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.
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