Welcome to episode four in the series “How to Analyze Self Storage in Today’s Market.”
We’ve established that it’s an overpriced “Seller’s Market” and prices for facilities seem over the top expensive. Even crazy.
But here is the good news, you can get in the self storage business today. You don’t have to wait until prices start coming down.
But you have got to know what you are doing. You have got to be able to find the value added opportunities.
And most importantly, you have got to be able to determine how much value added income you can add.
If you have not watched episodes 103,104, & 105 do so here so you can get the context for what we are going to do now.
So far in the series, we have learned how to:
- Determine Gross Potential Income (GPI)
- Apply a stabilization factor to GPI
- Analyze new construction, conversions, and/or expansions to determine how much new income they can provide and on what timeline
- Based on that analysis, determine how long it will take to achieve stabilized occupancy
- Calculate the total GPI and Net Income before expenses after stabilized occupancy is achieved.
That’s a lot of ground covered.
Now let’s switch gears.
I get a lot of questions about how financing works when you are doing expansions, conversions, and new construction.
The bank is going to determine the value of the project, once the expansion has occurred, or after the conversion has occurred, and for new construction, after it is built and the project is stabilized.
Then, they will loan whatever the “Loan to Value” (LTV) you are asking for. In other words, if you are buying an existing facility for $2 million, and the expansion will cost $1 million, the appraised value of the total project, once it is expanded and leased up to stabilized occupancy, must appraise for $3 million or more.
Then if you are asking for a 75% LTV loan, they will loan 75% of $3 million. In this scenario, the bank will usually give you 75% of the $2 million when you close, and then 75% of each construction draw as you complete the expansion.
Sometimes the timing of when your 25% goes in and when they fund the 75% of the construction is different, but the main principle is the same.
The good news is you now know how to see what the blend of the project will be when expanded or completed and stabilized. Well, you almost know. At least you know how to determine the income potential, and how long it will take to get stabilized.
But a big part of the value add in most cases requires construction, and many of us are not that familiar with construction. It has been a barrier for many of us.
Being involved in a project that involves construction is just a skill set to learn. For self storage, the good news is it is not that complicated.
You can hire someone to function as a builder and just give you a price to add or build the new space. Many do that, but I find it is expensive.
Or you can learn what you need to know about construction and the construction process involved with self storage using all the resources out there.
Basically, we usually figure out the budget, hire a construction manager, and work together with them to bring the project in under budget.
I wouldn’t do that if I was building an apartment complex or office building, but this is self storage. It is not that complicated in most cases.
Here is a sample Pro-forma budget for an expansion we have recently done.
As a brief overview, here are the steps to cover:
1. There is site work. It can be very expensive or in some cases almost nothing. This is the wildest variable for me out of all the construction numbers. I have had it come in as low as $13,000 for a half acre to over $1 million for 5 acres.
2. There are the concrete pads the buildings will sit on.
3. The buildings themselves. We get bids from self storage building fabricators and love using them. They build quality, low-cost self storage units, and deliver them to the site. They also, in most cases, provide the stamped building plans, concrete specs for the concrete contractor to use, and more. I would not be able to do what I do in this business without them.
4. Next is the erector. In many cases, the self storage fabricators do this themselves. In some cases, you can hire directly the approved erectors. We prefer this because it is less money, and we usually still get the fabricators warranty because it is an approved erection company. This is about 80% of the entire project.
5. There is usually an electrical company, plumber (very little), security company for installing cameras if you want them, fire suppression contractors, and usually a fence company.
That’s about all there is. The construction cost today usually ranges between $45 psf on the low end up to $65 psf on the high end. I have seen higher and lower, but most are in this range.
Prior to the building actually taking place, an engineer will help determine the integrity of the site, create the site work plans for the site work company to bid, and generally leads the charge through the approval process. The engineer you hire, I have learned the hard way, is critical. That person plays a very important roll in getting everything through the regulatory process in the location of the facility.
Sometimes a lawyer is needed if there is a zoning change.
Architects, which play a big role in almost every other kind of construction project, but play a minor role in self storage usually. You can use them for renderings to get approvals, design of the retail or office area and that building if it is not included in the storage area, and sometimes, if the self storage fabricators are very busy and can not deliver the building plans in a timely manner, they will actually generate the building plans themselves. This is way more expensive for no added value than getting the building plans directly from the self storage fabricators. We, fortunately, have only had to do this once.
There are a lot more resources out there on everything I’ve just discussed. The QuickStart Academy has a course “ How to Build Your First Self Storage Facility” that walks you step by step through the process. It also includes a lot of the forms and worksheets we use for our projects.
The Inside Self Storage group (ISS) has lots of material as well as the Self Storage Association (SSA). You will not have to go far to get support. The first few times you expand or convert, use some resource like this to support you (even if you hire a contractor, or especially of you hire a contractor) so you have a guide and know what steps to go through next and what to expect.
Once you get the construction budget filled out, such as the last one you had access to, add that total construction number to the cost of the facility for expansions, to the cost of the building for conversions, or the cost of the land for new construction (Storage World Analyzer automatically does this), and you have your Total Project Cost.
Now take a breath and look at what you have accomplished. For any type of project, you can project a total cost at this point. Sure, the construction budget is just that, a budget, however, it is a ProForma we are doing, and it is totally appropriate for it to be an estimate at this point.
My relationship to it is that I will use the due diligence period to take my assumptions in the ProForma and put in real numbers and then see if the project still works.
At this stage, f you have no confidence in your numbers on your construction budget, have someone who knows something about construction and /or specifically, self storage construction look at it.
None the less, you now have total project cost and total projected income complete.
Determine the type of loan you want to get. There are a lot of resources on this site for you, as well as a FREE resource, my eBook “Beginner’s Guide to Financing Self Storage” which you can download below.
We have covered a lot here. You now know how to generate the income and acquisition project cost for existing self storage, expansions, conversions, and new construction. You know how to start or complete a Pro-forma construction budget, and where to go to get support if you need it for that portion of the process.
You are 75% of the way to completing your analysis.
Next episode we will discuss the portion of the analysis that allows us to project into the future so accurately, as well as the operating expenses.
My coaching is to practice on a few expansion projects. The more you actually do the work, the more confident you will become in your ability to analyze self storage. Those of us who can analyze are usually the ones who win at this great game of self storage.
