Self Storage Valuation: How to Value a Self-Storage Facility

 

Self Storage Valuation is what your facility earns today with what a buyer will pay. Owners and buyers look for clear, practical guidance on self-storage valuation. This guide explains how value is built, how it is measured, and how sellers can prepare a facility for a smooth sale.

 

What Drives Self Storage Valuation

The evaluation hinges on the existing income and expenses generated by the Self Storage property. Additionally, several other elements play a crucial role: 

• Opportunities for expansion

  • A facility with expansion options allows investors to increase capacity as demand grows, maximizing revenue streams without the need to acquire a new property. 

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• Rate management 

  • Rate management for self-storage is a strategy of adjusting rental prices based on things like demand, occupancy, and competition to maximize revenue and property value.

 

• Occupancy 

  •  Physical occupancy and economic occupancy

 

• Visibility & Traffic Count

  • Location, location, location! You know what they say: “Out of sight, out of mind.” Your future self-storage customers must be able to see the facility from a major road. If the storage facility isn't visible while driving by, it won’t have sufficient visibility and it’s that simple. Your facility will perform better in the long run if it can be seen from a high traffic road or a busy intersection. While there are marketing strategies you can implement to boost brand awareness and enhance your SEO ranking for better visibility on the internet, one must consider the ongoing costs involved in competing with another storage facility.

 

• Condition Of The Facility

  • Is the paint on the facility old and worn out? 

  • Age of roof & condition

  • Is the insulation still intact or falling down?

  • How is the road condition?

  • How is the property drainage?

  • Are there Broken Doors/Broken springs/Rusted latches

  • Do you need to install or upgrade the gate, fence, cameras, & software 

 

• Oversupply of Storage Units 

  • Oversaturation can drive down rental rates, further impacting profitability. There is also a risk of declining property values if the market becomes overly crowded, making it difficult to achieve a good return on investment or to sell the property at a desirable price in the future. Overall, investing in self-storage in an oversaturated market requires careful analysis and strategic planning to avoid potential financial pitfalls.

  • If the SF per capita is below 8, is considered a good & should be able to support the population. While above 9 could indicate oversupply. 

 

• Trends In Population Growth or Decline 

  • Buying in a growing area offers several advantages, such as higher potential for occupancy, increased demand driven by population growth, and the opportunity for property appreciation. However, there are also some downsides, including higher purchase prices, increased competition, and the risk of overestimating growth potential.

  • Buying in a declining area may result in lower acquisition costs and possibly less competition, but it also carries significant risks like declining demand, lower occupancy rates, and potential difficulties in selling or refinancing the property later. 

 

• Population Density within 1,3, 5 miles radius

  • Self storage is very localized, you must determine the population in a 1,3,5 miles radius. 

 

• Competing with Competitors

  • Can you truly compete with your competitors? Consider the amount of marketing you need to undertake, and the budget required for Google Ads, Facebook, Sparefoot. What will it cost to enhance or upgrade your lighting, security, software, access, & call center?

 

The Three Valuation Approaches Appraisers Use 

 

Income Capitalization Approach

Appraisers & banks commonly use this type of approach. To determine the value, you take the Stabilized Net Operating Income (NOI) ÷ Market Cap Rate Value = Value. The result is an estimate of value for the real estate. Appraisers and banks focus on true stabilization. That means normal occupancy for the market, market-level rents, and a normalized expense load, including a management fee and reserves for capital expenditures. 

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Sales Comparison Approach

Recent sales of similar facilities provide a reality check. Appraisers will adjust for age, quality, size, location, and performance. Buyers often translate these sales into implied cap rates and price per rentable square foot to triangulate value.

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Cost Approach

The cost approach to real estate appraisal considers the cost to replace the subject property from the ground up, including land and construction costs less depreciation.

 

What Key Metrics Buyers Look At

Evaluating the value of a self storage facility involves analysis of the last 12 months performance, expenses, and value and then predicating the future performance, expenses, and value. Start by gathering the revenue and expenses from the last 12 months (categorized by month), along with occupancy information. Having accurate records is critical. 

 

Price Per Square Feet

Typically, buyers focus on the price per square foot of the storage property they are considering. To calculate this figure, take the purchase price and divide by the square footage. Example: Purchase price $468,000 ÷ 12,000 square feet = $39 price per SF.

 

Cap Rates

The cap rate serves as a performance metric and an indication of value. The cap rate is the expected rate of return on a property and is shown as a percentage. For instance, a cap rate of 10% is expected to provide an annual return of 10%. In determining cap rates, several factors come into play.

 

Small square footage facility, small tertiary markets, poor visibility, difficult access, and the need for repairs such as painting, needing a new/upgrading gate, security cameras, & software. This typically results in a higher cap rate. 

 

Larger storage facilities with institutional features, state of the art technology, an upscale appearance, potential for expansion opportunity, a growing population, and clean financials often command a lower cap rate. 

 

To begin, you need to figure out what your NOI (Net Operating Income) is by subtracting your expense from your gross revenue (note that debt service & Federal & State taxes are not included). To perform your final calculation, take the Net operating income (NOI) ÷ by your market cap rate. 

 

Cap Rate Formula Example: 

• Net Operating Income (NOI) equals $150,000 dollars.

• Your Market supported cap rate equals 8%.

