Self Storage Investing Newsletter

It’s time to get out the Halloween decorations for millions of Americans. Halloween has become the most popular U.S. holiday behind Christmas. And these decorations are, for most people, found in a self-storage unit. I’ve never seen a study on what percent of all self-storage is occupied by holiday decorations, but I’m sure it’s pretty high. Everyone who owns self-storage properties should be thankful for Halloween as it makes all of us money. Most Americans store items that they don’t need every day, but can’t bear to part with – and holiday decorations fit that bill perfectly. Let’s hope that the retailers keep selling larger and more elaborate items, from inflatables to life-sized Frankensteins. Every time you see someone at Walmart buying a cart full of Halloween items, be thankful since those decorations will be probably ending up in a self-storage unit a few weeks from now.

The skunk has been a highly discussed animal since it was first found. It has the ability to make a stench that is so intense that even large mammals will run away. You can smell a skunk from a very long distance. So what can make you smell something is wrong with a self-storage deal?

Current owner has not owned it very long

An immediate red flag is how long the seller has owned the property. What you want is someone who has owned it for decades, preferably the mom & pop who built it. What you don’t want is someone who has owned it for only a short period of time, like a couple years. Nobody buys real estate for a couple year hold. When someone has owned a property for only a short period of time, it would imply that something went wrong. Maybe they failed to hit their revenue target. Maybe there’s a structural problem they can’t afford to fix. But whatever the reason, it’s typically not good. The only exception is when the seller has died or has a health problem. Of course, in many of these cases, the seller claims they have a health problem when they really don’t, to hide the real reason they’re selling. The bottom line is that a short-term seller needs to raise a red flag.

Past foreclosure of the property

Just like a short-term owner, a past foreclosure on a property should be cause for alarm. Not that many storage facilities end up in foreclosure, and that means something went hideously wrong. A foreclosure means that the borrower lost everything they put into the property, and may have destroyed their credit. So you know they fight as hard as they could to save the property and that means, despite giving it 110%, it still failed. While some foreclosures are the result of bad management, others are the result of a bad market. One you can fix, the other you can’t. Be careful.

Lots of fresh new leases with little payment history

Self-storage has a national average of 10% customer replacement per month. You rarely see a self-storage property that has a huge number of recently-signed tenants. When you do, be very concerned that the rent roll has not been “cooked” by an overzealous seller who is not afraid of committing fraud to get the deal sold. If 50% of the tenants are only 30 days old, you have no idea what their payment history will be or if they are legitimate customers and not just friends and family of the seller who will cancel their contract the day after closing.

Recent increase in rent (sometimes without even taking effect yet)

If a seller has recently increased the rents (including increases that don’t even take effect until after closing), be very concerned. When you raise rent, there is typically some portion of customers that move out. By trapping you with a recent increase, the seller may be forcing you into a position of paying for customers that will no longer be on the rent roll shortly. Be worried.

Recent seal-coating of pavement

While there’s nothing wrong with seal-coating pavement to protect it during the winter, it can also be used as a cover-up of paving problems. Spraying tar on old asphalt may make it jet black again, but it’s a fooler. Don’t think that paving is good because it’s black and not grey. Look beneath the color.

Graffiti cover-ups

One of the hallmarks of self-storage is the safety and security of what you store inside. Signs of graffiti are a dead giveaway that security may be questionable in that neighborhood. Watch not for graffiti, but for neutral paint that has been painted over it to mask the problem. No seller would let graffiti be on their property, but nobody can completely mask its existence. Also look for signs in the general neighborhood. You can’t fix a neighborhood no matter how good a manager you are.

Manager uncomfortable with questions

You should immediately smell a skunk when the manager or owner is evasive or gets upset when you ask questions. Due diligence allows for every stone to be turned over – there is no subject that is taboo. But when you ask for a simple list of who has not paid rent this month – and the manager/owner says “that’s not available” or “that’s none of your business” – then you know that there’s something wrong. I was once conducting due diligence on a property and ask for a rent roll from the manager and the owner – was setting around the table with me – grabbed it out of their hands and screamed “no, that’s the wrong one!”. Of course, what was going on was the owner was “cooking the books” and he wanted to verify that the rent roll matched the one he made up. Needless to say, we dropped the deal, as uncertainty over the honesty of the seller makes buying a property extremely different.

Bad gut feel

The human mind is still superior to the computer (although nobody knows how much longer that will be the case). So if the human mind is the greatest information processor on the planet why do so many people fail to listen to their subconscious? If something about a deal is worrying you, then maybe there really is a legitimate problem. I once bought a property despite the fact that I had a bad gut feeling about it. I later found the property to be a loser and that the former owner had hung themselves in the office a few months earlier. The bottom line: listen to your gut instinct – it’s pretty accurate.

Conclusion

There are a lot of great self-storage deals out there, in which the buyer can improve the occupancy and rents but starts off with a nice selection of long-time customers. And there are also some that have something wrong with them, and are being sold based on the hope that you don’t spot the fraud. Be careful and when you smell a skunk. When you do, investigate or drop the deal!

Many people are unaware that the British play a prominent role in any discussion of the history of the self-storage industry. Most explanations as to the history of self-storage begin in China, where personnel effects could be stored in large jars in protected warehouses. But the greater refinement of the concept began in England during the 1700s and 1800s. At that time, many wealthy gentlemen would, at some point, go away to war as army officers. The standard practice of these officers was to have their household goods packed into crates and stored in barns and stables on their estates, while they were gone. The most valuable of these cargos would be guarded by an armed watchman, who was traditionally employed by the bank where the officer kept their money. When they would return from war, the crates would be emptied and life would return to normal.

