Self Storage Investing Newsletter

On June 6, 1944 the invasion of D-Day began. Titled “Operation Overlord” it encompassed 1,527,000 soldiers, 4,400 ships and 11,000 aircraft. It was the largest single military event in world history. And it succeeded as a result of laborious planning. In the same vein, the most successful self-storage investments begin with highly detailed planning and proper analysis, as well as having a Plan B to almost every contingency. One of the most important steps in planning your storage deal, in our opinion, is a careful analysis of the risk & reward metrics. Sam Zell – the nation’s largest owner of office buildings, apartment buildings and mobile home/RV parks – is a huge advocate of only engaging in deals with a healthy risk/reward relationship. Effectively, you should always buy deals with low risk and high reward, and never buy deals with high risk and low reward. Most deals fall somewhere between the two, so you have to think carefully about whether or not your risk is being adequately rewarded with profit. So how do you begin this analysis? By making a grid of best case, realistic case and worst case. If you can survive the worst case, be happy with the realistic case and overwhelmed with the best case, then the deal has the right material. But it’s always important to weigh risk and reward and make sure they balance. This is the same analysis used in the invasion of D-Day, and it’s the hallmark of a sensible plan of action.

Owning and running a self-storage facility is similar to commanding a large ship – it takes planning and time to maneuver on your goals, and you don’t want to put yourself at the risk of hitting the shore or getting stuck in a hurricane. So what can be learned from the Navy regarding self-storage investing?

It takes time to maneuver

Any big enterprise takes time to turn. Let’s say you buy a storage property with 70% occupancy and want to boost your customer basis. It will not happen overnight. You would never want to bet on a fast turn-around, but instead a slower, continual progress in keeping with the realities of time and consumer behavior.

Need to plan way ahead

Every self-storage facility should have a written business plan and budget. This budget needs to be established at least one year ahead, so that the plan for 2019 was enacted sometime in December, 2018. This plan needs to be set in stone, and can only be altered if there is a material change in the facility (like a partial fire) that was not known at purchase.

You must always know exactly where you’re at and where you’re going

This budget, once ratified, becomes your road map. And to keep you on the road, you need to have a monthly formalized meeting in which you review the budget, the actual performance, and the difference between these two outcomes. Any performance that is better than budget needs no further work, but any category that is worse than budget needs immediate scrutiny. This would include brainstorming at least three courses of action to fix the item that is over-budget, and then discussion on which is the most appropriate, or even enacting all three at one time.

You need a great team

Just as the Navy prides itself on selection and training of all personnel on board, a good self-storage owner only hires those that have the ability to excel and then supervises them constantly. There’s an old saying “don’t send a duck to eagle school” and that’s definitely true. If your plan is to increase occupancy, you need a manager with strong people skills and good sales ability.

But you always have to keep your eye on the controls

The Captain of the ship eats dinner, sleeps eight hours, but they are always watching the controls a little bit at all times, making sure that the ship is staying on course. The problem is that you can never fully delegate management since the only one who has “skin in the game” is the owner and, as a result, nobody will watch over your storage business better than you will.

Conclusion

While they are never built to float, a storage facility is similar to a large naval ship. It takes good planning, a good team, and continual supervision to make sure your storage property stays on a successful path and avoids the rocks.

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Other than a beach vacation or a swimming pool, water and storage owners is not a good combination. In today’s world of extreme flooding, it’s a safe bet that smart storage owners are focusing on their exposure to flooding and making the needed adjustments. So what can you do?

An ounce of prevention is worth a pound of cure

If you already own a storage facility, the first question is if you have flooding exposure via being in a flood plain, and how much of the property is subject to flooding. In some cases, you may be able to cure the potential flooding by adding fill dirt or building some type of berm and pump combination. If you have not bought a storage property yet, you should probably avoid flood plain, if possible. Even though sellers will downplay the risk of the flood plain designation, the recent events in many states – such as the Arkansas, Missouri and Mississippi river floods – suggest otherwise.

Metal and concrete are much better than wood on the first story

If you are looking at an older storage facility, it’s important to remember that wood and water is not a good mix. One good thing about the construction of most self-storage properties is that they are made of two materials that have little impact from water: metal and concrete. Another plus is that there is no utility system except electricity, so there’s little to damage and ease in remediation. But an older property with a wooden frame construction could end up with mold or other problems.

Obtain flood insurance – if you can afford it

While flood insurance is great, it may be hard to afford it even it it’s available at all. Remember that the U.S. government backstops the cost of residential flood insurance (effectively propping it up) but it gives no subsidies to the commercial flood policies. As a result, they can be very expensive. You’ll have to weight the options. “Loss of income” insurance may also be available.

