Should I buy this Self Storage Facility?

[AroundTheWorld]

Great Question:

Actual Income
minus Actual Expense (but add in your own expense items that you feel she left out)
= NET INCOME

Then, you want to look at cashflow.

Net Income
less your payments to her or the bank

= The cash you are taking in .... or... the cash you are paying out.

[Doug]

Josh,

You need to look at this deal as if you were going to build from the ground up. First is to do your market analysis. Is this even a good market? What are the occupancy levels of other facilities? Check the prices of the competitors? Etc.

You can spend/ waste a lot of time crunching numbers, conducting due diligence and negotiating then find that the market may be saturated.

Remember that YOUR TIME IS YOUR MOST VALUABLE ASSET

Doug

[JoshuaSCurtis]

Doug,
Great advice.
Sonya,
Thanks for that. Hopefully I can get to this today. Worst part is that I actually have a "9-5" (which I actually love and it is a very small business that I am helping to grow) but they regret to tell you that it is actually more like "7-6" haha.

Anyways, Thanks for the advice. I will come back with any questions if I have any. I got some pretty good tips from another Self Storage colleague and it should not take too long because I am basing most expenses off of his facilities. They are fairly nice and IF this makes sense to buy, then I would want to run and have them like his.

Best,
Josh

[JoshuaSCurtis]

Well...

Came to a gross realization on this facility, and basically this person either paid way too much, or just let it go down the drain. If I she were to owner finance it 100% at 7%, I would be PAYING about $1100 a month at the current price that she is asking. Now...this takes into account a few things (please correct me if I am wrong):

-These are pretty conservative numbers; however, as an investor, I would say no to the deal than to go in and it be extremely risky!
-This is also based on the current facility production. I realize (as she points out) that there is a ton of potential here (only 30% occupancy) with growth (another 1.5 acres to build); however, I do not buy on speculation and potential. For it to make sense to me, it has to be making me money NOW. And with that said, the best offer that I can put in would be $80K.

Any ideas, advice, etc?

Josh

[AroundTheWorld]

NICE WORK!!!

You are exactly right - on a few fronts...

#1: You will have a major negative cashflow at first. (I was coming up with a number that was even bigger than that). Sometimes, when you are getting into a self storage facility, you will see a negative cashflow. It "can" be okay - as long as you fully understand the reason for it, you have an end in sight, a plan to fix the problem, and most importantly - - THERE MUST BE A HUGE PAYOFF for you - for the risk that you are taking. Which leads to #2 - -

#2: This is a HUGE lesson for investors - and one that is EXTREMELY important. NEVER PAY FOR POTENTIAL. If you are paying for more, because you see a future potential, then you are giving away any future profits. If you want to buy a project - buy it for (or less than) what it is worth TODAY... Many a investor has gone "down the tubes" because of making this mistake.

They pay for a dream
They pay for a hope
They pay for a potential
When all they really should be paying for is the current, actual value.

Now, this doesn't mean that you don't look for a project with potential or buy a project that has future potential. Indeed, this is the way that you can make a fortune as a real estate investor. But, don't pay an inflated price.

Here is the next thing for you to reflect on:

Is there TRUE potential, or perceived potential? It is possible that there is still an opportunity here. It is definitely over priced (even the seller said that in one of her letters). The seller would need to realize that she is way overpriced. It will be a tough pill for her to swallow, I imagine. As you said, she probably overpaid - and it clearly has not worked out for her since she bought it.

But, there is ONLY POTENTIAL if there is enough demand in that particular area. That is why we keep asking you to do market research. What is going on in the area?

More importantly - - - what was really going on for it to drop from 95% occupancy to 30% in one year? That is a DRASTIC drop. IMO, there is more to the story.

What did you like about this deal? What caught your attention? Did someone "tell" you it was a great deal? Was it the fact that she would "owner carry"?