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Sometimes you buy a self-storage facility with the big focus on renting vacant units. A lot of them. Hundreds of them. So how can you fill a ton of vacant units fast?

Become a master of the market comps and specials

It’s a competitive world out there. In order to undercut and offer a better deal to the customer, you have to be an expert at what you’re competing with. You should make a careful chart of all of your immediate competition and then call each and get a handle on their actual prices and special offers.

Signage on the frontage

Most self-storage facilities have valuable road frontage – so make the best use of it. Cover it with banners and “feather flags” – vertical flags that are inexpensive and create a lot of attention. Nobody should be able to drive by your property without knowing that you want their business.

Google presence

Today’s customer searches for their storage unit on Google. They type in “self storage in ____”. If you do not show up under such a search, you are dead in the water. Make sure that you have a presence on Google. If you don’t know how to do it, hire someone who does.

Great website

In the same vein, all customers should be referred to a professional website for your business. Not some amateur thing that your cousin Rob did for you. You cannot scrimp on web design if you want to get customers. Your website creates your first impression, and it better be favorable.

Facebook advertising

Facebook now offers advertising options. Many people select their self-storage unit from Facebook. Get on there immediately. Again, if you don’t know how, hire a 20-year-old.

Craigslist

Craigslist is a free advertising tool. FREE. You should never pass up a free marketing option. It’s not hard to get set up and you will be shocked at the number of calls you get from it.

Direct Mail

This is the most expensive of the options. You send a direct mail piece (typically a postcard) to all the people who live in a certain radius of your facility. You typically target apartment renters. It costs about $1 per person to do this, so do so sparingly.

Track your results and put more money behind what’s pulling in customers

A smart marketer always tracks their marketing to see what’s pulling. And then they invest more money in those areas that are pulling best. For example, if you do a direct mail piece of 500 units and rent 10 units, you may decide to do 1,000 more. Put your money where the results are.

Mystery shopping

Sometimes what’s holding you back from greatness is not demand, but what your manager does with those incoming calls. We have seen it all: managers who don’t answer the phone, answer with “what do you want”, or don’t return calls at all. Others fail to show up for appointments, are rude in person, or fail to want to fill out the paperwork. So get to the truth by mystery shopping the manager. Call or pay someone to go by posing as a customer, and see what happens.

Manager’s compensation

Nothing makes people perform at a higher level than money. Cashola. Give your manager a very exciting bonus or commission program for hitting impressive sales numbers. But set the numbers high – make it a legitimate great job to celebrate, not something average. Most people respond well to a challenge, particularly when there is money involved.

It’s easier to change people than to change people

If your manager is not hitting good sales numbers, and their mystery shopping scores are low, you will be better served to just replace them. Few self-storage owners have the time or patience to re-train their personnel. You’ll have to leave that to big companies like IBM, who have huge H.R. departments.

Conclusion

It is possible to rent a lot of vacant self-storage units quickly if you put your mind to it. Sales is a volume business. Do all the right steps –at the same time – and you’ll shocked at the impact on your occupancy and, therefore, rental income.

Warships in the 1700s had a huge amount of firepower. One of the biggest was the HMS Victory, with had 104 cannons on it. When those cannons went off, the result was devastating to its opponents. It really got the job done. So how can you increase the firepower of your offer on a self-storage facility?

Full price

One way to get a seller’s attention is a full price offer. Few buyers will offer the seller 100% of what he wants. Of course, this tactic is dangerous because it can often scare the seller off – they may think that the priced the property too low. Additionally, the property may not be worth the full price. But if you want to make the seller take notice, a full price offer is definitely one way to do it.

Reduced examination period

If you know the property well, and have the ability to gather the third-party reports quickly, then offering a shorter examination period definitely gets attention. Most buyers want a 30-day exam period, so a 14-day will definitely get the seller excited. The danger, of course, is can you get the due diligence done that quickly?

Reduced financing period

Just like a reduced exam period, you can try the reduced financing period. Again, this is only possible if you have a lender already on board with the deal – typically someone who has loaned on an earlier deal. And, just like the reduced exam period, the danger is if you can’t get the loan together quickly enough.

Bonding with the seller

One of the most powerful ways to make your offer stand out is to “bond” with the seller – to make them like you more than the other buyer. This has been a smart maneuver since buying and selling first began. All you do is to spend time with the seller by phone or in person, so they see you as a human and not just a number on paper. Once you have bonded, it is very hard for another buyer to compete.

Showing enthusiasm with getting the deal done

There is no substitute for enthusiasm, as it is contagious and makes the seller feel you will definitely close on the transaction. Sellers will often rank the enthusiasm of the buyers and go with the one that cares the most, as they are most logically the one most likely to pay at the end.

1031 – even when you don’t have one

Mentioning that you have a 1031 exchange has been well known to excite a seller. They know that a 1031 means that you have the money ready for the down payment, and the time ticking that forces you to close on time. Of course, what’s at odds is if you should say this if you don’t really have a 1031. We’re not going to go over the morality of saying things that are not true, but it is a fact that many buyers use this technique on every sale, and we question if all those 1031’s actually exist. For those who don’t know, a 1031 is a tax savings strategy that is allowed by the IRS (although get a professional’s opinion) to do a tax-free exchange of one real estate property for another.

Conclusion

In an extremely competitive property market, giving your offer some firepower may be the difference between getting your dream deal and missing out. Learn how to muster enough cannons to go to the top of the pile when the time is right.