What are the factors to consider when you purchase an existing self-storage project? The traditional measure for comparing such investments is the capitalization rate, or ratio of net income to purchase price. Obviously, you want the highest return on investment, but what if youre considering several properties with comparable cap rates? This article addresses some of the key items that can influence a projects long-term viability and growth potential.

The first step is to determine your particular needs. Are you going to be an active or absent owner? How will you manage the property? Will you hire a management company? What sort of return do you require? What are your investment objectives? How long do you plan to hold the property before reselling? Answering these questions will help you find the best property for your interests.

Site Selection

Youve probably heard the adage about the three most important things in real estate: location, location and location. Its one of the primary factors to consider, as its just about the only thing about a property you cant change. With a poor site, youll have to spend more on marketing to keep your units filled, and youll be at a disadvantage compared to better-positioned competitors.

But what makes for a good location? Storage facilities tend to do better in spots well-suited for retail business. A site should be convenient, visible and easily accessible to attract customers within the trade area.

Chain retailers have site selection down to a science, and their approach can work for you too. Use the following criteria to evaluate the viability and quality of a storage project. Youll rate a site on a scale of one to 10 in six categories, multiplying each score by the indicated weight. Once youve determined the number of points for all areas, add them together. If a property doesnt score at least 500, its unlikely it will be able to compete in the market over the long term.

Visibility

Visibility is among the most important characteristics of a site. As the market becomes increasingly competitive, visibility becomes more critical.

Access Access is clearly a major issue, but modest compromises can be made for a site that is otherwise superior.

Traffic Count

Drive-by traffic is an important source of business. However, excessive traffic can also inhibit access.

Site Configuration

Frontage and potential expansion are the significant issues to watch for in this category.

Competition

Competition is another important issue. Properties with less existing competition or barriers to entry for future competitors are best.

Demographics

Higher household income levels are generally conducive to self-storage because customers can afford it. But some areas with smaller homes and no basements are also promising because customers need it.

Self-storage is a retail business, which is why facilities are often referred to as stores. So look for projects with good retail locations. You wont find a Wal-Mart in an industrial park, so dont buy a storage facility in one! You want a visible, accessible site in the heart of your customer base. This will be your most important marketing tool, especially if prospects can see the building itselfnot just your signagefrom more than one direction. You dont necessarily need a lot of frontage, so long as its clear to customers who you are and how to access your site.

High occupancy will serve as evidence of sufficient demand in the trade area, but if occupancy is low, you need to determine whether the property or the market is to blame. You can make changes to management, product offerings, etc., but you cant change your location. Reviewing the competition and the relative vacancies and rental rates is the best way to make the call. If vacancies are high and rental rates are declining, the demand is simply not there. If rates are stable or increasing, you can rest reasonably assured of future business.

Quality Counts

The type and quality of self-storage construction varies widely. Admittedly, a dollar of income from a low-quality project spends just as good as that from an upscale facility, but class matters in ways that count. Customers are generally more attracted to an aesthetic site, which means better occupancy and higher rents. A well-built project also requires less maintenance, which translates to lower expenses. Its generally easier to finance and insure a higher-quality project. And when youre ready to exit the investment, a better project will sell faster and for more money.

Evaluate a project with an eye toward buying the best you can afford. Lots of features and amenities can be added after a facility is acquired, so focus your audit on items that cant be readily altered. Here are a few quick guidelines:

Size Matters

As a rule of thumb, large projects are those with at least 45,000 square feet; mid-size projects range from 30,000 to 45,000 square feet; and small projects have less than 30,000 square feet. Large projects, which enjoy a better economy of scale, are generally more desirable. This is demonstrated by the fact they tend to trade at lower cap rates. Operating expenses for small facilities tend to represent a larger percentage of gross income. With a higher breakeven point, they carry more risk.

Buying a facility with room to expand can be highly profitableprovided that authorities will allow you to build more units and customer demand is there. When you expand a project, only variable expenses increase, so a larger percentage of the additional income goes to the bottom line. Expansion can also make it possible to resell at a lower cap rate or refinance at a lower interest rate, thereby deriving additional value from the existing income stream.

Knowing what to look for in a property allows you to make better buying decisions. Seek opportunities with long-term viability. Closely examine each location, keeping in mind that storage is a retail business. Consider quality, remembering expense items such as upkeep. You may not find the perfect site, but with intelligence and a little luck, you can hit upon a property with optimal factors for value and growth.

Mark Keys is the principal of Cornerstone Realty, which provides brokerage and consulting services to self-storage owners and investors. His industry experience spans more than 20 years. You may contact him at 210.366.8817 or e-mail [email protected].