How do I know if I should buy this property?

Have you ever looked at a self-storage facility and wondered, “Should I buy this? Is it worth it?” There are a lot of ugly properties out there that are more than worth it and there are a lot of beautiful properties that you should walk away from. In today’s blog, we are going to discuss how you know the difference between the two. Keep reading to find out more!

We are going to evaluate a self-storage facility to see if it is something that we want to buy. This is an older mom and pop self-storage facility that has been occupied at about 95% to 100% for years. The reason for that is because they have kept the rents the same for the last 10 years. The property needs some cosmetic updating. The main structure and layout are fine, but it has old paint that is weatherworn. There are 136 drive up units. Some of the doors are a little lopsided. 10 units are 10x20s, 40 units are 10x10s, 50 units are 10x5s, 36 units are 5x5s. The exterior fences to the property are damaged. Many people drive through the facility to get between two main streets because the fencing is damaged and missing in places. This has left a lot of potholes in the asphalt.

The cap rate for the area is 6%. The area is like every other area, it is holding its breath waiting to see what is going to happen with the pandemic. However, there is a very diverse job market, and the economy seems to be weathering the pandemic storm. There are still layoffs and there are still people who are financially struggling, just like every other market.

Now that we have set up the scene, there is a lot of information there for us to analyze. The sellers have said that they might be interested in selling, but they want you to make an offer. They will not disclose any of their numbers to you, so you must do your homework.

After a lot of research, you found out that the area supports rents of $44 for a 5x5, $63 for a 5x10, $127 for a 10x10 and $275 for a 10x20. You know that the current rents for this self-storage facility are substantially less than this so you will have a mass exodus if you buy the property and raise the rents to market rates all at once. This means that you will have to gradually ramp up to the max gross operating income. If you assume that you will be at an 85% occupancy rate once you raise the rates, then you know that your gross operating income will be around $128,152.80. You get this by taking the market rates and multiplying them by the number of units the property has. Then you multiply that by 12 to get your annual income and then you multiply that by 85%.

You can assume that most self-storage properties will have about 34.34% in expenses off the gross rent. Now, this is just an estimate. You may find that you are able to keep your costs much lower because you have a different portfolio or management style. Until you know exactly what your numbers are, we are going to use the national average. This means that you will take $128,152.80 and multiply that by 65.66% to get your net operating income. This leaves you with $84,145.13 as your net operating income for the self-storage facility. We know that the market will support a 6% cap rate. If we take the Net operating income of $84,145.13 and divide that by 6% we get a market price of $1,402,418. This is not the current value of the property. This is the value of the property once it is rented at market rent and the repairs have been completed.

Now that you know what the self-storage property can be worth, you must decide what you are going to offer. You obviously must reduce the price by the amount you are going to pay in repairs. You must do the deferred maintenance yourself to raise the rents and so you need to take that into consideration. If

it is going to cost you $150,000 to do the repairs, you should subtract $165,000 to compensate yourself for managing the construction. You should also reduce the price by the amount that you want to make in profit. You should be paid for the work that you are going to do to get this property in shape. This might be 10% or 20% of the future value, this may be a smaller number, the amount is up to you. What is your goal? Now that you have subtracted out those two amounts, is your offer reasonable? Are you embarrassed by your offer? If not, lower it?

You do not want to put in an offer on the self-storage property that leaves you thinking “what if” for the rest of your life. You want to make sure that if they accept your offer, you feel like you got a great deal. The person who puts out the first number usually loses. That is why they want you to make the offer without giving you a number. If you offer $1,000,000 and they were hoping for $900,000 then you just lost $100,000. However, if you offer $800,000 then there is some room to negotiate. Make sure that you feel really good about your first offer so that if they accept it, you spend the rest of your life happy with the amount you offered instead of always wondering if they would have taken less.

Let’s spend a minute talking about beautiful self-storage facilities. If someone is asking market value for their property, how do you make a profit? Sure, there is cash flow, but ultimately, when it is time to refinance your loan in 5-7 years, how are you going to show that your facility has increased in value so that you can refinance? Never bank on appreciation! You must make money when you buy your property. That way you know that you have equity in the property from day 1 or you know that you have a way to improve the property so that there is equity.

Buy your property with your end game in mind. You may think that you are going to keep the property forever, but always keep the idea in your head that someday you are going to sell that property for top dollar to one of the large chains. You cannot sell the property for a profit, if you bought it for what you can sell it for. Make sure that you buy your property at a discount so that you can make a profit when you sell it. 

As always, 

Happy investing