Inside Self-Storage

JAN 2019

Inside Self-Storage (ISS) is an information source for industry owners, managers, developers and investors covering news, trends, facility operation, finance, real estate, construction, development, marketing, technology, insurance and legality.

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P urchasing a self-storage facility can be more difficult than you'd think in this over-heated market, especially for first-time buyers. There are more investors than ever competing for fewer available properties. As a novice, you enter that competition with several disadvantages. To succeed, you should know what those shortcomings are and how to counteract them. Even under current conditions, opportunities can be found if you know how to identify them and you properly structure your offer. Search Criteria The first step in finding the right self-storage facility to purchase is to define your search criteria. Answer the following: • In what city, state or region will you look? • What's your price range? What can you buy for that price in the target market? • Will you manage the site yourself or hire a management company? • How often will you visit the facility? After identifying where the perfect property will be, consider the best offer you're willing to make, keeping your competition in mind. Be prepared to bid at a fair price. Offer the largest possible earnest-money deposit and the shortest possible due-diligence period. You can only do these things with confidence if you've researched and understand your chosen market. Investment Type After learning all about your target market, it's time to consider which kind of investment suits your capabilities. Self-storage buyers usually consider stabilized properties or upside properties. Prices and capitalization (cap) rates for stabilized properties in any given market should be fairly consistent. This means that when a property is evaluated by several well-informed buyers, its cap rate, sales price and value will fall within a narrow range. This isn't the case with upside properties, where prices and cap Guidance on selection, due diligence, financing and more By Bill Alter rates vary widely and are much harder to establish. Upside is often subjective based on a buyer's perceptions, beliefs and assumptions. Stabilized properties generally offer higher current return with lower risk. They present the opportunity to slowly and modestly increase rents over time. Upside properties usually offer lower current return, sometimes much lower or even negative. However, they provide the chance to significantly increase return by improving the facility. These improvements can be physical, operational or a combination of both. The following are common indicators of possible upside in a property (bear in mind they aren't proof positive but a sign that further investigation is warranted): • Higher vacancy than nearby competitors, especially if rents are equal to or lower than the competition • Inexplicably high operating expenses • Room to grow, i.e., excess land or many open parking spaces Upside properties are in high demand by entrepreneurial buyers, but too often, stabilized properties are mistaken as having upside, causing buyers to substantially overpay. To avoid this mistake, it's important to know the market, including the number of existing and planned self-storage facilities in the area, the major players, occupancy rates, rents, and expense ratios. You must know specific neighborhoods or sub-markets, their current population and growth projections, and other demographic information and trends. There's a lot of information to discover and absorb. It would be best to shortcut the process by working with a local real estate broker who specializes in self-storage. He'll already have this information and should be willing to share it with you. He'll know what's for sale in the market or will be soon. Remember, you'll face competition from many other investors seeking properties in the best markets. Show your broker you understand local market values and are prepared to be competitive and act quickly when it comes to making an offer. Financing By this time, you should've contacted several lenders who understand self-storage and have a desire to loan on this asset class. Understand their loan programs in terms of: • Minimum and maximum loan amounts • Required loan-to-value ratios • Rates and repayment terms • How much time the lender will need before it can provide you with a "terms sheet" for your deal The Lingo Before you set out on your investment journey, you should learn the commercial real estate vocabulary. Here are some common terms: • Loan-to-value (LTV): A ratio of how much money you're asking from a lender vs. the total value of what you want to purchase • Debt service-coverage ratio (DSC): Operating income over total debt service; basically, how much of the debt you'll be able to cover each year with income • Capitalization rate (cap rate): Income of the property divided by the total value of the property • Cash on cash: Annual income over how much you invested (which might just be your down payment) • Vacancy rate: Percentage of properties that are vacant in a given area Source: 42 Floors, "7 Steps to Owning Your Own Commercial Real Estate" ing Your First Facility 30 ISS I January 2019 www.insideselfstorage.com

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