Has the ongoing recession and lack of development capital left you wondering how to get into Commercial Real Estate?
Well one strategy that some investors are beginning to consider is investing in Small, Class C Self Storage Facilities – many of which can be bought for less than the cost of a Single Family Home. Class C Self Storage Facilities are generally defined as older properties in need of repair or updating, often first generation, single-level sites that may be unfenced, and they typically lack in security features and amenities commonly found in Class B or Class A Properties. They may also possess a less desirable unit max and orientation with regard to door operation, upper levels, and lack of temperature control. They may also suffer from having poor access and limited visibility and subsequently, rental rates are lower than Class A or Class B Properties.
This may not sound so appealing to the masses, but don’t discount the potential for the savvy investor who is willing to put forth the effort in turning these Cinderella facilities into the belle of the ball. Some investors and small companies have made a small fortune focusing only on investing in Class C Facilities and improving them to a solid Class B contender. And it’s not as tough as you may think. Though the leap from a Class B property to a Class A property is difficult, you’ll find that the jump from a small Class C property to a Class B property is quite simple, and with a very small amount of work and capital investment.
Which leads us to the question of how to go about finding these diamonds in the rough? Uncovering these gems is no more difficult than finding a good single family fixer upper, and in most cases, it’s even easier. First, there are a number of these facilities listed with Commercial real estate brokers, business brokers, on commercial and self-storage websites. You can also get a comprehensive listing of all facilities in a given market by purchasing directly from the numerous list brokers who have the names and addresses of all the facilities in a geographic area. You may begin the process by creating a relationship with the brokers to assist in finding properties that meet your buying criteria while simultaneously contacting the owners directly with a mailing campaign, or just by cold calling the facilities in person or by phone after “Googling” all the facilities in your targeted market(s) for acquisition.
“Sounds appealing – but in today’s lending environment, where do I find capital and funding to purchase these Small Class C properties” you ask? Well contrary to popular belief, banks are still making loans on Self Storage Facilities. Historically, Self Storage has the lowest loan default rate of all commercial real estate when compared to apartments, office buildings, and retail strip centers. And banks are taking notice. Especially the Community Banks, Credit Unions, and Savings & Loans banks which are located in the communities where these facilities are located. Banks are in the business of making loans and due to the strong performance in the Self Storage sector, many investors are being welcomed with open arms when presenting a loan request for their Self Storage projects and at favorable rates and terms. Banks have increasingly moved away from making “speculative” loans on development projects in favor of making loans on income producing assets with a historical track record of measurable performance. And with a solid business plan and thorough due diligence to back it up, you may be pleasantly surprised how easy it is to acquire funding for this asset class from the local lenders where these facilities are found.
When thinking of ways to upgrade these Small Class C Facilities to a Class B facility, remember that the changes that you put in don’t necessarily have to be major. The First place to start is on Curb appeal. What are the colors compared to the newer facilities in the area? Are all of the buildings weathered to the point where the roof, walls, and doors have all faded to 1 shade of “gray” or “tan”? A color change by one of the many painting contractors specializing in Steel buildings and doors can do wonders for the appearance of your new acquisition. Similarly, the addition of a new sign, or replacement of the existing one along with color-coded flags, banners, and “bandit” signs will draw attention to your paint job and raise awareness of the changes you have made.
The next point to consider which has the most impact on forcing the appreciation and value of the facility has to do with the land. The smart investor will immediately assess the highest and best use of any vacant land at the site or any adjacent land that may be available for purchase. Hopefully, once you’ve improved the look of the facility and made some management improvements, you will be rewarded with higher occupancy and the possibility of constructing additional buildings/units at the site. Don’t forget to look at the existing boat/RV lot as the return on constructing additional buildings on that land generally outweighs the ROI of leasing out parking spaces. And if you’re out of room, contact the neighbors to assess whether there may be an opportunity to purchase additional land/buildings for expansion. This is probably the greatest way to increase the value of your facility while simultaneously “scratching your development itch”.
The laws for success in the self storage industry are always changing and buying These Small Class C Facilities has quickly become a very viable addition to a successful investing strategy – especially in this time where development has slowed to a crawl. The merits of this strategy have proven to be very profitable to many investors who have chosen this path rather than focusing solely on development. And being one of those investors myself, this author couldn’t agree more.