Purchasing a self-storage facility can be a daunting task. With intense competition from investors and so few properties available, it’s difficult to find one that makes economic sense.
Learn the Market
Stabilized or Upside?
The most desirable regions of the country remain sellers’ markets, but opportunities are lurking if you know where to find them. Buying a profitable property involves several key ingredients, including a generous measure of location, location, location.
First, decide the best place for you to own. Consider things like:
- What are the growth markets?
- Will you manage the facility yourself?
- Will you hire an offsite management company to manage it for you?
- How often will you visit the facility?
This thought process helps determine if you should own a property in your hometown or city, or if you can widen the search area to include a property within a one- or two-hour airplane flight.
Learn the Market
Once you settle on a geographic area, learn the storage business in that specific market. Find out about properties that have recently sold—their selling prices and date of sale. You should understand their physical and operational characteristics, and how those relate to their net operating income, capitalization rate and pricing. Markets vary and it’s critical to have a market-specific understanding of the value of any facility presented to you.
By knowing your geographic area and its need for storage, you can quickly verify whether a property is reasonably priced and worth pursuing. You should know its age, size and amenities. Also take into account if the facility is in a good location and priced proportionately to recent sales in the area.
A prime storage locale has:
- Frontage on a street with significant traffic.
- Not too many competitors.
- Encouraging numbers and trends in rents and occupancy.
Stabilized or Upside?
After learning and understanding your target market, look at investment types. Buyers usually consider two kinds of opportunities: stabilized and upside properties. Prices and cap rates for stabilized properties should be consistent, meaning values won’t vary much when educated buyers analyze them.
This isn’t the case with upside properties. Prices and cap rates vary widely and are much harder to establish. Why? Upside value is often subjectively based on perceptions, beliefs and assumptions of a specific buyer.
Stabilized properties generally offer higher current returns with lower risk. Owners also have the possibility to increase returns by increasing rents over time.
Upside facilities tend to bring lower current returns— sometimes much lower or even negative. However, owners may significantly increase income by somehow changing the property. Alterations can be physical, operational or a combination of the two. Common indicators of an upside position include:
- A property with a higher vacancy than nearby competitors, especially if its rents are equal or lower than competitors’.
- A property with inexplicably high operating expenses.
- A property that can be expanded; it has excess land or a large number of open parking spaces.
- These factors don’t necessarily prove a facility is upside, but they are signs further investigation is warranted to understand the situation.
Entrepreneurial buyers crave upside properties but often mistake stabilized facilities for those with upside, causing them to substantially overpay. To avoid this mistake, know your market. Learn the number of existing and planned facilities, their occupancy rates, rents, expense ratios and the major players. You must know specific neighborhoods or submarkets, their population and growth projections as well as other demographic information and trends.
You may want to shortcut the process by working with a real estate broker who is a self-storage specialist in a particular market. He’ll already have the information and should be willing to share it with you. He’ll also know what is for sale or soon coming to market.
Remember, you’ll be facing competition from many other investors searching for properties in the best markets. For this reason, once you’ve met with your broker, it’s important to stay in close communication with him. Ask what you can do to move yourself to the top of his list of qualified buyers. Be sure he is aware of your price range and vision of the ideal property. Most important, he should know you understand the local market values and are prepared to be competitive when it comes to writing an offer.
Position yourself to beat the competition: Be prepared to offer a fair price, make the largest-possible earnest money deposit with the shortest-possible due diligence period. You can only do this safely if you’ve already researched and understand the local market.
At this point, you should have already contacted several self-storage lenders about loan programs. This way, you can include a reasonable loan contingency in your offer. Available properties often have existing loans that have to be assumed, so be ready—and happy hunting!
Bill Alter has been a self-storage sales specialist in Arizona for 20 years, helping sellers and buyers realize their goals in nearly 100 self-storage transactions. He is a founding member of the Arizona Self Storage Association, serving on its board of directors since inception. Mr. Alter may be reached at 602.315.0771; e-mail firstname.lastname@example.org.