[JoshuaSCurtis]

Thanks for the encouragement! I got back in contact with her with my offer and some more information that I needed if she wanted to see a better number (which of course she did). I am going to do some market research myself also (just to see if they match so that I can see if her numbers are actually true).

On the topic of this deal, nothing specifically. I do most of my work with single family homes and just happened to run upon this as I was searching for someone to owner finance. I will always, at least, look into it of course! Plus...worst case scenario, this was good practice! I had never actually ran/owned/bid on a self-storage facility; however, I definitely see the potential. So that looks to be my next project, now that it is in my head! Not this one of course (unless she basically gives it to me). But I will stay in touch as I run up on more market numbers.

I talked to a prominent Self Storage investor the other day and am about to get in contact with his broker here in Nashville. Should be beneficial. I will keep you updated into what I find out about this deal as well as others to come!

Best,
Josh

[Yveskleinsky]

Hi there-

I have some land I've been sniffing around for awhile. I would like to build some self-storage, however I want to make sure that I am doing the initial analysis right. ...Can I pay you guys to do a feasibility study/initial analysis? I would feel so much better if I had a second set of (experienced) eyes on this!

[LuckyManAtPool]

What is your TRUE NOI: Did you get a rolling 12 month expense report?
Personally I won't boy any facility lower than a 10% Cap Rate and absolutely refuse to pay based on Proforma figures.

If you are doing all of the work, advertising etc. it is you that should benefit and not the seller. Sometimes the best deals are the ones we walk away from.

Originally Posted by JoshuaSCurtis

Hey guys!
Ok, a little bit about the facility that I am looking into buying. This will be a very long post, as I am copying the notes that the owner sent me, regarding the facility. Need some insight!!

Here you go!


FINANCIAL ’08 DATA AND FACILITY INFO

Current rates: $39 for 5x10 (12 units)
$57 for 10x10 (14 units)
$72 for 10x15 (24 units)
$84 for 10x20 (14 units)
$200 for 1 16'x36' bay (currently rented)
$350 for 1 28'x36' bay (unoccupied, has small corner office inside)



Proforma Income:
100% occupancy: Gross Annual: $56,640
90% occupancy $50,976
70% occupancy $36,648
50% occupancy $28,320

We recently started a special for 20% off all units (about what the previous owner's rates were) to see if that would help fill the place...too soon to see if it helped. Only a couple of tenants are at the discounted rate.


The facility was built in 2000 by the previous owner who self managed it. I have owned the unit since July 07, and bought it at 90-95% occupied. Multiple problems occured with the transition including: management became 1)offsite, 2)managed by someone new to not only self storage but property management in general, 3) mgmt moved offices, creating more confusion. For a more complete list of management issues see below.

Here is the financial data for 2008 : (see also attachments for 2007 P&L, and Rate Analysis done by the previous owner in ’07. )

Jan -July 2008 Financials:
Gross Income: $15439
Net deposits: $10,015 (after management and bookkeeping expenses, which are $3-400/month, maintanance, advertisisng, some upgrades* and utilities)
Taxes: $1937 (6 months)
Insurance: $992 (6 months) (Tax and insurance costs not included in the above net deposits)
Occupancy: approx 30-35%

*For 2008 expenses which differed from 2007: Bookkeepers hired, cost approx $750/6 months. For the large bay unit (which has a small office inside of it- see diagram) we put in extra doors to access the building from the outside, wired it for electrical, and put in a gravel driveway. Those expenses were about $1500. This was done with the hopes of renting either the largebay/office, and/or the rental office (currently unoccupied as management is offsite), to a business.

I'm in the process of breaking down 2008 expenses and can also email the statements for Jan to July.

About the facility…

The facility was built in 2000 by the previous owner who self managed it. I have owned the unit since July 07, and bought it at 90-95% occupied. Multiple problems occured with the transition including: management became 1)offsite, 2)managed by someone new to not only self storage but property management in general, 3) mgmt moved offices, creating more confusion. For a more complete list of management issues see below.

The property is fenced with an electronic access security gate and yard lighting.

