Self Storage- "Value Add" Options

[Henry Clark]

Been running the Skidsteer spreading about 60 truckloads of dirt on our upcoming Contractor building location. One of the Bumps, made me think of Value Add as a topic. In between Breaks, kept jotting concepts down. Sure there are more, but this is a start.

Overview:

Operational:

A. Raise rents

B. Automate

C. Clean up, add features security, roads, etc.

D. Add services or products, Uhaul, Fedex mail drop,

E. Added land- add more units, unit mix, parking, Contractor buildings, etc.

F. Cost reductions- property tax, insurance, processing

G. Payment terms- autopay,

H. Customer upgrade- slow pay, problem, etc.

I. Occupancy%- Higher right?

J. Management

K. Marketing

Strategic:

L. Refinance terms, cash flow

M. Build more local locations

N. Buy out competition, value add

O. Control 60% pricing and distance

P. Common Systems and security

Q. Local Investor Ready

R. REIT Ready

S. Downgrade- Reverse 1031 or Syndication

T. Value Add Returns ($) and upside?

You just Died:

Not included is Controlled Climate and Multi Story business models not included.

Start small and Make Your Big Mistakes Early

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Operational:

A. Raise rents- won’t go into detail. Considerations are your occupancy, how much of the market you control, distance to next town or storage. If your Risk averse, you can do all new customers, certain sizes, across the board- In Iowa do this one in January- really cold/they will forget by spring. Someone is saying why not use a computer generated system. Not part of my business model. Some of our customers have rates from 6 years ago, value add for the next owner. Although we have increased rates on new customers. We have focused on Buying and Developing.

Impact? Lets use a country unit of $60. Break even to cover all costs and debt service we will say $30. Current cash flow is $30. You increase the rent $10, then you have a 33% increase in Cash flow and your margin just went from 50% (keep it simplified before taxes), to $40 / $70= 57%. We concentrate on Cash Flow/years of payback; if you do Cap rate, you can do the calc. Investment- none.

B. Automate- order online, Gates open/close, Security cameras, self service, autopay, actually saw a place last year that automated their snow removal when they build their driveways.

Impact? Reduces work load if you want to achieve no onsite Management. In a city lets say you have 300 units at $100 average. 12 months x $30,000= $360,000. Lets use $50,000 onsite management 7 days a week. This is $50,000/$360,000= (14%) margin impact. Another way to look at it takes 40 units at $1,200 annual gross to cover. Investment- website already would have online booking; Automated gates $25,000; Security cameras- we do 1 camera for 6 units plus about 10 at the entrance, say $40,000 for 200 units; Self service see our youtube, someone still has to clean out units and restock contracts/free locks, Autopay- part of software.

C. Clean up, add features security, roads, etc. Site dependent. Most of these are cost adders, to help with price increases and marketability.

D. Add services or products, Uhaul, Fedex mail drop. Site dependent and probably requires an onsite manager to justify.

Impact? Reduces net onsite management costs. We have 8 locations but only one with Uhaul. Population 10,000 and our revenue is about $6,000 without product sales.

E. Extra land- add more units, unit mix, parking, Contractor buildings, etc. Market dependent as to the impact.

Impact? Normally on our added units our break even is 35% occupancy. So this is very profitable. If you add more units, do an inventory of sizes in the market. One town in our area the two owners have about 400 units which are all 10x20. The market is saturated, but I would still build 30 wide units with a mix of 15/15 and 20/10 depths. They also built to the south due to easy zoning, but the population is north. There is properly zoned land in between these locations and the customers. Why haven’t we built there? Better opportunities elsewhere and this is 60 minutes away, outside of our 40 minute radius. Another town, the largest location has about 300 units. They are 4 miles out of town near no one. They have 160 acres extra. We are building in town. Understand your market, before utilizing the extra land.

F. Cost reductions- property tax, insurance, processing, electricity.

Impact?

- Property taxes is one of your highest costs with little recourse.

- If your adding more units up front, check on Zoning if Cargo Containers can be used. No property tax. You can write off in year one. This is covered by Personal and not property on your insurance coverage.

- Insurance is so small, as long as your with a Storage specific insurance carrier, your not going to find appreciable cost reductions. Example: On a $1mm location, your premium might be $2,500. Not worth shopping.

- Electricity- as you build or change out, go with LED. Will save you on both Electricity and Bulbs.

G. Payment terms- autopay debit/credit card or Bank ACH. Our last two locations we do autopay only.

Impact? Reduces workload (manually recording checks and money orders, life is tuff). This does a Credit filter on bad customers. Also reduces work load and “Check is in the Mail” phone calling. We do no phone calls, we just lock them out. Reduces work load on collections and the Auction process.

