The single most important question when analyzing a facility is what is the real income.

This month we are going to focus on the financial analysis aspects of looking at a self-storage facility to purchase.
You will see a number of ways to figure this out; however through trial and error, we have found a system that is very accurate, and when complete, lets us truly see the financial health of the facility we are looking at.

What you see in the marketing package is interesting, but irrelevant. You need to determine the income potential yourself. This is done through the unit mix page.

If there is no unit mix page in the marketing package, stop the action, and get it. All operating systems from Site Link, Wen Sen, to U-Haul Web have it. You want to know how many 5’ x 10’s they have and what they are charging (street rate) for them. You want to know how many 10’ x 10’s, rates and so on.
Enter that information on the unit mix page on the Storage World Analyzer, or on a excel page you have created. When complete, total up the monthly income potential number, the yearly potential number, the square feet, and number of units.

When I review the completed unit mix page, I then go to the marketing package and look at what they are showing as income. The unit mix page will show the “gross potential income”, that is the most income possible if every unit was rented and everyone was paying. I look at how far apart the unit mix page is from the income number they are reporting. That tells me the health of a facility.

For example, let’s say the gross income potential is $100,000 (I wouldn’t be looking at one with such a small number, but I like easy math). The marketing package indicates last year there was $78,000 in storage income. I know something is up. I have ordered a feasibility report, and 9 times out of 10, the stabilized occupancy (the final occupancy rate achieved in a lease up where the property stops and that remains) the yearly average is 85%. I know that there is a gap of 7% in income that needs to be accounted for.

There are a number of reasons that could account for the gap, but it is usually either (1) their occupancy is below where it could or should be, (2) different rates are being charged for the same size units, (3) poor collection or disposition practices, (4) or the manager or owner is not reporting all of the income (such as cash), or someone is taking money. It is usually 1, 2 or 3 or some combination of those scenarios.

I love it when that happens because we can quickly get the income up with our management practices.
Recently it has been the other way around. Meaning I expect income around $85,000 with a GPI (gross potential income) of $100,000, but they are reporting $93,000. That is because the occupancy rates may be rising (see blog post number 4 – Are Stabilized Occupancy Rates on the Rise).

Usually the sellers want to be paid for the total income while I only want to pay for the $85,000 because that is how my loan will be underwritten still today. That is the negotiation dance, and we will talk about that in another blog.
For now just be aware that for every dollar you pay today when acquiring a self-storage facility that is over 85%, or the stabilized occupancy number in your feasibility report, you are on thin ice. It could go away as the market stabilizes (supply and demand become more in alignment as more self-storage is built in the submarket).
However, it could be a new day in self-storage and stabilized occupancy rates are higher. To be safe, we are still assuming they will drop to 85%. The good news is if I am wrong, I am richer.