Primer on Underwriting Storage Deals

There are nuances to underwriting commercial properties but underwriting storage facilities are not inherently difficult. Aside from merely calculating the monetary returns that a storage facility can or may generate, be mindful of other important factors.

• Supply & Demand

Studies have found that people choose storage that is within five miles of their household. Generally speaking, the less storage available, per capita, in a five mile radius from a storage facility, the better. One rule of thumb is eight square feet of storage space per capita. This can be calculated simply by obtaining population figures and identifying the storage facilities within a five mile radius from yours on Google Maps, or by using some paid services, like Radius+.

While this is a good rule of thumb to follow, at a high-level, in determining whether the market can support the storage facility and future rent increases, you should also determine the occupancy of nearby storage facilities. If there is ten square feet of storage per capita, but you find that the nearby facilities are all on a long wait list, the market can still be strong. You can obtain this information simply by looking at other facility websites or secret shopping them (calling to ask for availability for a unit).

• Population Growth

Storage investors generally search for areas where the population is growing. As more people come to the market, the demand for storage increases, thereby allowing facility owners to increase rents and buildout additional storage buildings.

• Estimate the New Tax Rate

This is particularly important in storage because so many facilities are owned by mom and pops, and have been in families for decades, resulting in the assessed value of the properties being far less than market value. Some cities and counties chase the sale, and increase taxes when you close, while others will largely disregard the sale in its calculations. Be sure to discuss with the tax assessor’s office to understand the potential tax increase.

• Understand Value Add Opportunities

Similarly, you should review and discuss permitted land uses with the county zoning office. Is the property grandfathered into its current use? Is outdoor RV or boat parking permitted? If you want to build an additional storage building, what regulations are in place? Simple questions like these will help you underwrite the potential income of the facility.

• Median Household Income

Generally speaking, households that have a storage unit earn more than $45,000. Again, this is not a hard and fast rule, but something you should identify as you are underwriting.

What else do you analyze when underwriting a self storage deal?