H. Customer upgrade- slow pay, problem, etc. When we had 100 units total, we would have 25 past due accounts at the beginning of the auction process, whittled down to about 8 auction units. We have an escalation process now, if you are a repeat offender. No late fees. Another value add for any future owner. We move your from Cash to auto pay. If you keep having issue, we increase your rent significantly, say from $60 to $80. If you don’t pay, we auction you and also evict you at the same time, even if you pay up.

Impact? Now we have around 1,300 units and have about 25 past dues and about 4 auction units. We could not have grown, nor would we have liked it. Why no late fees? Since we do a lot of autopay, we don’t want phone calls on billing questions. This offsets our management needs. My buddy gets about $1,500 per month in late fees and loves it. He also has his storage clerk sending out invoices, late notices, doing special billing and cash application.

I. Occupancy% Higher Right?- This is really about; do a market analysis (6/100), develop a marketing plan, competition, geography, road sign, website, Sparefoot, rate comparison, Office hours, gate hours, etc. Always remember its “One” contract at a time.

Impact? Before you buy, understand their Occupancy and Paying Occupancy. All of the above can be fixed except for Market. Even Market can be fixed if there are sufficient customers, then rate changes can be made.

Actually, I would reduce Occupancy right off the bat. See “H” above. Get the problem accounts out of the way up front, so your not looking over your shoulder.

J. Management- We are self service rental. Unless its timing, we never meet our customers coming or going during the rental process. A lot of operators like to “meet” their customers at these times, we don’t. As I’m walking the property, mowing, landscaping; I stop by and say hello.

Impact? When you pull up to a hamburger shop, you want your burger. You don’t want to meet the cook. This allows us to do self service, so you can rent a unit at that moment or when you want to. No meetings to set and miss. Plus with 8 locations spread over a 40 minute radius, we couldn’t meet. Not our business model.

K. Marketing- Road signs are the cheapest and best advertisement. However, people like to use their phones and computer to do comparison shopping. We will get an order from Sparefoot who we pay 1 ½ months rent per customer, when I know the person drives by our road sign every day. I love Sparefoot and Google. On Sparefoot you can see who is and isn’t using it. On google you can see who doesn’t use a website. Sparefoot you can do price comparisons. You can see if the competition is out of a size if they have it turned off. Also, like Bus Benches in our two city locations. See our next Post.

Impact? Although a high road count location is great, internet marketing is the king. We pay our SEO $1,500 per month. He at first wanted to get us to the top search location and I told him, that was not my objective. Wanted to be on the Google Map and be in the top three recommended on the map, which show up below the map. We can’t out SEO Sparefoot and the REITS. Even if we did, we would only show up once out of about 8 pages. Sparefoot has 4 search criteria and other than “distance” you can be number one in the other three, you just have to understand their measurements. Also when a customer does a self storage search, You tubes show up easily out of 8 pages. We did two you tubes and have worked them up on the google search.

Strategic:

L. Refinance terms, cash flow- 1. Refi and extend terms. Improve cash flow for more deals.; 2. All banks have Federally mandated Loan Cap rates. Identify what bank fits your long-term needs and can meet your loan requirements.; 3. If your in SBA, determine if you have enough equity and switch back to conventional and consolidate all of your loans. You will be giving up lower interest rates and longer fixed terms. This is more of a positioning move so you can do a quick sale.; 4. Or go into an SBA loan from a conventional for the lower rates and longer fixed terms. There is a time limit from original ownership to do this.

Impact? Looking for greater cash flow for future deals. You will pay for updated appraisals and any loan processing fees.

M. Build more local locations- Add them in a radius, so they can be sold as group. You will generally have three types of potential buyers. 1. Small single location buyer, 2. Large regional, 3. REIT. Although Building/Developing on our new locations is running a premium around 40% Appraisal over cost to build, this is separate than Value Add, so not delving into it here.

Impact?

Future Sale- If you buy stand alone locations of less than 300 units, you will primarily be only marketing to single local buyers. A large regional buyer won’t want to buy a 50 unit location, if that is their entire portfolio.

Current Operations- try to buy within the same town/location to gain price control. Shoot for 60% or more of market. Evaluate competitor extra ground to build and other land that could be developed into Storage. The less probable storage can be built, then the greater you can increase the price. Same thing with distance to the next town or facility. If you own the storage at the next town, say 5 miles away, then there is less chance of them leaving you. Reference back to the $10 rate hike in “A” above. You might say you already increased the rates in “A” from $60 to $70. Now that you control the market, move from $70 to $80.

Lets understand what the above dynamics mean. Lets say there is a competitor you want to buy and with this you achieve market dominance, or your already dominant. Competitor says they will sale 100 units for $500,000 and their market rate is $60 also. Say annual rental $63,000 at 90% occupancy. Operating income of $50,000 with no onsite management. You buy it and raise rates to the $70 or $80 level. At $70 you added $10k at 90% occupancy. At $80k its $18k. No additional investment, and cash flow increased an average of $20 per unit.

