By Michael Rogers
A few months ago, my company closed on a self-storage property in Cleveland, Tenn., our third storage acquisition in five years. All three properties were underperforming due to lack of proper management. The opportunity it presented for me was I was able to purchase these facilities at a discounted price, remediate them and have a solid investment.
So how did I find this fixer-upper? A yellow letter. First, I prepared a list of all the self-storage facilities in my area. Then I looked up the owners’ addresses via property-tax records. I took a yellow, lined piece of paper and wrote, “I’m interested in buying your storage facility. I own two other facilities in town. If you would like to sell or just want to network with another facility owner, please give me a call.” I received one call and was able to work out a deal. Due to a few issues with the access road to the facility, it took five months to close, but I got it done.
Property Overview
The Cleveland facility includes 152 units with potential gross rent of $8,000 per month. Since I own two other facilities in the same town, I was comfortable with the rental rates used in my financial projections. If you don’t own a facility in the area in which you’re buying, I recommend doing research by talking to other storage owners in that market to determine comparable rent rates and occupancy levels.
The additional units acquired in this purchase helped me spread the fixed cost of an office manager over all three properties. My company has a single office from which to rent all of our storage units and other rental properties. This new facility wouldn’t produce a cash flow if I’d had to hire a dedicated employee to manage it.
The good news was the core of the buildings was strong. The units were metal framing, and the property had a functioning gate operator, solid fencing and a paved driveway.
But there were challenges, too. On the day of closing, there were locks on about 90 of the 152 units. Of these, about 30 hadn’t received rent in anywhere from six months to two years. About 20 had no name or contact on file. Of the remaining 62 units, roughly 20 were full of trash to be cleaned out. I also had to repair about 30 doors. Some were total replacements while others simply needed new springs.
The short story is it was a lot of work just to get in contact with tenants and empty the abandoned units so they could be rented. The process took several months. Overall, it wasn’t a pretty picture.
So why in the world would anyone buy a property like this when you can purchase one that’s performing and offers far fewer headaches? The answer is simple: lower cost to acquire a higher monthly cash flow. If I were to go out and buy a similar property that was 95 percent occupied with few delinquent tenants, I’d have to pay nearly double. In the case of an underperforming property, the upside on the deal is much better once the property is operating at full capacity.
Action Steps
Here are the steps I took to get this facility on its way to full glory:
1. Prior to closing, I set up my management software. The program allows customers to rent and pay online via credit card as well as receive automatic texts and e-mails alerting them about due dates.
2. The weekend after closing, I took a full unit inventory. This is a good move to document the status of the business. The process included determining which units had locks and which needed repairs. I’m really glad I did this, as there were several tenants whose unit lock was missing; they were upset to learn this after not visiting the property for many months. I was able to go back to the documentation and politely explain that on the day of the purchase, there was no lock on the unit and it wasn’t removed on my watch.
3. I ordered and installed new facility signage.
4. I renumbered all of the units to match my number system.
5. I sent a letter to each customer. For tenants who were more than six months past-due, I sent the letter via Certified Mail. For units without address or contact info, I posted the letter on the unit door notifying the renter that I had no documentation for the space and he was considered a “squatter” since he hadn’t paid rent in at least last 90 days. This also notified him of my plans to auction the unit contents at a future date.
My goal was to get these tenants to move out so the unit could be rented to a paying customer, or to get them set up as paying renters. I never wanted to auction someone’s contents. It’s not good for them, and it’s bad for me because there’s the potential for backlash, a baseless lawsuit to defend or just bad press. I do everything I can to avoid an auction. I’ve bent over backward by providing forgiveness of past-due rent just to get tenants to sign the monthly lease, pay the current month or move out.
6. I called every customer to inform him of the ownership change. I let each tenant know I needed him to sign a new lease and get current on his rent.
7. I began a marketing campaign that included claiming the business listings on Google Business, Bing Business, Yelp, etc., to improve search engine optimization. Almost everyone who needs self-storage will Google the topic to find a facility. No one goes to the printed Yellow Pages anymore. To keep my facility rented, I have to be on the first page of results when someone searches for self-storage in my town. Fortunately, my hard work has paid off in this area, and we almost always show up on page one under searches for “Cleveland Tennessee self-storage.”
Going Forward
Moving forward, the business will require the basic “blocking and tackling” to get the facility operating at full capacity, which I consider to be 85 percent. My other storage sites typically range from 80 percent to 97 percent occupancy, depending on the time of year. Spring and summer are stronger than fall and winter. Based on the last two acquisitions, it’ll probably take six to 12 months to rent up the new property.
Self-storage can be a wonderful investment, and it’s been very good to me. You just have to buy it at the right price. Purchasing an underperforming asset is a great way to acquire a property. Then you must put systems in place and have someone to manage it to ensure it operates at optimal performance.
Michael Rogers is the owner of Chandler Properties, which operates self-storage and residential properties in Cleveland, Tenn. For more information call 423.614.0069; visit www.chandler-property.com.
