We found an interesting article this month in Inside Self-Storage that raises the question of how newbies to the industry might benefit from looking at under-performing self-storage operations rather than starting from scratch.
The article said ‘The self-storage industry is growing rapidly, and new investors are popping up every day. Many of them are starting fresh, with no experience in the industry. They’re looking for an easy investment to put more cash in their pockets. One way to make a purchase worthwhile is to invest in an underperforming property, turn it around and realize a great profit.
There are many benefits to this investment strategy, particularly for industry newcomers. First and foremost, buying a “fixer-upper” is cheaper than buying a well-performing property. This is especially helpful because the recent market has shown a historically low capitalization-rate environment, and finding a stabilized property to buy and run efficiently is difficult.
Identifying a property with profit potential can be challenging, but there are a few key indicators. These “diamonds in the rough” have a common set of characteristics that tell you they’re worth the investment:
Web presence. If the facility lacks a modern website, or doesn’t have a website at all, it’s likely underperforming. Operators of these properties often don’t know the importance of a web presence and are spending money on other things, which means there’s lots of room to improve.
Ancillary income. A facility that doesn’t have any add-on profit centres such as retail sales, tenant insurance or truck rentals can also be a candidate. These are easy ways to make additional income. If the facility isn’t using them, there’s a lot of room for financial enhancement.
Low occupancy. If the facility has a lot of vacant units, it isn’t maximizing its revenue. A new investor could put strategies in place to reach higher occupancy and gain more profit, thus raising the net operating income (NOI).
Capital expenditures. Some facilities are outdated and need a few repairs such as a new roof, upgraded security or even a fresh coat of paint. These are small investments that greatly improve a facility’s appearance and help to raise occupancy and NOI.
Financials. Some owners spend money in the wrong areas, such as personal expenses or travel, and fail to allocate funds to important items like the marketing budget. Some also give a lot of freebies or discounts, or neglect the collection of fees. A new investor can re-categorize expenses to create a greater return on investment. Ideally, a storage facility should be running at a 60 percent to 70 percent margin, with expenses at 30 percent to 40 percent of income. If this ratio is off, a new investor can strategize how to mitigate expenses.
In addition to indicators of underperformance, you must look at the property characteristics to gauge potential. First, look at the facility’s size. The smaller the facility, the more difficult it will be to turn a profit. A lower square footage means lower rentable income. A site that’s too small can be hard to run efficiently. For example, a 25,000-square-foot property and a 70,000-square-foot property will both need a full-time manager, but the larger facility will have an easier time offsetting the manager’s salary with revenue. This means it’ll have a higher NOI.