Absolute Newbie Considering Self Storage as First Deal

[Tony S.]

Hi Everyone,

I've read through most of the threads I could find on self-storage and have seen a lot of good input from various sources. I am particularly interested in what Rich Weese and Michael Wagner have had to say in some of the threads I've read. Basically, as the subject line said, I have been watching real estate investing from the sidelines for a while, but have yet to pull the trigger on a property. I have found one that I think could be a winner, but I want to see if there is anything I'm completely missing and maybe gather some good questions I should take to the seller before jumping in.

The basics are that it is a 247 unit business, split between two locations. It is bank owned and currently on the market for just over $500K. With the current NOI, the cap rate is 10.6%, but that is at only 45% occupancy. The low occupancy is due to various factors, not least of which being that the bank doesn't want to spend money on it. It needs probably $30-50,000 invested in it to replace fences, gates, add cameras, etc. Competitors in the area are seeing over 85% average occupancy, which, if I could match, would give the property over a 19% cap rate.

One thing I've read that makes sense is that this is a business rather than purely a rental property, I understand that part of it and am willing to take that on, as I think there is significant upside to be had here. However, I absolutely recognize my lack of experience and my emotional response to what I see as great numbers, so I'd love to hear from anyone who knows about this sort of thing. What should I be wary of, what questions should I take to the seller, what type of financing would be best for this kind of deal? I have read that SBA loans are available, but it seems that commercial real estate ones would be too. It seems like there may be pros and cons of each. Do any of the pros have recommendations either way? Basically, I just don't want to rush into a bad decision, if there are red flags that those more experienced than me are seeing.

I appreciate everyone's time and input.

Regards,
Tony

[Rich Weese]

Happy Thanksgiving Eve to all on BP!

Tony- As I replied in my e-mail to your PM, you'd get more responses this way.

Aaron gave you great pointers and although I've not read the thread by Michael Wagner, I'm sure it will be great for you. My input is strictly from buying one single facility in SW Florida and the experience of owning it. I do have a couple thoughts on the one you're looking at.

247 units is not very big and with it being in 2 locations, I'm immediately concerned about the mgmt. Are you going to handle it yourself? On location? Available just by phone? What are the other facilities like in the area?

With storage facilities your expenses are roughly the same for 200 units or 1000 units. The security, surveilance, software system, advertising, etc don't really change. It is much easier for me to amortize my expenses over my 700 units (all in single location) than it would be for you. I have hours that are managed by staff and that makes things ok for me. You need at least a couple which I doubt your facility will afford.

I worry about a couple other things. Why does the Bank want ZERO involvement? Age of facility? Age of roofs and doors etc. They can be expensive. We had to redo our roof and facility was only 10 years old. Why is it only 45% occupied? I bought mine when FL was in the doldrums and it was still 52% occupied. It is my experience that storage does well when RE is doing well. People need to be buying and selling. When that is not happening, not much activity in storage. With everything selling recently, I'd be concerned as to why only 45%. We're at about 84% now.

The other thing is that it can be a cash cow, with very little protection from tax consequences. There is almost no depreciation to offset the cash flow. With current administration, you'll be keeping less and less.

What are your plans for the property? Long term hold? Fix, rent and exchange? My purpose was to buy, rehab, maximize rents and exchange. It is ready now. Having no loan on mine, the cash flow gets hammered by taxes. I'll either refi or exchange property next year after we've had 2 good annual returns for buyers to see.

Last thing. This is not just buying a piece of real estate. This is a business somewhat like a hotel or restaurant. Employees, govt and county/city reporting. regulations, credit card handling, security etc. It can be a real learning process.

Know your competition and why are they at 80%? Location, on site mgmt, better security, nicer, etc? If you can fix things to compete with them, then you'll maybe be ok. If you can't compete due to age or items above, then don't think you'll reach their % of occupancy. Good luck. Rich