Your Self-Storage Expenses Can Make or Break Your Property

When you are determining the value of your property you need to know what the gross operating income is and what your expenses are. This allows you to determine what the CAP rate for the property is today. Once you know what this number is, you can figure out what a good offer is. You can also project into the future to determine what your property should be worth. This will help you to predict the upside potential of the property.

There are many different investment strategies. Whether you intend to keep your property forever or you are in the fix the property up and turn around and sell it for a profit business, you need to buy at the right price. If you pay too much for a property, it will take years just to break even.

Start by determining what your net operating income is today. You do this by taking the Gross Income and subtracting the expenses. Sometimes the current owners will pad the numbers by making the property look like the expenses are less than they are. You need to review their profit and loss statement to make sure that your numbers are going to be close to what they have.

For example, they might have their cousin managing the property for a free storage unit. That isn’t something that you are going to continue to do. You want a fantastic, well trained, motivated manager in the office who can hit your target goals and keep your units rented. This means that you will be paying them to do that. This is an expense that you need to figure into your numbers.

You also notice that Uncle Johnny is “doing the maintenance” for a storage unit. The place looks terrible, and this is part of why it is losing renters. You are going to replace Johnny right away and that is another expense that needs to be figured into your numbers.

On the other hand, they may have some numbers in there that are highly inflated. Your expenses are going to range anywhere from between 35% and 45% of your gross operating income. Review the numbers and make sure that they match what you are estimating for the property.

Now that you have your actual net operating income, you need to look at the market. What is the average CAP rate in your area. If the average CAP rate is 7% you want to try to get a higher CAP rate. You are the one that is going to have to fix up the property and get it fully occupied, not the current owner. They do not deserve to get full market price for a property that is not up to full market standards.

You also want to look at market trends. Self-storage is traditionally incredibly stable. Because it is such a strong asset, there isn’t a lot of variation in the value of self-storage properties. However, interest rates can affect the kind of returns that buyers need in order to cash flow. What are interest rates predicted to do? Are buyers going to need to get higher returns in 3 years in order to cash flow? Does this mean that the CAP Rate is going to have to come down for them to cashflow? If so, does this change your strategy? Does this mean that you need to buy the property at a bigger discount today? Is that realistic based on how strong the market is today?

There are a lot of factors to take into consideration when you are looking at a self-storage property. You want to know that you will be able to make a profit on the property that you are buying before you buy it. Review the profit and loss statements to make sure that they are accurate for what you are going to be doing. As always, happy investing.