It is also paramount to understand the current financials. Everyone runs facilities differently and it’s important to see the performance of a storage facility in 12 to 24 months.
You also need to learn where to add values. One of the things that you can do is to cut spending.
To understand more about Facility value 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,
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So, when it comes to self storage, I think one of the most important thing is to understand, not only the value of the facility that you're purchasing today, but also where that value can be. Once you are done with your term of ownership, let's say you're doing a value add on a facility. How do we go from point a today to this increased value, you know, 18, 36 or 60 months down the line. One of the very first thing is, understanding the current financials and not necessarily taking those, you know, built-in stone, if you will, carbon stone. So, everyone will run facilities differently. So, I think it's important to look at the trailing, you know 12 or 24 month performance of a self storage facility, but then also see where you can add value. So for example, the very easiest things to do is just to cut spending.
So for us, when we go look at a facility, the first thing we look at is the property taxes. And if there's any way that we can either contest, the property taxes or structure the sale in a way where we assign a lower value to the property and the improvements in a higher value to the Goodwill, thus dropping our taxable basis for the County. So for example, let's say I'm buying a $1 million self storage facility. I'm not going to write a purchase agreement for $1 million. When I'm most likely going to do is I'm going to write a, purchase agreement for $700,000 for the property itself, the land, and any improvements on the land. And then I'll write a separate purchase agreement for 300,000 towards Goodwill, which is like an imaginary value that's assigned to the business itself. The Goodwill can not be counted towards property taxes.
So, now the tax assessor is going to see that we bought the property, the land and the improvements for 700,000 and we'll tax us accordingly to the mill rates on that portion of the purchase. Now, that will help us drop our purchase or our property taxes pretty substantially. I've heard of some buyers, especially some larger REIT's getting really aggressive with the strategy and almost splitting the purchase price 50, 50 between land and improvements versus Goodwill. So, that's one method that we use. Another method is, you know, insurance and labor. We can always get better insurance quotes, especially if we're getting insurance policies that are specific to self storage, because they carry much less risk than say traditional commercial property. So, if you don't have a good insurance broker or risk advisor, they may not understand that and might just quote you general commercial insurance and the premiums can be much higher.
Another thing is, labor. What we've noticed is, it swings both ways. Sometimes, sellers do all of the management work themselves and don't pay them anything. So, all of a sudden what you thought was a 10 cap deal, because the expenses don't account for any managers, all of a sudden you put $50,000 back into the expenses to pay for a manager. And now all of a sudden your 10 cap deal drops down to 7.2 or a 6.5. And all of a sudden it's no longer as appealing. Now, one of the things you can do on the flip side say that you have a property that is just overmanned, they're using two and a half people, we'll say two managers rotating plus a part-time person when the facility doesn't warrant it, or maybe a warranted it while the property was leasing up.
But, now that it's stabilized and now just kind of humming along, you don't need people just sitting behind a desk playing solitaire going on Facebook. So, one of the things that we look at doing is number one, how many man hours do we actually need at this facility? And then, how much of that can we automate? Can we use technology for? So for example, one of the things that we can do is, we can go to on one extreme, you know, we can have the two-and-a-half managers for a, call it 80,000 or a hundred thousand square foot facility, or on the way other extreme as we go completely unmanned. We use a system of kiosks that almost looked like ATM machines that allow people to rent properties or rent units, pay for insurance, get a lock box, sign their lease, everything right there at the site.
We also so always mix this with a online strategy as well, where someone can just go to the website and rent a unit. They can sign the lease on website, or send it to their phone. They can sign it with their finger. These are all ways that we can drop the total labor load. What we found recently is that almost 80% of our reservations are done over the phone. About 10 to 15% are done online, and about 5% are actually done in person in the store. So, it's only 5%. If you apply the 80, 20 principle to this, we shouldn't have any managers because 80% of our revenue is coming from a phone call. So, one of the things that we can do is, we can just hire a call center and that call center will take all the calls. And if there's anything that needs a physical person at the site, we can schedule that on a one-off basis, pay that person hourly, or as an independent contractor, as opposed to putting them on salary and having them sit in an office for eight hours a day, in the off chance that once a week, somebody comes in for five, 10 minutes.
It's just not worth that time. Another expense that, we usually look at dropping obviously is going to be our mortgage expense. If you have really good loan brokers, you're able to pay more for properties because usually the way that we look at buying properties as a spread against the, interest rate. So, if we can get an interest rate on a property for 4%, you know, I'm willing to buy three, 400 basis points above that at let's say a 7% or an 8% cap rate, as opposed to, if I'm paying 6% on my money, a seven or an eight caps not going to work, and I'm going to have to start buying it at a nine or a 10% cap rate, which is very difficult in the environment we're in currently. And then on the flip side, how do you increase revenue? Maybe, the property when you do a competition study, the property is 20% below market rents.
Maybe all the existing tenants haven't, have never had their rent increased in the 10 years that the owners own the property. So maybe they're due to be increased up to say, 90 or 95% of what the street rates are. You can add and ciliary profit centers, you know, such as boxes and moving supplies or locks or shredding services or mailing services, U P S, or FedEx, wine storage. You can rent out moving trucks. You can rent spaces for storage, for cars, boats, RV's, there's all these little ways that you can just keep edging the gross revenue up. That after 12, 18 months, all of a sudden you've doubled your income and you've had your expenses, and now you're going to sell or refinance this property for four times what you bought it for. So, those are ways that we look at understanding and increasing our facility's values, just from a, like a non cap ex, capital expenditure model.
Another way that you can increase revenue or the value of that facility is by getting pretty creative, say, maybe you don't want to expand the facility cause you don't want to pay the cost to build new buildings. But you know that if the year facility had additional land to expand onto, that it sell at a premium to the next buyer. So, one of the things that you could do is, put lease options on all of the adjacent land and either execute it yourself and purchase that land while you own the property or assign that lease option to the new buyer. And that will increase the value of your property.
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