As a self storage business owner, do you know what your main KPIs (Key Performance Indicators) are?
I wrote about them in the book Creating Wealth Through Self Storage.
There are several KPIs we can track, but the most important one, in my opinion, is the “income growth over expense growth each year.”
It is very easy to track and the net result is a positive growth in your NOI (Net Operating Income) each year.
The Importance of Net Operating Income (NOI)
The NOI is the net income after operating expenses but before loan payments and capital expenses (such as new roofs, HVAC, etc.).
The NOI is so important because it’s how the value of the facility is determined by appraisers and self storage buyers.
An appraiser or buyer will take the NOI and divide it by the CAP rate (Capitalization Rate) to get a value. (If you are unsure of what a Cap Rate is, view this episode).
But the bottom line is, whatever you keep your eye on and measure, will usually go in the direction you want it to go.
Why?
If your energy and effort are actively engaged in measuring something, you will start making decisions and taking actions that positively affect it.
That’s why the five KPIs we measure our manager by move in the right direction. You can read the episode about the 5 Key KPIs HERE.
Also, if the Manager’s or facility’s KPIs are moving in the right direction, it’s much easier to move the Owner’s KPI in the right direction.
Let’s dive into this Owner’s KPI more deeply.
Nothing creates wealth better than self storage for the small investor.
I say this because of all the real estate assets you could buy, self storage is the easiest to grow the NOI year after year.
Don’t confuse NOI with Net Cash Flow.
Net cash flow is the amount of money left over each month after loan payments and other below the NOI line expenses. This is income that can go into your personal bank account.
Nothing is better than self storage for this number either because there are so few variables to pay month after month.
Let’s look at the NOI line more closely.
In Creating Wealth Through Self Storage, I showed that in our Proforma, we calculate the income going up an average of 3% per year and our Operating Expenses going up 2.5%
That half a percent income growth rate is what really creates the wealth for an owner in this example.
Let’s take a look.
In the book, I would introduce a concept and then relate it to a transaction I was working on. Let’s look at what I projected for the deal I used as an example in the book and then what actually happened.
Below is the ten-year cash flow that was created during the due diligence period of this transaction.
This is what I thought the project would look like, or at least this is what I told my investors it would look like.
The income goes up 3% per year and expenses go up 2.5%.
Look at the NOI line. This is always amazing to me. Just this half a percent!
In year one the projected NOI was $601,653. By year five, with nothing more than a half a percent increase between income and expenses each year, the NOI was projected to be $684,125!
Again, nothing more than a half a percent increase in income over operating expenses. It’s the compounding.
Using a 9% CAP Rate I had a projected value of $7,601,387 in year five. In 2013, when I did this projection, I didn’t know what Cap rates would be so I was very conservative.
Now let’s take a look at what really happened.
In year five, the actual NOI was $676,787. Slightly under, by 1.07%, from what I projected 5 to 6 years before. Not too bad.
Here is the good news. CAP rates are much lower than what I projected. When we received an appraisal in the last quarter of 2017, the facility was appraised at $10.4 million.
Way above the $7.6 million I projected.
So we refinanced and paid our investors back.
In reality, our income and our expenses were higher, but the important line is the NOI. If you keep the income going up over operating expenses, your NOI line grows.
When the NOI line grows, the value of your facility goes up (not to mention your cash flow).
Now as an Owner, I keep my eye constantly on that NOI line. Monthly even. I take the yearly Proforma numbers and break them down monthly and do an actual to budget comparison.
I am interested in the income line and expenses line, but what I really track is the NOI. If I am behind, I know it and figure out a course of action to keep the NOI line equal to or above the projections.
So do you know your NOI?
Are you ahead or behind of your projections?
Nothing will create wealth better than self storage because there are so few variables that can affect your cash flow and your NOI projections.
If you haven’t already, create a projection for the next five years. Then create a monthly budget using the projected numbers.
Then track it!
Just keep the income growing at least a half a percent over your expenses and you can create true wealth in the self storage business.
