How to Underwrite Self-Storage Properties

In the fast-paced world of commercial real estate, self-storage properties have emerged as a resilient and profitable investment class. Underwriting these deals can be daunting, time-consuming, and prone to human error because the process of analyzing their financial and operational viability. Here’s a step-by-step guide to underwriting self-storage properties efficiently and effectively.

Step 1: Gather Key Documents

The first step in underwriting a self-storage property is gathering essential documents. These include:

• Offering Memorandums (OMs): A comprehensive overview of the property, including location, unit mix, and market positioning.
• T-12 Cashflow Statements: A trailing 12-month report of the property’s income and expenses.
• Rent Rolls: A detailed record of unit occupancy, rental rates, and lease terms.

Organize these documents to ensure all necessary data is readily available for analysis.

Step 2: Perform Financial Analysis

Once the data is gathered, perform a thorough financial analysis. Key metrics to calculate include:

• Net Operating Income (NOI): Calculate by subtracting operating expenses from total income. This metric is crucial for assessing a property’s profitability.
• Cap Rates: Estimate the property’s value based on NOI and prevailing market conditions.
• Debt Coverage Ratio (DCR): Ensure the property’s income can cover debt obligations.
• Occupancy Trends: Analyze current and historical occupancy rates to project future performance.

Step 3: Conduct Market Benchmarking

Evaluate the self-storage property against market benchmarks. This involves comparing:

• Regional and national market trends.
• Comparable property performance metrics.
• Local rental rates for self-storage units.

Benchmarking ensures that underwriting decisions are aligned with market realities and competitive conditions.

Step 4: Model Financial Scenarios

Testing multiple financial scenarios helps you prepare for different outcomes. Consider modeling:

• Revenue Growth Projections: Simulate rent increases or additional revenue streams, such as retail sales or admin fees.
• Expense Adjustments: Evaluate the impact of cost-saving initiatives.
• Debt Structuring: Assess how different loan terms affect overall deal viability.
• Sensitivity Analysis: Identify risks by evaluating how changes in key variables, like occupancy rates or interest rates, influence returns.

Scenario modeling enhances your ability to assess risks and identify opportunities.

Step 5: Draft a Letter of Intent (LOI)

Once the analysis is complete, draft a professional Letter of Intent (LOI). This document summarizes your intent to purchase the property and outlines the key terms of the deal. A well-prepared LOI can set the stage for successful negotiations.

Why a Systematic Approach Matters

Self-storage underwriting can be complex, but a systematic approach ensures thorough and accurate results. By focusing on key metrics, market insights, and scenario planning, you can:

• Save time by organizing and streamlining the process.
• Reduce errors by relying on structured analysis.
• Make informed, data-driven investment decisions.

Underwriting self-storage properties requires diligence, precision, and a clear understanding of market dynamics. By following this step-by-step guide, you can navigate the complexities of self-storage investments with confidence and efficiency. Whether you’re analyzing a single property or managing a portfolio, these best practices will help you make informed decisions and maximize your investment potential.

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