How to Value, Price and Sell Your Facility
How to Value, Price and Sell Your Facility
A self-storage cheat sail
By Burt Gay
Internet-Operating Income Determines Value
As with any other investment, the value of your cocky-storage facility depends upon its income–not its number of units or even its foursquare footage. If yous doubtfulness this, look at the graph beneath. Multiply cyberspace income (constitute along the horizontal axis) by roughly ten and y’all will encounter the sales toll per square foot (on the vertical axis). Net operating income of $2, $four, $6 and $8 per foursquare foot is equivalent to $20, $twoscore, $60 and $eighty per square foot, respectively, of selling price. Notice how many self-storage facilities cluster effectually $4 per square foot of income and $40 per square foot of value. In fact, the average self-storage facility sells for just under $forty per square pes co-ordinate to the
Self Storage Almanac.
How does cyberspace income per foursquare foot relate to your cocky-storage facility? If you rent x-by-10 units for $50 per month, that is equivalent to $600 per twelvemonth or $6 per square foot. If your expenses run one-third of collections, a xl,000-square-foot facility earns $4 per foursquare foot and is worth well-nigh $ane.6 million.
How Exercise You Summate Net Income?
An income statement from a seller usually shows bodily historical income. Even so, it may show what income
would have been
if circumstances had been improve. At that place are no more often than not accepted accounting principals or rules a seller cannot break in presenting income.
Buyers and sellers create different income statements for the same facility because of timing and operating differences. Buyers volition own facilities in the future when expenses may be different from the past. For instance, property taxes may rise if the sale of the facility triggers a new tax assessment. Buyers and sellers also incur different expenses depending on how they operate the facility. For example, local sellers may personally supervise their on-site managers while out-of-state buyers or lenders must hire management firms for this purpose. Buyers may accuse unlike late fees or may shut downwardly truck rentals. One of my sales roughshod autonomously when a buyer assigned no value to $31,000 of annual truck-rental income that he planned to shut down.
Nautical chart 2, “Typical Self-Storage,” demonstrates an example of two dissimilar income statements. Information technology is an average facility (twoscore,000 foursquare feet) with average rents ($half dozen per foursquare pes) and has the potential to collect $240,000 per year.
Truck-rental income may be reduced or eliminated because truck-rental distracts managers from self- storage and may disappear when the director leaves.
“Other” income (belatedly fees, box sales, locks, etc.) may be reduced to some arbitrary per centum of revenues that a particular buyer historically nerveless, e.g., 6 percent.
Vacancy expenses may be increased to market levels–typically 10 percent, although vacancy on a national basis averages 12 per centum.
Property tax may be adapted upwards to equal the sales toll times the revenue enhancement rate.
Off-site management expenses of 6 percent may be added to rent a direction business firm to oversee the investment and account for the owner’s fourth dimension if he performed this function himself.
Repairs and maintenance expenses may exist normalized to $.10 per square foot to reserve funds for repairs and preclude owners from increasing income past deferring maintenance.
Majuscule improvements expense of $.ten per square pes may be added to fund major improvements that a facility volition eventually require to remain competitive.
Find that both income statements exclude involvement expense so that facilities purchased with debt tin be compared to ones purchased for all cash. Besides notice there is no depreciation expense. Nonetheless, lenders and buyers add reserves for repairs and majuscule improvements that start the absence of depreciation. In this example, the heir-apparent has eliminated $40,000 of revenues and added $30,000 of expenses. He has cut cyberspace income by $70,000, and his perception of value may be $600,000 to $700,000 below the seller’s. Unless the heir-apparent, seller and lender have like perceptions of income and value, there may exist no sale.
Amend Your Income
Because every dollar of current income is magnified into almost $ten of sales price, it is worthwhile for a seller to maximize income before marketing begins. Income that is created before the marketing packet is prepared is “current” income, while prospective income (which is more tenuous) is relegated to a “proforma” (assumed) income statement.
Why does this matter? Sellers often say, “My rents are below market, simply you tin raise them.” Buyers so answer, “If that is really true, why didn’t you raise them yourself?” 1 self-storage owner retained a prominent brokerage firm to sell his facility without success for a yr. He then tried to sell information technology at auction without success. Then he tried to sell it himself. Equally a final resort, he gave me the listing and it went under contract at full price on the start twenty-four hours of marketing. How? I got him to enhance rents, recalculated income and showed a higher cap rate. Unlike the stock market, which looks frontwards, real-estate buyers mostly await dorsum and give more than acceptance to actual or current income. Hither are some actions to consider:
- Owners should pay full rent for any storage units they have been using for free. It doesn’t matter that the units would accept been vacant and not brought in any rent. An owner who “saved” $3,000 per year by using six free units may take lost $25,000 in sales price. Buyers look at collections deposited in the bank. An owner who needs cash can always withdraw his money after making the deposit.
- Reduce discounts to existing customers who are paying beneath your current list prices. If some customers threaten to leave, restore their onetime rates.
- Heighten rental rates if occupancy exceeds 90 percent. Since buyers disallow occupancy above 90 pct, you should maximize income from the 90 percentage occupancy they volition permit.
- Utilize setback spaces by calculation RV parking or portable storage. Portable storage can be bonny due to tax advantages of rapid depreciation.
- Install truck rental if in that location is none. Truck rental creates its own income. As a byproduct, information technology also brings new storage customers, which helps occupancy and rents.
