R = Records
A review of the records is like a blood test for a patient—it reveals the health of the facility. Look for trends in occupancy, income and rental rates for the past three years, if available. Consider the following:
- Occupancy: Review economic, physical and unit occupancies to determine trends and opportunities.
- Revenue: Review current and recent revenue. Is all the revenue recognized? Are there additional opportunities for revenue?
- Expenses: Review current and recent expenses. Can expenses be reduced? Are the reported expenses realistic?
I = Income and IRR
How does this self-storage facility perform as an investment? In other words, will it provide an adequate return given your contributions (financial and non-financial) as compared to alternative investments such as corporate bonds, stocks, other real estate, etc.?
Most buyers focus on current income and attempt to determine a value by applying a cap rate. While that may be a useful exercise, it’s a bit like driving forward looking in the rearview mirror. Yes, it’s important to review income trends, but it’s more important to use all the information gathered to project future income and returns.
Basically, the only reason a buyer cares how the property has performed in the past is to project how it will perform in the future. It’s essential to prepare and carefully review an internal rate of return (IRR) analysis, which will take into consideration all future cash flow. Consider the following significant items:
- Revenue and rates: Can rates and revenue be realistically increased and, if so, when and how often?
- Real estate taxes: Will they increase based on the sales price, and when?
- Payroll: Will it remain at the same level?
- Repairs and maintenance: Is there deferred maintenance? Will the future expense be greater as the property ages?
- Advertising: Will the budget increase or decrease?
- Financing: What are available financing terms and conditions?
- Sale: What will be the future value of the property?
M = Market, Management and Demographics
Many in the self-storage industry believe demand should be estimated based on available square feet per capita. Others feel it’s related to households. Each market is different, but whichever indicator you use, it’s useful to look at current demographics to determine the drivers of demand. Some key parameters include:
- Housing units
- Housing type—rental, single-family, multi-family
- Household size
- Household income
- Percentage of renters
- Home and lot sizes
- Retail activity levels
Those parameters should then be considered in the light of projected demographic trends. Will there be population growth over the next five years? Will there be income growth? Does the average income or net worth in the marketing area support self-storage rentals?