Maximize Your Storage Investment: 7 Underwriting Mistakes to Avoid

Welcome back to the show.

Today I want to talk about how can you buy more storage deals? And this is going to be, this show is going to be focused more on your underwriting and how you're looking at deals as opposed to, you know, how can you market more, market better, find more leads? We're not going to focus on that today. We're going to focus on more kind of what you've been taught in underwriting or maybe what, what you've seen.

And these are things that, that were spurred on by definitely conversation I had the other day with a couple that they currently have one storage deal and looking for more. But I've had this conversation who knows how many times with multiple people trying to get into self storage and, or have one or two facilities and, and can't find any. So actually while I'm thinking about it, I'm adding another one here as a bonus. But right now I've got six of them.

And make sure you hang on to the end because to me the, the six one, they're all important, but maybe the most important. So don't skip, don't, don't just listen the first couple minutes of, of this one and uh, and move on. Listen to the last one because I do think that one has maybe the most value in it. So let's get into it.

Number one is looking at value add. You should be buying value add, right? If you're not buying value add, then you're paying retail. So that means you're probably buying something that whether it's listed or off market, you can't raise rents, you can't add tenant insurance, you can't add setup fees, you can't add parking, you can't add more units. There's no type of value add that you can possibly do. You can't reduce expenses, right? There's no value add there.

So really when someone says are you buying value add? It better be, right? Maybe you can't raise rates. Maybe rates are what they are, but maybe they don't have 10 insurance. Maybe you can add outdoor parking. Maybe you can add more units. You can do all these things.

So when, when, when you're looking at these deals, more than likely probably 99 of the time they're value add again, unless you're buying from someone that's very sophisticated and already has these things in place and have them completely dialed in. More than likely most deals that are for sale are some type of value add now. And this is actually goes into number two, which I just thought of before it kind of piggybacks off. This is doubling the value. You don't have to double the value.

Okay. You don't have to buy something for 300,000 and it has to be worth 600,000. That's not now. And when I say that I'm going to add a disclaimer there. I'm looking for cash flow. If you're looking to, to buy and flip.

And in one way or another, whether that's flipping to get your private investors out of the deal so you can pay them off or that's just so you need some, some cash quick to buy a better deal then, then yeah, you know, you don't have to necessarily double the, the double the value. But gaining equity, gaining appreciation is obviously important.

And I guess going back to doubling value, if you buy something for 300, 000 and double it to 600, 000, clearly your value there that you've added is $300,000. Okay, now let's look at a 5 million dollar deal and let's say you just raise it the, the value by 10%. You've made $200,000 more than you would. Than you did. I did the math right. Than you did. Buying a $300,000 deal, doubling the value so you don't have to double the value. I hear that a lot. You don't have to double the value.

While that sounds great, like hey, I bought something for 300, now it's worth 600. That's fantastic. You could buy a $5 million facility, right? Add and have 10% gain and now you just made 500,000 in equity. That's almost double of what you did in equity than you did when you doubled the, the small deal. And I'm not saying. And actually while I'm at it, here's another one to piggyback off that. I'm not saying don't buy small deals because I've got some small deals and they cash flow, great.

But don't leave out to me, look at every single deal, every deal, especially deals that are in your markets. Look at big, small, medium, whatever they are, look at all of them. I mean I've got a 6,000 square foot facility, it's now 8,000 because I put some relocatable units in, but I've got it. It was 6000 square feet. I was making $1500 a month in cash flow. Okay? That's better than any single family rental, more than likely. And I paid very little for it. So don't leave out small deals.

And I kind of threw three quick ones in there pretty, pretty, pretty quickly. But yeah, most deals are value add. You don't have to double the value. And look at every single deal. So those, those are first three, fourth one here is, and I gotta change my numbers here. You don't have to give up equity. Okay? You do not have to give up equity to get in deals. I know that happens a lot, especially in these, in these groups that are, people are part of.

There's certain people in there that can certainly give you value. But even if you're a newbie or second, third deal, whatever it is, you don't have to give up equity. There are a lot more ways to do it. If you find a deal that's truly a deal, I'm not going to go into everything, but there are a lot of ways that you can take that deal down without bringing on an equity partner.

You can still use that person maybe just with hard money, right, where they're just charging you a percentage and maybe a couple points on top of that. But you don't have to give up equity. I think that's a, I think that's a deal killer. With a lot of deals, especially these smaller deals. If you're giving, if you've got a deal that's got $300,000 worth of equity, you got to give up half that. Man. That's, you know, it's just, it's a lot.

So my opinion, if you're finding, if you're getting the deals you want to operate it and, and you want to continue to find good deals, quit giving up equity.

Next one is, this is kind of just somewhat a negotiation tactic. It was something that I may not fit with the others here, but I wanted to bring it up because I find this a lot when dealing with sellers, especially directly. And that's other offers that are made to the seller and those other offers are supposedly in cash. More than likely, more than likely. It's one of two ways they probably don't have just a wad of cash that they're handing them. It's probably one of two things.

One, it could be a bank loan because technically the seller will get cash when they close, right? So one, it could be a bank loan and two, it could be that person has raised money and, and, and used, you know, in a way I, it is cash, right? But they've raised money and there, there are things that could, I guess, still hold that deal up is kind of my point here. So when it's cash, more than likely it's not Just sitting in their bank account.

Excuse me, and, and they're just giving this, the seller cash. So I always like to tell the sellers that it's just a little bit of education to them. I've gotten good feedback from sellers just telling them that because most times these sellers think when, when they're offered cash, they think they're just getting a bag of cash and closing, which looks, looks a little different than that. So yeah, that one doesn't really fit with these others, but wanted to bring that up.

