Getting Ready to Sell Your Self-Storage Facility?

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There are times when a self-storage owner would like to ascertain what their facility is worth. Knowing the value of your asset in the current market can be helpful when creating your long-term goals. It can also help you determine what would be a good and fair price if you ever plan to sell. In this article, I’ll explain the business data you need to collect and analyze, and then share three ways to calculate property value.

Before We Begin…

Learning to value a self-storage facility without realtor input is an important skill every owner should have, but there are two things you need to remember: The real estate market is ever-changing, and self-storage doesn’t exist in a vacuum. Value is affected by property condition, location, market supply and many other factors. Our assets also compete with industrial, office and retail along with other investment options.

Investors naturally look for good returns, so when calculating the worth of your property, it’s important to assess its past revenue and future earning potential. Also, remember that if you plan to sell for cash, buyers typically don’t want to pay much, if anything, for projected income gains. They generally don’t place much value on vacant units or expansion land, either.

In addition, self-storage facilities are sometimes sold for less than their replacement cost and the expenses incurred by you as the current owner. This is because buyers only pay what they feel is justified by the expected return. If you want to increase property value, you must raise the return.

Collecting and Analyzing Data

The first thing you need to do when attempting to calculate your self-storage facility value is review your business records with an eye toward predicting future income. It’s critical to gather accurate information. Start with the past year’s income and expenses, older income statements, and occupancy history. Confirm all the income generated from rent, retail sales, truck-rental commissions, administrative and late fees, and so on.

Next, review all the operating expenses. Many owners fail to factor in all costs such as payroll, maintenance and repairs, pest control, etc. Even if you aren’t paying yourself a management fee, the new owner may incur this expense, so include it. Remember to remove expenses that aren’t related to operating the facility, such as debt service, depreciation and amortization, so you can get an accurate picture.

Once you’ve gathered all this information and compared it month to month and year over year, you’ll be able to understand the seasonal fluctuations in your business. Analyzing the last few years of data can also help you spot other property trends. A facility with steadily rising occupancy and income is obviously a better buy than one that’s on the decline.

Calculating Value

After collecting and analyzing all your business and financial data, you can start calculating your self-storage property value. It works similarly to valuing other types of real estate. There are many methods you can use, but here are the top three.

Income capitalization. This method looks at your business cash flow, focusing on capitalization (cap) rate. Specifically, it converts monthly revenue into return on investment. You simply divide your net operating income (gross income minus operating expenses) by the sale price, which is the price at which you intend to list the property. A lower cap rate will give you a higher return on investment and a better value.

There are some nationalized average cap rates, but they aren’t necessarily applicable to a specific market. A real estate broker or appraiser who specializes in self-storage can provide an estimate or range for your property based on their experience and/or comparable sales. Bear in mind, however, that each may apply a different rate, as they approach property from a unique perspective.

There’s a good bit of art to finding an accurate cap rate. The goal is to determine a reasonable rate based on the market and property. Even then, it won’t address all the potential differences in NOI based on actual and projected revenue, expenses, etc. Calculating NOI is just as subjective, and that’s what investors are buying—the income stream.

Sales comparison. This method assumes your property’s value is comparable to that of similar self-storage facilities that were sold recently. In this case, you need to know property attributes such as the age and condition, lot size, and construction materials. You’ll need to gather sales data for each candidate and rank them by the degree to which they “match” your own. Factor in the time of the sale and location, and adjust accordingly. Establish the value based on the best match or an average of all.

Cost method. This may be useful if your facility is new and has very little historical data or you just need a quick number. The method targets physical assets, then factors in depreciation and calculates the value based on the costs the business would incur to rebuild. Consider the price for land, construction and materials and then subtract the accrued depreciation.

Hopefully, this helped you understand the different ways to make a fair valuation for your self-storage facility, especially if you plan to sell. Even if selling isn’t in your plans right now, knowing these metrics can help you plan for your future.

Tim Randle is owner of QuickOffers, a Round Rock, Texas-based company that acquires self-storage facilities. He’s been investing in real estate since the mid-90s. He left corporate life as a CPA and senior financial analyst in 2000 to become a full-time real estate investor. After purchasing his first self-storage property in 2014, he redirected his focus to buying and fixing mismanaged facilities across the South. To reach him, call 512.890.0091.

About the Author

Tim Randle

Owner, QuickOffers

See more from Tim Randle

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