Hi folks,

My wife and I are considering a self-storage business as an investment.
There are 2 separate sites in our area for sale (owner is deceased, and his widow wants to get out of the business)

Property 1 has 122 units, 11,600 sq ft rental space. Built 15 yrs ago
Current occupancy is at 60%
At 100% occupancy, net income is about $46,000
Asking price is $325K

Property 2 has 52 units, 560 sq ft rental space. Built 15 yrs ago
60% Occupancy rate is 60 %
At 100% occupancy, net income is about $18,000
Asking price is $110k

My question is, does this seem like a fair market price for these properties?
There are only 2 other self storage units within a 20 mile radius.

Seeing I'm still just a student, what other questions should I be asking?
Any hekp would be appreciated.

Jackhill:

I am sure you will get a lot of feedback on your question so I will keep my reply brief. The first thing you have to ask yourself is what rate of return am I willing to accept on my investment? And the second is what risk am I willing to take to get it?

Whether a facility is large or small, when you are doing a purchase analysis you should focus on the Net Operating Income (NOI). After all operational bills are paid including real estate taxes, but not debt service or depreciation, what is left on the bottom line. If you discover that the facility will generate say a $25,000 NOI and you want to earn a 15% return – if you paid all cash – the purchase price you should be willing to pay would be in the range of $166,000. Getting a $25,000 return on a $166,000 investment yields a 15% return.

I realize that this is a very simplistic way to look at these two deals, but my point is the attention to the NOI calculation. And forget about using anything above 85% to 90% occupancy in your assumptions. And you have to realistically ask yourself how long will it take me to move occupancy from the current levels of 60% to 85% or 90%. Remember, one of the first things you will discover, as the new owner, is that you might not want some of the currents tenants. So occupancy could drop even further as you clean up the “deadwood”.

Facilities of that age will always require investment in capital costs as typically small owners have ignored ongoing maintenance issues. (OK to be fair, owners of large facilities also ignore these issues as well.) You will need to invest in many of these improvements at the beginning so make sure to build that into your acquisition financial strategy.

Finally, management of small facilities is always an issue. You can't pay for full time management and unless you are willing to be the “on-call I’ll drive right over to rent you a unit” guy, you can’t ignore personnel costs. If you are going to be the Jack of All Trades - Go to Guy for the business, you must include the extra costs of doing that – dedicated cell phone and transportation costs etc. that many new owners ignore and don’t take into consideration when building an operating budget.

I hope that these thoughts help as you consider making these acquisitions. Our industry has gotten a real competitive since I got involved over 20 years ago. But it is still a great business.

Best of luck,

MisterJim444

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Learning Never Ends

great in site Jim!!!!