All Forum Posts by: George Fitz

Hi Steven, usually self storage is valued based on current NOI. It can be a competitive market and some buyers are willing to buy based on pro forma numbers. I would not do that. Why pay someone else for the work you're going to do? They should've already done it themselves! With that said, for very distressed properties, an NOI valuation may not make sense and so you may want to do comps based on acreage or square footage, or figure out a business plan and come up with a number that works. However this property does not sound like its actually underperforming in any significant kind of way. So even if there is some upside on the rents, I would definitely not work that into my offer price. If it was me and they are firm at a 6 cap, and there's not much room to increase revenues or cut expenses, then I would probably walk away and look for something better.

Eric, Self Storage is usually valued like most other commercial real estate. It's all about NOI and cap rate. Generally the older the property, and smaller the market, the higher the cap rate. You'll see class A properties in large markets at sub 5 cap rates. But an older property in a rural market may go above 10. Obviously the main thing you want to look for is upside so can drive NOI through better management, adding new revenue streams, or expansion. Ask for a P&L and a management summary report from the owner. You need to make sure their expenses are reasonable and will be similar if you take over the property. But don't trust any expense numbers that aren't at least around a 35% expense to income ratio. As others have mentioned, best to do your research and get educated.

I met Mike Wagner recently and he knows his stuff- he'd be a great resource. Scott Meyers has an academy every few months that is very valuable. He also has home study and other options. You definitely need to check out what he offers. The ISS conference is coming up in April in Vegas. That would be worth a trip. There are many other ways to get educated online. 

Also, I would respectively disagree with Eli. If properly run, and depending on the property, self-storage can actually be way less time and effort than residential rentals. That's been my experience, as well as most others I know who have gotten into it.

Zach's idea of owner financing at a low rate and long balloon is solid. 

Also, since you think there is a ton of untapped upside that you can realize, there may be another idea that could work if you could buy in to the business. What if you purchased an equity stake in the business with the agreement you will take over management? If you can drive NOI, then you could sell in 5 years and make some decent cash, while he could still get his price. Obviously you would need to sharpen your pencil and run the numbers to see what kind of returns were possible. But I've seen this strategy used successfully in similar situations. Predicting interest rates in 5 years will be tricky. As Don said, the owner wants the price that rewards him for the work that YOU do. Tell him that, then wax on about your experience and how you can drive NOI. Turn it in to a win-win. Pay yourself a hefty management fee. Look at waterfall/promote strategies.

Or just stay friendly with him and keep checking in every few months, then (not to be morbid) wait until he becomes unable/unwilling to deal with the business any longer and hope he or his family come down to earth and are more willing to negotiate. 

Good luck!

Is Aberdeen in an opportunity zone? If so, the tax advantages might make the deal a little sweeter.

@Eddie Pfeifer I personally use third party management to manage out-of-state storage and would concur with what @Neil Henderson wrote. But it's also worth noting that there are loads and loads of people managing out-of-state self storage remotely without any full time staff, and doing it very successfully. Usually it's a through the use of technology, as well as limited local "boots on the ground" help. If you need more info, feel free to DM me.

@George Gao There is no size that is too small- just depends on the buyer and their goals. There is no "average" size. SS properties run the gamut from small facilities like this to large, Class A 1000 unit properties. If you are interested in this asset class, then it could be a good way to get your feet wet, but do your research and learn. Lots of opportunity in this asset class. It's a great business to be in! 

Those questions are all big magilla's, and Justin gave you good answers. I would expand on that by saying if you are looking at smaller facilities (< 100 units) that you would self-manage, I would personally look for something within an hour or two from home. You can automate a lot of the management, and you can hire local "boots on the ground" for part time help. But you'll still need to visit the property pretty often since part-time help is, well, part-time. If you are looking at larger facilities where the size and revenues justify a management company, then you could literally own one anywhere and keep tabs on it via the online management software, as well as quarterly property visits.  

Picking a market and location is the secret sauce. I personally feel most comfortable choosing a market I'm pretty familiar with. I like smaller, more rural markets because the cost of entry is lower and competition is usually less fierce. Also, lots of municipalities are making it harder to build new self-storage, with moratoriums and such. So if you can buy a property where there are barriers for new competition to enter the market, then that's obviously a big plus. The general rule of thumb is that people don't travel more than 5 miles to store their stuff. That can be a little more or a little less depending on the size of the market. So if you are analyzing deals, draw a radius around the location and determine the amount of people within that radius. Then see how many square feet of units are also located in that radius. This will give you an idea if the market is under or over saturated. The latest figure I've heard is that there should be 7 sq ft of storage per person, within the radius. So a 5 mile radius of 10,000 people should have 70,000 sq feet of storage. Around 9.5% of households rent self-storage. These are national numbers, so obviously YMMV depending on the market.

Also, I definitely recommend Scott's academy or some type of education before you dive in too deep. You'll learn a ton and it's fun!

Hi Zach, I paid $7k for a CostSeg study back in the summer of 2017. This is on a 6 acre, 580 unit self storage property with about 40 buildings. It saved me on my 2016 and 2017 taxes- I paid no taxes on that income those years and have a large carryover as well. Obviously it will eventually catch up with me since I'm just accelerating the depreciation I'm taking, but I will probably be out of it by then and (hopefully) 1031 into something else. An interesting side note is that it saved me in a couple of ways I didn't anticipate. For example, the town where the property is located has a municipal Occupational Tax. It's calculated based on the federal return. Since the federal return showed a loss, I paid no Occupational Tax (would've been about $3k otherwise).

Call a property manager in the area. They will likely have more expertise in the rental market and also won't have quite the profit motive as the agent.

I am a recent transplant to Grass Valley and may be able to add a little insight:

Property Taxes on a $230,000 purchase will be around $2500/yr, give or take. Looks like my tax rate is 1% so yours might end up touch less than $2500.

I own a 3000sf, 4 bedroom/2.5 bath SFH that recently became my family's permanent residence. But we bought this a year ago and leased it until we moved in. I can tell you that we had no trouble finding a renter at $3000/mo, even though we told them upfront that the lease would only be for 10 months. It took about 2 weeks to get it leased. I have been told by realtors that rents are very strong, especially at lower price points. So $1600 may be possible. I'm guessing I could've easily gotten $3200 for a long term lease. So half that amount seems like it might work for a 3/1 in a duplex. My house is probably not a great comparable, so take my opinion with a grain of salt!