Before investing in a self-storage facility it's crucial to do your homework and carry out a comprehensive due diligence process before finalizing the purchase of the asset.
Understanding the Importance of Due Diligence
The due diligence process is your safety net. It's a thorough investigation that provides insight into the potential risks and rewards of your investment, and it can make or break your deal. You want to know of any potential issues upfront - not after you have already paid the seller. If you find any issues during due diligence you can use these to re-negotiate the price with the seller or walk away from a potentially bad deal.
Step 1: Environmental Inspection
The first step in the due diligence process is conducting an environmental inspection. This includes determining whether there are any environmental hazards or concerns associated with the property. This could range from potential contamination due to past uses of the site, to flood risk or other natural hazards. Engage a professional environmental consulting firm to carry out a Phase I Environmental Site Assessment (ESA). The ESA will identify potential or existing environmental contamination liabilities and satisfy commercial lending requirements.
Step 2: Physical Inspection
Next, conduct a physical inspection of the facility. This includes evaluating the overall condition of the property, the quality of the construction, and the state of maintenance. Check for visible signs of damage or disrepair, such as roof leaks, faulty doors, or poor drainage. It's a good idea to hire a professional property inspector to ensure nothing is overlooked.
Step 3: Operational Review
The operational review is where you analyze the current management practices and policies. It includes looking at rental rates, occupancy rates, delinquencies, and marketing strategies. Compare the facility's rates and occupancy with local competitors to determine if it is being properly managed. Operational inefficiencies can often be an opportunity for a new owner to increase net operating income (NOI).
Step 4: Legal Review
Consult with a real estate attorney to review all legal documents associated with the property. This includes the title, zoning compliance, existing leases, service contracts, and any pending litigation. The attorney will also help ensure compliance with local, state, and federal laws and regulations.
Step 5: Financial Verification
Finally, and perhaps most critically, comes financial verification. Check the facility's financials against actual bank statements to verify income and expenses. Look closely at revenue trends, operating expenses, and net operating income. Also, examine the trailing 12-month financial statement for any inconsistencies or red flags. According to the Self Storage Association, a well-run facility should have operating expenses that range between 25% and 40% of gross potential income.
Taking a methodical approach to due diligence can help you avoid potential pitfalls and make an informed decision about your self-storage investment. Remember, the time you invest in thorough due diligence will pay off in the long run.