The three existing buildings total 10,560 square feet and include an office/sales area with restroom, 12- 5x10 units; 14- 10x10 units; 24- 10x15 units; 14- 10x20 units; 1- 16x36 unit; 1- 28x36 unit.

The buildings are sized like this: Office/Shop 36x60x14; Mini Storage #1 30x130x8'6"; Mini Storage #2 30x150x8'6". The roll up doors on the shop are 12x12; the doors on the 5x10's are 3x7; the rest of the mini storage unit doors are 8x7.

There is 1 acre available for expansion, and if placed properly there is enough space to nearly triple the number of units. Location: 2-3 blocks east of Main St The town of about 16,000 people and Tennessee in general has been an area of slow and steady growth.

Terms: Since the occupancy rate is low I am trading terms for price. Of note, the previous owner was 90+% occupied when I bought it in 2007. Thus, the facility should be able to be turned around with proper management; I just had a hard time doing this from afar with inexperienced personnel. And again, there is room for expansion.
Here are three options for consideration:

1. 15% down, 85% seller financed at 8%, 30 yr amort., 5 year balloon.
2. 25% down, 75% seller financed at 7.75%, 30yr amort, 5 year balloon.
3. 10% down with agreed upon equity split at a later date.

As you can see the income does not justify the price, which is why I'm offering terms. Keeping cash in your pocket with low downpayment provides capital for expansion. This needs to be purchased by an experienced self storage operato/developer willing to put in the work to turn it around, and probably needs to be managed by the owner to save costs.

Terms are negotiable.

Regarding the management…

I am including this section to better inform the buyer as to the events that occured this past year which were significant factors in the occupancy and collections decline.
1. The "legs" of the management team has changed several times, one person got fired for being incompetent.
2. The management was not enforcing any fees at all; fees are a significant portion of self storage income.
3. It was difficult to have leverage on the management team as it was a lot of work for minimal reimbursement; the current manager is also a busy realtor.
4. The phone was not being answered consistently. Now it is rolled over to the manager’s cell phone. A call center may also be helpful.
5. Little networking was done in the way of cross-promotion, but I recently partnered up with a moving company (Hardison Moving Company) ...from what I can tell this family business is the main or even only game in town and was a big source of referrals for the previous owner. (2-3/week). I am in the process of co-branding with him, making flyers for each of his custormers, etc.
6. Credit cards were not accepted until very recently, and most tenants do not have a card on file.
7. Invoices and self addressed envelopes were not initially sent. The management did start that practice back up in February, but by that time a lot of the tenants were very delinquent.
8. RE: collections no one is making repeated phone calls to collect delinquencies. We just hired the bookkeepers who are now sending certified letters but do not make phone calls. I'm in the process of hiring an outside collections agency to tighten up the reins.
9. This is a brand new management team which started their business at the same time I bought the faciltiy. They were new to both property management and self storage.

As you can see all of these problems are fixable especially if it's owner-managed.

The name of the business, signage, and phone number will be transferred with the facility.

[LuckyManAtPool]

Remember you are buying an income stream and only YOU know what cap rate you are comfortable with, but stop thinking about paying for wish come and pay for existing income only. Good Luck

Originally Posted by JoshuaSCurtis

Well...

Came to a gross realization on this facility, and basically this person either paid way too much, or just let it go down the drain. If I she were to owner finance it 100% at 7%, I would be PAYING about $1100 a month at the current price that she is asking. Now...this takes into account a few things (please correct me if I am wrong):

-These are pretty conservative numbers; however, as an investor, I would say no to the deal than to go in and it be extremely risky!
-This is also based on the current facility production. I realize (as she points out) that there is a ton of potential here (only 30% occupancy) with growth (another 1.5 acres to build); however, I do not buy on speculation and potential. For it to make sense to me, it has to be making me money NOW. And with that said, the best offer that I can put in would be $80K.

Any ideas, advice, etc?

Josh

[Mumakiloptimi]

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