How Much Money Do You Need to Get Started in Self Storage? [Your First Facility]

[Music] what's up everybody aj osborne here from self storage income and we get to talk today about how much money do you need to get started in self storage we're gonna cover a few things and i obviously love the self storage game but one of the biggest reasons i love the self-storage game is because of the opportunity to get into self-storage especially for beginners i've said this once and i'll say it again i think self-storage offers more opportunity for an individual to start investing in commercial real estate than any other commercial real estate asset with that said we need to cover some stuff before i get into examples and talk about facilities that we've bought and how we got started so let's lay the foundation self storage is a great industry um it's one of the newest real estate asset classes that there is self storage really came about in the 60s right late 60s 70s and took hold in the 90s because self storage is a newer real estate asset class it's the individuals that started investing in it were primarily not institutional investors wall street funds those guys they didn't play in it nearly as much as the other real estate asset classes now when looking at the industry as a whole this shows very very clearly i mean 74 of all the self-storage facilities on the market are mom and paw or single operator owned why is that important right why would that mean anything to an individual because generally speaking those are the best buys and two generally speaking those are the ones that you have opportunity to buy so that means inventory right if you're gonna go play in large apartment complexes or if you want to go play in retail centers there's not nearly as much mom-and-pop operators so that means less opportunity so the question is here how is this whole industry made up and what can you get in at and where can it go so if you're looking at getting into the self-storage space you got to understand that they're really three fundamental types of facilities and i'm going to break them down into small medium and large okay small facilities are under 50 000 square feet medium facilities are 50 to 100 000 square feet and then you have a hundred thousand plus square feet square feet is generally how we rate storage facilities okay so when we're looking at square footage i'm talking about the net rentable square footage okay so if i have 15 000 square feet that's the 15 000 square feet that i'm actually renting out now how many doors is that depends on if they're small big obviously 15 000 square feet of five by fives which is like a closet compared to twenty by twenties which are like two car garages is very different that's one's gonna take up a lot more space and so you'll have less doors so that can vary widely that's why we usually don't use doors as a measuring stick because that can skew the reality of the situation so when looking at amount of square foot footage it goes from very small to very large up to 400 000 square feet of net rentable that's you know 10 acres or more of actual rentable sell storage if you're in bigger markets you can have a six story building if you go in to new york you can get 500 plus thousand square feet they can be really really big and obviously really really expensive but if you go into markets like where i started that's very very different but before we get there let's go over who's renting why because this is important to understand price now why would the renter be important to understand the price of a storage facility or how much you need to get into it let me explain self-storage is valued upon a cap rate all right cap rate is based upon the net revenue that is delivered so the net revenue expenses minus revenue right so if i buy a storage facility that net revenue is going to give me a certain return that return is generally viewed as the cap rate now this is before taxes right and before debt so those two things taken out your taxes obviously don't matter because they will differ and the debt will also differ for individuals but if you take the actual expenses and the revenue minus each other you're going to get your net income and then that is how you determine the value of the self storage it's the return on your money that you're going to get from that right this is commercial real estate in general we're looking this as more of a business okay we're looking at the revenue coming in how much money i'm going to make off that so why does that have to do with customers well in self-storage customers vary greatly there's really three types you have customers that care about one thing and one thing only and that is price they just want the cheapest they can get then you have customers that care about convenience listen i want it to be close to me and that's really you know i want to just just to be close i don't want to go too far then the third one is quality these are people that are looking for a really nice facility the spread in what these people will pay is very large in fact it can be up to three four times as much not all units or doors right sell the at the same price and storage even if they're similar assets and even if they're right down the road from one another that's because of two things first of all the customers they attract and secondly how the facility is being managed are they adding extra products and services right what's going on all these things affect revenue the higher the revenue the higher the net income the more it's going to cost because that's how we value it off that cap rate so if you're looking at facilities that only are working on price so it's a low cost to the customer generally speaking those facilities don't don't run their business very well they're not looking at add-on products and services so their net income is generally lower that means that facility is a lower price now we're getting into the real reason why i love self storage so much because what is the difference of a 10 by 10 here and a 10 by 10 here it's a cement box but this 10 by 10 versus this 10 by 10 the spread in revenue could be three times so we made a lot of money doing this because we take the low cost ones and make it higher cost that's for another video though which we'll talk about our value add strategy in the spread but let's get back to the market when you're looking at small facilities that have a low cost of a unit that means they have lower revenue and they're not very big this can make prices very attractive in fact in my market right now there are some small facilities that are at less than buying a well a four plex but some of them are even less than buying a duplex which blows a lot of people's mind they're looking at a commercial real estate asset with much more upside yet they cost more than a regular fourplex or even a duplex in a lot of markets this is why it's such a great opportunity the landscape of self-storage will this last forever no i don't think it will in fact i think we probably have 10 to 20 years it's consolidating but if you're watching this now that's a good thing because that means there's still time 74 out of that 74 a huge amount of those mom and paws compete on price this is your ticket to success it also means that you can pick up facilities for a few hundred thousand dollars so that what drives the price of the facility is revenue right but size is calculated into that not from comparables just because you have more square footage to rent so generally speaking if you have 50 000 square feet you have more net rentable square footage