Purchasing the Facility by Corey
Donaldson
The biggest question that I am always asked is how much should I pay for a self storage facility or how do I calculate the right price to pay? Self Storage facilities are usually analyzed based upon cap rate (capitalization rate) which is a direct determinant on the asking price.
To determine the cap rate of a property divide the net operating income by the sales price. From an income standpoint, the higher the cap rate, the better the deal (for the buyer). The cap rate is directly related to risk and effort. The current cap rate for a self storage business is from 5% to 11% (based upon location, size, age, condition, etc.) I fully expect as interest rates increase that the cap rates will increase as well.
CAP rate example chart
250 units @ 30,000 square feet
$19,000 monthly gross income = $228,000 Annualized
$6,400 monthly expenses = $76,800 Annualized
Net Operating Income $151,200 Annualized
Cap Rate = NOI/Sales Price
10 CAP price = $1,512,000
8 CAP price = $1,890,000
12 CAP price = $1,260,000
As you can see when purchasing, the higher the cap rate the better for the buyer!
Warning: When determining the cap rate scrutinize the income and expenses used in calculating the NOI (net operating income). Broker and owners will sometimes overstate or understate these numbers which will definitely impact your NOI and your cap rate. I have found many times that brokers/owners will not put in a management fee, understate the taxes, or inflate the income to name a few.
Buy on Actual numbers not Pro Forma. Pro Forma is "What the property could do." I have seen some sales packages that a self storage facility has been producing $200,000 of gross income for the last 5 years but the broker says that it could (pro forma) produce $350,000 of income and is trying to base the sales price on $350,000 of income. Don't be fooled! If the broker/owner is so intent on selling the property based upon $350,000 of gross income I would tell them to call you when the property is actually grossing $350,000 and then you would be interested in the property! :)
After you have settled on a fair price with the owner/broker I would then put it under contract. Don.t be timid to put it under contract if you are truly interested in buying the property. You will want to use a sales contract with a strong due diligence clause of at least 30 days (45 days preferable) within the contract. The due diligence clause will allow you time to inspect the property and for any reason you can back out of the deal.
If you are unsure or uncomfortable about the due diligence process as a whole, it might be a good idea to hire a professional or find a seasoned investor to help you on your first purchase. I would highly recommend finding an expert that could assist you in the due diligence as this could save you BIG $$$ in terms of learning mistakes!
Financing will be an important consideration when purchasing your self storage facility. Long-term stable financing is an important determinant for your profitability with your new facility. I look to try and secure the longest term fixed rate loan that I can find. The 10 year fixed rate terms from large national banks are the most preferable. Local banks usually offer 1 to 3 year fixed rate loans.
Variable rate loans can be dangerous especially if you have a small profit each month from your facility. As the interest rates continue to rise, your profits could be evaporated with the increased interest rates. You could possibly be negative with the property if the interest rates rise rapidly. Loans that are tied to adjustments in the prime lending rate could be dangerous because as the prime rate rises, so do your payments!
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