Valuing A Self-Storage Facility With Huge Vacancy

So you’re looking at a self-storage property with huge vacancy – let’s say 70% of the space is unrented. That’s a huge issue on many fronts. So how can an investor make a successful transaction out of a property like that? Is it even possible?

What’s the current net income at the current occupancy?

The first stop in assessing the viability of a storage facility with massive vacancy is to figure out what it is producing in the form of net income right now. Not what it could produce but what it is producing. Because that’s all you have to work with at closing as far as paying the bills and the mortgage. And you have no idea of how long it will take to increase that number in today’s competitive world.

What could the net income be if you were to hit 90% occupancy?

Now take a snapshot of what it could be at strong occupancy (but don’t use 100% to be realistic). This is the potential the property has at full horsepower. This will give you an idea of what you get for all your effort and risk in a tangible manner. However, don’t let this flavor your earlier assessment, as this is not the current performance.

What would it take to get there?

So what’s the plan to take the property from low occupancy to high occupancy? Is it better on-line marketing and advertising? Is it improving the visibility from the street? Undercutting your competitors’ pricing? You need a concrete plan with action steps that are reasonable and achievable.

Will the market support it?

Is this property massively empty because there simply is no demand in this market? Is there too much available storage space and the market is drowning in move-in specials as owners chase after the same customers? This is where your ability to do a decent market study is essential. Make a complete list of the storage centers in the market and try to figure out how occupied they are by comparison.

Can you afford the negative cash flow early on?

A storage facility with massive vacancy will typically also have cash-flow problems from the get-go. It may not even be able to cash-flow positive before the note payment, not to mention after it. Can you afford to feed the property every month with your cash until you can turn it around? Be reasonable on this because negative cash flow can crush you.

Can you get it financed?

Lenders hate properties with less than 80%+ occupancy. They think they reek of poor management and potential. To sell them on tackling this type of financing, you’ll need a brave lender and a good story that is compelling. Can you put that deal together? Big vacancy is a stretch for even experienced operators, not to mention new entrants. If the answer is “no, I tried 20 banks and they all said no way” then the only way to save the deal is to get the seller to owner finance it. And that may not be possible.

Is the appropriate risk/reward threshold met?

Sam Zell, one of America’s greatest real investors, has always said that “if there’s low risk and high reward then buy it and if there’s high risk and low reward never buy it”. In this case – given the above questions – you should be able to determine this algorithm. If the answer is “no, the value enhancement in tackling this deal and filling it up is not worth the risk” then drop it immediately. However, if the deal is priced based on current occupancy only, and you feel that you can fill it up with your efforts and strategies, then you may decide to go forward.

Conclusion

You can buy storage deals with high rates of vacancy if you use some common-sense approaches to valuation and risk. This list will help you get started. There’s big money in turning vacant storage properties around – you just have to make sure that you’ve figured it out correctly on the front end.

Frank Rolfe has been an active self-storage investor for around two decades, with self-storage units in many states throughout the U.S. His nuts and bolts knowledge of what makes for a successful self-storage facility has led to a three-decade career without a single failed property.