Feasibility and due diligence, this is one of the many facets of real estate that Fernando loves. He likes computing numbers and making analysis.
This is necessary for the sense that this will make or break your deal. Don’t ever go to a real estate business if you do not know anything about this topic.
The important thing about self-storage is as soon as you get the numbers from the seller at the same time you should also discuss the due diligence.
First, check the market. Before you even look at the property itself, before you even do the math for the income and expenses of the property, you have to check the market. Look at the market and the competitors first because in self-storage there is a supply and demand meter that could make or break your deal.
Study the supply index number in the area. This is calculated based on the amount of storage in an area divided by the population.
To learn more about the feasibility and due diligence with Fernando, continue watching this video.
Fernando O. Angelucci is Founder and President of Titan Wealth Group. He also leads the firm’s finance and acquisitions departments. Fernando Angelucci and Steven Wear founded Titan Wealth Group in 2015, and under his leadership, the firm’s revenue has grown over 100% year over year. Today,
Find out more at
https://www.TheStorageStud.com
https://titanwealthgroup.com/
Listen to our Podcast:
https://thestoragestud.podbean.com/e/feasibility-and-due-diligence/
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Hello everyone! Fernando Angelucci here, Storage Stud. So, we're going to be talking today about feasibility and due diligence. This is one of the pieces of real estate that I really love. I love jumping into the numbers and doing analysis. I'm kind of a deal junkie that way. Some people are not a big fan of this, but it's super necessary and this is what's going to make or break your deal. You never want to walk into a real estate deal, not knowing anything, because that's how you can lose your shirt. So, very first thing, when it comes to self storage as soon as we get the initial numbers from a seller and they basically raised their hand, they're saying, yes, I'm willing to sell, let's do this dance. Then, we get right into the due diligence as quickly as possible.
So, the very first things that I'm going to do is I'm going to check the market. So, before I even look at the property itself, before I even look at the income and expenses of the property itself, I'm going to look at the market and the competitors, because with self storage, there is a supply and demand metric that can make or break your deal. So, the very first thing we look at is something called the supply index number or the supply and demand in the area. So, this is typically calculated based on the amount of storage in an area divided by the population. And we use trade areas. So, we won't use like a city, we'll say, okay, based off of this asset type or this asset grade. So, if it's a, let's say classy self storage facility in, let's say a suburb of a major city or an excerpt of a major city, we'll say, okay, in this five mile radius, how much square feet of storage is there net rentable?
We say net rentable square feet. And what is the population in this five mile circle? That's just an easy way to start. Some people also use drive time, as opposed to just a fixed circle, because let's say you're looking at a property in the mountains, something that's, you know, if you have a Philly here and the edge of a three mile radius is here, but what you don't realize is there is a mountain range that goes there in between, to get to this three miles, you have to drive like 45 minutes around the mountain pass to get there. That's probably not going to be one of your customers. What we've found is that 90% plus of your customers will come from a set area, a set trade area. So, let's just use the five mile example. Let's say in an area, I find that there are 100,000 square feet of self storage, and then that same trade area, there's 20,000 people.
So, using that ratio, we have what's called a five supply index number or a five net rentable square feet per capita number per population, per person. That's one caveat. And what we see is that, the national equilibrium is roughly 5.96 net rentable square feet per person. So, that's a good average baseline to start on, but that doesn't tell the whole story. So for example, if you're looking at a property in the downtown Metro area of a major population hub, like here, let's say I'm looking at a property in River North in downtown Chicago. The supply index number may be way higher. Just because just the amount of people that fit into a small square footage, or maybe if you live in downtown, you know, you're living in smaller, you know, you maybe you're in a thousand square foot apartment, as opposed to, if you lived out in a rural area where you can build a 5,000 square foot house and sit on, you know, 40 acres of land.
So, the supply index number will change depending on where you are. So, if you're in a rural area, the supply index number may go down or may even go up, depending on where you're looking and what the population is like versus how much square footage is there. So, that's a caveat to kind of take with a grain of rice. The second part of what we do in the demand study is we look at our competitors. If we call all of our competitors in that trade area, and they're all a hundred percent full, that's a good sign for us. That means that there is pent up demand in this market. Even if the supply index number is say 11, right? This is there's a deal is looking at recently where the supply index number was 11. It was in a more rural area, but every one of the competitor was at a hundred percent occupancy plus having a waiting list.
