Have you ever wondered what we look at before we make an offer on a potential property? Before diving in, it’s crucial to uncover a facility’s true potential but that can be a daunting process. In our previous article [1], we gave a high level overview of what we look at. This week, we’re cracking open our vault and summarizing our pre-offer due diligence process, showing you how we assess if a property aligns with our investment goals.

Not every facility translates to a golden investment. That’s why we’ve developed a 12-point checklist to separate the gems from the duds. The things we look at are:

1. Do the numbers make sense. We look at the asking price for the property and the price we can pay given our expected expenses and our projections. If we are off by more than 25%, it isn’t worth spending more time on the property unless it has been on the market for 6+ months. The seller is just not likely going to be ready to sell at the price that makes it worthwhile to us. So we move on to the next opportunity. We use our own numbers for the majority of the calculations, using the broker’s pro forma for just the non-controllable expenses (taxes, insurance, utilities) and the unit mix and current rates.
2. Crime rates. Very few people want to deal with running a business in a high crime area. It keeps tenants away and makes it difficult to maintain the property to a high standard. That said, there is pretty much no neighborhood that doesn’t have some crime, and business districts are generally higher crime than residential areas because there are fewer people around at night and on weekends (skewing the demographic numbers which are typically measured per resident). When we look at crime rates, we are looking to see how the property location compares to both the nearby neighborhoods and more broadly against state and national benchmarks. If the location is significantly higher than the state average, and is surrounded by similar high crime areas, we move on. I am sure no-one is surprised that there are parts of Houston and Dallas where we will not consider purchasing a facility simply because of the crime rates. But it can be surprising to see equivalently high crime rates in smaller towns until you realize that the smaller populations can skew the numbers – if there is only 5,000 people in a town, a single crime can have an outsized effect on the statistics. As a result we look at both the number of events per resident and the totals before deciding whether or not to reject a location.
3. Census tract demographics. The US census tracks population density and change over time. We look for an area where the population is increasing, as a net inflow of people is good for self storage. Conversely, if the population is decreasing, there are going to be fewer people who need our services in the future so it is a market we will generally avoid. Once a market hits a certain size, it starts attracting bigger players, which have the ability to drive down your profit margins, so while we look for a minimal number of people in the area we also avoid the most densely populated markets and look instead for secondary and tertiary markets where there is less competition.
4. Local employers and economy. We want an area that has a robust economy and overall job growth. Jobs bring people into a location and allow them to afford luxuries, which leads to increased needs for storage. While some locations are primarily driven by a single industry, such as tourism, we want to see a balance with no single employer completely dominating the jobs in an area. Ideally there would be at least 3 economic drivers for a city (e.g. tourism, manufacturing, construction, health care, government, retail, energy) and more than one business associated with each driver. That isn’t always the case for smaller markets, but wedo not want to invest in a location with a single company providing the major economic driver as there is just too much risk if something happens to that company.
5. Storage density and competition. Storage density is calculated as the number of square feet available per person in the 1, 3, and 5 mile area around the facility (or within a 15 minute drive in a rural area). Since storage is primarily driven by local needs, this is a primary factor for determining the demand for the facility, which in turn determines how profitable the facility will be. Different locations around the country have different standards for how much space is commonly needed. In locations like Texas, where people tend to not have basements and have a lot of larger toys (think RVs, 4x4s, boats, tools, etc.) the need for storage is higher than in areas where those larger purchases are less common. Thus markets with 15 sqft available per resident are common and can still reflect reasonable demand, while in other locations that would indicate the market is over saturated. To truly understand demand, we look at the current density, any new facilities that are being built, and the overall availability of the existing facilities. If we determine that demand is low in an area, and unlikely to change (for example, because of new development occurring) we will pass.
6. Property boundaries. We always look at the property boundaries listed by the county and see if they match up to how the buildings, roads, and fencing is set up on the facility. While we wait to get the formal survey done until we are under contract, it is worth getting an idea for whether or not there is space available to expand the facility, there may be encroachments on your neighbors yard, or there may other issues, such as drainage or security, related to the layout of the property. While we are not looking to do immediate development, having the opportunity to expand the facility in the future is a definite positive.
7. Flood zone. We do not want to be in, or even next to, a flood zone. The chance of damage to the property and the items stored by the tenants is too high. And the cost of flood insurance has skyrocketed in the past few years, making insurance in these areas a major expense and negatively impacting profit.
8. Zoning. Many cities are getting stricter about where they allow storage units to be located. While there can be an opportunity to have the property rezoned, you are taking a risk if you purchase a property that is not zoned for its current usage. You could lose the entire value of the business. While brokers may try to convince you that it is not a big deal, it can certainly become a major headache and so you want to be aware of the process before hand. This will also help you determine if, for example, you can put up billboards or cell phone towers on the property to generate additional income. We look to purchase facilities that are properly zoned, or make our offers contingent on the rezoning of the property occurring before closing.
9. Google reviews for the facility. Almost every business has google / yelp reviews these days. Doing a web search on the facility allows us to understand how customers are viewing the current facility operations. This can identify areas for us to improve, such as security concerns or pest problems, as well as what the facility is currently doing well and is valued by the customers, such as lighting or 24 hour access. A poorly managed facility that isn’t taking care of the basics can be easily improved by bringing in professionals to operate it.
10. Current website functionality. Looking at the current functionality of the website gives us insight into whether or not there is opportunity to improve the operations. If the website doesn’t contain much information and you have to call or show up to reserve a unit, then there is the opportunity to improve overall occupancy by increasing the functionality on the website, allowing rentals directly from the website, creating an owner portal, etc. On the other hand if the website is already fully optimized yet the vacancy rate is still high, that could reflect a lower than expected demand for the facility.
11. Google maps. While the images are usually a little dated (5+ years old in some locations) this gives you a great look at what the neighborhood is actually like, who the neighbors are, and what is going on near the location. It is also important to consider how easily people can get into the facility, so we look at the entrance and likely traffic flow. Ideally the facility will be near homes so it is convenient for people to use. Finally, the pictures can give an indication of how much work will be involved in fixing / maintaining the facility. Along with the broker’s pictures, you get a feel for whether or not the facility has been maintained well, if the roofs are likely to need to be replaces, etc. This on-line check doesn’t eliminate the need to visit the facility in person, but it does make it so that the site visit can occur once you have agreed on terms with the seller instead of having to do it before hand..
12. Traffic counts. Surprisingly, a lot of the storage business still comes from drive by traffic, which means the visibility of the facility from the road is very important. So we check the traffic counts on the frontage roads around the facility to see exactly how much traffic it gets. In addition to traffic adjacent to the facility, it is worth looking to see if the facility is near major interchanges or freeways, since proximity to where people are can make a difference as well.

The easiest to evaluate is whether or not the cash flow is going to be sufficient to make a reasonable return for our investors. Once we convert the broker’s projections into our spreadsheet, most deals fall short there. As a result, we reject many deals within about 15 minutes of starting the process. For the small number of deals where the numbers can make sense, we then go into the other factors. Doing a paper evaluation on a property using these criteria can take a few hours.

Only when the deal meets our criteria do we move forward with an offer – using a price and terms that makes the numbers work for us. If the offer is accepted, then the heavy lift of due diligence begins since we move from this initial, high level, evaluation into the details of the deal – including site visits, professional inspections, and detailed analysis of the financials.

For additional reading:

1. https://mbc-rei.com/blog/how-do-we-evaluate-a-property-to-decide-if-it-is-a-deal-part-1/3

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.