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Self Storage- COC, Cap rate, Cash Flow evaluation; which is best?

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  • Self Storage- COC, Cap rate, Cash Flow evaluation; which is best?

    Was on another post and the question was asked, "What is a good COC for B and C self storage." The following discussion relates just to drive up B/C self storage locations. More than 80% of these are owned by Mom/Pop.

    Realized, I didn't have a clue, since I don't use COC or cap rate to evaluate my deals. So I thought lets educate myself, so sorry for the basics. Keeping the examples, simple.

    COC- Cash on Cash ratio:

    Formula- Annual Cash flow divided by original Cash investment. Pre-tax.

    Example: (Cash flow= NOI $60,000 less debt payment $50,000= $10,000) / (Original cash investment (example:$100,000 infusion with a $900,000 loan))= 10%.

    Note: Net "Operating" income does not include depreciation.

    Cap Rate:

    Formula- Net Operating Income divided by current market value

    Example- using the example above: NOI $60,000 divided by $1,000,000= 6%.

    Note: NOI does not include depreciation and does not exclude debt payments.

    Whatever I am about to say, the above two metrics are the best to use, since they are common metrics and definitions used in the Real Estate world.

    We use the "comparison" of Pay back in years versus Loan Amortization period.

    Our target for Pay back is 8 to 12 years. Our Loan Amortization we want is 20 to 25 years.

    Our primary focus is on cash flow first; Returns are an inherent part of the Payback calculation.

    Remember the discussion started off with a metric to evaluate B/C self Storage properties. I'm going to avoid picking a winner. Just use what suits you best. The key point relative to all three of the approaches, as they relate to Self Storage, especially B/C locations are use them as a starting point, but for Self Storage do a look beyond the numbers. Disregard which ratio of the above you use:

    A. Is extra land available or is parking rentals included? The next units you build on this property, subject to the market need, greatly swing all three ratios. Our first Phase is always built around a 65% occupancy level that pays for everything. All Land, All fence, All engineering, P/I, insurance, property tax, electric,etc. The next phase only takes a 35 to 45% occupancy for Cash breakeven (includes P/I).

    B. Increase your rent $10 per unit. Doesn't sound like much but your NOI goes through the roof. Evaluate your market to see the potential. Example: Using your metric, two potential properties have a "ratio" of 8%. All things being equal "financially" which one is worth more? The one in the underserved market. You can raise the price $10 per unit with Occupancy staying the same. $10 per unit on a $60 10 x20 is 16% gain. $10 on say the same unit but NOI, lets say NOI $25 is 40% gain.

    C. Market strength. Again both have the same "ratio" of 8%. All things being equal "financially" which one is worth more? Market A "needs" 2,000 units; has 1,500 units with a shortage of 500 units. Market B "needs" 4,000 units; has 4,100 units with an oversupply of (100) units. The "quality" of your "A" investment is better than your "B" investment, all things being financially equal.

    D. Occupancy level. If the occupancy level is low, the sellers will think in terms of Cost to build, versus revenue stream/NOI. This will have a "Poor" ratio due to the low revenue/cash stream. Gets back to "C" above. Which market A/B are you in. Emphasizing their Net operating Income which will be low. They will be stuck on their price at Cost to build. If your in market "B" above, walk away. Its not worth working with them on the price. If your in market "A" above, work with them. Possibly get them to do zero interest finance for a portion of the investment for 5 years balloon.

    The question was on B/C self storage properties, which are primarily owned by Mom/Pop. A. Extra land and parking is valued at that "use" value and not with a what if, built out., B. They don't raise prices as fast as REITS or regional firms, if at all., C. They don't care about "Market", "theirs" is the only property in town. Their Sales Price is not based on any of the discussions above. They don't think that way and most will not go through a broker.

    Look beyond the ratio's, especially for B/C Mom/Pop self storage.

    Start small and make your Big mistakes early.

  • #2
    On section D.

    Could you also please explain why you would walk away in market B? Is it because this market is already overbuilt?

    Thank you so very much
    Last edited by TamarD; 19 September 2021, 07:51 AM.


    • #3
      Correct, weaker market. We do a 40 mile radius driving range. This allows us to have several potential markets. Thus we can both prioritize which options are better. Also if nothing is available or for the right price, we don't have to force it. We can just wait.

      If your just in one town and want to grow, if it doesn't have the additional market, then your forced into either waiting or paying to much.


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