So, we will actually wait those two things. So, we put about a 30 to 40% waiting on our supply index number and then a 60 to 70% rating on the competitor analysis to see what occupancies they're at and what they're charging. So, that's the very first thing that we'll do is look at the supply index number. The second thing that we'll do is once we're calling around all these competitors, we're going to start getting their rates as well, and figuring out how much they're charging. Say, for example, you have a self storage facility, that's a hundred percent full that you're looking to purchase, but all of the facilities in the area are at 50% occupancy. And then, you find out the reason why is, because all your competitors are charging maybe $20 more than you are, or you're charging $20 less than everybody else. So, you really don't know until you've done the market rent, study to see, like, where is the street rates in this area? What are the street rates? So, you have a couple options on your hand. Do you buy this facility and raise rent until your occupancy starts dropping down? Or do you leave it where you're at because you want to stay a hundred percent full? So, these are some things to consider when you're looking at the due diligence and looking at the feasibility of a market.
The second thing, There, I guess, the third thing that we'll start looking at is the actual metrics of the facility itself. How much income are you bringing in? What are your expenses? Are there any areas where I can have the opportunity to increase the income? Maybe, I start increasing the street rates because maybe let's say we have an opposite situation. Everyone in the market is much more expensive than you, but everyone's still full and you're a hundred percent full. So, you have the ability to raise your rents up. So, that's one of the very first things we'll look at as far as adding income. Another thing we'll look at is, how many additional income streams are you creating from the self storage facility? Are you only renting boxes or renting you know, storage units or are you also selling boxes locks and moving supplies? Are you, do you have additional profit centers like printing and shipping are you renting out trucks?
So, these are all things that we look at, where can we increase our income from this property. On the flip side, then we look at our expenses and see, where can we drop expenses here? Maybe they have a manager that's getting paid way too much. You have a manager of a small facility making $80,000 a year. That's something that you can probably find a new manager that's willing to work just as hard for much less. Maybe their property taxes are super high and they've never gone to their County to contest them. So, maybe you can contest the taxes after you purchase them, or even better. What we like to do is we'll split the purchase agreement. You know, we'll say 60% of the purchase price is going towards the land and the improvements there on and 40% of this purchase price is going to be split towards goodwill and buying the business, the non-tangible assets of this real estate investment.
And that way, when the County Assessor, the tax assessor looks at the property and said, okay, well, you know, for this million dollar facility, Fernando paid $600,000 for the land and the improvements and the rest was to buy the business. So, this land and the improvements are now worth 600,000, and we're going to tax it as if that's the value. So, now you get to drop your property taxes substantially in some cases, another thing that we find a lot of savings in is insurance premiums. Usually when you're getting insurance for property insurance, for self storage, you don't want to go to your residential insurance broker that, you know, down the street, because they don't know self storage, like they know residential properties, self storage is a very low liability asset. And that's what insurance companies are worried about, is how much liability do I need to bake into my annual premium to this customer?
So, that in the chance that something happens across my entire book of clients, this is accounted for, so this is called actuarial science. So, somebody that knows storage realizes that a lot of the liability is taken off of our shoulders. The tenants have to carry their own renter's insurance. It there's no habitation. So, no one's on site, which automatically drops your insurance substantially because if no one's on site to potentially get hurt, then the chance of something happening is much lower. The insurance premium will be lower as well. And then again, you know, these are, this is concrete and steel. That's really, it, there's not much that can happen to a self storage facility aside from, you know, occasional hail or just some act of God, like a hurricane or a tornado. But again, you can buy additional coverage for these types of things.
Another area that we find a lot of efficiency is by putting in automations and software packages to help us run the facilities without as many man hours. So, say a facility before you buy it. It has two managers and a part-time manager. Let's say it's a little bit larger facility, a hundred thousand square feet, but you find that once you go in there, you can automate all the locks and all the doors. You can automate the sales process of getting somebody, a new unit, selling them a new unit to rent. They can get in and out of the property using a key pad instead of having to call a manager to open it up. And all of a sudden you realize, now you can go from two and a half people, you know, two full-time people and one part-time person down to one full-time person or even one part-time person, ideally and you know, the biggest expense in a self storage facility is going to be your labor, your man hours.
