In 2023, we looked at over 70 properties and made an offer on only 1 of them – and for that one, we weren’t able to come to terms with the seller. The overwhelming majority didn’t meet our investing criteria.

While it is frustrating to be unable to find a property that meets our requirements, it is important that we stick to our underwriting and move forward only when we find a deal that actually works based on our numbers.

While our criteria continue to evolve, in this article, I share the high level factors that we consider before deciding to put in an offer.

• Demographics: Self storage is a business that requires change and people. As a result, we look for locations where there are strong demographic trends that keep moving in the right direction. While a strong influx of people is one of the reasons we are looking at Texas, when evaluating a property, we are looking at the county or census tract that the property is located in to make sure that it is growing as well – there are actually counties in TX where the population is shrinking, which would not be good for storage facilities in that area.
• Location: The actual location of the facility is a critical factor. When we evaluate a facility, we are looking at a number of factors – some obvious, some less so. The major factors we consider are (a) whether the facility is on or near a major through fare by looking at the traffic counts and (b) whether or not the neighborhood is safe by looking at crime rates. Renters want facilities that are easy to access, where they can get in and out quickly, which implies not only near where they go regularly but also where the access to the facility is simple. For example, having to make a left hand turn onto a busy road makes access challenging, particularly if you are in an RV or towing a boat. It is also critical that the facility not only is safe, but feels safe, since no-one wants to have their property stolen when they aren’t looking. Beyond those obvious factors, we consider whether or not the property is in or near a flood area, what businesses are nearby, how many other storage facilities are in the area, and if there are any planned developments. Finally, we also look at whether or not the property is near a tourist area, since that can drive certain types of traffic (for example, boat and RV storage) to higher rates than would be indicated strictly by the demographics.
• Potential: When looking at a facility, we consider whether or not the property has any untapped potential. There may be land that is undeveloped that could eventually be turned into additional storage or for parking or there may be uncovered parking that we could eventually convert to either covered parking or additional storage. Conversely, if the facility is run down, and thus unable to charge the same rents as others in the area, there is the opportunity to fix up the property and bring the rents to market. While our purpose is not to begin development immediately on buying the facility, it is always worth considering whether or not there is the potential to expand at some point in the future if the demand warrants it.
• Our expected NOI: Brokers love to write pro formas that have high cap rates, since those lead people to believe that is what they will get if they buy the facility. However, in most cases, I have found those projections to be unrealistic. For example, they don’t include any management fees or, at best, a minimal management fee. I don’t know about you, but I don’t want to spend 60 hours a week doing on-site management for a facility and get paid only $5,000 for the entire year. Yet that is what some brokers use in their projections. We have talked to multiple third party management companies and use their actual costs in our projections. We also adjust the property taxes and insurance based on the purchase price of the property as opposed to expecting the current tax rates to continue unchanged. Finally, we include services like tax prep and book keeping into our projections since these are important services to have done properly and professionally. Brokers tend to be similarly optimistic when it comes to addressing existing vacancies. For a new property, they will often project that it will be full in less than a year, for existing properties, they project both being able to raise rents 10% and decrease vacancy at the same time. While these assumptions may (or may not) be reasonable in a particular market, we tend to be conservative and go with industry averages – for example, expecting at 15% average vacancy over the year as opposed to a 5% projection. As a result of evaluating a property using our own numbers, we can move from a broker projected 8 Cap down to a 4 or 5 Cap pretty quickly.

Next article, I will go into more details about how the specific things we look at that break these high level criteria down to specifics which we can use to evaluate a property.

If you have any questions or comment about this post, please email them to me at blog@mbc-rei.com, I will reply to the questions that are straightforward and will turn the questions requiring more detailed answers into future blog posts.

This article is my opinion only, it is not legal, tax, or financial advice. Always do your own research and due diligence. Always consult your lawyer for legal advice, CPA for tax advice, and financial advisor for financial advice.