Purchasing an existing self-storage facility can be a great introduction to the industry if you know what you’re getting. The question is: What should you look for when you buy, and why?
The Right Fit
Before you purchase a facility, evaluate your investment strategy. Are you looking for a steady rate of return, say 5 percent, 7 percent or 10 percent? Do you prefer minimal management responsibility and maintenance issues?
If this is the case, find a site that has reached stabilization, meaning the property has achieved market occupancy (typically 80 percent or more, annually) and rental rates. Stabilized properties may be your best fit if you’re prepared to “clip coupons” to achieve a steady rate of return on a monthly and yearly basis.
If, however, you want a higher rate of return or don’t intend to hold the property long, hunt for one that is a “value-add” play. This scenario is not for the faint of heart. These properties usually have issues related to management, advertising, competition, age of structure, etc. If your goal is to improve a site’s performance and you have the resources to do so, look for your diamond in the rough.
The Right Fit
Regardless of your investment strategy, you’ll need a proper fit. Some pointers: Always purchase based on actual operating numbers not pro forma. Provided by the seller/broker, a pro forma projects how the property can perform, but you need hard numbers confirmed by the following:
- Profit-and-loss statement for at least the past two years
- Profit-and-loss statement for the past 12 months, by month
- Annual occupancy report for the past two years
- Occupancy report for the past 12 months, by month
- Rent roll showing total number of units, sizes, climate control and rental rates
- Delinquency report for the past 12 months, by month
This data will reveal what, if any, problems exist at the facility, and help you determine if the investment is suitable. For example, let’s say a rent roll shows the property at 95 percent physical occupancy, but the monthly profit-and-loss statement reveals a 70 percent economic occupancy based on monthly receipts. It could be some rents are pre-paid, verified by higher revenue collected in preceding months. It could also mean a high number of delinquencies. If this is confirmed in the delinquency report, a red flag should be raised.