What to Look for When You Buy - Self Storage Broker Arizona

Document Sample
What to Look for When You Buy - Self Storage Broker Arizona Powered By Docstoc
					As appeared in the January 2009 issue of Inside Self Storage magazine
What to Look for When You Buy
By Bill Alter

Purchasing a self storage facility can be a daunting task. There is so much competition from
other investors and so few properties available that actually make economic sense. Even with
these conditions, opportunities do exist if you know how to find them. I will describe in this
article many of the key ingredients required to successfully purchase a profitable self storage
property. Remember: location, location, location.

The first thing to do is decide where it would be best for you to own a self storage facility.
Consider things like:
• What are the growth markets?
• Will you manage the facility yourself?
• Will you hire an off-site management company to manage it for you?
• How often will you visit the facility?
This thought process will help determine if you should own a property in or near your home
town or city or if you can widen the search area to include properties within a one or two-hour
airplane flight.

Once you settle on a geographic area you must then learn the storage business in that specific
market. You should know about properties that have recently sold in that market. You should
know those specific properties, their selling prices and date of sale. You should understand their
physical and operational characteristics and how those characteristics related to their net
operating income, capitalization rate and pricing. Markets vary and it is critical to have a market-
specific understanding of the market value of any facility presented to you.

By knowing your geographic area and its self storage market you can quickly determine if an
available property is reasonably priced and worth pursuing. You should know its age, size and
amenities. You should be able to quickly know if the property is in a good location or not and if it
is reasonably priced based on recent sales. In the context of self storage a good location has:
• Frontage on a street with significant traffic.
• Not too many competitors.
• Positive trends in rent increases and occupancy rates, both in the subject property as well
among its nearest competitors.

After learning and understanding the market that is the target of your search it is time to consider
which kind of investment opportunity you want. Buyers usually consider two different types of
opportunities: stabilized properties or upside properties. Prices and cap rates for stabilized
properties in any given market should be pretty consistent. This means cap rates, sales prices and
values will fall in a narrow range when a property is evaluated by several different well-informed
prospective buyers. This is not the case with upside properties. With upside properties prices and
cap rates vary widely and are much harder to establish. This is because upside is often subjective
based on perceptions, beliefs and assumptions of a specific buyer. Stabilized properties generally
offer higher current returns with lower risk. They offer the possibility to slowly increase returns
by modestly increasing rents over time. Upside properties usually offer lower current returns,
sometimes much lower or even negative. However, there is the possibility to significantly
increase the current return by changing the property in one way or another. Changes to the
property can be either physical or operational, or a combination of the two. The most common
indicators of the possible existence of upside are listed below. It is not necessarily proof positive
of upside if any of these conditions exist in a property but rather a sign that further investigation
is warranted to better understand the situation.
• A property with a higher vacancy factor than that of nearby competitors; especially if the
subject property’s rents are equal to or lower than those of the competition.
• A property with unexplainably high operating expenses.
• A property that can be expanded. This will be a property with excess land or one with a large
number of open parking spaces.

Upside properties are the ones most in demand by the entrepreneurial buyers. All too often
stabilized properties are mistaken for properties with upside causing buyers to overpay
substantially. To avoid this mistake it is especially important that you know your market. You
should know the number of existing and planned facilities in your chosen market. You should
know their occupancy rates, rents, expense ratios and the major players in that market. You must
know specific neighborhoods or sub-markets, their current population and growth projections as
well as other demographic information and trends. This is a lot of information so it would be best
to short-cut the process by locating and working with a real estate broker who is a self storage
specialist in that particular market. He will already have this information and should be willing to
share it with you. He will know what is or soon will be for sale. This is where it is important to
remember that there is competition from the many other investors searching for properties in the
best markets. For this reason once you have met with your broker it is important to stay in close
communication with him. You should ask your broker what you can do to move yourself to the
top of his list of qualified buyers. Be sure he knows your price range and your “ideal” property.
Most importantly, be sure he knows that you understand the local market values and are prepared
to be competitive and act quickly when it comes to writing an offer.

To be competitive you should be prepared to offer a fair price, make the largest possible earnest
money deposit with the shortest possible due diligence period. You can only do these things
safely if you have already researched and understand the local market. You should already have
contacted several self storage lenders to know what loan programs are available so your
financing contingency, if any, is realistic. Available properties often have existing loans that have
to be assumed. In those instances you should know what is involved in qualifying for the
assumption. Sometimes loan assumptions can be more difficult to accomplish than loan
originations.

I have tried to describe in this article the key ingredients to successfully purchasing a profitable self
storage property.

				
DOCUMENT INFO