How to Underwrite a Self Storage Property & What to Look For in The OM

Commercial Real Estate Investing From A-Z

How to underwrite a self storage property? How to look at an OM? Kathryn East has several years experience in the self storage space, she is the Founder of Sopapta Consulting, Management & Auditing, and shares her knowledge.

You can read this entire interview here: bit.ly/3JMFgay

We are going to underwrite a deal together, and see where Kathryn's mind is at when she gets an OM, I will let you take it from here.

Deals are made. In order to create the cap rates and the profit analysis that’s needed for specific clients, I have to underwrite these very carefully. I love OM's, they generally have 95% of the information that I need. The first thing I’m doing is looking at pictures, it sounds very elementary, but I need to see the property from their eyes. Those pictures are designed to make the property look better than what it is, so there could be some filtering applied. The purpose of that is to see what the general condition of the property is, because I have to know how much Capex I’m going to have to put into this property, and that’s directly going to affect my evaluation.

The next step is to enter the numbers exactly as they’re stated on the OM, into an evaluator. I need to see, from the numbers that they provide, how accurate is it to get that price point that they’re looking for. Most of the time, brokers are cap rate driven, so if I’m looking at a property that says that they want 1.2 million at a 6.5 cap rate, I need to determine whether or not that’s realistic, based on the information they’ve provided in their current analysis column. We all know that as interest rates go up, cap rates go up, things fluctuate, it’s a cycle.

When I’m looking at the numbers, I’m trying to determine whether or not it’s a fair asking price. A lot of times we’ll find some small issues on the underwriting on the offering memorandum and that leads to questions for the broker, so we're able not only to decipher whether or not they’re necessarily a self storage broker, and believe me, I love self storage brokers, because their underwriting is quite impeccable, but they often underwrite price for pro forma.

What do you think when you see a broker put a projected cap rate for year one or two and not the existing cap rate?

First of all, don’t buy off of a cap rate, but you can determine what the value is on your exit strategies on cap rates. If I buy this property at a six and a half cap, I’m estimating to sell it at a 6.5 cap in my exit strategies, which are three to five years, generally. We have seen a lot of inventory come across that has been selling in a year or 18 months, that was a year ago, that’s the past. Now we’re back onto our holding pattern. It’s always a cycle, so we are back to the three to five years. When they say “I want $2.4 million based on the exit strategy I’m projecting in five years of an eight cap", I’m asking “Where did you come up with that information, because our current column is more like 2.5?”.

A lot of brokers are dictated the pricing by the seller themselves, so they have to ask their clients how much are you wanting for this property? They throw out $2.4 million, the broker runs the analysis on the current numbers and says “That’s at a four cap, interest rates are at a six and a half, you’re probably not going to get that”. Then the client says “Well, you are going to get it for me anyway”. Which is why underwriting as-is is so important, that is what will give you your actual asking price.

Kathyrn East

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