- Increment “other” income by raising late fees and selling boxes, locks, insurance, etc.
- Cutting expenses. Appeal belongings-tax bills, etc.
What Cap Rate Is Appropriate?
Cap rate is an investor’due south yield, i.e., net-operating income divided past the sales price. Cap charge per unit is the inverse of the price/earnings ratio used in the stock market, except that earnings are calculated differently. Only every bit price/earnings ratios vary over time by visitor, cap rates vary by fourth dimension, geography, quality and risk. Investors expect higher yields for small facilities (under 40,000 square feet) and ones in bad locations (poor visibility and access). They pay premiums for skilful demographics: rapid population growth, high density (over 100,000 residents in five miles), high household income (associated with high rents) and a high concentration of apartments. Apartment renters demand storage because they lack space and move more oft than homeowners. Buyers pay a premium if there is vacant state for expansion, particularly if restrictive zoning presents potential competitors with a barrier to entry. Co-ordinate to the
Cocky Storage Almanac, the average cap rate for approximately 200 transactions is 10.five percent (although the
incorrectly calculates information technology at 12 percent).
Financing Affects Value
Theoreticians argue that financing does non touch value. Look at the counterexample presented in chart 3, “Financing Affects Value,” and see if you agree.
In this case, financing that is only two percent lower in interest charge per unit (8 percent vs. 10 percent) earns 50 percentage more cash after debt service. Many investors base their purchases upon “cash-on-cash” yield, which is net-operating income after debt service divided past the down payment. Cash-on-greenbacks is an investor’south almanac “cash-in” divided by his initial “cash-out” (down payment).
Sellers tin can raise their sales prices by offering attractive financing. If a seller offers a $200,000 second loan at 10 percent involvement for 5 years, the buyer’southward greenbacks period drops past $20,000 per year ($200,000 x 10 percent). However, the greenbacks-on-greenbacks return rises to 20 percent as the down payment drops by $200,000 ($45,000/$226,000 = 20 percent). More than importantly, many investors who take simply $250,000 to invest (and cannot afford other large facilities) will make offers and bid up the price.
A Adept Broker Affects Value
You tin buy a stock over the Internet for a mere $12 commission, but a real-estate broker may accuse you $100,000. Why? Existent manor is not a commodity with exact specifications like books, computers, stocks or automobiles that can be readily compared and purchased over the Internet. Real-estate income statements lack generally accustomed accounting principals enforced by a regulatory agency and, therefore, lack comparability. How can you lot compare cap rates when the income statements they are based upon are prepared differently? Buyers focus on reliable sources of information to waste less time.
If 2 mathematicians are given a problem and one fails to solve it, at that place is no amount of money–no matter how small–you would want to pay the one who failed. One-3rd of listed properties do not sell at all and are like the unsolved problem. Similarly, if you rent an attorney and he loses your case, he has a negative value. Many self-storage properties sell, only at prices beneath their worth. Some sellers who will not list their property with a banker will then take an offer from a buyer represented past one and sentinel helplessly as the broker immediately resells the property at a huge profit. Even self-storage appraisals offer no assurance of fair market value. As an example, I sold i self-storage facility at $2,104,000 just after information technology had been appraised at $1,700,000 because the appraiser was just wrong.
The photo above demonstrates the importance of perception. Practice you see a metro-Atlanta dump site? If so, this illustrates the rule that “assertive is seeing,” not vice-versa. You lot are actually looking at a bulldoze-in volcano on the island of St. Lucia. Y’all believed and, therefore, perceived information technology differently. Good brokerage does the same thing–and affects value.
Burt Gay is a self-storage broker at Marcus & Millichap, the nation’due south largest investment property brokerage firm. Last year the visitor’s 550 brokers sold more than $5 billion of real estate and, during the decade, sold $200 meg of self-storage. In the first eight months of 2000, Mr. Gay has personally sold 14 self-storage facilities worth $20 one thousand thousand. Several of his sales included self- storage facilities in hire-upwards or in overbuilt areas where his prior experience every bit a CPA enabled him to structure unusual financial arrangements.
Mr. Gay has been a popular speaker at numerous self-storage trade shows and for the Georgia Storage Possessor’s Society. He graduated from Princeton University, received an MBA in finance from Wharton and became a CPA at Coopers & Lybrand. Final year he received the Certified Commercial Investment Member designation. For more information, visit www.mmreibc.com.
|Truck Rental||$20,000||$10,000 (Notation 1)|
|Other||$25,000||$19,000 (Note 2)|
|Less: Vacancy||-$0||-$24,000 (Note iii)|
|Belongings Revenue enhancement||$12,000||$21,000 (Note iv)|
|Off-Site Management||$0||$15,000 (Note 5)|
|Repairs & Maintenance||$2,000||$4,000 (Note half-dozen)|
|Majuscule Improvements||$0||$4,000 (Notation 7)|
|Net Operating Income||$225,000||$155,000|
Financing Affects Value
|Net Operating Income||$189,000||$189,000|
|Less: Debt Service||-$146,000||-$124,000|
|Cash Catamenia Before Taxation||$43,000||$65,000|
|25% Down Payment||$446,000||$446,000|
|Cash In/Cash Out||$43,000/446,000||$65,000/446,000|
|Per centum Return||9.vi%||14.6%|