Absolute Newbie Considering Self Storage as First Deal

Real Estate Deal Analysis & Advice
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Absolute Newbie Considering Self Storage as First Deal

Tony S.
High Point, NC · Member since 2011 · 10 posts · 1 vote

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

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Rich Weese
Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
12y

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

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  • Giovanni Isaksen
    Investor · Bellingham, WA · Member since 2010 · 308 posts · 230 votes
    12y

    Tony, check out the thread here called: "Success in the World of Self Storage" started by @Michael Wagner. A lot of good info and discussion with people who are already in SS-

    1Reply
  • Tony S.
    OP
    High Point, NC · Member since 2011 · 10 posts · 1 vote
    12y

    Hey,

    Thanks for the recommendation, I had read some of his other posts, but I'll specifically look for that one.

    Tony

    0Reply
  • Aaron Montague
    Rental Property Investor · Brookline, MA · Member since 2013 · 1k+ posts · 777 votes
    12y

    Put up some seriously ugly numbers and see if the places still works. Being a rookie does not mean you don't know what you're doing, it just means you decision(s) will be made without the benefit of experience.

    What happens if it is only 60% occupied for a long period of time?
    Does your life change dramatically if you are having a little/a lot/a ton of financial trouble with the rental?
    Do you know how to market the units?
    Do you have the money to market the units?

    Financing will probably require at least 10% down, no matter how you end up looking at it. Who knows how much the bank will actually take for the property. Part of the process of getting into the business of anything is figuring out how to maximize you returns.

    Maybe the bank that owns the place will look favorable about getting rid of units for short money if you get a loan through them. Who knows. Get creative and keep bouncing things off the players until something sticks and you make some money.

    If you want to let someone know they are being thought of in a post, add @Tony S. to the mix.

    1Reply
  • Tony S.
    OP
    High Point, NC · Member since 2011 · 10 posts · 1 vote
    12y

    Aaron,

    Thank you for the input. I have been "what if-ing" this property for a little while now, and honestly I don't see a major downside. Even at the current 45% occupancy, with the NOI I was shown, and using the asking price with a down payment of 10% it looks like it would be paying for itself. I had already checked and the current bank will not finance it, which is odd to me, but perhaps they just want to get away from it. I'll continue considering what you mentioned and see if I can find the scenario that would keep me from wanting it, and then it's a matter of guessing how likely that is.

    Thanks for the tip on how to include someone's name. I was trying to tag the names I mentioned before but I wasn't sure how to do it.

    Tony

    0Reply
  • Rich Weese
    Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
    12y

    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

    7Reply
  • Tony S.
    OP
    High Point, NC · Member since 2011 · 10 posts · 1 vote
    12y

    Happy Thanksgiving to you as well!

    This post is exactly what I needed! I knew I was just too excited by some of the big numbers that I thought looked good. I had started to wonder about the tax issues, and you really cleared those up for me and showed that they definitely would be a problem.

    My plan is/was long term hold. As I mentioned, I hadn't considered many of the things you brought up, but I do think that there is a lot of room for growth for this property. The reasons for the low occupancy seem to be pretty straightforward, there are other options available that actually have gates, lighting, cameras, etc. and this one doesn't. I had thought that fixing those issues and just re-marketing the property would begin to fill it up, but that may have been overly optimistic. I am not sure how the housing market in the area is doing, so I will look into that, as it seems like a crucial element.

    Your input has definitely given me a lot to consider, and was much needed. It seems like for my long term goals this may not be the best fit, but I'm going to continue to look into it and see what I can learn.

    Thanks!

    Tony

    0Reply
  • Rich Weese
    Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
    12y

    More research is always a good thing. Make sure you are comparing apples with apples in your excitement for this property. Good luck on this and other projects.

    p.s. Thanks for the votes Jeff and Steven. I admire both of you and your input on BP is always point on.

    0Reply
  • Jim P.
    Boise, ID · Member since 2013 · 45 posts · 18 votes
    12y

    Not trying to derail this thread....

    Thanks to the very helpful experienced veterans here on this thread... As a newbie myself(I should close on my first duplex in two weeks)- it is amazing how helpful everyone at BP is. I learned many unknown things just in the five minutes of reading this thread... thanks guys!

    0Reply
  • Tony S.
    OP
    High Point, NC · Member since 2011 · 10 posts · 1 vote
    12y

    You're right Jimmer, great people here, and this thread cleared more up for me than any of the research I'd done prior to reading what was said here.

    Thanks again everyone! I think that after taking everything into account, this just isn't going to be the right fit for my first deal. Oh well, another one is out there.

    Tony

    0Reply
  • Aaron Montague
    Rental Property Investor · Brookline, MA · Member since 2013 · 1k+ posts · 777 votes
    12y

    @Rich Weese How is depreciation determined on storage facilities?

    0Reply
  • Rich Weese
    Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
    12y

    Same way as other real estate. Deduct the land value % and the amount you have left is your depreciation amount to write off. Since the structure is basically a shell, the % to depreciate is tiny compared to other types. Hope this answers it for you. As most on BP that know me, NOBODY hates paying income taxes more than me. I'm going to need more depreciable basis from other stick built RE and probably the same cash flow-only some of it will be offset. Rich

    1Reply
  • Tony S.
    OP
    High Point, NC · Member since 2011 · 10 posts · 1 vote
    12y

    The comments you made regarding taxes really hit home with me, and I hadn't considered that aspect of it before your first post on this thread. I absolutely loathe paying taxes as well. After letting what you said marinate a bit, it's enough of a deal breaker to point me away from storage right now. Maybe if I was more experienced and had plenty of other properties for the depreciation, but I'm just starting out and could really use some tax benefits.


    Tony

    0Reply
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