Determining what to offer is critical when purchasing Self-Storage

Finding a property can be one of the more exciting parts of the marketing process. You have talked to countless people and have been told no numerous times and now finally, you have someone who has said yes. The problem is that the euphoria of being told yes can often lead to making a mistake when you are determining your price. So now that you have found someone who is interested in selling their property, let’s talk about how to determine what to offer.

When you are looking at a property, you want to make sure that you are going to make a profit going into the deal, that you are going to have cash flow while you own the property and, finally that you will be able to make a profit when you finally decide that you are ready to sell the property. In order to do that, you have to look at the numbers.

The first number that you need to look at is the current cap rate based on the current occupancy. The second thing that you need to look at is the upside potential of the property. Finally, you need to determine that when it is time to get out of the property you have added enough value to the property to make sure that you can sell it for a profit.

When you are evaluating the cap rate of the property, you need to make sure that you know what the average cap rate is for your area. Educate yourself so that you know what a good cap rate is so that you know what you need to offer. Cap rates change throughout the country, so you need to educate yourself on each area that you are investing in. If the average cap rate for an area is 7% and your property is asking 5% you have a little bit of negotiating to do. On the other hand, if they are only asking 9% you might want to find out why.

Make sure that you gather as much financial information as possible. They may not be willing to share tax information until you have the property under contract but at the very least, you need to get profit and loss statements so that you can see what the gross income is and what the annual expenses for the property are. Be aware that often these numbers do not indicate that friends or family are renting units or doing the maintenance at a discounted rate. Make sure that you verify that the expenses will not change when you take over the property. If you think that a number looks high or low, do your due diligence.

If a seller will not give you any detailed information on the property prior to an accepted offer, then you can use 35% as a rough estimate for the expense ratio. That means that your net operating income will be about 65% of the gross income for the property. Once you have that number, you can divide it by the purchase price to see what the cap rate is for the property. On the other hand, you can take the net operating income and divide that by the cap rate you want to get and that will tell you your maximum purchase price.

Sometimes you will want to force a deal because you have worked so hard to find a seller who wants to sell. Make sure that you stick to your numbers rather than trying to make a deal work at less than ideal terms.

Second, you want your property to cash flow. Often you will find properties that are not at full occupancy because of poor management, however, other times it is because the market is oversaturated not because of mismanagement. You need to be able to tell the difference. When you are doing your due diligence, make sure that there really is an upside potential to your property. You want to be able to increase the cash flow on the property and therefore increase the value of the property. Either way, you need to be able to show the bank or your investors that you can make the payments on the facility while you are getting the property up to full capacity. If you offer to much for a property, this will be harder to do. Make sure that your offer is such that you can cash flow once you have the property operational.

Finally, you may intend to keep the property forever, but someday down the line circumstances may change and you may decide to sell your property. Whether that is in 2 years or in 50 years, you want to make sure that you can make a profit. If you offer too much for a property, you will not have any equity in the facility when it is time to sell. Make sure that you offer the right amount when you make your offer.

No matter how excited you are when you find a property, you always have to take the numbers into consideration. You want to verify that you are getting a good cap rate on the property, that the property has an upside potential so that the value will increase, and that the property will cash flow. Do not get caught up in bidding wars that force you to go above the maximum number you have determined. Do not give into emotion. Stick with the numbers so that you will make a profit.