Scott Meyers, Founder of Kingdom Storage Holdings.
Whether it’s your first or 10th self-storage facility acquisition, you want to make sure that you maximize the value by implementing four key steps. Unless you paid cash for your facility, you will most likely be refinancing your facility in five to seven years or possibly selling it. Depending on what the market is doing at that time will determine the options available to you. You will want to make sure that your property has enough value that the banks will be jumping all over themselves to refinance your property at a great rate.
There are four different things that you should always keep in mind when you are looking at the value of your property. You need to know what the current market capitalization rate is, pay attention to the commercial interest rates, maximize your net operating income and avoid deferring key maintenance on the property. Let’s take a closer look.
1. Know the current cap rate you can expect to use when valuing your facility.
The value of your property is determined by the cap rate. If your property is operating at top occupancy levels, has very few competitors and you have a maximum net operating income, then you will most likely enjoy a valuation at a low market cap rate. On the other hand, if you have a lot of deferred maintenance, a lot of vacancies and a lot of competition within two miles, then you are less likely to see a higher cap rate which means a lower value place on your facility.
Each market and facility will see different treatments with regards to the cap rate used to value it. In some areas, the cap rate is around 5%; in other areas it’s around 7% or 8%. If the property is in disrepair, you can sometimes get a double-digit cap rate. For example, if your net operating income is $100,000 and you want a 5% cap rate, the value of your property is going to be $2,000,000. You divide your net operating income by the cap rate to get the value. On the other hand, if your buyer wants to get an 8% cap rate, that same $100,000 net operating income is only going to equal $1,250,000. This is why you have to know your market so that you do not undersell your property. Even within an area, the cap rate varies depending on the property. By keeping your net operating income high, you keep the value of your property high.
Understand that when you buy a property, you want to purchase at a high cap rate, which equates to a lower purchase price. When you are selling a property, you want to get the lowest cap rate that the market will bear so that you can get the maximum purchase price possible.
2. Keep an eye on commercial interest rates.
If you can borrow money for 3% or 4% and the property has a return on investment of 6%or 7%, then there is a profit to be made. However, if interest rates are 7%, it’s very difficult to turn a profit when the best rate of return is only 5% or 6%. If interest rates are higher, then buyers are going to demand higher cap rates. That means that your property value is going to be smaller. When interest rates are lower, you can demand higher prices because buyers can still make a profit. Deals that may once have looked unreasonable at your asking price are suddenly realistic because the cost of capital is so much less.
3. Maximize your net operating income.
There are several ways to positively affect your income. Obviously, you want to keep your occupancy levels as high as possible. However, there are other ways to create profit without adding a lot of expense. You can offer moving packages such as moving boxes, locks, packing tape, bubble wrap, etc. You can also offer rental trucks to entice people to rent with you over your competition. If you have additional land available, rent it out as RV and boat parking, if that is applicable in your area. Do not leave an inch of your land unutilized. Get creative when it comes to making additional income on your property. If you are in an area where there is demand, offer pickup and delivery services. The higher your net operating income, the more you can ask for your property.
4. Don’t defer maintenance.
If your property lacks curb appeal, you are going to have a hard time attracting clients over the competition. Appearances also play into the amount of rent you can charge, and ultimately, an appraiser will not give you top value when it is time to refinance.
Remember, the moment you purchase your property is the moment to start adding value to it. You are in the business of real estate; make sure that you follow the finance and local market activity closely. Make sure to maintain your property and always strive to increase your NOI so that you can demand top dollar if you decide to sell. Finally, remember that this is a business and you need to walk the four corners of it and make sure it is operating at peak capacity to beat your competition who may be treating their facility as a hobby.