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Secrets of Self-Storage Investing

David Campbell Professional Investor

Jon EnglandSEC, CCIM

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Today’s VIPs(very important points)

• A good investment is one that’s good for YOU

• Commercial real estate basics

• Why self-storage?

• Is self-storage investing right for you?

• Spotting a good deal

• Case studies

David Campbell - FounderHassle-Free Cashflow Investing

Former high school band director Self-made multi-millionaire

Real Estate investor / developer / brokerFinancial educator / author / speaker

Houses, condo-conversion, multi-family, winery, resort, office, retail, medical office, production home building

Faculty Member: Investor Summit at Sea with Robert Kiyosaki

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Jon England, CCIM, SEC

• Investment Sale Broker since 2001

• Brokerage of 12 self storage facilities totaling 600,000 SF / 3,700 Units.

• CCIM Designation in 2006 (Certified Commercial Investment Member)

• Counselor in the Society of Exchange Counselors www.secounselors.com. This is the most exclusive creative real estate organization in the world that holds invitation only meetings to invest and market commercial real estate.

• Active investor and manager of several real estate partnerships.

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Disclaimer

This is NOT legal, tax or investment advice.

No agency created.

Educational only. Consult your advisor.

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Profit(Money + Time + Hassle)

ROI =

We all want more profit with less invested

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Cash Throw Off from

Rental Income

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Equity growth from loan amortization

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Tax savings from depreciation

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Equity growth from appreciation

(CAP Rate Compression)

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Equity growth from rent increases

(income/CAP)

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Arbitrage

CAP Rate > Interest Rate

8% RETURN - 5% COS T of BORROWING = 3% PROFIT ON BANK’S MONEY

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Equity growth from Lease Renewal

Longer term lease = lower CAP

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Equity growth from increase in

tenant or property quality

Stronger tenant = lower CAP

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Forced Equity from improved tenancyor development

Higher NOI = Higher PRICE

Why Self Storage?

Why Self Storage?

•One of the fastest growing commercial real estate sectors

•49,940 “primary” self storage facilities in the US.

•Top 5 self storage companies* own and operate 9.8% of all primary facilities.

*(Public Storage, Extra Space, Sovran, U-Store-It REITS and U-Haul / non REIT)

According to the Self Storage Association Fact Sheet:

Why Self Storage?

•22,000 small business entrepreneurs who own and operate just one facility.

•New construction is down • Only 450 new facilities came on line in the US in 2010 and 2011. • Development peak in 2004-2005 when 8,694 facilities were developed.

According to the Self Storage Association Fact Sheet:

Why Self Storage?According to the Self Storage Association Fact Sheet:

• It took the self storage industry more than 25 years to build its first billion square feet. It added the second billion square feet in just 8 years (1998-2005)

•Ten percent of US Households currently rent a self storage unit, an increase from 6% of US Households in 1995.

Self Storage Advantages:

• Low Maintenance – (No Toilets)• Steady Cash Flow• Lower operating expenses• Low loan default rates • Month to Month leases• Inflationary hedge• High barriers of entry• Multiple profit centers aside from renting units• 3rd Party Management is available

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Self Storage Myths

• Passive Investment

• If you build it – customers will come

• Location isn’t important

• A mom & pop can’t compete with the REITs.

• Why own a facility when I can make more money at storage unit auctions?

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MYTH BUSTED

Is Self Storage right for you?

•Do you currently own a bunch of residential, retail, or other commercial real estate? Self Storage may an ideal way to diversify your portfolio.

•Self Storage often said to be 20% business 80% real estate. (This is not a NNN investment)

•Employees….

•Passive vs Active

Facility Types

• 2000 to present.

• Mostly REIT and large company owned – especially in urban markets.

• Prime retail locations

• May include car washes and other retail oriented businesses as part of their operation

• Offer multiple camera video surveillance and door alarm systems.

• Construction Materials:• Brick

• Glass

• Single and multi-level properties

Class A Properties

Facility Types

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Class A Properties

Facility Types

• 1980s to 1990s• Ownership combination of Mom & Pop and REITs. • Seasoned Facilities – many are location driven• Construction materials:

• include metal and block buildings

• chain link or other fencing

• May offer climate controlled units• May include manager’s residence on site

Class B Properties

Facility Types

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Class B Properties

Facility Types

• 1960s to 1980s

• Mom & Pop. Largely rural and smaller facilities.

