The Pro Forma: How to Tell if You Want to Buy a Self-Storage Property

Ideally, you want to keep your purchase price as low as possible. The seller wants to get the purchase price as high as possible. This is where the pro-forma is going to come into play. The seller is going to provide you with a list of income and expenses. They are going to try to show the property in the best light possible so they can get the highest price possible. You are going to verify all of those numbers to make sure that they are accurate today.

However, you are also going to create a pro forma of what you think the property could be. You need to know how the property has performed in the past, what you are getting into today and the potential the property has. If the property is already performing at its maximum potential, how will you double the property value in the next 3 to 5 years? You can’t.

The first thing that you should look at in a pro forma is the income section. What is the gross income? What was it during the last 2 years, what is it this year, and where do you see it going over the next 3 to 5 years? Will the income increase? If so, how? Will this income increase because of new management and advertising techniques? Are the current occupancy rates lower than the market standards? If there is no way to increase the income, then you need to look at the expenses.

You are always going to have vacancies. You are going to have renters that move out before new renters can move in. That will create a vacancy. What is a realistic occupancy rate? How long will you be vacant for between occupancies? How will these temporary vacancies affect your income?

What incentives are you going to offer current tenants for referrals? How are those incentives going to decrease your gross income? Are you going to offer free rent to new tenants or discounted rents to new tenants? How will that affect your income? Once you know what your Effective Gross Income is, then you can determine your net operating income.

The next thing that you want to determine is what the net operating income is. You may know what the property has the potential to bring in, but you also need to know the potential expenses. What does the property have in current expenses? What are the property management fees? How much does it cost to maintain the property? How much does it cost to operate the self-storage facility? What do you pay in real estate taxes and insurance? What do you need to set aside for reserves? How much do you need to set aside for capital expenses?

Now that you know what the expenses have been, you need to project what they are going to be. Don’t underestimate your expenses. You don’t want to create a property that cannot exist. You need to be realistic in what your self-storage facility is going to cost. This is the only way that you will know if you have found a great opportunity.

Knowing where the property has been allows you to project where the property has the potential to go. You want to be realistic when you make these projections. You want to make sure that you do your research. How much has the market increased? Do signs show that the market will continue to increase at the same rate or is the market slowing down? Are your competitors continuing to raise rents every 6 months or do they keep their rents stagnant. You need to be able to increase your rents if you are going to increase the value of your self-storage property.

Your pro forma helps you keep a lot of information in one spot. It also lets you know in a glance if you want to move forward on a self-storage facility. If the pro forma indicates that a property has no upside potential and you have backed that pro forma up with research, you may want to keep looking. As always, happy investing.