• Net Operating Income (NOI) $150,000 ÷ (Cap Rate) 8% = $1,875,000 

 

Debt Service Coverage Ratio (DSCR)

Banks, SBA, and other financial institutions rely on the Debt Service Coverage Ratio (DSCR) as a crucial indicator to evaluate a borrower's ability to generate enough income to cover their debt obligations. For a deal to be considered bankable, the DSCR must be a minimum of 1.3 times. Typically, this is the initial factor that a buyer examines to determine whether the bank would approve a loan at a specified asking price.

 

Banks and other financial institutions look at the Debt Service Coverage Ratio (DSCR) to evaluate the risks involved in providing loans to a business or individual, to make sure that the borrower has enough cash flow to easily cover principal and interest payments. This ratio helps lenders in making smart choices, reducing the chance of default, and setting suitable loan terms based on the borrower’s ability to handle debt. If a buyer can't secure financing for a property at a certain purchase price to meet the minimum DSCR, it's probably not going to happen. There must be enough cash flow from the property to manage the debt to satisfy the lenders' criteria.

 

DSCR Formula Example:

•  Net Operating Income (NOI) is $100,000, while the annual debt service amounts to $76,000. That results in a calculation of $100,000 ÷ $76,000 = 1.3, which is typically the minimum debt coverage banks want to see. In a scenario, where the NOI remains at $100,000 but the debt service rises to $100,000, the debt coverage ratio (DSCR) would be 1. Financing would be extremely challenging unless injecting more cash to reduce the mortgage balance. 

 

Operating Expenses

Expenses play a crucial role in figuring out how much a facility is worth. You have to calculate the actual Net Operating Income by taking the rents received and subtracting all expenses except for debt services & Federal/State taxes to find the NOI. Usually, for facilities that are less than 15,000 square feet, expenses can take up a larger chunk of the revenue, around 35%-50% depending on factors like insurance and property tax. However, for bigger facilities, you should conservatively estimate expenses to be about 30%-40% of the revenue. Be cautious of deals that show unusually low expenses. Here are some examples of expenses related to self-storage facilities:

 

• Property Taxes: 

  • In many jurisdictions a sale triggers reassessment. Buyers will model a post-sale tax bill. Bring recent assessments, mill rates, and any exemptions or appeals to the table.

• Insurance: 

  • Insurance that will cover your building and liability claims.

• Repairs and Maintenance: 

  • Making large repairs (fixing broken doors/springs, repainting, paving) or upgrading the facility to bring it to the 21st century (game, cameras, online portal). Regular upkeep. 

• Utilities: 

  • Power, telephone, internet, water, & trash.

• Marketing/ Advertising: 

  • The cost associated with renting out units over your competitors. 

• Third Party Management, BOTG & Software Cost: 

  • Ongoing cost to run the facility on a day to day basis. 

 

Physical & Economic Occupancy 

Physical Occupancy is a common metric that provides a quick overview of the facility. This metric is represented as a percentage. To calculate the physical occupancy, take the number of total occupied units divided by total units. 

 

Physical Occupancy Formula Example: 

• 45 occupied units divide by 90 total units = 50%

 

Economic Occupancy is another metric that takes into account your highest rate that could be charged for each unit size compared to the actual rent being collected each unit size. It is important to note that products and fees are excluded from this calculation. To calculate, divide the rental's current rate into the corresponding unit type. 

 

Economic Occupancy Formula Example: 

Let’s assume there are 30 out of 50 10x10 units that are rented and they rent for $100 a month (full price). However, 10 of the 30 10x10 units are rented at a discount rate of 20% off for the first 3 months, which comes to $80 a month. 25 out of 40 10x15 units are rented & they rent for $125 a month.

 

Current Performance Formula Example: 

• Full price of $100 (20) 10x10 = $2,000

• Discount price of $80 (10) 10x10 =  $800

• Full price of $125 (25) 10x15 = $3,125

• Total being collected = $5,925 gross

• Rented Units = 45

 

100% Occupied With No Discount Formula Example: 

• Full price on (50) 10x10 = $5,000

• Full price on (40) 10x15 = $5,000

• Total being collected = $10,000 gross

• Rented Units = 90

 

Economic & Physical Occupancy Results - In This Scenario 

• Economic occupancy would be 59% ($5,925 ÷ $10,000)

• Physical Occupancy would be 50% occupied (45 units ÷  90 units)

 

Unit Mix

A well-balanced unit mix with standard dimensions is crucial. It will allow you to maximize profitability, be diversified, maintain high occupancy rates, and meet local customer demands.  

 

Move in and Move Out Activity

This will demonstrate the number of new customers you have acquired in a specific month and will inform you about the turnover rate resulting from move-out activities.

 

Competition

The construction of a new facility or the planned expansion of a competing establishment will impact the market by introducing more units, potentially leading to saturation and extended lease-up timelines.

 

What Lenders Look For

Lenders underwrite stabilized NOI with conservative assumptions. They analyze past occupancy, rental rates, competitive supply, and taxes post-sale. A debt service coverage 1.3 or higher along with loan-to-value ratio. It is important to have a business plan, a strong track record, and clean site inspections.

 

How We Can Help Without The Hard Sell

We buy self storage and spend our days analyzing facilities like yours. If you want an opinion of value, we will review your records. Reach out to start a no-pressure conversation.