8 Steps to Creating Sound Financial Projections for a Self-Storage Acquisition

Developing accurate financial projections is crucial when evaluating the viability of a potential self-storage acquisition. Sound forecasts will help you understand the facility’s financial health, so you can make an informed decision that’ll position you for long-term success. Generate them any time you find a property on which you intend to submit an offer. Below are eight fundamental steps to follow.

1. Conduct Market Research

When creating financial projections for a self-storage acquisition, it's vital to understand local demand. You need to gather data on the surrounding area, including:

Current population and projected growth. This is an essential factor. Look ahead five to 10 years. The U.S. Census Bureau is a helpful resource for tracking population trends.

Demographics. Demographic analysis is crucial to assessing the storage needs and preferences of consumers in the market. Factors such as age distribution, marital status, income level, housing type, household size and lifestyle can provide valuable insights. For instance, a growing population of Millennials might indicate a higher demand for smaller units to accommodate frequent moves during life transitions. In contrast, a large population of Baby Boomers may suggest the need for storage to accommodate downsizing and decluttering.

Competition. Identify the primary self-storage competitors in the target market, usually a 1- to 3-mile radius from the acquisition site, though it might need to be larger in rural areas. A simple and effective tool for this purpose is Google Maps.

Rental rates. Research is imperative. Online searches, calls and visits to nearby facilities, and industry reports can all help you determine the state of the market.

If the prospect of conducting this market research daunts you, consider hiring an industry feasibility expert to assist.

2. Collect Financial Information

Next, you’ll need to gather financial statements and operational data for the self-storage facility you wish to acquire. This includes tax returns, profit-and-loss statements, rent-roll statements and management reports. Usually, your lender can assist you in obtaining this information. Review the facility's historical financial performance to understand its revenue trends, expenses and occupancy rates.

3. Estimate Revenue

Based on your market research and the self-storage facility's historical performance, estimate potential rental income. Consider all factors, including unit sizes as well as average market rents and occupancy.

Determine the seller’s current physical occupancy and what they charge for a 10-by-10, non-climate-controlled unit compared to the competition. If the property is at 100% physical occupancy but charges 15% less than surrounding operators, there may be room to increase rates and grow revenue.

4. Focus on Expenses

Estimate the acquisition’s operating expenses including property taxes, insurance, maintenance, utilities and employee wages. Generally, the self-storage expense ratio will fall between 25% and 35%. Also, consider any improvements or renovations the property will need after the sale and how you’ll manage the facility on an ongoing basis. For example, you might manage it yourself with onsite staff, explore remote management or hire a third-party management company. Each comes with its own costs.

5. Calculate Net Operating Income (NOI)

NOI is a key indicator of a self-storage facility's profitability. In simple terms, it’s the earnings generated after deducting expenses from revenue. To calculate it, simply subtract the estimated operating expenses from the estimated rental income.

Ideally, NOI should be 65% to 75% of facility revenue. If you plan to finance your acquisition, the NOI should exceed your principal and interest debt payment.

6. Add in Financing Terms

If you need a loan to buy your self-storage investment, consider how it’ll affect your NOI. Your lender can help you evaluate potential profitability after factoring in the debt. It’s best to work with someone who has industry experience to ensure they understand the unique financing needs of the business.

7. Factor in Capital Expenditures

Consider any capital-improvement projects necessary to make your new self-storage facility competitive in the market. For example, you might need to replace the roof, paint buildings, replace unit doors, update the landscaping or install a new access gate. Include these costs in your projections. 

As they say: “It takes money to make money.” Improving the property can help attract new renters or justify rent increases.

8. Create Cash-Flow Projections

To create a cash-flow projection for your new self-storage facility, subtract the debt payment from NOI. If your NOI is $6,250 and your monthly loan payment is $5,000, cash flow is $1,250, which is a debt-service coverage ratio (DSCR) of 1.25%. Banks typically require debt-service coverage figures when underwriting a loan, so ask them about this metric.

Proceed With Caution

It's important to be careful when creating financial projections for a self-storage acquisition. Being overly optimistic, underestimating expenses and ignoring market trends can lead to costly mistakes. Always conduct thorough research of market conditions, use realistic assumptions, regularly update projections based on new information, and consider the potential impact of various factors on the facility’s financial performance.

By following these steps, you can create realistic forecasts that’ll help you make informed investment decisions. However, it's important to note that these steps should supplement a self-storage feasibility study, not replace it. If you need help, engage an expert.

Tyler Lambert is a loan officer on the self-storage team at Wilmington, North Carolina-based Live Oak Bank, a subsidiary of Live Oak Bancshares Inc. that serves small-business owners in all 50 states. Tyler joined the company’s business-analyst group in 2019, then moved into underwriting. To reach him, call 252.876.1271 or email [email protected].