By Chris Hitler
There are many ways to enhance your self-storage facility’s net operating income (NOI), including raising prices or lowering expenses. However, the recent popularity of reality TV shows such as “Storage Wars” and “Auction Hunters” has given self-storage operators a new tool to improve their NOI—capturing lost revenue from non-paying tenants.
Historically, the most important outcome of the lien sale was to have the unit emptied so it could be rented to a new customer. Most operators recognize auctions likely won’t generate much cash. Fortunately, these reality shows have changed the game for storage operators by creating a wave of treasure-seekers looking for bargains.
In the past, a 10-by-20 unit full of boxes, clothes, furniture and other personal items may have netted $10 to $50 at auction. Today, an operator can expect anywhere from $200 to $1,000 or more for that same unit. Better auctions are not only important because more cash ends up in your pocket, but they also increase your NOI, which is the most critical valuation factor when it comes time to sell your property.
Before exploring how you can tap into this trend and get more buyers to your auctions, let’s review the impact of successful lien sales on property valuation. NOI is the basis for roughly 70 percent to 99 percent of a property’s value. Most buyers appraise properties based on a multiple of NOI, and then make some adjustments, such as a deferred-maintenance allowance. Valuation multiples generally range from 10 to 13 times NOI, so every dollar improvement has a $10 to $13 dollar impact on a property’s value.
Let’s look at an example. Assume an operator has five to 10 delinquent tenants who should’ve paid $5,000 in rent and other fees. Let’s also assume the operator never gets any bidders at his auctions, forcing him to give the stuff away to the local “junk guy.” The accompanying chart illustrates the valuation impact of failing to realize that rental income.
Even if this property’s value has a relatively low multiple of 10 percent (i.e., high cap rate), the operator is still missing out on $50,000 in value when it comes time to sell. The impact is even higher if the property justifies a lower cap rate.