Success in the World of Self Storage

[Michael Wagner]

I thought I would post the link to my most recent blog article here. It includes a VERY brief (and entirely incomplete) description of what it takes to be successful in real estate. It also links to a case study detailing the success I have recently experienced in my chosen niche of Self Storage. I hope you enjoy reading it!

http://www.biggerpockets.com/blogs/3915/blog_posts/27561-a-case-study-in-self-storage

[Brandon Turner]

Nice Michael Wagner! Looks awesome!

[Seth Williams]

Thanks for the insights Michael Wagner. I just closed a loan with a self-storage owner yesterday (he does really well for himself and has 100% occupancy, with a waiting list). This niche always sounded interesting to me. I'd love to learn more!

[Andrew Herrig]

Very interesting article. I really like the case study you put together. Makes me want to learn more!

[Michael Wagner]

Seth Williams, Andrew Herrig- I am more than Happy to answer any specific questions you have about storage.

Seth-As a courtesy to your borrower, you might consider gently telling him that 100% occupancy is actually a problem. Sounds crazy, I know but its true. Granted its a great problem to have but I'm hoping he is using the loan to expand his facility to meet demand. Alternatively he really should be raising rents immediately. With 100% occupancy AND a waiting list, he is vulnerable to an influx of competition. Calling facilities in search of a situation just like his is one way storage investors can identify under-served markets. He can make the same amount of money at 85-88% occupancy by raising rates to off-set the increased "vacancy cost" and, at the same time hold competition at bay. Plus, as he sits now he has no idea how much money he is leaving on the table by keeping prices too low. Turning him onto these tidbits is a great way for you to "add value" even after your commissions are earned....that should generate a lot of goodwill!

[Seth Williams]

Wow, that was brilliant. Thanks Michael Wagner! It seems so obvious, yet I probably wouldn't have thought of it myself. These kinds of conversations are where the BP forum really shines!

[Daniel Miller]

Hey Michael,

My family purchased a self-storage facility in August of 2012. I really love the business. The people are great. I have had one issue in 14 months. A gentleman was living in the unit. He got pissed that I asked him to leave and he started defecating inside the unit. Did I mention I live in Florida? It baked...That was not a fun morning.

We only have 0.85 acres of land. There is no room to expand. If I could I would though. Its a great business and much less intrusive/exhaustive as multi-family. Also, there is no more land to build near downtown. Even if competitors wanted to come in they physically could not.

Ill run through the numbers with you.

Previous owner purchased in 2004 for $649,000.

We purchased in August of 2012 for $515,000.

I have tried increasing the rents, but when I do people move into the large climate controlled facility. Its $200 for their equivalent, large units with A/C. Ours are not climate controlled.

We are at 100% occupancy within the Self-Storage Units and have 66% of the parking spots occupied.

Gross Rents

42 Units at $160 = $6,720

4 Units at $45 = $180

9 Units at $75 = $675

15 Parking Spots (10 occupied) at $50 = $500

$8075 monthly / $96,900 annually

RE Taxes - $8,300

Insurance - $6,400

Maintenance and Repairs - $4,000

Replacement Reserves - $2,000

Management Fee - $6,000

NOI - $70,200

Cap Rate - 13.6%

We could easily sell this now for $775,000 - $825,000.

Parents do not want to sell. They love the cash flow...and if someone moves out it really doesn't affect the bottom line.

I manage this for my parents, so the management fee might be a little low but it all goes to the family. I am cool with it.

I really wanted them to put 50% down and get a loan so we could invest in something else but they wanted somewhere to put their money.

Storage is getting aggressive here in Florida. Cap Rates have significantly dropped and many are selling for their peak levels.

Another interesting fact...Self-Storage REITs posted positive growth throughout the entire recession!

I hope this helps anyone looking at storage. Its a great feeling to go to the mailbox at the beginning of the month and collect 65 checks!

[Michael Wagner]

Daniel,

Is sure sounds like you've discovered all that is good with Storage! Congratulations. Your story is an inspiring one and I love hearing about other's success. If I may provide some unsolicited advise.....might not be a bad idea to shop around for another insurance quote. Obviously your location could be the cause of rates that seem high to me (we get a lot of snow up here in NY but not as many property destroying disasters). Even with that its worth a second look, we currently pay around $2500 annually for our insurance and we now have a total of 25,000 square feet insured (5000 sq. ft. is a pole barn, rest is typical storage).

All the best,

Mike

[Daniel Miller]

Mike,

Thanks for the advice. I am going to look into that. I do not know why it is so high. We are not in a flood zone...

Thanks again,

Dan

[Dave Sparks]

Daniel - You don't have any employee costs shown. How do you operate a self storage facility with no employees? The one I use has an office that is open 8-10 hours a day. Each time I go and pay my $68/month for 40 sq ft of space, I run the math and think the place must be a gold mine, but then I see that it's Owner Operated and that they live upstairs over the office and the shine disappears a bit.