So, that's another thing that we always look at. When it comes to other parts of the due diligence in the market feasibility. You know, we're also looking at things like, is there a moratorium against parking your boat and your RV's on your property? You know, if that's the case, if the local municipality that you're buying in says, Hey, homeowners not allowed to park their RV's in their driveway overnight or on the street overnight, then that almost forces a demand for boat and RV's storage. So it might make sense to buy a property that has additional land that comes with it, or buy a property, put lease options on land, surrounding it, to then eventually buy that or transfer it to a new owner when you sell. So, that you can capitalize on the opportunity to fill that demand for people that are not allowed to park their large vehicles on or around their properties.
The next thing we do is we'll look at the condition of the property. If all of those things that I mentioned previously are good to go, then we'll start looking at the actual condition of the property. And depending on the size of the property, we may even hire a third-party consultant to do what's called a PCA or Property Condition Assessment. They're typically a civil engineer. They'll walk the property and then they'll tell us here's everything that needs to be done to the property. And they'll break it apart into a schedule, usually 10 year schedule. And they say, the second you buy the property, you have to fix all these holes. Like you have to repair the roof in a certain section. Anything that might be causing damage right now to possessions, but then they say, okay, now over the next 10 years, you need to a lot X amount percent or X amount of dollars per year to exchange or to changing doors or changing springs, to doing a new paint job or to redoing the asphalt in year three or year five.
So, it gets broken down so we can see what our true costs on this facility. Cause the cost is not what you're buying it for. It's what you're buying for. Plus all the capital expenditures that you're going to have to make to that facility, either keep it running or to get it to a state where it's allowed to be run. You know, if you're buying something that's really defunct. So, we'll go ahead. And in order that PCA for larger facilities on smaller facilities just because we all have knowledge as contractors, we have a contractor on our team. We can usually do that ourselves, but as soon as the purchase price goes over about a million bucks then we're hiring a third party consultant to do a PCA. They're pretty cheap depending on the size of the property. It's really good information to get.
I've gotten them as low as 2200, I've paid as much as 6,500 for a PCA, depending on the size of the property. Usually a lawn side that PCA we'll also make sure that we're covering our bases when it comes to environmental liability. Now, this is super important and I really want everybody to listen to this because environmental liability is a really nasty type of liability. So, to mitigate this, we'll always have an environmental assessment done by a, an environmental engineer. Usually these are called phase one, Environmental Assessments or ESS. The phase one, the environmental engineer, when they're doing their phase one, they're going to look at any potential hazardous material or anything that can be considered heavy pollution, that may affect not only the use of the land, but may even endanger people that are using the land or using the property.
So for example, somebody, a hundred years ago put up a chemical manufacturing facility and they produce really nasty stuff. Some heavy hydrocarbons, some really nasty pollution. And this was all before the EPA was formed. So, there was no standards on how to dispose of this stuff and they just put it into the ground. They just had a fire pit in the back. And anytime there was something that they couldn't use it, just go put it in the fire pit and light it on fire. And then they buried it. Well, then let's say 50 years ago, somebody bought that land and puts self storage on it. And then, you go and you buy you a non-sophisticated investor. You do not do an environmental assessment. You buy this property, not knowing of all these hazards that are all over the ground. Then all of a sudden 10 years in the, you into, you owning this property, your property manager develops some type of rare cancer.
And then they find out that that rare cancer developed because of these environmental toxins that were in the ground that you purchased, that you're not aware of, the property manager creates a lawsuit. And let's just say for the purpose of this example, they win that lawsuit. And there's a $10 million judgment against you. The way that environmental liability works is that it's non diluting and it carries through the chain of title. So, even though you are not the one that put those environmental pollutants in the ground, you are still on the hook for that $10 million because you didn't do your due diligence, but it's also a non diluting liability. So say for example, not only do you owe that $10 million, but the person that sold you the property, Oh, is that $10 million. And the person that sold him that property, was $10 million. So you gotta be very careful, when it comes to any type of environmental issues.
