The 5 rules of thumb – Due Diligence in Self-Storage

What is due diligence? Due Diligence is the time frame needed for you to do all the research on a property to know whether or not this is an investment that is going to work for your investment model. The due diligence period allows you to back out at any time if you find something that won’t work for you. So how long does that take and what does that entail for self-storage?

The first thing that you want to do when you are doing due diligence on self-storage is you want to review the financials. What do the books really look like? Are those numbers realistic or do you think that they should be adjusted based on when you take over? For example, do they pay a manager, will you? Will there be a difference in salary? They may be paying Aunt Mary to manage the property in exchange for free storage. Make sure that the number in the pro-forma is the number you plan to spend.

Another thing to consider is that many of the people renting are family and friends and they might possibly move out. Look at their profit and loss statements very carefully and form your own proforma based on what you will do with the property. Your numbers will determine your Net Operating Income. Does this number still work for you?

You also want to make sure that you give yourself enough time to verify that you can make the changes to the property that you want to make. If you are building new self-storage or adding on to an existing facility, you need to get contractors out there who can tell you how much it is going to cost and how long it will take before you will be up and running.

You will need to find out how long it will take to get the permits necessary to make those changes and then add another 2-3 months just to be sure. If you are making zoning changes you need a lot of time to go through the various meetings that the city will require. It can take a few months or many years to get zoning changes approved depending on the area that you are in.

Once you have calculated how long you might need to do your due diligence, then you need to find out how long your feasibility study and financing will take. The feasibility study is a comprehensive analysis of the property that backs up all of the information that you have gathered. This is a necessary piece of the puzzle for investors and lenders to be willing to work with you on your self-storage project.

Once you have all of these times lined up, then you can write an offer with a long enough due diligence period that you will be able to get everything in place before you start paying interest on a loan. You have to have time to research the property. You can’t do that in 24-48 hours. You can do preliminary work to make sure that this is a property that you want, but the due diligence period is where you verify.

Don’t be afraid to get creative in your offer. Ask for a lot of time but be willing to put down additional earnest money along the way to show that you are serious. Make sure that they know you are working on the process and that you are not just tying up the property.

Due diligence is a critical part of your offer and your research. Don’t skip over this. You need to know what you are buying and that it will work for you. As always, happy investing.