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Looking at buying storage facility, questions on how to evaluate the business

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  • Looking at buying storage facility, questions on how to evaluate the business

    Hey folks,

    Brand new here - Yay!

    I am looking at buying a self storage facility and was wondering what advice you would give on doing a business evaluation on the property. I do have some of the financials in hand and from looking at the numbers it looks like it is worth quite a bit less than they are asking.

    I appreciate any advice and if you have any questions let me now and I will try to response as soon as possible.

    Thank you!
    Best Regards,

    JBA Storage

  • #2
    Use the cap rate method. It is one way I like a cap rate that is above 9%
    Dave (Woodee) Scott

    Comment


    • #3
      Hi there, welcome to the boards.

      Brief background about me, this is our 6th year into owning a facility, just expanded so now have about 400 units. When we bought, the market was very flat, so we got a screaming deal. Our facility has been recently appraised at 4x what we bought it for 6 years ago (we could retire at a young age).

      Recently, there have been a lot of facilities for sale since the market is now hot (at least here in Idaho). Most of the places we have looked into purchasing are way over priced, but most of them sell within a week. Most of the purchases are from investors with cash.

      If you are interested in purchasing, you need to look at more than just the financials. I always look at the breakdown of unit sizes, the current rate, and the market rate (what they are getting vs what they should be getting). Then take a look at the expenses and figure out if there is money to be made. If you are running the place yourself, then take that into account when looking at financials as most places have a managers salary as part of the expenses. Also look at the mortgage (unless you pay all cash). Can you afford a 6 or 7k mortgage, and do you have a large down payment (usually 20%)?

      You need to determine your intentions. For us, this is our family business. We run it, and basically bought ourselves jobs for the next 20+ years, while making a nice living. Assuming we sell at some point, we stand to make a nice profit, but our intentions are to strictly run the facility ourselves and live a comfortable lifestyle. When you first start, expect to make little or no profit for a few years. If you are lucky and the market grows, you can make some money if you have units to rent or can increase rents on existing tenants. If there is room for expansion, then you are sitting in a good position should the market call for more units in your area.

      Lastly, location location location. If you buy or build a facility that is 1 block off the main road, your competitor on the main road will have a huge advantage with exposure and more than likely can get more money for the same unit size. We are fortunate to have an outstanding location, and are the highest priced facility in my immediate area and we stay full. Even with new facilities opening up around us, we stay full. Over 35% of our business is strictly drive-by. Another 25% or so is because we are "right down the street" from a tenants home. They will pay more to rent at a facility close to their house.

      Hope that helps, I know I ramble a lot. Happy to answer any more questions you might have, and good luck!

      Comment


      • #4
        Originally posted by Dave Scott View Post
        Use the cap rate method. It is one way I like a cap rate that is above 9%
        Yes cap can be looked at, but it is very subjective. Any one can put together financials to come up with a cap rate, but I ignore cap and look at every dollar coming in, potential income, and what my expenses would be. I don't trust anyone else's numbers. One place we looked at had a different amount of units in the same listing. First RED flag!

        Comment


        • #5
          Dave Scott
          Cap Rate, got it. I read some of this, makes sense and I think I could get a fairly accurate number from the financials that I have.

          letsgosonics
          I am looking at purchasing for a family business, like you. This location is on a highway (near several apartment complexes) so good traffic but not near the busy side of town, but the town is growing this way - I would say the location isn't great but not really bad either, good overall. This location has about 200 units, I like your idea of diving more into that and I am going to get them to send me how many units they have at the different sizes and also what they are charging for them. The plot of land is 13 acres and they are only using I am guessing 2-3 at the most, so we have a lot of room to expand. My wife and I have also talked about building a building for renting out for parties etc...and that could be something we do with some of the land. From the financials it looks like this place is sliding, they went from like 95% full to about 65% now, I don't think the owners are properly managing it and hopefully are trying to get out and will be easy to deal with.

          I will crunch some numbers and see what I can figure out for a cap rate and in turn a business value. I will let you guys know what I figure out, thank you for the info so far, been very helpful.
          Best Regards,

          JBA Storage

          Comment


          • #6
            If you are near a growing side of town and numbers drop that much, there is something with management for sure. Could be why they are selling. Even if a large chain moved in down the street, I can't see losing 60-70 tenants. If it is being mismanaged, former tenants could be your biggest hurdle as word of mouth is very powerful. If you do purchase, make sure you rebrand then entire business and property. Change the name, do all new logos, new signage, new website, domain etc. It will cost some upfront, but basically be like you are a new facility. Then the tenants you still have can be your biggest form of advertising. Offer them a rent credit of $20 or whatever for every new tenant they refer to you. We did that and had a couple tenants get some nice credits, while we cheaply acquired new ones. check with your local county or city to see if there are any new facilities planned within 5 miles of your location, or you may be able to look yourself depending on their website. Best of luck!