Now my last two are ones that I've heard probably since I started getting the self storage. But the more I'm in it, the more I hate hearing about them. So the first one is square foot per capita. And if you're in self storage, you know what this metric is? Basically it is how many square feet each one of us everybody rents. So on average it's seven or eight. We'll just use eight square foot per capita. So that says I rent eight square feet of self storage myself.

It's just, it's square feet per capita. So all of us rent 8 square feet of self storage. That's the average, which is probably true. That's also probably growing. It's somewhat of an old number, but also growing because we're becoming more of a renter nation. But that also, that, that put, that gives you every single market in the U.S. okay. So you've got markets like we'll use Florida that doesn't have any basements. Okay. So obviously they need more storage down there.

They also have more retirees. They have more people living up north that, that may have a winter house down there that need storage. So their square foot per capita can be higher in certain areas. Then you've got other areas. I'm in the town and I'll give you two examples. I'm in a town where within a mile, I think the square foot per capita is like four. And it is one of the hardest facilities for me to lease up. The I've got.

I'm in another city where the square foot per capita is at one point is in 30s. And I know there's been more storage that has been built. I myself has added more, have added more storage. We could be pushing 40 square foot per capita at this point. And the rental demand is still super strong. It's starting to lease back up. It did fall off a little bit over the winter, but I barely have to do any marketing there. And it just leases up. And again it's at least 30 square foot per capita.

If not pushing 40. So when I hear square foot per capita and I see people, you know, doing a deal or not doing a deal based off that, you can't, it's not a real number. It has nothing to do with your market. So you've got to do market research. You got to figure out what everyone's occupancy is. And you also got to look at climate compared to non climate. You got to look at parking. You got to look at all these different factors, different products basically that people are selling.

So you've got to take all that into account. Don't look at square foot per capita. I don't say don't look at it, don't judge your deal off of it. And this is kind of a maybe a seat. I don't want to call it a secret, but it's helped me land some deals in markets where I think others have definitely been afraid to get into. So hopefully not many people are listening to this podcast that invest where I do. But yeah, I, I, I look at the market.

I don't, I'll look at the square foot per capita before, right before we get under contract just to kind of, I guess make myself feel a little bit better or worse, I guess. But yeah, I don't, I don't judge any deal off square foot, square foot per capita. And then the last one, the final one, which is this one, irks me too. And, and square foot per capita is a general rule of thumb and so is this next one.

It's a general rule of thumb, but I see too many people just using this in their underwriting and that's using a 30 or 35% expense ratio for their, their operating expenses, which is insane to me because while that may be again, a national average and a lot of appraisers do use that, brokers will use that sometimes when, when selling your deal. That doesn't mean those are going to be your expenses for your deal. Your real estate taxes could be super low. It could also be super high.

You could be in a flood zone or you could be in an area where insurance is super low. There's just so many factors that go into that that while you can, I don't even like using it as a quick dirty to, to quickly look at a deal. I can look at a deal within probably two minutes and figure out my actual expenses within two minutes. Now it takes a little bit more time figuring out where I can take rental rates, you know, what the occupancy in the market is, all those types of things.

When it comes to underwriting and actually plugging numbers into a spreadsheet. Two minutes and I'm done. So I would not use ever again. Throw it out the window. 30%, 35%, whatever it is, operating expenses for your expense ratio. I just, I wouldn't do it. Just don't do it. I've got some fill, I think globally and I believe this includes, we'll just call it payroll. So my employees and call center and everything, I think we're around. I'd have to double check, but we're under 30 without a doubt.

I want to say we're probably closer to 25ish, 26 somewhere in their expense ratio. I've got one facility that's like 18 expense ratio. So it just throw it out the window. I don't like it. I know a lot of people talk about it and teach it. I don't like it. It's not real. And it's also killing a lot of deals that you're looking at. Think about it. What if you can find a deal that the operating, your real operating expenses are 20%, that's 10% difference.

And the bigger the deal, the more you're saving and then the more you're making and putting in your pocket. So I just, I hate that metric. I hate the square foot per capita metric. And I may get some, some flack on some of this stuff, but it's in my experience, it's just not, it's not accurate. It's, it's not how you look at deals. You have to underwrite deals and use real life numbers and, and the more you're in it, the more deals that you have, the easier that becomes, right?

So you may not know what Internet costs in your area, doesn't take very long to figure that out. But you may not know that cost day one before you get a facility. But once you do have one, now you know what Internet expenses and what, what type of Internet speed and everything that you need for your cameras in your gate, you know those things. So now you can use that number. Same with electric, your electric bill. Same with the boots on the ground.

Because everyone, you know, the day of, to me, in my opinion, the day of paying someone, you know, 100 bucks, 150 bucks as boots on the ground. I'm not a fan of that. I think you get what you pay for. We've got a full time maintenance guy, which I've talked about and I think for the, for the time that he works and, and the great work that he does, I I believe he's paid well. Definitely more than, you know, the 150 bucks per site, which, you know, again, I think you get what you pay for.

So now kind of getting out of the box here of what I want to talk about. But yeah, those are, I think now seven. I had five, but added two more seven.

Kind of common misconceptions that we've been taught that are absolutely killing your underwriting and not allowing you to find more deals. So hope this was helpful, hopeful it was valuable. Appreciate everyone for listening and we'll see you next time. Thanks for following subscribing and listening to this episode of The Do More podcast, hosted by Jon Farling. To learn more or ask questions, go to L4Investing.com.