We create a Proforma for every self storage project before putting it into service. If I’ve had one consistent success in the self storage business it has been hitting or beating the Net Operating Income (NOI) projection in these Proforma.
This has been a big part of the success we have had. This allows us to create projects that hit or exceed values we projected prior to putting the projects into service.
Where I have made mistakes in projections is below the NOI line.
That may seem counter-intuitive because the beauty of self storage is the fact there are so few variables below the NOI line.
What is below the NOI line are capital improvements and debt service (i.e., loan payments).
There are few capital improvements in self storage, so guess where I have made the most mistakes?
Most of the projects we have done are value add-projects, primarily expansions where we are adding more self storage to an existing facility.
Where I have missed on projections is on the construction and interest estimates. Not such a big miss that we are over budget (although that has happened on a few, but by less than 5%). The mistakes I have made is that it has taken longer to get approvals, engineering work, foundation permits, etc.
In most cases, we put money aside for negative cash flows. Many of our loans have interest reserves with them that we can use.
My goal is to to use as little investor money as we can.
That is the most expensive money (i.e. we pay a preferred return on it).
When the project takes longer than projected, those are lost months with interest payments on the amount of the loan we have pulled PLUS the debt service on the acquisition.
That can add up quickly.
So it doesn’t matter whether it is loan interest reserve or investor money, both add more cost below the NOI line than I had anticipated. One in the form of debt service and the other in the form of more preferred return to be paid.
I have had many projects where more money went in than we anticipated. Or the loan is more than we had on our Proforma due to more interest caused by longer construction time.
This has translated into some projects taking longer to hit our preferred return than we anticipated.
So far, we have been fortunate. Because our values are so high, we can usually refinance early, pay back the accrued preferred return and give the investors their money back.
But, since we are not paying the full preferred return the first few years, some of the investors get concerned.
I get it.
I have learned to add more holding cost than seems necessary.
(Or at least what I think is necessary.)
Also, as we move into a period in this industry where we will have more product on the market, I anticipate lease up taking longer in some markets. We are also adjusting our Proformas for that as well.
It is great having the ability to create projects that are worth a lot more than investors, partners, or even lenders anticipated. However, the biggest mistakes I have made effect net cash flow during the first few years.
Don’t make this mistake, especially if you have investors. It may reduce returns on paper, but that would allow for expatiations to be more in line with what turns out to be the reality.
It has been a long road of learning what works and doesn’t work as we grow our company. Part of the design of these articles and training is to shorten that curve for you.
Thank goodness we don’t also have all the capital investments most other types of real estate have below the NOI line: commissions, tenant improvements, and higher reserves.
Even with the mistakes we have made below the NOI line, we have always been able to hit or exceed our values and cause the payback to our investors.
Keep this in mind as you look for your upcoming projects to put into service and create True Wealth and a Fulfilling Career in this fantastic business of self storage.