right so you're gonna have more revenue if they're full so when you look at a facility the size occupancy how they're being ran those all factor into the price and so we see a lot of prices that are justified but they're lower than the market and in small facilities we can see a huge swing in what's being offered or valued at those prices but it's important to remember that you don't use comparables and storage you can get in trouble doing that even if it's a small asset you really need to value it on revenue what we look at when we're looking at the price of a storage facility as far as comparables is important i'm looking at replacement cost right i'm looking at what other things are selling for but i don't buy off performance this is really important let me rephrase this i buy off proforma i don't pay for it that's the difference because when i buy something i'm buying off its actual revenue where we get where you need to be really looking hard at is your expenses versus your revenue sellers love to minimize the expenses at a facility and love to i don't want to say lie but we'll say exaggerate maybe some of the revenue so you need to do really good due diligence also we're making a video on that so that's to come so but that's a huge topic we're not going to focus on but the reason why i mentioned the synonym it's important because remember your net income is how it's valued so if expenses are suggested at lower than they may be truly are and revenue is a little higher those two things combined really increase the net income and add to a bigger value so it's really important when looking at the value of the facility we look at occupancy right so how much is actually being rented versus how much could be rented a lot of people like to sell off performance which we don't pay for performance you need to look at the market just so you understand what's going on that will tell you where that facility can go and then you need to look at the quality okay the quality is important because of the capital expenditures need to be put into it because if i'm looking at a facility and i say this is a great buy it's two hundred thousand dollars but you have to put in three hundred thousand dollars worth of work it's really not two hundred thousand dollars right it's five so when looking at how much money you need you need to look at the quality so you get the price tag based upon your net revenue but then we got to look at capital expenditures needed are roofs leaking is the pavement bad you have to factor all those things into it so how much money do you need well let me show you an example of what we did and show you where we were and where we've gone and how that looked at getting started all right so the next important part of understanding how much money you need to invest in self storage is the financing in self storage it's a little different that it requires a lot down like 30 percent we see this in other assets like hotels that need a large down payment and this is mainly due to the month-to-month lease arrangements so if you think about assets like apartment buildings they have long-term leases so it's easy to predict the cash flow over an extended period of time although cash flow remains very predictable in self-storage it doesn't take away the fact that these are month-to-month leases so banks want to see 30 down so when looking at self storage we could see self storages that will sell from 200 to 500 000 right which requires a 30 down so you're looking at 50 to a couple hundred thousand dollars on those smaller ends then you have the mid-size facilities that can range anywhere from a million two million to four or five million and the large facilities the same it can be 4 to 5 million to 20 million it varies widely due to the revenue component but 30 down is standard and will almost be guaranteed that that's what you're going to need to do there are several financial partners that we work with like live oak bank that love to invest in self storage and they look at the asset and they look at the business plan and what you're trying to accomplish in that asset and they go into lots of markets that traditional banks maybe like the larger ones would avoid this is coming from my own personal experience because when we got started this is what we did we started and we bought small facilities that were right around six hundred thousand dollars so we needed to put two hundred thousand dollars down which we did and we put two hundred thousand dollars down into these small rural storage facilities let me talk to you about how this looked there the facility was on the outskirts of town there was no fence there was no office and it was gravel road but it was very stable and we wanted to learn self storage we didn't know so we got into it and we bought these small assets up one of the small ones that we bought was in a very rural town in oregon this one we got the owner to finance it this is a great way to do it because then we got off of the debt that means i wasn't personally liable because the asset backed the note so if the asset failed the person we bought it from would receive the storage facility back it was also good because we got to put less down so i think we had to put around 20 it down which was around 150 000 so there's ways that you can work through the financing but generally that's with the owner not institutions and in you know fourth tier markets and smaller facilities this can be a great way to go about it lots of the owners they still want to receive some kind of residual income and so that financing can really help out but that's how we started now as we got much bigger we did everything from convert big bankrupt super kmarts ground up build multi-story as you can see they get very nice and very big now our down payments are 2 3 million instead of the 200 000 and it scales well because the same exact principles apply the point is with self storage you need to understand when it comes to value and how much money you need to put down you need to understand where that value comes from right that comes on your net operating income so how it's derived your revenue minus expenses and understand where that can go right what dangers may be and how stable those cash flow flows are it also comes from its occupancy how many people are using it is it 100 full 60 full and you need to look at the difference in occupancies and rates and how that will affect the net income therefore affecting the value of the facility the second part you need to look at is the financing part so how much do you need to put down and what are the terms of those agreements that's really how you come up with how much money you need to put down in a facility but the range is large but for a commercial asset there's amazing opportunities to get into it relatively cheap as far as other assets go and start small but to grow really big hey everybody thanks for watching this if you've had any experience and you've bought self storage facilities before please put down in the comments how much you put down on the facility that will help others learn and if this is helpful please like and subscribe like and subscribe tells the youtube algorithm that you like what we're doing and tells us to produce more of it so that's how you can help us as we continue to try to put out great self storage content

Channel: Self Storage Income

Views: 19,462

Rating: 4.9447236 out of 5

Keywords: Self Storage Income, AJ Osborne, Self Storage Investing, Self Storage, Real Estate Investing

Id: Ma1zSDJzTYY

Length: 16min 53sec (1013 seconds)

Published: Wed Dec 09 2020