Investing in Self-Storage: Gauging Property Potential

May 29, 2020

GaugingWith the arrival of COVID-19 and the subsequent economic fallout, many investors are on the hunt for discounted self-storage facilities. Public Storage’s latest industry outlook states that we may be at the precipice of an acquisition cycle. For those looking to get into the self-storage space, but have little knowledge of the business, this article will help you navigate the buying process.   

Before You Invest

When considering an investment in self-storage, first ask yourself:

  • What do you want to get from your investment?
  • What’s your long-term goal for this property?
  • Are you investing solely for an income stream, or to eventually sell the site for a larger profit?

There are many reasons people choose to invest, and it’s important to have a plan and an exit strategy from day one. This will align your goals and implement a process to be successful and manage costs.

Weighing Potential

When looking at a property for purchase, first consider the functionality of the site. Is it big enough to run efficiently from a financial perspective? Is it a class-A facility in top shape or a “fixer-upper” that will require a little TLC to turn a profit? It’s important to gauge the potential of the facility, so you know what to expect. The easiest way to do this is to examine its size, expansion capabilities, and expense ratio. Let’s look at each.

  • Property size. The scope of a facility is important because different sizes require different operating procedures. Remember, the less rentable square footage you have, the less income you’ll make. If you buy a site that’s too small, you run the risk of it not being financially feasible. If you do opt for a smaller site, consider running it via an automated kiosk, rather than a flesh-and-blood property manager. During this current era of social distancing, many facilities both large and small have opted for the more technological approach in the name of safety. Not only are automated kiosks safer, but they can also save you as much as $50,000 annually.
  • Expansion capabilities. Examining the potential of a property is important because expanding an existing property will allow you to create more rentable income. Self-storage facilities are cheaper to build than other types of real estate. A small investment in an expansion could double your profit in the long run.
  • Expense ratio. Facilities should ideally run at an expense-to-income ratio of 30% to 40%. If you’re seeking to invest in a low-performing facility to turn it around and make a profit, look closely at the expenses. Are there things you can cut or places where you can save money? Can you raise the rent to increase income? There are many facilities that seem to be under-performing or a bad investment; however, with the correct management, they can be successful.

Red Flags

We’ve talked about property characteristics to consider, but it’s also important to be aware of red flags. The following issues can be more hassle than they’re worth, causing delays in the sale process and generating further problems. Avoid properties with the following challenges:

  • Environmental contamination: For example, there could be an oil tank on the property or an adjacent parcel that’s slowly leaking onto the site and contaminating the soil. As the new owner, you’d be responsible for fixing this problem. This can delay the sale and cost a lot to remediate.
  • Easements: Make sure you understand what, if any, easements are on the property, as well as the associated process and costs. For example, an easement for water or draining needs to be properly documented. If it isn’t, it could lead to a new, mandatory easement for entering and leaving the property, costing you time and money.
  • Zoning: Find out if all connected parcels, including expansion land, are properly zoned for self-storage. Also, ensure the zoning permits the total square footage of any potential expansions.
  • Capital expenditures: Understand which capital improvements the seller has completed, as well as any deferred improvements and repairs, such as a new roof. If there are a lot of deferred or high-ticket items, it can cost you extra up front.
  • Tax reassessment: Understand the tax laws in the area, as property taxes vary in each location. It’s best to contact the local property assessor who handles self-storage and discuss how the sale will directly affect the property’s assessed value.
  • Leasing vs. owning land: Make sure the seller owns the land and isn’t leasing it. A lease will complicate things and add more parties to the mix. The more groups connected to this process, the less control you and your broker will have.