How do You Evaluate a Self-Storage Property to Make Sure You Want It?

You can’t really compare self-storage properties to one another. They have different locations, different numbers of units and different amenities. As a result, you need a way to boil them down to one thing that you can compare. The best way to do that is the cap rate.

You can take the net operating income and divide that by the purchase price to get the Cap Rate. This lets you know what the rate of return of a property will be based on its purchase price.

We all know that there are other things that can affect the value of a property. For example, you may be looking at a property that has a terrible cap rate and yet you still want to buy it because of it’s potential. There are mismanaged properties that have extremely low occupancy rates, or the rates are much lower than they should be. As a result, they have a very low cap rate. This means that you can potentially pick these properties up for a discount and then fix them up and sell them for a profit or keep them as a great investment.

Return on Investment takes several things into account. The formula is ROI = All gains / cash invested. All gains include the improvements you make to the property to increase the value of the property. It also includes any appreciation that has happened within your market naturally. If you have a property that had an annual cash flow of only $65,000 but it increased in value by $350,000 because of all the improvements, rent increases, and occupancy level increases you were able to make, then your increases are $415,000. You would divide that by the cash invested to get your actual return on investment. This number is different than your CAP rate.

Cash on cash return is another important factor to consider. You may have one property that is $2.5 M where you only have to put down 10% with an SBA loan and it doesn’t need any deferred maintenance, so you are only putting down $250,000 in cash plus closing costs. On the other hand, you have another property that is only $1.5M but it needs $500,000 in deferred maintenance. Unless you are able to incorporate those repairs into your loan, your cash on cash return is going to be much lower on the less expensive property because you are going to have so much more out of pocket. There are several things to consider when making an offer on a property.

Self-storage is a great place to invest. Self-storage holds its value well, it is a very desirable investment property. Remember that you make your money when you make your offer. If you offer too much for a property, then you will have to wait years for it to appreciate enough to be worth what you paid for it. On the other hand, if you are able to buy the property at a good price, you will have equity up front as well as the cash flow that the property generates. Run your numbers during due diligence before you buy a property. As always, happy investing.