Valuation of Self-Storage Facilities and the Relationship Between Price and Performance

There are a lot of ways to determine the value of a self-storage business. However, you must understand the income made by the property and the reliability and nature of that gain. The figure that you get must also be compared to other investment types, and you must determine the return on investment (ROI).

The valuation of self-storage facilities is considered by many in the industry as an art. While several factors can affect the process, you need a lot of experience in real estate to determine the right range of value. It’s also a bit difficult to cover every point of judgment that is required to get a precise figure. 

In this article, you’ll know some of the basic things that help you get things going and some common mistakes to avoid.

Performing Self-Storage Valuation

Getting the true market value of a self-storage property is an in-depth process that covers three elements that serve as decision-making points for real estate appraisers.

  • Cost: This is an important factor to consider when choosing a self-storage facility in a specific market. 
  • Market-sales comparables: These pertain to the returns of recently sold self-storage properties in a market.
  • Income: An “income approach” strategy involves calculating the income of a property to determine the capitalization rate (cap rate). By dividing the net operating income (NOI) with the cap rate, you will get the property value.

If you get figures that are too far off to recognize by using these elements, you probably need help to do a market analysis and valuation of self-storage facilities that you own. Especially when you’re not trained to do these kinds of things, it pays to have someone who will help you to value self storage facilities the right way. But for the most part, most potential buyers and sellers can determine the value of a self-storage facility by comparing the NOI and cap rate.

As you go through your calculations with an experienced self-storage property professional, you should try changing some of the numbers to see how it affects valuation. This will give you more insight and discover that good management is often a make or break in maintaining and creating value for a self-storage facility.

Due to modern buyers’ heavy reliance on the income strategy, it’s very important to get a good picture of the property’s operating numbers. One of the best ways to start is to find it on your most recent tax return or an operating statement/report from the past year. By getting this valuable information, you’re all set to start looking into and getting an accurate market valuation for your self-storage facility. 

You should also consider using a self-storage investment calculator.

Gauging Performance

Knowing how to evaluate self-storage facilities requires specific knowledge and skills. These are some of the areas that you need to focus on to gauge the performance of your self-storage facility:

Rental income

Since the self-storage industry is a seasonal business, you must factor in a full year of actual rental income. You should also determine the rental income made over the past years to gauge if it’s improving or declining. If you notice a clear trend, you might need to adjust your cap rate.

Aside from that, modifications might be needed if the property has seen substantial vacancy. It’s important to compare actual rent that you received from potential rent, instead of merely looking into physical occupancy when you evaluate vacancy. Your facility would likely have a physical occupancy of around 92%, but you only get 80% of actual rent because of various discounts and concessions. You should also keep in mind that a few buyers or real estate appraisers will include revenue that exceeds 90% of potential rent, except for very rare situations.

Plus, if brand-new self-storage facilities are being built in your area or if there’s one that’s already in lease-up, the outcome is unpredictable if the rates and occupancies still aren’t stable. This is a good time to test the waters by altering your revenue targets to mirror the potential impact of the competition.

Miscellaneous income

a little girl playing inside a box while her parents are packing things to store at a self-storage facility

This is a broad category that covers the funds generated from late fees, commissions from truck rentals, and sales of items, like boxes, locks, and tenant insurance. If the income generated from these additional offers exceeds 10% of the income collected from rent, you can use a different approach to get the valuation of self-storage facilities that you run. As this income grows, it may be separated from the “miscellaneous income” category. 

This income is also normally valued a lot lower than those made from real estate sales and usually not considered by appraisers for financing.

Operating expenses

These expenses normally range from 35% to 45% of the total costs of running a self-storage facility. If your self-storage facility is not within this range, you need to do further analysis.

The most common expenses included in this category are salary and benefits, real estate taxes, utilities, business insurance, management fees, repairs and maintenance, office supplies, marketing and advertising, and capital reserves. On the other hand, those which are not included in this category are depreciation, loan payments, and personal expenditures, like travel, convention costs, business meetings, and vehicle mileage costs. Also, you need to remember that the things mentioned on this list do not represent all of the potential expenses that you may encounter while running your business. Like any other business, each self-storage facility is unique.

Conclusion

By assessing your self-storage facility’s performance, you can make a better plan to deal with estate planning, refinancing, or sale. Valuation for self-storage facilities that you own can also reveal hidden opportunities that can help improve your returns. Also, it’s important to optimize your self-storage property to get maximum value.

This is a complex task that needs ample preparation and conviction, especially if you want to achieve results in a manageable timeframe. Since these concepts can be a bit overwhelming for beginners, you should seek professional advice if you can.

If you want to know more about maximizing investment returns, read our other articles!