Purchasing a mismanaged (48% occupancy) self storage in Wichita

[Bill Zou]

Hey BP friends,

My partner and I have been looking for a value add self storage facility in Wichita and have been on the fence since there are multiple questionable variables that we're not too certain about so hoping to get some feedback and advice that can help us make a smart decision that we are in contract for.

Here's the breakdown:

- this is a 2 location property very close to Wichita state / Airport / surrounded by residential

- the area tends to be of lower income (market homes sub 80k compared to outer areas of Wichita that range from $200-$500K+

- has about 200 units (drive ups) in decent condition

- seller has 2 businesses and have been focused on the other primarily. mainly looking for an exit to fund other business ventures.

- spend $0 on marketing.

- priced slightly below replacement costs.

Things we are concerned about:

- location is not the best in town. concerned that it generally wont attract folks in the neighborhood, which negates the pro that this is centrally located around residential

- there are a lot of self storages in the east and southern parts of the city with more being built. not a whole lot more within the city though. I did some research with competitors and think occupancy is just hovering at 70-80% occupancy across the larger players.

- the whole "raising rents" concept may not work due to the community that it's serving (lower income)

- generally afraid of massive amounts of lay payments (which is part of the current problem)

Thanks for the help, all

[Henry Clark]

@Bill Zou

Responding to your DM.  It had additional info on it.  If you haven't done the below analysis at least 5 times on different properties, I wouldn't do this deal.

186 units, $1.6mm asking.

1.  Location is fine.  Read my post on location selection.  Do both a Sparefoot and a Google self storage search on that area.  Look within 3 miles.

2.  Lower income Hispanic area.  This is great.  They will appreciate the drive up access, versus elevator/cart system.  Also, they will like the lower rental rates versus the higher climate controlled rates. Basically, the same as all customers, unless you're in a high priced metro area, which this area is not.

3.  Value your offer as follows.  Make adjustments to the figures below, to represent Boots on the ground, knowledge.

Cost Basis:  Both locations combined.

    -  Land  use 4 acres x $80,000=  $320,000

    -  Utilities/ground work/roads- $100,000

    -  Buildings new- 186 units, let's say 170   15/20 equivalents at $4,100= $697,000 new.  Two years ago was running about $3,100 per unit.  You will need to adjust for condition of buildings.

   -  Electric work- lights/office- estimate $60,000.  Whether they have it already or you need to plan for additional investment.

   -  Security system- two locations, $50,000 again whether they have or not.

    -  Additional land to build-  the land price is included above.  Don't include the fact you can build, to justify their price.  In other words don't pay them for work you have to do.

     - Signage/Web site-  $20,000

     - Roads- concrete/asphalt or rock?  Get a quote based on the square footage.  Use 6 inch thick or get City requirements.  Let's say $400,000 new cost.

Total- $1,643,000 NEW.  They are asking $1.6mm.  Understand one thing, these aren't your numbers, these aren't my numbers (no boots on the ground). You have to put in the work to validate.  If they don't have a cost item above, then take it off.  For example, if they have no or little security system, switch the number above to zero.  The numbers I am giving you are for 1 camera to cover 6 storage units, plus special entrance/exit cameras.

Cash Flow basis:

Revenue- 170 equivalent units at say $80 each at 90% occupancy= $146,000 per year.  Adjust to actual. Using a basic 15/20 size mix.

Insurance- $7,000

Property tax- ???? $30,000  get actuals.

Electric- $3,000

Upkeep- mowing, snow, maintenance $8,000

Management- $??????? $10,000 your time/driving/taking calls.

Depreciation- forget for now, doing cash flow.

P/I- assuming 25% down on $1.6mm  $7,000;  Used $1,200,000 balance, 5% interest, 25 year amortize.  Change as needed.  =  $84,000/year

Total cash out= $142,000 before taxes/Depreciation impact.

Operating profit= $146,000 - $142,000= $4,000;  plus whatever is missing or needs adjusted above.

The above was at a 90% occupancy.  We always use 65% occupancy on our initial builds for breakeven from a cash flow standpoint.  Thus, based on the above figures I wouldn't do the deal.  Especially knowing you're at a far lower occupancy level currently.

If a deal looks good, I never walk away from a deal, without making an offer at "MY" value.  The cost approach above means nothing, if I can't make it cash flow.  We use a target of 8 to 12 year payback, which includes the P/I.  

Roughly backing into an offer price:

At 65% occupancy, revenue 170 units at $80 at 65%= $8,840/month = $106,000 per year revenue.

Costs as noted above without P/I= $58,000

Revenue less Costs w/o P/I= $106,000 less $58,000= $48,000 P/I before income taxes and depreciation expense.

$48,000  / 12= $4,000 P/I per month.  Run this through your P/I calculator= $690,000 offer versus the $1.6mm asking price.  Can you pay more, yes.  But set a baseline.

Summary:

Nothing above is "Correct". You have to run through the numbers.  Apply Boots on the Ground.  Determine your risk tolerance and management approach.  Cost approach, it's in the ball park at new prices.  Cash Flow, its far off.

Value Add- is easy.  Their hours need to be changed from M-F 9-5 to 8-10.  Half a day Saturday to open both Sat/Sun 8-10.  They aren't on Sparefoot.  The two locations are close enough together to feed customers between the two, if you're out of a certain size at the other.  Increase their ranking on Google Map to the top three.  This might not be worth it, for this few units.  Would do google ads by zip code and bus seats in your market.

Remember it's your money, you are always right.

Start small and Make Your Big Mistakes Early.