The cost to build has gone way up – make sure you have sufficient coverage

Even if you have flood insurance, make sure your limits are accurate given the current cost of building a storage property. Prices have risen significantly in recent years, and your old numbers may not be accurate. There’s little benefit to having insurance if the payoff will not put your building back.

Conclusion

While nobody enjoys a drought, there are even more storage risks with too much water. Make sure you understand the risks and act accordingly.

Conduit debt (also known as CMBS debt) is a special product that offers 70% LTV on appraised value – regardless of what you paid for the storage facility. This means that if you have created value through greater net income, then you will be rewarded at refinancing with a higher valuation and, potentially, a “cash-out” situation. This means that you will effectively get all your down payment back from the original purchase, plus additional cash out based on the new effective value. And this “cash out” is tax free since it’s effectively a loan. In addition, these conduit loans are non-recourse and feature low, fixed interest rates and long loan terms. But how do you get one? If your deal is over $1 million, then the answer is using a loan broker, and the best in the business is M.J. Vukovich at Bellwether Capital. We’ve been using him for years and he essentially creates the loan request, meets with the lenders, helps you in the selection, negotiate the final terms and shepherds the deal to closing. In exchange he gets a small commission that is a bargain for the amount of time and expertise rendered. For more information call him at (612) 335-7740 or email him at [email protected]. You’ll be glad you did.

One of the first steps to buying a self-storage property is to negotiate a price that is satisfactory to both buyer and seller. That sounds easy, but the truth is that most of your money in real estate is established by the price you sign up under the purchase contract.

Start low – but not too low

Typically, the buyer ends up having to throw out the first price with a mom & pop seller. So you want to go low – but not too low. If the price is ridiculous, the seller will not even counter it and there’s no forward progress. The key is to make an offer about 20% lower than what you really intend on paying, so that there is plenty of room to negotiate but the price is in-line with expectations of the seller enough that they will give a counter price.

Appear pained at every price change

It sounds corny, but good negotiators pretend that every counter price is painful to even contemplate. This theatrics is part of the process, and sends the message that the price is nearing a peak. If you act like the counter is painfully shy, it gives the seller an immediate clue of where the price is going (and sometimes makes them feel better about their “tough” negotiation ability).

Know the max you can pay before you start the process

You can’t be a good negotiator unless you have an idea of where the price needs to actually end up. Otherwise, it’s like going for a hike but not even knowing where you’re supposed to arrive at. By confirming your top price, you can then score effectively how things are going and give push back when the price is going to land outside of your comfort zone.

Remember that it’s a game

Negotiating is as old as ancient Egypt, but it’s always been more of a game than an actual requirement of doing business. Some people refuse to negotiate (think about a grocery store) but yet others think it’s the best game since Monopoly. Don’t get too upset about it. Nobody ever died from negotiation.

Time kills deals

There’s an old saying that “Time Kills Deals” and that basically means that there is always a backdrop of time urgency in any negotiation. The reason is that there are always other buyers lurking in the background that might outbid you – even in the final moments before the contract gets signed. So don’t delay for any reason. Try to cut a good deal fast and tie it up and put the deal in the title company.

Watch the process on TV for good examples

There are two shows on television that are devoted to the art of negotiation: 1) Pawn Stars and 2) American Pickers. They are basically 30 straight minutes of real-life back-and-forth negotiating drama, and an invaluable tool to familiarize any storage investor with the negotiating game. If you are not currently watching these shows, you should start.

Conclusion

Negotiation is a part of buying a storage facility. And it’s a skill you have to master. These tips will get you started, but practice makes perfect.

There’s no question that any successful storage owner will at some point think about expanding their property and adding more units. It’s a natural progression when you hit about 90% occupancy. So how do you approach expanding your storage units?

Watch for contiguous land going on the market

Obviously, the only way to expand is when the land is right next door. So watch for cases in which your neighboring land comes on the market. Better yet, call these property owners and let them know your interested if they ever want to sell. Once that land is sold, there won’t ever be another option, so you should put some effort in on that front.

Always get the needed votes before you file for the zoning

When you want to obtain the necessary zoning officials or city council votes to win passage, you first need to make sure you have the votes before you proceed. The reason is that most city groups decide their vote before the meeting, so your speech really has no impact on the actual end result. Go to each member and say “what would I have to do to get you to vote in favor of my storage expansion” and then listen to what they say.

Sometimes you can trade improvements

When these individuals are on the fence, the correct step is to brainstorm what you would need to do to improve your existing buildings and entry to garner their support. For example, you might say “if you let me add on another 100 units, I’ll put some money in the construction to install a much nicer sign and landscaping” and that might do the trick.

Conclusion

Expanding a storage facility is a natural next step as you approach full occupancy. And there’s no question that the critical mass will increase the value of your existing property (since many big buyers like larger scale facilities). So watch for the opportunity and, if the planets are aligned, go for it.