How old are the roofs? Are they screw-down or standing-seam? Are doors easy to open? Are latches new or rusted? If you find some substantial problems such as roof leaks or cracking pavement, get some estimates on the cost to correct them to ensure the acquisition financing or cash flow generated by the property can cover the expense.
Confirm the information provided by the owner or broker is consistent with your first-hand analysis and conduct a facility audit. Do all of the occupied units from the occupancy report have locks on them and leases attached to them? Audit the leases to verify the rental amounts are consistent with what is reported by the owner.
Request copies of the past three years of federal tax returns. Are the income and expenses the same as the financials you have received? If not, is there a reasonable explanation for the difference, for example, one-time expenses on the tax returns that were excluded from the facility’s net-operating-income calculation?
Review the latest rent roll. Are tenants current on their rent? Do they have a security deposit? Is the amount consistent with the lease? How many tenants are pre-paid? How many are on auto-pay? Answering these last two questions will help you evaluate your tenant quality and whether collecting rent will be as easy as the owner or broker tell you.
If your target property is listed, a good broker will provide ideas on how to improve the facility’s performance and formalize it in a pro forma financial statement. You may also have your own ideas. Either way, determine if you can realistically reduce expenses or raise revenue because these changes can often dictate whether the property generates the expected investment return.
Potential ways to reduce expenses may include using more efficient labor practices, changing insurance coverage, using new marketing tactics, and bringing in-house some of the activities that have been outsourced such as maintenance and lawn care. Opportunities for raising revenue may come from ancillary products and services, rent increases, the enforcement of late fees, and the better capture of late fees and other charges through tougher management.
Acquiring a storage facility is a serious undertaking. It requires thorough research of the acquisition target and the competition to ensure the financial return justifies the investment risk. Although it's difficult to research everything, the above referenced areas should address the critical factors and give you and your lender confidence the facility will be a sound investment opportunity.
Chris Hitler is a self-storage broker with Investment Real Estate Specialists LLC and the founder of Rummage Marketplace, a website that promotes storage auctions. He can be reached at 312.404.7933.