If you are thinking about starting or growing your self storage business, you are in the business of analyzing self storage.
In Episode 178, I reprinted an article I wrote for Inside Self Storage. In it, I discuss the skills needed in my opinion to get in the self storage business today.
If you want to be in the self storage business then no skill is more important than being able to analyze self storage opportunities and understand the numbers.
Especially today when prices are so high. The ability to see where the upside is and to know how to calculate it could mean the difference between getting in self storage or not.
I have written a lot on the blog and made many video tutorials on how to analyze self storage. You can find one video series by clicking the button below.
The idea that I hope you will fully engage with is that this is your responsibility. Do not rely on other people to do the analysis for you. If you are in the self storage business, or in the business of starting a self storage business, this is your responsibility.
Even if you are not good with numbers. Have someone proof your work. But you are responsible for the business, so be responsible for the analysis.
The good news is that it’s self storage. It is not that complicated. Believe me, if I can do it, you can do it.
I’m the guy that could only pass 10th-grade math class if I promised to never take it again.
Because self storage has so few variables, getting accurate projections isn’t that hard.
There are a few things to learn, but it is not hard.
Just last week, as I was sending out the financial reports for our facilities for last month and I marveled at how accurate they can be.
We use the numbers from our ten-year cash flow projection as the yearly budget. (A shameless plug for the 10-year cash flow report in the Storage World Analyzer).
We have one project that we put into service in December 2013. That puts us in Year 5 of the cash flow sheet. That is the budget. We were $320 higher on the NOI for the year than what our cash flow sheet said we would be at last month. That report was created in the third quarter of 2013.
You can get very close on your projections in self storage because there are so few variables that impact the cash flow and below the Net Operating Income line.
In my opinion, this is why self storage is the best investment there is for the small investor.
If you haven’t watched the tutorials I have created on how to analyze, again feel free to do so HERE.
What is different now is the fact that I think income increases are going to be much less than in previous years. In my analysis, I still use an average of 3% per year income growth. We are still confident we can achieve that.
We still use a 2.5% inflation factor (i.e. expense rate growth).
The biggest mistake I see people make is in stabilized occupancy.
I know if you are looking at an Offering Memorandum, most of the facilities are in excess of 90% occupancy.
The goal of creating your analysis is not to get as close to the sales package as possible. It is to accurately reflect what the project will do under your ownership.
I don’t think the 90% plus occupancy will hold forever.
No matter what is in the package, underwrite at 85% to 88% depending on the market and the facility.
Those are closer to historical stabilization rates. And if the deal works great at 85%, it will work great at 92%.
This may be controversial, but I don’t put late fees in my income as I create the analysis.
If I am using 85% as my stabilized occupancy, what I am really saying is that is my economic occupancy. That facility is going to operate as if 85% of the units are paying the street rate in my unit mix page. Economic occupancy includes late fees.
I noticed in the early days after putting projects into service, I would be off by almost exactly the number I put in as “Late Fees” in my financial analysis. I stopped that practice over fifteen years ago.
Another thing I learned the hard way is to not assume you know the cost of self storage systems today because you have purchased them before.
If your project includes an expansion, get a quote.
Because of the steel tariffs (don’t get me started on that person), I have seen self storage systems swing 30% to 40% in a quarter.
Another mistake I see many make is they don’t put in a management fee because they are going to be running the project.
My coaching is put it in. If you are going to get financing, they are going to put it in, even if you are running it, because if they take it back, they will have to pay for it.
One last thing. Yes, you can use the expenses in the package as a reference point, especially the utilities and perhaps the insurance. But don’t just copy the current expenses into your analysis.
Always use your expenses.
How are you going to run the project? How much are you going to pay a manager? What will the property taxes be at your price?
“But I don’t know?” Many may say who have never owned a facility.
Well, figure it out. Think it through. Use SSA numbers or ISS numbers from the almanac. That will show industry expense averages.
Don’t use the total operating expense number in the Offering Memorandum. Your expenses will be different than that, I promise you.
Also, I don’t use a percentage like 42% unless it is a very, very preliminary analysis.
I would never show to a partner, and investor, or a lender a projection or give them a suggested course of action using a percentage number.
I know in the Storage World Analyzer you can enter a percentage for operating expenses. My coaching is don’t use that tab. Enter the expenses. Think it through.
I am always higher on my analysis in operating expenses than the sales package.
Remember, the listing agent has a different goal than you. His goal is to set a market price. Your goal is to determine your cash flows and what you can pay today for those future cash flows.
The good news again is it is not that hard.
Practice.
Develop that skill.
In last week’s episode, we discussed finding an area that you can claim as your self storage market.
Analyze every facility anywhere near your acquisition criteria that is for sale in that market area.
Even f you don’t buy or make offers on any of them, doing this will allow you to know the numbers for your market area and what Sellers are asking and getting.
Useful information if you are going to be in the business in that area.
You will also develop your analysis skills, which is one of the skill sets I say are needed in today’s market if you are getting in the self storage business.
Once you develop this skill, you will begin to see where the upside is. What is missing in this project you can add.
That skill will open up opportunities where others only see an expensive listing.
Much of the training I give away for free and sell are all geared to support you as you analysis self storage.
I look forward to seeing you in the business.
