How To Find Value in Self-Storage InvestmentsMay 12, 2023
Self-Storage Income: How to Value Your Investment
Today, I want to talk about self-storage income and how to value your investment. As a real estate investor, I have found self-storage to be a lucrative investment opportunity. I’ve had a lot of success in this investment opportunity, and I want to share some of my insights and experiences with you.
To begin, let’s talk about what is involved with determining value in your investment. The main things I want to discuss are:
- Revenue Evaluation and Value-Add Potential
- Cap Rates
- Intrinsic vs Extrinsic Value
- Market Forces
- Identifying Opportunity
- Pricing and Probability of Achievement
Evaluate Revenue and Value-Add Potential
Before investing in self-storage, it's crucial to evaluate the revenue and the value-add potential of the property. To do this, we need to understand the market demand as well as the property's location. This is essential. You should also analyze the competition, occupancy rates, and the property's operating expenses. If the property is underperforming, there may be opportunities to increase revenue by improving operations or expanding the property.
Cap rates, or capitalization rates, are used to value commercial real estate properties. They measure the expected rate of return on the investment based on the net operating income (NOI). A lower cap rate means a higher price, and a higher cap rate means a lower price.
It's essential to understand how cap rates work in self-storage. Self-storage properties tend to have lower cap rates than other commercial properties due to their stability and security. Self-storage properties generate stable cash flow, even during economic downturns. This makes them a more attractive investment. However, it’s also important to remember that cap rates can fluctuate due to market forces (which we’ll discuss later) and can impact the property's value.
Intrinsic vs. Extrinsic Value
Intrinsic value refers to the tangible assets and the quality of the investment. Intrinsic value is what matters when evaluating a self-storage property's performance. It's essential to focus on the quality of the property and the revenue it generates, rather than the extrinsic value, which is the price.
Extrinsic value refers to the market forces that impact the price of the property. The extrinsic value can change based on multiple variables such as the number of buyers and sellers in the market, the cost of capital, and other external factors. As an investor, it's crucial to focus on the intrinsic value of the property, which is the value that the property generates from its operations.
As stated earlier, market forces can impact the cap rates and the value of the property. Let’s take a closer look at this. For example, if there are more buyers than sellers in the market, the cap rates will decrease, and the property's value will increase. On the other hand, if there are more sellers than buyers in the market, the cap rates will increase, and the property's value will decrease.
In the current market, we have seen a decrease in cap rates due to market pressures, which can be concerning for investors. However, it's important to remember that the intrinsic value of the property remains unchanged, and there may be opportunities to find undervalued properties.
Despite the market pressures, there are still opportunities in self-storage investments. Investors can find undervalued properties that have not been impacted by the market forces. Investors can also focus on improving the quality of the property and its operations, which can increase revenue and the property's intrinsic value.
Pricing and Probability of Achievement
One of the most critical aspects of self-storage investment is pricing. The price of a self-storage asset can determine the investment returns, the risk profile, and the exit strategy. However, pricing is not an exact science. It involves finding the right balance between what the seller wants, what the market can bear, and what the investor can achieve.
With this in mind, investors must consider the probability of achievement when setting the price. The higher the probability, the higher the price can be. Conversely, the lower the probability, the lower the price should be. This means that investors must be realistic about their expectations and evaluate the risk-reward tradeoff carefully.
Community and Resources
Self-storage investment can be a challenging but rewarding journey. To succeed, investors need to stay informed, connected, and engaged with the industry. Fortunately, there are many resources and communities available for self-storage investors.
For example, there are online forums, podcasts, and social media groups dedicated to self-storage investment. These platforms allow investors to ask questions, share insights, and learn from each other's experiences. They can also provide access to industry experts, market data, and investment opportunities.
The Art and Science of Self-Storage Investment
Self-storage investment is both an art and a science. It involves analyzing the numbers and variable conditions (as stated earlier) such as demand, revenue, and profitability. It requires intuition and experience to identify the best pricing strategy, negotiate with sellers, and manage operations effectively. In other words, self-storage investment requires a balance of quantitative and qualitative skills.
Fortunately, there are tools and systems in place to help investors evaluate self-storage assets. For example, data analytics can provide insights into market trends, customer behavior, and operational efficiency. Valuation models can help estimate the fair market value of a property based on its income potential and comparable sales in the area. Due diligence can uncover any hidden risks or opportunities that may affect the investment decision.
The reality of self-storage investment is that it involves a lot of unknowns and uncertainties. For example, the seller's motivations, the competition in the area, the changing customer preferences, and the economic conditions can all affect the investment outcome. Therefore, investors must be prepared to adapt and adjust their strategies as new information emerges. By educating yourself and taking advantage of the experience of other investors, you too can fine-tune your strategies and turn the opportunity of self-storage investing into a revenue building venture.