Factors to Determining Self-Storage Investment Quality: Questions to Ask Your Seller and Broker

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Competition and Property Condition

Be aware of any possible new entrants to the market or expansions to existing self-storage facilities. Are there vacant land parcels in the area that could allow for new competitors? If so, maybe the cap rate on your prospective property needs to be a little higher to offset that risk. Ask your broker and the seller if they’re aware of any new facilities in the pipeline. They will usually know.

Also consider the existing competition and the physical condition of your prospective property. How does this property compare to others in terms of location, age, curb appeal, security and amenities? Is there any economic obsolescence? What about deferred maintenance? How are the roofs and asphalt? Find out from local contractors how much it will cost to repair physical and structural issues or install improvements that will allow the property to compete successfully in the future. If these issues are minimal, it's not necessary to push the cap rate quite so high.

Is there any room for expansion on the site? This can be in the form of vacant land included with the purchase or land now being used for RV or boat parking. Expansion potential is a good thing because when operating expenses are already covered, virtually every dollar of new income goes directly to your bottom line.  

Facility Marketing

Marketing is an essential part of a self-storage facility's overall success. You should know going into the sale what the current owner is doing in this area. Does the facility have a website? Is it well-optimized so it comes up near the top of all the searches? Are you able to improve on what the seller is doing? You might accept a lower cap rate if you can improve these results without breaking the bank.

All these items need to be considered and factored into your determination of which cap rate is required for a specific acquisition. Don’t go into any sale blindly. Ask questions, consider your options, then make the best decision to ensure your investment offers the rewards you seek.

Bill Alter has been a self-storage specialist with Rein & Grossoehme Commercial Real Estate in Arizona since 1986. He has been responsible for the sale of more than 100 storage facilities, totaling more than 5,500,000 square feet and more than $200 million. He can be reached at 602.315.0771; e-mail walter@comcast.net.

Using Direct Capitalization to Estimate Facility Value

By Charles Ray Wilson

Though self-storage facility values have declined since their peak in 2007, the industry has outperformed all other real estate types during the recession, and that has once again garnered the attention of investors. Self-storage as an industry is also becoming more transparent. Econometric models designed to measure supply and demand have improved, which allows investors to feel more comfortable with their risk-assessment calculations.

Key industry brokers, property owners and managers still use direct capitalization and discounted cash flow as primary tools of the income approach to estimating facility value. They use the sales-comparison approach as support. For the purposes of this article, I'll focus primarily on direct capitalization as a method for determining value.

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