Investing in a self-storage facility can be a lucrative venture, but like all real estate investments, it requires thorough due diligence. Before diving into such a commitment, it's essential to understand the various factors that can influence the success and profitability of a self-storage facility.
Here are the top seven things to watch out for during your due diligence process, and a quick checklist of the most important factors for each.
#1 Location, Location, Location
Market Analysis: Understand the local market demand. Is there a growing need for storage solutions in the area? Look at population growth, urbanization trends, and local economic factors.
Competition: Identify other storage facilities in the vicinity. How do their rates, occupancy levels, and amenities compare?
Accessibility: Ensure the facility is easily accessible from main roads and highways. Check for any planned infrastructure changes that might affect access in the future.
#2 Physical Inspection of the Property
Condition: Conduct a thorough inspection of the facility to identify any structural issues, water leaks, or potential maintenance concerns.
Security: Examine the security measures in place, including surveillance cameras, access controls, and perimeter fencing.
Expansion Potential: If you're considering future expansion, check the available land or space and local zoning regulations.
#3 Financial Analysis
Revenue Streams: Beyond storage unit rentals, identify other potential revenue sources, such as retail sales (locks, boxes) or truck rentals.
Expense Review: Scrutinize the facility's historical operating expenses. Look for any anomalies or areas where costs can be reduced.
Occupancy Rates: Review historical occupancy rates. Consistently low rates might indicate an oversaturated market or operational issues.
#4 Legal and Environmental Concerns
Title Search: Ensure there are no liens or encumbrances on the property.
Environmental Assessments: Especially if the facility is older, consider conducting an environmental assessment to identify potential contamination or other environmental risks.
Zoning and Land Use: Verify that the property's zoning allows for its current use and any planned expansions or changes.
#5 Operational Assessment
Management: If the facility has on-site management, evaluate their performance and consider whether you'll retain them.
Software and Technology: Review the facility's management software, security systems, and other technology. Are upgrades needed?
Marketing and Online Presence: Assess the facility's online reviews, website quality, and overall online presence.
#6 Customer Contracts and Relationships
Rental Agreements: Review existing rental agreements. Are there any unfavorable terms or long-term contracts at below-market rates?
Customer History: Understand the customer base. Is there a high turnover, or do customers tend to rent long-term?
Deposits and Payments: Ensure that security deposits are accounted for and that there are no significant outstanding payments.
#7 Growth Potential and Exit Strategy
Market Evolution: Consider how the local market might evolve. Are there significant developments planned that could increase demand?
Facility Upgrades: Identify opportunities to add value to the facility, such as adding climate-controlled units or enhancing security features.
Exit Strategy: Even before buying, think about your long-term strategy. How easy will it be to sell the facility if needed? What are potential future valuations?
Conclusion:
Investing in a self-storage facility can offer significant returns, but it's crucial to approach the process with a meticulous eye. By focusing on these seven areas during your due diligence, you can mitigate risks and position yourself for success.