[Daniel Miller]

42 of my storage units are very large. 12x24 units with 14 foot ceilings and 10 foot wide bay doors. Contractors love to rent out these units. They can pay in cash (I have a largo drop-box mail box I installed that can only accept mail. One cannot reach into it. It has to have a key to open). Everyone mails checks, cash, or money orders at the beginning of the month.

I make appointments with people and 75% of the time they show up. The Mgmt Fee is the only employee cost associated with it.

If someone wants to see a unit they call me. I make an appointment with them (I live 1.5 miles from facility) and show them the unit. If they like it I sign them up. If not, then we separate. The whole process takes 10-20 minutes.

[Ron Karim]

I am new to self storage and analyzing 1st deal in Texas. Would like to hear views from seasoned investors how best to approach the deal, here are the key items -

1. Asking Price $500K, 22,000sqft, Cap rate 10.16; NOI $51.8K, Expense $51K, vacancy 45%. Rental rate 15% below competition. Claims poor mgt.

2. 1.9 Acre, limited room for expansion (existing space used as 50 boat/RV parking spots), Class C property, built early 80s, metal, no climate controlled. Visibility is fair with average access. Traffic count is fair to poor.

3. Demographics of 3 mile radius - 135K people, median household income $48K, existing storage competition is 385K sqft

Thank you, Ron

[Michael Wagner]

@Ron Karim

Sounds like you might have some potential here. The single biggest question you have to ask yourself is if you can identify the cause of this facilities sub-optimal performance and, if so, can you fix it. IF it truly is management, and you live locally, then that should be an easy fix. That was exactly the case with my facility and it was incredibly easy to go from 55% to 95% just by picking up the phone. Don't count on it being that easy though. Assuming your NOI is an ACTUAL NOI and not a proforma, the asking price seems fair and there appears to be a ton of upside if you can answer and solve the question above.

Biggest thing you didnt mention in your post is competition. How much and how good? Is this facility 55% full because the market is saturated and its the ugliest of the bunch? Or would some lipstick and maintaining the aggressive rental rates allow it to compete? Best way of doing a preliminary search of the competition is to google map all the facilities within 3 miles. You can then use google maps to determine sq. footage available at each facility (count each door and multiple by ten:) to get length and width at each facility. Once you have than you can get rates from online or by calling. Also need to find out occupancy rates at those facilities. This will take a bit more digging. If the findings are positive, it may be a simple management overhaul and that would be awesome.

Lastly, the poor traffic count means you should expect to pay more in advertising. If they are paying 6-8% (industry standard) you might factor in 10% or so to push thier NOI and associated purchase price down. DO the rest of their expenses line up with industry standards?

Hope this gives you something to think about. Always happy to talk SS! Reach out anytime.

Mike

[Ron Karim]

Thank u Mike. The competition from B and C class properties within 3 miles radius about 300k SQFT, while in 1 mile is say 120k SQFT. There are 5 facilities in 3 mile radius - A, B, C class. Most are around 80 pct full.

The NOI is recast to $39K based on actual expenses. The property will need a new face, a lipstick will not do! I think the top 5 things to do immediately after acquisition will be - increase visibility, increase access/security, put marketing in overdrive, put a new 200 SQFT office in front part of the existing 800 SQFT apt. And add a kiosk. Since I have a FT job, the expense above includes 1 FT employee during the week.

Current owners do not have any mktg budget and he is focused on the retail part his business.

I would really appreciate you consider sharing some of your ideas those could yield better results for turning around the facilityi. Thank you again, BR, Ron

[Michael Wagner]

@Ron Karim ,

Couple things jump out to me. First, it seems that there should be plenty of demand within your 3 mile market as there seems to be roughly only 3 sq. ft. per person.....this is very low. What I can't figure out is why with this low supply, are the competitors not more full. With suplly like that, I would imagine all folks at 90% plus. Did this strike you? Do you have any insight into the dynamics at play in your particular market. This to me is the big question.

Even with 80% occupancy at all competing facilities, you could create a lot of value in your property just by getting up to that number. The question becomes what will your improvement cost and what increase in value can you project as a result of them?

Also, consider getting creative with your one full time employee. I have been able to outprice my competition by limiting office hours to 16 hours per week. All other customer needs handled over the phone or by appt. We move 50% of our clients in remotely using email and telephone. Just an idea on how to cut that expense....essentially you pay the manager for the office hours and then either per task after hours or use an incentive program/revenue sharing to facilitate after hours efforts (only if he/she is sophisticated enough to do well in this type of system).

Lastly,

I would recommend figuring out how high you can get occupancy up just by marketing and answering the phone. That way you only do the renovations that add the most to bottom line until revenue is up some and can support the other improvements that will vault you above the other B and C'ers.

Hope some of that helps.

[Nate Miersma]

@Michael Wagner - Super impressed with your willingness to share your expertise! Only at a place like Bigger Pockets does this seem to be the norm rather than the exception. Thank you for your selflessness!

[Michael Wagner]

@Nate Miersma , Thanks for the kind words! Happy to share.