“Your monthly rent will be $145 per month, plus the tenant insurance brings your monthly total to $155 per month.” That’s what the manager of a local self-storage facility quoted me as I was secret-shopping his location. Their rents were at the top of the market, and they included the tenant insurance as part of their quote. Sounds like they know what they are doing. A lot of managers and owners don’t.
In this article, I’m going to share with you five ways to maximize the value of a facility. Some of these seem so obvious to us, but they aren’t always implemented. The owners are leaving money on the table when it comes time to sell, something we want to avoid doing at all costs.
Surprisingly, a lot of self-storage owners are not willing to raise rents once their facility reaches a certain level of occupancy—usually somewhere above 90%. When it comes to mom-and-pop owners, they like being on a first-name basis with their tenants. This management style causes the owner to start treating tenants as friends. As a result, owners start to feel bad when they think about raising rents. I’ve visited some facilities that haven’t raised rents in three or more years!
Consider this: A five-dollar rate increase is unlikely to cause a tenant to move, especially when rents are about the same at the facility down the road. But that five percent increase equates to an extra $60 per year. At a five percent cap rate, that could mean an extra $1,200 in value. If you have 100 units, that’s $120,000 in added value!
Bottom line: When it’s time to sell a facility, refusing to raise rates equates to a major loss in value. We run our facilities like a business and have implemented rate increases across our portfolio, where it makes sense to do so.
Parking Spaces and Tenant Insurance
If you visit a self-storage facility and you see lots of space for parking but no vehicles, it usually means the owner is leaving money on the table. Parking is simple and can be done on paved or unpaved space using paint, rope, and simple numbered signs.
At an average of $50 per month for a parking space, an owner can realize an extra $600 per year in net operating income (NOI) with a nominal increase in expenses. At a five percent cap rate, that equates to an additional $12,000 of value on just one space!
Tenant insurance is exactly what it sounds like: An insurance policy for tenants that covers the value of the goods they’re storing. Usually, tenant insurance policies cover about $2,000 in value but can be higher or lower depending on the policy and customer needs. A customer is usually charged between $10 and $20 per month for tenant insurance on top of their normal monthly rent. Depending on the insurance provider, that insurance charge is split between the provider and owner. The split can be 50/50 or 60/40.
The point is, if a tenant is required to purchase tenant insurance, the facility is making ancillary income from every policy they provide. Surprisingly, a lot of facilities do not offer this to customers and are missing out on a lot of revenue, and value, for their facilities. An eight-dollar profit on 100 units is $800 per month or $9,600 per year. At a five percent cap rate, that equates to $192,000 in additional value!
Bottom line: Adding simple things like parking and tenant insurance can dramatically boost the value of a facility. We’re adding parking to our locations where it makes sense and requiring all our tenants to have insurance policies. It gives them peace of mind, reduces our liability, and provides another income stream for us.
Many self-storage owners are notorious for poor record-keeping, especially mom-and-pops. They typically don’t use property management software, and they tend to keep most, if not all, records on paper in a filing cabinet. When it comes time to value a facility, poor record-keeping leads to confusion over the actual income of the property. This can lead to a lower valuation.
Think of it this way: Self-storage is an income-producing property, so a buyer needs to know how much income the property produces. If the record-keeping is fuzzy, it increases the likelihood the buyer will offer less than what the property is worth. Remember, NOI is used to determine value. If NOI is fuzzy, so is the value.
Bottom line: By keeping accurate records of operating income and expenses, it’s going to be easier to prove the value to a potential buyer. If the records aren’t accurate, the buyer has the advantage. We use industry-standard property management software for each of our facilities, making it easy to pull records when it comes time to sell. A buyer will never be confused when reviewing our financials.
Marketing and Online Rentals are a Must
“I don’t even have a website, but I’m full all the time.” Mom-and-pop owners like to tell potential buyers some version of that statement, as though their facility is special because it’s always full. C’mon!
In today’s world, a website that can rent a unit, sign the lease, and take payment is a must. So is online marketing so people can find your facility. Last week, I was reviewing a portfolio for sale for north of $20 million, but they didn’t have a way for customers to rent online! Mom-and-pop management exists at large institutional-quality deals, not just small deals in small markets.
If an owner isn’t budgeting for marketing, the buyer will have to add it to their acquisition budget. This will decrease the NOI and the value of a facility. In other words, not budgeting for marketing now leads to decreased value later, and a lower offer when it comes time to sell.
Bottom line: It’s critical to have an online marketing plan and a way for customers to rent online. This will typically result in a higher offer from a buyer, and it’s exactly what we have implemented at all our facilities.
Understand How Value is Determined
There are three ways appraisers determine the value of a property: the cost approach, the sales comparison approach, or the income approach.
The cost approach determines the replacement cost, or cost to build the same facility today and uses that number to place a value on the facility. The sales comparison approach uses recent sales comps to value a facility, something common in appraising single-family homes. The income approach applies a cap rate to the NOI of the facility to determine its value.
In today’s world, cap rates are good to know, but none of these approaches are used by institutional self-storage investors.
Self-storage investors use the cash-on-cash return, the internal rate of return, and sometimes the equity multiple to value the cash flow stream of a facility. I’ve discussed these return metrics in previous newsletters and on our YouTube channel, so I won’t go into detail here.
Right now, institutional buyers are valuing facilities based on pro forma income, not historical income. They are typically using a line of credit from a lender and paying all-cash for their acquisitions. This enables them to move quickly, with a lower cost of capital, and place the debt later when the portfolio has reached a certain size.
Bottom line: We are mostly targeting the types of deals these buyers want to acquire. We will keep our finger on the pulse of the market, to ensure that when it comes time to sell our portfolio, we will understand how our portfolio will be perceived by the market, and how different buyers will value our properties.
We want to maximize the value of our portfolio by marking rents to market, finding additional sources of income like parking, making it easy for customers to find us and do business with us, and by understanding how buyers are buying and how our properties will be received by the market. If we do these things, we are confident we can exit in a way that is beneficial to our investors and meets our goals.