• Low cost provider of storage.

• Construction materials:

• metal/wood buildings

• swing doors

• no gate

• gravel driveways.

• Most will need to be converted or will eventually become obsolete

Class C Properties

Facility Types

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Class C Properties

Self Storage Components

Unit Sizes

• 5x5• 5x10• 10x10• 10x15• 10x20• 10x30• Parking

Self Storage Components

Unit Mix is Key!!•Does the facility have multiple unit sizes?•How balanced is the mix? •Are vacancies all one size?

Self Storage Components

Unit Type:

•Traditional Storage

•Climate Control Storage

Self Storage Components

Tenant TypesResidentialCommercial

Student Military

Self Storage Components

General TrendsMajority of customers will be residential

Commercial tenants stay twice as residentialMost storage customers live/work within 5 miles

Strict HOA rules create demand for outside storage

Evaluating the Facility

•Size•Unit Mix•Location Location Location•Traffic Counts•Management (retail office vs residence)•Signage / visibility•Expansion Potential?•Drainage•Traffic Flow within the facility

Evaluating the Area• 1-3-5 Miles Demographics• Neighborhood trends• Owner occupied housing vs apartment housing• City Growth patterns• Competition?

• Who are they? • How far away? • Is location better or worse than the subject?

• Prices of Units?• Verify property tax and budget for any adjustments

Evaluating the Numbers

Gross Potential Rent - (Vacancy Factor)Gross Income- (Expenses) – Should range between 30-45%Net Operating Income (NOI)

NOIPRICE

CAP =

Evaluating the Numbers

$185,000 (Gross Revenue) - $74,000 (Expenses)$111,000 NOI

8% Cap Rate = $1,387,50010% Cap Rate = $1,110,00012% Cap Rate = $925,000

NOIPRICE

CAP =

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Durability of Income

Lease Term

Tenant & industry strength

Property attributes

for expensesDemographicsfor releasingUpside

potential

Releasing income potential

Cost oftenant

improvements

Financingavailability

CAP RATES VARY

Evaluating the ExpensesTypical Self Storage Expenses:• Property Taxes• Insurance• Payroll• Off Site Management• Utilities (phone/trash/gas/electric)• Software• Bank Fees• Office Supplies• Legal / Accounting• Maintenance & Repair• Snow / Lawn • Advertising• Website

Two Types of Self Storage DealsTurn Key vs. Turn Around

Turn Key FacilityClass A or Class B

Little to no deferred maintenanceMinimal work required

Lower Cap Rate / Higher PriceREIT’s attracted to these especially in urban markets

Turn Around FacilityClass B and Class C

Low occupancyPoor management

Significant deferred maintenanceHigh upside potential if “problem is solved”

Two Types of Self Storage DealsTurn Key vs. Turn Around

Case Study #1 - Turn Key Deal

227 Turn Key Units

• built in 1998 • 34,000 SF• Stable Occupancy 80%• Motivated Seller• No Website• Not open Saturdays• No rent raises in 7 years

• Acquired using SBA 504 Financing

• New website and SEO marketing program established

• Established New Saturday Hours

• Raised Rents after six months of ownership. Not a single tenant complained.

Case Study #1 - Turn Key Deal

• Occupancy consistently at 90%

• Increased the value approximately $300,000

Case Study #1 - Turn Key Deal

Case Study #2 – Turn Around Deal

350 Turn Around Units

• 80,000 SF • Built in 1996• 60% Occupancy• Distressed Seller• Poor Management• Abandoned vehicles• Poor reputation in the market.• Gaps in perimeter fencing • Broken security cameras• Poor owner record keeping

Case Study #2 - Turn Around Deal

SolutionsReplaced Manager

Installed storage software Implement security measures

Reconfigured Access GateInstalled New Digital Signage

Fixed maintenance items

Case Study #1 – Turn Around Deal

• Occupancy trending up

• When stabilized $1M to $1.5M increase in value

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Feel free to contact our panelists with your questions

David Campbell Jon Englandjengland@lee-associates.comDavid@HasslefreeCashflowInvesting.com

SECRETS OF SELF STORAGE INVESTINGBy Jon S. England, CCIM SECPrincipal – Investment BrokerageLee & AssociatesPhone: 913-890-2002jengland@lee-associates.comhttp://www.linkedin.com/in/jonengland

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