Generalization- We use a financial target of 8 to 12 year payback when doing evaluations. We do a break even analysis around 65% occupancy to cover all costs and debt/interest. Usually Debt service is about 35% points of the 65% points. If we are at 90% occupancy or 25% points more than break even. If we add another $20 rent on top of the original purchase level of $60 per unit, this is $20/$60= 33% added cash, but our added cash flow after break even 65% at an occupancy of 90%, actually $20 per unit on top of 35% x $60= approx $20. Or an added cash flow of 100%; current $20, plus additional $20 per unit before taxes. 100% cash flow increase above cost/debt Service at 90% occupancy.

N. Buy out competition, value add- See above. Don’t haggle. Make the deal. Your about to add an additional 100% profit potential to that location. See “M”.

O. Common Systems and security- This reduces management, which reduces your cost and increases cash flow and profit.

Impact? See “B” above.

P. Local Investor Ready- This is more about having systems in place, whereas a REIT will probably change the systems. Finance is also an issue, being flexible with close, payment terms, SBA loan, seller financing and possible 1031 by them.

Impact? Now that you have done all of the Value Adds, its time for the last one. When you go to sell, you want a premium on top of all the value add. You raised rents $10; you controlled local prices and raised $10, now when you sell get another $10 or more. Actually “more”. I might be greedy, but its a lot of work and risk. When we go to sale, we want “Cost” plus “Revenue Stream”. Why sell someone an asset the “Cost” will stay the same in the 10 years, forgetting inflation; with a “Revenue Stream” that will pay it off. Especially since “locations” will be harder to find.

Q. REIT Ready- Add onsite management facilities. Shoot for more than a 300 unit location in a city, versus small town.

R. Downgrade- Reverse 1031 or Syndication.- Say you have bought all of the locations you can handle. Have added all of the Value Add you can do. Everything is perfect. Now you have two value streams captured. 1. Increase cash flow from operations., 2. Increased embedded location “Added” value. To “realize” the embedded “Value Add” you would need to sale.

Impact? Your Bored. "BRRR" You have finally learned, executed and become efficient at all Value Add techniques and now that is worthless, because you can't do anymore deals. Although you have "2" above captured, your not generating anymore of this "Value Add" profit potential on your existing units. How do you "Cash Out" and start this all over again? You do the last "R". Talk with your RE Tax accountant and understand all of the angles, documentation, impact, etc.

Reverse 1031- you Buy, then Sell. Versus 1031 you Sell, then Buy. 1031’s have time limits on them. You don’t want to sell, then be forced to Buy in a short time frame. You would rather be forced to “Sell” in a short time frame since Self Storage is a hot commodity and can easily be sold in 90 to 180 days within 1031 guidelines (talk with your accountant). A problem with doing 1031 exchanges is finding the proper size deals. Example if you Sell a $5mm dollar operation, you might have to find 5 $1mm operations. That’s hard under a time constraint, and do they fit your above “Value Add” strategies? Its easier to buy 5 $1mm operations (buy options), and then be forced to sell your $5mm operation.

Syndication- No background in this. High level you might move your investment into a syndication and take cash off the deal up front, since you already have a packaged deal. This would be good for Financial Investors, who don't realize or care about the "Value Add" or BRRRR profit potentials. Basically take your "Value Add" profit out of the deal. Keep the revenue stream income embedded in the Syndication. Again talk with an experienced Syndicator and your RE Tax Accountant. This won't be your area of expertise.

S. Value Add Returns ($) and upside? If you have been aggressive be aware of any Depreciation recapture and tax impacts.

There are several types of revenue streams: 1. Developer- higher risk/higher reward/Strategic Site selection.; 2. Buy location.; 3. Marketing control market in the town and nearby.; 4. Value Add.; 5. Packaged locations.; 6. REIT ready in A/B market.

I would rank E- extra land first, then M/N (add more locations or buy locally) and then Developing as having the greatest impacts financially the quickest versus effort. All the rest should be worked on because they are easier and faster. They also reduce management needs, allowing you to scale faster and spend more time on Deals.

Side note:

You just Died: While you are doing all of this Fun work and adding value and wealth; this is the greatest time you, your family, vendors, financiers and customers are at risk. Read my post, “So you just Died”. Can you imagine having $150,000 in your company bank account with no access and your family and Contractors are having to take out loans to cover your debt? Realize your supposed to end on a Fun note, but the above was truly one of the most enjoyable exercises my Wife and I did. When you take care of this its full bore forward and your not looking over your shoulder.

Not included is Controlled Climate and Multi Story business models not included. I like to stay in my “lane”, plus you can beat that model with Drive up, non climate. If you truly deep dive above, you will realize there is far more profit potential, room for growth and less risk in the B/C/D property range.

Start small and Make Your Big Mistakes Early