Hopefully all your research has paid off and you have found a property that you are interested in making an offer on. Now you need to know if it is a good deal or if it is something that you are even interested in making an offer on. If you are interested in a property, you should make an offer. You never know how motivated a seller is until you make an offer.
The first step in making an offer is to determine what the cap rate on the property is. Is this a cap rate that you are willing to work with? More importantly, is this a cap rate that is typical for the area? Remember that cap rates change from area to area. Call a commercial broker in that area and ask them what the cap rate is for that area to make sure that you are not overpaying for the property.
Determining the cap rate is easy. You simply take the net operating income and divide that by the purchase price. Determining the net operating income can be difficult based on what the sellers are willing to give you prior to an accepted offer. If a seller is willing to give you their net operating income, verify that none of the numbers are going to change when you take over the property. For example, are you going to put a different property manager in place? How will that income change? How many friends are currently renting storage at a discount? A lot of those friends will leave when the rents go up.
If the seller is unwilling to give you any detailed information on expenses prior to an accepted offer, then you can use 35% as the expenses. This means that you would keep 65% of the gross income and that is the net operating income. For example, if the property makes $100,000 a year, then $65,000 would be the net operating income. You would use $65,000 to divide by the purchase price to get the cap rate.
Another way to determine what a property is worth is to look and see what other self-storage properties in the area have sold for. This is not as helpful because the likelihood of finding a self-storage property that is identical is slim. But it will give you an idea of what they are selling for in that area. Costar Comps is a way to find out what properties in the area have recently sold for. http://www.costar.com/products/costar-comps. You can also work with a Real Estate broker to find out what values in an area are.
Once you know what the value of the property is then you need to determine what capital expenditures you are going to have to make on the property. If you are going to have to spend $50,000 to get the property into rentable condition, then you need to factor those expenses into your offer.
Check out our next few blogs on other things that you need to watch out for when making an offer. If you are new to self-storage there are many tricks and tips to keep yourself safe. Explore our website to find out more about how to learn to navigate the safest way to invest in self-storage.
