All Forum Posts by: Henry Clark

Since we manage ourself we only look in markets within 40 miles. 

With that said we approach the owners directly. There are roughly 40 storage facilities within that realm that are B/C facilities and that are mom/pop.  Most of these people will be in their late 60’s or older.  Subject to age, health and kids not wanting the business a good percentage of these will be for sale.  At the same time we are building.  All of the facilities we have purchased or passed on the owners came to us.  Two purchased.  Three passed on.   

Because it takes us a year to build a location or to digest an acquisition we really haven’t tapped our market. Or pushed contacting people.  

See our post on “will they come”.  We rate the different cities and decide which is the best to invest in based on potential market and unit inventory.

This is truly the best time to ever get into storage.  Baby boomers will be leaving the market.  They are not interested in expanding this territory is left open to grow into.  Don’t compete with “A” properties, REITS and climate controlled.  Both their financing and SEO power are better than you can ever be. 

Texas is joint assets.  50/50 split unless there was a prenup.

Even if she never contributed a dollar to the marital assets  

Simple question to him.  Was there a prenup.   If not, you need to walk away.   Unless you get her signature which you won’t,  you can’t take title to the assets whether gifted to you or purchased without her signature.  

@John, my attachment was not allowable.  Please look over in BP youtubes for a copy of our Self Service rental process.  Thanks.  If you can't find it, just PM me.

Was on another post and the question was asked, "What is a good COC for B and C self storage."  The following discussion relates just to drive up B/C self storage locations.  More than 80% of these are owned by Mom/Pop.

Realized, I didn't have a clue, since I don't use COC or cap rate to evaluate my deals. So I thought lets educate myself, so sorry for the basics. Keeping the examples, simple.

COC- Cash on Cash ratio:

Formula- Annual Cash flow divided by original Cash investment.  Pre-tax.

Example: (Cash flow= NOI $60,000 less debt payment $50,000= $10,000) / (Original cash investment (example:$100,000 infusion with a $900,000 loan))= 10%.

Note:  Net "Operating" income does not include depreciation.

Cap Rate:

Formula- Net Operating Income divided by current market value

Example- using the example above: NOI $60,000 divided by $1,000,000= 6%.

Note: NOI does not include depreciation and does not exclude debt payments.

Whatever I am about to say, the above two metrics are the best to use, since they are common metrics and definitions used in the Real Estate world.

We use the "comparison" of Pay back in years versus Loan Amortization period.

Our target for Pay back is 8 to 12 years.  Our Loan Amortization we want is 20 to 25 years.

Our primary focus is on cash flow first; Returns are an inherent part of the Payback calculation.

Remember the discussion started off with a metric to evaluate B/C self Storage properties.  I'm going to avoid picking a winner.  Just use what suits you best.  The key point relative to all three of the approaches, as they relate to Self Storage, especially B/C locations are use them as a starting point, but for Self Storage do a look beyond the numbers.  Disregard which ratio of the above you use:

A.  Is extra land available or is parking rentals included?  The next units you build on this property, subject to the market need, greatly swing all three ratios.  Our first Phase is always built around a 65% occupancy level that pays for everything.  All Land, All fence, All engineering, P/I, insurance, property tax, electric,etc.  The next phase only takes a 35 to 45% occupancy for Cash breakeven (includes P/I).

B.  Increase your rent $10 per unit. Doesn't sound like much but your NOI goes through the roof. Evaluate your market to see the potential. Example: Using your metric, two potential properties have a "ratio" of 8%. All things being equal "financially" which one is worth more? The one in the underserved market.  You can raise the price $10 per unit with Occupancy staying the same.  $10 per unit on a $60 10 x20 is 16% gain.  $10 on say the same unit but NOI, lets say NOI $25 is 40% gain.

C.  Market strength.  Again both have the same "ratio" of 8%.  All things being equal "financially" which one is worth more? Market A "needs" 2,000 units; has 1,500 units with a shortage of 500 units.  Market B "needs" 4,000 units; has 4,100 units with an oversupply of (100) units.  The "quality" of your "A" investment is better than your "B" investment, all things being financially equal.

