How to Determine What to Offer on a Self-Storage Property?

Sometimes, when you are looking at a property, there is pressure to get an offer in fast.  The market is hot and there are 5 other investors who are interested in the property too.  When that happens, you have to go in with your highest and best offer first.  You don’t want to offer too much for the property because you need it to cashflow.  On the other hand, you don’t want to go so low that you lose out and don’t get the property.  So where do you find a good balance.

When you are evaluating a self-storage property to make an offer, you need to be able to quickly determine what you think you can offer.  In order to do that, you need to be able to determine the Cap Rate.  The cap rate tells you how much of a return you will get on the property based on the purchase price.   The formula is very simple, but you need the seller’s cooperation.  If they are unwilling to cooperate, then you can calculate it based on what you think the property’s current occupancy is and what your projected occupancy will be after you are managing the property. 

The cap rate is simply the net operating income divided by the purchase price.  If you know what cap rate you want, then you can divide the net operating income by the cap rate and that will tell you your maximum purchase price.

If the seller won’t tell you their net operating income, then you can estimate it fairly closely. If the property is being well managed and you know what the average occupancy rate is for the area, and you know what the average rental prices are in the area, then you can estimate what their net operating income is.  If it is not being well managed, you will find out during your due diligence and then you can revisit the purchase price.

The seller should tell you the number of units that they have of each size on the property.  Now you can roughly calculate the monthly income by taking what the average rent is for each size unit and multiplying that by the number of units that they have. Once you have added all that up, you can multiply that by 12 and you will get the annual income.  If you anticipate that the expenses are between 35% & 40%, then you will know your net operating income is by subtracting 40% off of your gross income. This is a quick way to estimate what you can offer. 

Anytime that you write an offer, you always want to give yourself a due-diligence period.  This allows you to get the real numbers from the seller and find out what your anticipated numbers will be based on your feasibility study. 

When you are making offers, your job is to get the property under contract.  If the seller’s numbers don’t make sense, then you can always cancel your contract later, but you can’t ever get a property back if someone else gets their offer accepted first.  As always, happy investing