Maximizing Property Value
Copyright 2014 by Virgo Publishing.
By: Bill Alter
Posted on: 02/01/2001



 
Maximizing Property ValueHow not to leave money on the table

By Bill Alter

The definition of "value" as found in Webster's Collegiate Dictionary is "the monetary worth of something or its marketable price." This suggests there is very little room for subjective interpretations of value. For example, you might think that any two people who study a particular self-storage property--assuming they are given the same information about its physical condition, location, income and expenses--would arrive at nearly the same conclusion about its worth. But this is not the case, partially because access to information is difficult to secure, and because the information itself varies from source to source.

This article identifies the specific factors that go into determining the highest possible value for a property, and provides an understanding of how much relative weight each of these factors adds or subtracts. With this information, you will have the ability to consider, given your specific circumstances, where to place the most emphasis and attention to maximize the value of your self-storage property.

Income: The number of units at a facility, their size and the rent charged for each determines the potential income of a self-storage property. The difference between the potential income and the actual income collected is the economic vacancy. Vacancy can also be calculated based on either the number of units or square feet rented; however, economic vacancy is most relevant to value. Most of the time, the three measures of vacancy vary only slightly in a given property. However, in a property with an abundance of smaller units or above-market rents that make promotions and discounts necessary, economic vacancy can significantly exceed the other vacancy types.

If you have a large economic vacancy, you should determine its cause and take measures to reduce it. You should not strive for a 0 percent economic vacancy because that would indicate rents could be increased. Optimum economic vacancy is approximately 7 percent in each category of unit size. (A more detailed discussion of how to maximize income through targeted marketing can be read in the sidebar accompanying this article on page 26.)

Operating Expenses: A discussion of operating expenses can be somewhat discouraging to an owner. This is because the great majority of self-storage properties are purchased by entities already in the business. As a result, these buyers know what it will cost them to operate your facility. Their operating budgets may vary greatly from yours, especially in the area of on- and off-site management, maintenance, insurance and advertising. Generally speaking, operating expenses for a 500-unit facility, including 6 percent for management and a 2 percent reserve, should be in the area of 35 percent of collected income.

Net Operating Income: Obviously, the larger the income and the smaller the operating expenses, the higher the net operating income. It is this figure upon which a capitalization (cap) rate is applied to arrive at value.

Cap Rate: It is impossible to have a discussion of cap rates in a vacuum; so many variables must be considered to determine an "appropriate" cap rate for a specific property. The quick answer to the question, "What is an average cap rate for a self-storage property?" is that it is around 10 percent. The problem is there are very few "average" properties.

Actual cap rates vary from close to 0 percent to 13 percent or more. The reason for this huge range in cap rates is the existence in a particular property of one or both of the following: 1) the opportunity to improve its net operating income or 2) the risk that its net operating income will decline. Properties with very large economic vacancy factors and/or very high operating expenses (that is, properties that have been poorly managed or those in lease-up) will be valued using lower cap rates. Conversely, properties that may have been very well managed, in terms of maximizing income and minimizing expenses, will be valued using a higher cap rate. This analysis reveals that, in reality, there is a diminishing increase in value for each additional dollar of income gained and each additional dollar of expenses avoided.

We can expand the definition of value to include the price that a willing and educated purchaser will pay for a self-storage facility. As a property owner, you have your own opinion of your property's value. That opinion might be accurate, or it could be high or low. In any case, your opinion of the value of your property is not the one that matters, but the one of the market or buyer.

The more efficiently a property is exposed to the pool of prospective buyers, the greater the ultimate value. This is because of the principle of supply and demand. In this situation, greater market exposure creates increased demand. The best way to determine the market value of your property is to offer it to the greatest number of qualified buyers and allow them to compete with each other. It is only in this manner that the buyer with the highest opinion of value comes to the surface.

The art of maximizing property value in a sale situation is what separates self-storage specialists from general-service real-estate brokers and owners who prefer to sell their properties themselves to avoid fees. When a non-specialist (including the owner) markets a property, there is a risk that the highest value may not be achieved.

A specialist will recognize justification for a low cap rate, or suggest ways to improve net operating income if a low cap rate cannot be justified. He will also know all of the potential buyers and package your property for sale in a format familiar to them, thus avoiding confusion and time-consuming question-and-answer sessions. A specialist will also create a sense of urgency in the minds of the buyers to move quickly at reasonable prices. An effective broker will know how to create a higher level of competition than would exist if the property were presented to a single, high-profile buyer. This is especially true in competitive environments where less visible buyers know they must move faster and pay more in order to compete.

Bill Alter has been a self-storage sales specialist with the Phoenix-based real-estate firm Rein & Grossoehme for 15 years. He is also a founding member of the Arizona Mini Storage Association and serves as secretary on its board of directors. For more information, Mr. Alter may be reached at 602.954.0217.

Enhancing Value Through Strategic Marketing

By Bill Alter

The goal of your marketing plan should be to fill the most units at the highest possible rental rate for the purpose of maximizing income. The primary form of marketing for self-storage properties has traditionally been the design and placement of a Yellow Pages ad. That advertisement should attempt to appeal to the broadest possible range of potential customers. It should not inadvertently limit or eliminate any prospective customer that could benefit from patronizing your business. This kind of advertising is broad-brushed rather than targeted. Its goal is to make the telephone ring. A well-run property must also employ a manager who is able to convert that telephone call into a rented unit.

In addition to Yellow Pages advertising, targeted marketing programs should used to gain better penetration into market segments containing the most prospective tenants. Those segments might include nearby apartment buildings, mobile-home parks, and office and medical buildings. The on-site manager should visit apartments and office buildings monthly, leaving fliers with the property manager and other building personnel. Small referral fees could be offered to those personnel for sending customers who rent for more than six months.

The segment that is most often overlooked is referrals from existing customers. Incentive programs designed to motivate your existing customers to refer their friends to your facility are well worth the money. These could be in the form of a free month's rent, cash incentives or even contests with valuable prizes being awarded to the customer responsible for the greatest number of referrals.

Another avenue to maximize income from a tenant base is to motivate the greatest number of customers to prepay their rent. One client of mine raffled off a 32-inch color TV, giving customers one raffle ticket for each month of prepaid rent they chose to pay. Not only was this a smashing success in terms of collecting a tremendous amount of prepaid rent, it also created terrific goodwill among his customers that was passed on by word of mouth to the entire local community.