D.  Occupancy level. If the occupancy level is low, the sellers will think in terms of Cost to build, versus revenue stream/NOI. This will have a "Poor" ratio due to the low revenue/cash stream. Gets back to "C" above. Which market A/B are you in. Emphasizing their Net operating Income which will be low. They will be stuck on their price at Cost to build. If your in market "B" above, walk away. Its not worth working with them on the price. If your in market "A" above, work with them. Possibly get them to do zero interest finance for a portion of the investment for 5 years balloon.

The question was on B/C self storage properties, which are primarily owned by Mom/Pop.  A.  Extra land and parking is valued at that "use" value and not with a what if, built out., B.  They don't raise prices as fast as REITS or regional firms, if at all.,  C.  They don't care about "Market", "theirs" is the only property in town.  Their Sales Price is not based on any of the discussions above.  They don't think that way and most will not go through a broker.

Look beyond the ratio's, especially for B/C Mom/Pop self storage.

Start small and make your Big mistakes early.

@ John.

Here is how we do our rentals as another variation for you.  Key is to have someone sweep out after someone moves out and then set a new contract and lock, with a zip tie.  

Recommend you work your search, backwards. Read my post on "Broad Discussion on Funding".

Determine how much collateral or cash you have to put in.

Then decide upon your financing method and its collateral requirements.

Example:

You have $50,000.

Traditional bank requires 40% collateral, thus your largest deal can be $50,000/.4= $125,000.

SBA 10%; then $50,000/.1= $500,000

Use this to narrow down your property search parameters.  No point in looking at anything above $500,000 in the above scenario.  

Also define your deal parameters:  I use a 8 to 12 year payback; with a 20 year amortization loan term.  This way I am cash flowing and also if I missed something or competition moves in, I have some cushion.

Have you done a market study?  What town is this in?  If you need to you can PM me.  Dial up Sparefoot with the town or zip code if a large city.  Switch to the map mode, with all unit sizes.  Keep flipping back and forth with select unit sizes.  See if your in a high competition area, or if you have a hole in the market.  Why didn't the current owner build on the land? etc.

Even if you pass on this property, I would go through the motions to both buy this one and also build in the same area.  This will help you analyze your next opportunities faster and with less misses.

Missed the might move part in 3-5 years.  

a.  Talk with your banker about selling your house in the future.  Is he okay holding the proceeds in escrow until you find a new house, that will be used for collateral.

b.  For the multiple deals, let your banker know up front.  That way he can write the loan up in a way to cover all three purchases, without having to re-do the loan.  They will appreciate you telling them.  This might help from having to do multiple appraisals on your home at $x,xxx; each time you do a new investment.  Also see if they can they a short term construction loan to the primary loan document.  That way you don't have to liquidate your funds temporarily to cover any repairs.

1.  Interest rates are so low, you don't need to do a home equity loan to get great rates.  Normally Home equity loan rates are lower, since you are tied to the house.  

2.  Magnitude question.  Don't tie up your collateral.  How much collateral or cash do you need for the investment your looking at.  Example:  a.  You need $50,000 for your deal.  You take a loan on your home for $50,000; although you have $300,000 of equity in your house.  Up comes a Second deal and you need another $100,000; and you want to get it from your home.  Unless this deal's loan is with the same bank; a new bank won't want to take a Second Mortgage position on your home.  Your Equity in your home is tied up, and not usable.;  b.  You don't take a home equity loan out, but use your house for Collateral.  Same issue.

3.  In 2 above you could take as big of a loan out as possible and keep the Excess cash around.  I hate cash though.  That's what my bankers are for.

4.  Make sure your Bank has a high enough "Loan Cap Rate" so your collateral doesn't get tied up with them, if you have to get your next loan with a different bank.

5. Personal decision on using the house. Potential financial gain versus risk of having a place to live. Most loans require a personal guarantee, so your home even though not listed, is still at risk. Even if the business is an LLC, since you did a personal guarantee. To me this is more of a discussion of to what extent do your want to do leverage.

Attached is a picture of the signs next to each entry way.  Again this covers 80 acres and the lots are 2 to 20 acres.  Lot 5 which is not showing is our house and acres we are keeping.