You're always gonna want to hire an engineer to do a phase one for any type of industrial or light industrial property, including self-storage. Cause you don't know what could have been on that land. I have actually have a good friend that this happened to him. He bought a property, he increased the value almost four times. But then, when he went to go sell, the sellers or the buyers did a phase one and it came back hot, as I would say. It came back with environmental contaminants. So not only was the bank not gonna allow their buyer to buy that property in its current condition, but it also stalled the timeline.
And now that environmental issue was discovered and now goes into a database. So it's not like, okay, I'll just get rid of this buyer and I'll go to another buyer. Now, every buyer that comes into the line to buy this property, once they pull the report, their initial phase one report, it will show up right there, right in one of the databases. And they'll say, Hey, this property is a hot property. There's nasty hydrocarbons on it. You have to clean this up. So the phase one, the engineer will look at databases. They'll look at site plans, they'll look at site maps and they'll see what the property is used for for the last hundred or so years. If something comes back hot, then they'll usually recommend to go to a phase two assessment. So, after walking the property and doing all their searches of the database, they find something that may be an issue.
They'll do a phase two, which usually requires taking samples. So, taking air samples, taking ground samples, taking water samples. And if that comes up hot, now you really got a problem because you have two options. One option is to just own the property for the rest of your life. And you're never gonna be able to either refinance it or sell it, which is not ideal. Or the second option is to clean it up and to do remediation. Typically remediation of hazardous materials is extremely expensive. You need special contractors to do that. That are licensed by the EPA to do these types of removals. You usually have to store and pay for ongoing storage of this hazardous material. You own it. So it's one of those things that I cannot stress enough if you're buying any type of property, any type of industrial light industrial commercial property, you must, must, must get an environmental assessment done on that property.
So, let's say that all comes back clean, so, okay. Okay. Let's go to the next step. So once we get to that point, then it really comes down to seeing what type of future opportunities can be had at this problem. So one of the things that we usually look at is, how can we monopolize this market? Once we have a foothold in that market, are there other facilities around us that are willing to sell? Maybe we could pay even a little bit more than what we traditionally pay, because now we have economies of scale. I can use the same manager to manage two facilities that are nearby or three facilities and four facilities. And once you get a portfolio large enough, now you can sell that portfolio as a, at a premium to what you would be able to sell the individual parts because you have big money out there chasing self storage, and they just want to write large checks cause to them doing the due diligence, it's all the same amount of time required, same amount of man hours.
They would rather stroke a $15 million check than, you know, five, $1 million checks or 10, $1 million checks. There's always a premium. It usually comes at maybe 1% discount to, or 1% premium to the cap rate. So, say you'd be able to sell these facilities typically at an 8% cap rate. Once you get over that $10 million mark, all of a sudden this portfolio is now being able to be sold that 7% cap rate or maybe six and a half percent cap rate. So those are some other things that we'll look at, when we're doing our feasibility and due diligence. Of course, we're going to need all the due diligence documents from the seller, that will allow our lender to lend on the property. So, there's going to be tax returns. These are going to be insurance statements, contracts, rent rolls verifying income, verifying expenses.
All these things are going to be standard, but so that's, without getting too far into it. Cause I've already done a video that's over an hour long on how to do self storage underwriting. Those are kind of the main things that we focus on when we're looking at purchasing a self storage facility. Is the market, you know, does the market still have demand? Are the competitors charging appropriately? Are we charging appropriately? Are the competitors full? Does the property produce solid income? Is there opportunities for us to increase that income and drop the expenses? Does the property carry any type of environmental liability or does it have any extremely deferred capital improvements that need to be made and then last but not least is the property itself, is it gonna qualify for a loan or the type of loan that we're trying to get for that property? So, let me know if you guys have any questions about that or any other topics you want me to cover, feel free to drop them in the comments below. Feel free to reach out directly through our social media or through our website. You can always go to the storagestud.com It's easy way to get in contact with me or on any social media platform. If you just type in, you know, The Storage Stud, you should be able to find me. So thanks again, guys. Talk to you soon.
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