            Comment


            • #7
              Cap rates can be manipulated like everything else because it's based on the difference between gross income and expenses. If the seller underestimates expenses or changes his loss rate or underfunds the expense of replacement reserve account or increases his average occupancy percentage then the profit will wildly swing up. In today's market of low interest rates and correspondingly low cap rates if you change profits by just a few percent it will be multiplied by the low cap rate.

              You might keep this rule in mind. When interest/cap rates drop from 8% to 4%, the market value doubles. Another trick: the seller holds prices blow market for a long time and reaches high occupancy. The customers are comfortable. Then he/she run through a big rent increase. For a few months the market goodwill and slow moving buyers keep clients from moving and profits look unbelievable. Then you buy something with a high cap rate that you think is undervalued. After you go to settlement, the customers leave and you're holding the bag.

              Look carefully at the Profit and Loss statements. There's a joke in the industry as to what P&L stands for --- Pack 'O Lies! Many many (maybe most) sellers massage expenses and puff up their profits to find a buyer who is not sophisticated enough to see through the numbers.

              I hope I haven't scared you out of anything.

              Comment


              • #8
                Originally posted by StorageBuddy View Post
                Cap rates can be manipulated like everything else because it's based on the difference between gross income and expenses. If the seller underestimates expenses or changes his loss rate or underfunds the expense of replacement reserve account or increases his average occupancy percentage then the profit will wildly swing up. In today's market of low interest rates and correspondingly low cap rates if you change profits by just a few percent it will be multiplied by the low cap rate.

                You might keep this rule in mind. When interest/cap rates drop from 8% to 4%, the market value doubles. Another trick: the seller holds prices blow market for a long time and reaches high occupancy. The customers are comfortable. Then he/she run through a big rent increase. For a few months the market goodwill and slow moving buyers keep clients from moving and profits look unbelievable. Then you buy something with a high cap rate that you think is undervalued. After you go to settlement, the customers leave and you're holding the bag.

                Look carefully at the Profit and Loss statements. There's a joke in the industry as to what P&L stands for --- Pack 'O Lies! Many many (maybe most) sellers massage expenses and puff up their profits to find a buyer who is not sophisticated enough to see through the numbers.

                I hope I haven't scared you out of anything.
                Compare the P&L for the past 3 or more years to those same years tax returns

                Comment


                • #9
                  There are other things to look at when you look at a facility. Occupancy is very important. What is the condition of the physical plant? Is it fenced and gated? Have you shopped your competition? Have you compared your rates with your competition? Any major repairs needed.

                  Storage is more than just what you have to pay for the facility.

                  Welcome to storage.
                  Bob Taylor (Astro)
                  Blue Ridge Self Storage
                  Cashiers, NC

                  Disclaimer: What Gina said....'cause the the cheese fell of my cracker.

                  Comment


                  • #10
                    Originally posted by JBAStorage View Post
                    Hey folks,

                    Brand new here - Yay!

                    I am looking at buying a self storage facility and was wondering what advice you would give on doing a business evaluation on the property. I do have some of the financials in hand and from looking at the numbers it looks like it is worth quite a bit less than they are asking.

                    I appreciate any advice and if you have any questions let me now and I will try to response as soon as possible.

                    Thank you!
                    Congrats on wanting get into the business - most talk about it but never make it that far. You've gotten some good things to look for in prior posts here. Here's a bit more for you to consider -

                    Seems like a value add opportunity as it is mis-managed. How does the place look physically?
                    Do they have a website currently? This is an opportunity as well.

                    With the financials you can, and should request the business bank statements so that you can verify what they are actually taking to the bank. Also, you will want the business Schedule E from their tax return for prior three years.

                    I'm more than happy to hop on a phone call with you to help more if you need it. My rate is one batch of chocolate chip cookies per phone call haha!

                    Comment


                    • #11
                      Originally posted by StorageBuddy View Post
                      Cap rates can be manipulated like everything else because it's based on the difference between gross income and expenses. If the seller underestimates expenses or changes his loss rate or underfunds the expense of replacement reserve account or increases his average occupancy percentage then the profit will wildly swing up. In today's market of low interest rates and correspondingly low cap rates if you change profits by just a few percent it will be multiplied by the low cap rate.

                      You might keep this rule in mind. When interest/cap rates drop from 8% to 4%, the market value doubles. Another trick: the seller holds prices blow market for a long time and reaches high occupancy. The customers are comfortable. Then he/she run through a big rent increase. For a few months the market goodwill and slow moving buyers keep clients from moving and profits look unbelievable. Then you buy something with a high cap rate that you think is undervalued. After you go to settlement, the customers leave and you're holding the bag.

                      Look carefully at the Profit and Loss statements. There's a joke in the industry as to what P&L stands for --- Pack 'O Lies! Many many (maybe most) sellers massage expenses and puff up their profits to find a buyer who is not sophisticated enough to see through the numbers.

                      I hope I haven't scared you out of anything.
                      Just quoting this post because I am not capable of liking it more than once. The numbers you get when reviewing a place are usually worth the paper they are written on.

                      Comment

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