Preparing to Purchase a Self Storage Facility, Part 1: Building Your Team of Professionals, Before You Start Looking for Properties
In the last few years, self storage has become an increasingly popular investment, in great part because returns over the last 15 years averaged 15.43% per year. Compared to some investments, self storage also seems easier to understand with less moving parts.
With approximately 83% of self storage facilities owned by “Mom & Pop” operators, new inventory is always coming into the market. That being said, a continuing trend in the self storage industry is consolidation, with real estate investment trusts (Public Storage, U-Haul, Extra Space Storage, etc.) owning 8% of self storage and mid-size operators holding 9%. So now is the time to buy a facility, with low interest rates on commercial loans, before more of the individual facilities are absorbed by self storage chains.
Whether you’re buying your first facility or your tenth, you need a team of professionals to make sure you buy the property that’s right for you. When you make an offer, time is of the essence, given how many other eager buyers there are in the market. Having your team in place before you buy enables you to quickly and professionally close on the property you choose.
In this first article of our eight part series on “Preparing to Purchase a Self Storage Facility”; we will look at the team members you’ll need before you even begin looking at properties. So, how do you start your search and which team members do you need first?
Self Storage Broker
Selecting the right self storage broker may be the most important part of building your team – this person will bring you deals to make offers on, give you recommendations for your offers, and negotiate on your behalf with the seller. Additionally, some self storage brokers, like our team at IRE, have experience as operators of self storage and can offer valuable insights into how to maximize your investment. Because self storage is a business, and far more complicated than some other types of commercial real estate (such as a triple net lease on an office building), it just makes sense to go with a broker who understands the business, and won’t steer you toward an investment without upside.
Depending on the amount of financing you’ll need for your first acquisition, there are several markets for loans that you could investigate.
- For most first acquisitions, though, the first stop is your local bank. If you have a long-term relationship with a local bank, they may be willing to finance your investment.
- Because you want to have several bankers lined up in case one falls through, make sure you also ask your self storage broker for recommendations. Since your broker has been involved in many transactions, he will know specific institutions that are issuing loans for self storage and can give you some recommendations.
- Finally, it never hurts to look through trade publications for lenders. The benefit of financing through an institution that focuses on self storage is that you won’t have to explain your business model to them, like you might have to with your local bank.
Feasibility Study Firm
When you look at purchasing a property with high vacancy rates, the elephant in the room is whether the vacancy is a result of poor management, not enough lease-up time (with new developments), or a deficiency in demand. If the demand isn’t there for a facility, raising occupancy is going to be an uphill battle, with the increased marketing costs eating into your profit margin. On the other hand, if the owner has artificially inflated demand for his facility (e.g. through an intensive, expensive marketing campaign not reflected in his net operating income), then having a feasibility study conducted can help you dodge a bullet. Keep in mind that certain seasons of the year will yield higher occupancy rates than others – if you live near a college, you can reasonably expect an influx of students renting units during the summer. Finally, a feasibility study from IRE may reveal opportunities for expansion that the owner may not be aware of, if the market supports a greater supply than currently exists.
A significant amount of money is made or lost in the negotiating process. For example, pro-rations are the funds paid by the seller or buyer for a period in which the other party owns the property. If the seller pays the real estate tax bill for the first six months of the year and sells the property at the end of the third month, it’s fair for the buyer to pay for the three months of real estate tax-free period. Although pro-rationing is typical in the sale of self storage facilities, it’s something you can easily overlook unless you have an attorney reading every single line in the Purchase Agreement.
CPA or Tax Attorney
If you understand taxes intimately, there are a lot of opportunities to minimize your tax bill. One great example would be the classic 1031 Exchange – by buying Property B with the capital gains from the sale of your Property A, you can defer capital gains taxes on the sale of Property A until after you sell Property B. Many investors love this concept, because it enables you to buy a property 10-25% more valuable (based on the deferral of the capital gains tax, which translates into a larger down-payment for the second property). Although this transaction can seem simple, it is complicated. Increasing risk is the fact that the IRS can later hit you with a tax bill for capital gains on Property A if the 1031 Exchange is not carried out properly. If this isn’t your area of expertise, (and let’s face it, for most owners it is not), it’s important to find a qualified CPA or tax attorney to advise you through the process of buying a property.
Real Estate Tax Estimates
In many states, real estate taxes are assessed upon the sale of each individual property. Because of that, your pro forma can be significantly affected by an increase in your tax bill. One way to mitigate risk in this area is to have a company like Property Tax Advisors LLC complete an estimate for an automatically triggered real estate tax increase.
Pulling together this first half of your team of professionals will help you find properties and quickly evaluate them. If you are ready to start building your team and you need an experienced self storage broker, or you are ready to have a feasibility study completed, contact us for more information.
In Part 2, we’ll review how to build the rest of your team, after you have found a property you like and are ready to buy.