With an acquisition, you’re not always stuck with the mistakes of the previous owner. In fact, it may create some opportunities. Renovating an office, repairing driveways, creating better access, training a good manager, replacing signage, or adding a move-in truck, landscaping, a security display, exterior lighting, or other aesthetic or management enhancements to an older property can make it more attractive to the demanding customer, and enable older stores to achieve stronger rental rates and higher occupancy.
Today’s customer demands a better product than what was built 20 years ago. But again, it doesn’t take a whole lot more to do things right.
For example, take a 400-unit store operating at 75 percent occupancy and charging, on average, $80 for a 10-by-10 unit. Let’s assume the average unit size is 100 square feet and actual monthly rent is averaging $24,000 (300 occupied units at $80). Also, we’ll put this asset in a market whose leaders report 85 percent occupancy. Using some reasonable assumptions (8.5 percent cap rate, 38 percent operating expenses), perhaps we can acquire this asset for $2.1 million.
Our due-diligence reveals a $200,000 renovation budget might realistically allow us to achieve a 5 percent increase in rental income. If our upgrades allow us to boost occupancy from 75 percent to 80 percent, we achieve an increase in asset value of nearly $400,000. If our improvements enable us to reach 85 percent, which isn’t unrealistic, we’ll see an increase in asset value of about $600,000—a pretty good return on investment.
And the quality and longevity of our investment increases as we sharpen our competitive edge. When I run long-term, hold investment returns on these types of scenarios, it’s not uncommon to see the internal rate of return increase by 3 percent to 5 percent.
Getting into this type of asset, however, takes a lot of work. It’s work to find it, work to analyze the opportunity, and it’s work to make it better. But it can be worthwhile when you’re committed to doing things right. We have to understand how the demand in our specific market guides our investment strategy for moving an asset up the competitive ladder.
Whether you build or buy a self-storage project, develop your vision, pay attention to the details, understand your market, and then commit to the necessary work that will get the most out of your self-storage investment.
Benjamin Burkhart is a professional self-storage consultant who provides developers and owners with detailed market and financial analysis and helps them create sound investment strategies. To reach him, e-mail firstname.lastname@example.org ; visit www.storagestudy.com .