So what are the factors to consider when buying an existing self storage facility? The traditional measure for determining the value is the capitalization rate or the ratio between net profit and purchase price. As an investor we always strive for the highest return on investment ROI but what happens if you are considering multiple properties with similar prices on coupons? What follows is an assessment of what might affect your decision to invest in a plant over another all the same.
The first step is to determine your own investment goals. Should you be an active or absent owner? How will you handle the property? Should you hire a management company? What kind of return do you need? What are your investment goals? How long do you plan to keep the property before selling? Answering these questions will help you find the best property for your interests.
You have probably heard the old saying The three most important things in real estate are location location and location. Well thats one of the most important factors to think about because its all about the only thing about a property that you can not change. Having a bad website requires you to spend more money and effort on marketing to keep your devices packed and you will almost always be at a disadvantage compared to your competitors located on a main road near other stores or in the main traffic areas on the market. But what makes a good place? Storage space tends to do better in places that fit well for retail.
A website should be comfortable visible and easily accessible to attract customers in the trading area. Chain retailers have the choice of space for a science and their approaches can work for you as well. Use the following criteria to evaluate the vitality and quality of a self contained facility. You can rate a site on a scale from one to 10 in six categories multiply each score by the specified weight. Once you have determined the number of points for all areas add them together. If a property does not make at least 500 points it is unlikely that it will be able to compete in the long term market. This is a very creative way I picked up from Aaron A. Swerdlin who is with Storage Investment Advisors LLP. His list is as follows:
Access is clearly a big question but modest compromises can be made for a website that is otherwise superior.
Frontage and potential expansion are the important issues to look at in this category.
Competition is another important issue. Features with less existing competition or barriers to entry for future competitors are the best.
0 2 Large project next to 3 5 Near vacancies planned projects or construction sites 6 8 Low vacancies no competition no new projects planned or under construction 9 10 Rent increases no vacancies no building Scheduled or on the way multiply scoring times a weight of 12 for total points in this category.
Pitched ceilings are better than flat roofs. Standing sleeping ceilings have long life and are low entertaining. Screw is also good but the slabs that make the screws waterproof can deteriorate over time which requires replacement. Flat or roof ceilings tend to be more problematic. Septic systems are less desirable than municipal sewage service. Insulated buildings are more comfortable for customers and better protect their goods. External devices need a weather leak to prevent water entering the building.
As a rule of thumb large projects are those with at least 45000 square feet; Medium projects range from 30000 to 45000 square meters; and small projects have less than 30000 square meters. Major projects which have better economies of scale are generally more desirable. This is demonstrated by the fact that they tend to trade at lower prices. Operating costs for small plants tend to represent a greater proportion of gross income. With a higher break even point they have greater risk.
Buying a facility with space to expand can be very profitable provided the authorities allow you to build more units and the customers demand is there. As you expand a project only variable costs increase so a greater proportion of additional revenue goes to the bottom. Expansion can also make it possible to sell at lower interest rates or refinance at lower interest rates thereby deduction of additional value from existing income stream.
Knowing what to look for in a property makes it possible to make better purchase decisions. Seek opportunities with long term profitability. Carefully check each location given that storage is a retail. Keep in mind quality remember costs like maintenance. You may not find the perfect place but with intelligence and a little luck you can turn on a property with optimal factors for value and growth