into Self Storage.