Determining Cash Flow from your Market

Every market has a threshold that it can bear for rents. If your rents are too high, potential tenants will go somewhere else. If your rent is too low, you will lose out on income. You must research your market to find out what the perfect rental rates are. What will your market allow you to charge for a unit?

The first step in determining rental rates is finding out what your competition is charging. A lot of times you can do this by visiting their website. They will have their rates published for each size unit. Now there are different rates for each size unit depending on the location of the unit. However, you can assume that they are advertising their lowest rates available for each unit price. You also want to focus on the properties that are within 3 miles of your facility. Most people will not travel long distances to find a self-storage facility. There is no reason for them to drive past 10 other facilities to get to yours.

If your competitor is not advertising their rates, then you should call them and ask them what they would charge for a 10 x10. Then you can go up or down from there depending on what you are most comfortable with. You are probably not going to be able to get every rate from them on that phone conversation, but you should be able to get a good enough idea that you can establish what your rates should be.

Once you know what your competition is charging, then you will know approximately what you can charge. If you are considering purchasing an existing self-storage facility, then you want to compare their current rates with what the market can sustain. Is there room to raise the rents or are they already at the top of the market? If there is room to raise the rents, then the property has room to increase in value simply from bringing the rents up to market rates. If the property is already at market rates, then you need to look at the occupancy levels.

How many people live within 3 miles of your self-storage facility? Google can help you get this number. Once you know that, then you can estimate that approximately 10% of these people will utilize self-storage. Now you know the demand for self-storage. It is time to determine the supply. You can figure out the supply by going to the county records and looking at every self-storage facility that is within a 3 mile radius of yours. How big are they? Do they have the number of units listed? If not, estimate them. If you use a bell curve, you can assume that the majority of the self-storage units are going to be 10x10’s with a few larger and a few smaller. However, if you take the square footage and divide that by 100, you should be able to get a rough estimate of how many units each facility has.

If there is only demand for 5000 units and there are 7000 units in that area, then there is no way that you will be able to be get 100% occupancy. On the other hand, if there is demand for 5000 units and you only have 4000 units, then you should easily be able to keep your unit completely rented. More than likely, you will have around 6000 units. This means that each property will have an occupancy rate of around 83%. This means that you want to assume that you will never be higher than this.

Once you know what your units can rent for and what the demand for your area is, you can determine what your property has the potential to generate in income. Take the number of units, multiply that by the rent and then multiply that by 12. Take this number and multiply it by your occupancy rate. This is your gross operating income. The next step is to determine what your expenses are. We will cover this in the next blog.

Knowing how much income your property can generate is a big step in knowing how much your property is worth today and how much upside potential your property has. If there is no way to increase the value of the property, it may not be worth as much to you or your investors as a property that has a lot of upside potential. Be sure to do your homework before you close on any property. As always, happy investing.