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Maximizing Property Value

February 1, 2001

7 Min Read
Maximizing Property Value

Maximizing Property Value

How not to leave money on the table

By Bill Alter

Thedefinition of "value" as found in Webster's Collegiate Dictionaryis "the monetary worth of something or its marketable price." Thissuggests there is very little room for subjective interpretations of value. Forexample, you might think that any two people who study a particular self-storageproperty--assuming they are given the same information about its physicalcondition, location, income and expenses--would arrive at nearly the sameconclusion about its worth. But this is not the case, partially because accessto information is difficult to secure, and because the information itself variesfrom source to source.

This article identifies the specific factors that go into determining thehighest possible value for a property, and provides an understanding of how muchrelative weight each of these factors adds or subtracts. With this information,you will have the ability to consider, given your specific circumstances, whereto place the most emphasis and attention to maximize the value of yourself-storage property.

Income: The number of units at a facility, their size andthe rent charged for each determines the potential income of a self-storageproperty. The difference between the potential income and the actual incomecollected is the economic vacancy. Vacancy can also be calculated based oneither the number of units or square feet rented; however, economic vacancy ismost relevant to value. Most of the time, the three measures of vacancy varyonly slightly in a given property. However, in a property with an abundance ofsmaller units or above-market rents that make promotions and discountsnecessary, economic vacancy can significantly exceed the other vacancy types.

If you have a large economic vacancy, you should determine its cause and takemeasures to reduce it. You should not strive for a 0 percent economic vacancybecause that would indicate rents could be increased. Optimum economic vacancyis approximately 7 percent in each category of unit size. (A more detaileddiscussion of how to maximize income through targeted marketing can be read inthe sidebar accompanying this article on page 26.)

Operating Expenses: A discussion of operating expenses canbe somewhat discouraging to an owner. This is because the great majority ofself-storage properties are purchased by entities already in the business. As aresult, these buyers know what it will cost them to operate your facility. Theiroperating budgets may vary greatly from yours, especially in the area of on- andoff-site management, maintenance, insurance and advertising. Generally speaking,operating expenses for a 500-unit facility, including 6 percent for managementand a 2 percent reserve, should be in the area of 35 percent of collectedincome.

Net Operating Income: Obviously, the larger the income andthe smaller the operating expenses, the higher the net operating income. It isthis figure upon which a capitalization (cap) rate is applied to arrive atvalue.

Cap Rate: It is impossible to have a discussion of cap ratesin a vacuum; so many variables must be considered to determine an"appropriate" cap rate for a specific property. The quick answer tothe question, "What is an average cap rate for a self-storageproperty?" is that it is around 10 percent. The problem is there are veryfew "average" properties.

Actual cap rates vary from close to 0 percent to 13 percent or more. Thereason for this huge range in cap rates is the existence in a particularproperty of one or both of the following: 1) the opportunity to improve its netoperating income or 2) the risk that its net operating income will decline.Properties with very large economic vacancy factors and/or very high operatingexpenses (that is, properties that have been poorly managed or those inlease-up) will be valued using lower cap rates. Conversely, properties that mayhave been very well managed, in terms of maximizing income and minimizingexpenses, will be valued using a higher cap rate. This analysis reveals that, inreality, there is a diminishing increase in value for each additional dollar ofincome gained and each additional dollar of expenses avoided.

We can expand the definition of value to include the price that a willing andeducated purchaser will pay for a self-storage facility. As a property owner,you have your own opinion of your property's value. That opinion might beaccurate, or it could be high or low. In any case, your opinion of the value ofyour property is not the one that matters, but the one of the market or buyer.

The more efficiently a property is exposed to the pool of prospective buyers,the greater the ultimate value. This is because of the principle of supply anddemand. In this situation, greater market exposure creates increased demand. Thebest way to determine the market value of your property is to offer it to thegreatest number of qualified buyers and allow them to compete with each other.It is only in this manner that the buyer with the highest opinion of value comesto the surface.

The art of maximizing property value in a sale situation is what separatesself-storage specialists from general-service real-estate brokers and owners whoprefer to sell their properties themselves to avoid fees. When a non-specialist(including the owner) markets a property, there is a risk that the highest valuemay not be achieved.

A specialist will recognize justification for a low cap rate, or suggest waysto improve net operating income if a low cap rate cannot be justified. He willalso know all of the potential buyers and package your property for sale in aformat familiar to them, thus avoiding confusion and time-consumingquestion-and-answer sessions. A specialist will also create a sense of urgencyin the minds of the buyers to move quickly at reasonable prices. An effectivebroker will know how to create a higher level of competition than would exist ifthe property were presented to a single, high-profile buyer. This is especiallytrue in competitive environments where less visible buyers know they must movefaster and pay more in order to compete.

Bill Alter has been a self-storage sales specialist with thePhoenix-based real-estate firm Rein & Grossoehme for 15 years. He is also afounding member of the Arizona Mini Storage Association and serves as secretaryon its board of directors. For more information, Mr. Alter may be reached at602.954.0217.

Enhancing Value Through Strategic Marketing

By Bill Alter

The goal of your marketing plan should be to fill the most units at the highest possible rental rate for the purpose of maximizing income. The primary form of marketing for self-storage properties has traditionally been the design and placement of a Yellow Pages ad. That advertisement should attempt to appeal to the broadest possible range of potential customers. It should not inadvertently limit or eliminate any prospective customer that could benefit from patronizing your business. This kind of advertising is broad-brushed rather than targeted. Its goal is to make the telephone ring. A well-run property must also employ a manager who is able to convert that telephone call into a rented unit.

In addition to Yellow Pages advertising, targeted marketing programs should used to gain better penetration into market segments containing the most prospective tenants. Those segments might include nearby apartment buildings, mobile-home parks, and office and medical buildings. The on-site manager should visit apartments and office buildings monthly, leaving fliers with the property manager and other building personnel. Small referral fees could be offered to those personnel for sending customers who rent for more than six months.

The segment that is most often overlooked is referrals from existing customers. Incentive programs designed to motivate your existing customers to refer their friends to your facility are well worth the money. These could be in the form of a free month's rent, cash incentives or even contests with valuable prizes being awarded to the customer responsible for the greatest number of referrals.

Another avenue to maximize income from a tenant base is to motivate the greatest number of customers to prepay their rent. One client of mine raffled off a 32-inch color TV, giving customers one raffle ticket for each month of prepaid rent they chose to pay. Not only was this a smashing success in terms of collecting a tremendous amount of prepaid rent, it also created terrific goodwill among his customers that was passed on by word of mouth to the entire local community.

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