Sold an 88-unit facility at a loss after 26 months, the move-in assumption was wrong from day one

1kevin_lombardPG1BPRO5

Closed August of the year before last, sold this past spring, out about 118k including closing costs on both ends. First facility I ever bought and I'd read everything twice, which turned out to be the wrong preparation.

The deal: 88 units, 9,700 rentable square feet, single drive-up building plus a small climate-controlled section, in an exurban town of about 11,000 roughly 40 minutes from a mid-size metro. Paid 640k. Physical occupancy at closing was 88 percent, and I anchored on that number harder than I should have.

Where it went wrong, in order:

Move-in volume. My underwriting assumed 8 move-ins a month based on the seller's trailing twelve, which showed 7.9. What I didn't do was look at what was driving those move-ins. When I pulled the reasons out of the software later, over half of the prior year's move-ins were relocation, people buying or selling a house in the area. Existing home sales in that county fell hard over the following 18 months. My actual move-in average across 26 months was 4.5. I never once hit 8.

Economic versus physical occupancy. Physical stayed decent, in the low 80s, because I chased it. I chased it with a first month free promotion and then a first two months at half rate. Those tenants churned at roughly double the rate of my organic ones. Economic occupancy, meaning collected revenue against gross potential at in-place contract rents, sat at 68 to 72 percent the whole hold. I was buying occupancy with revenue and calling it stability.

Expenses. Insurance renewed 41 percent higher in year two. Property taxes got reassessed following the sale, which in my state the assessor does pick up on transfer, and that added about 6,800 a year I hadn't budgeted. Between those two lines I lost around 14k of NOI to things I had no operational control over.

The exit. Buyers underwrote off my in-place NOI, which was roughly 47k against the 58k I'd projected. Sold for 585k. Broker fee, some deferred roof work the buyer got credited for, and I was down 118k against my basis plus my capital contributions.

What I'd do differently, plainly:

One, I'd underwrite move-in volume against local housing turnover, not against the seller's trailing twelve. Pull county deed transfer counts for the last five years and see whether the facility's demand rides on them.

Two, I'd verify economic occupancy from bank deposits over 24 months rather than a management software report, and I'd insist on seeing the discount and concession detail line by line.

Three, I'd assume a tax reassessment and get an insurance quote in my own name before removing contingencies, not after.

I don't think self-storage is a bad asset. I think I bought a relocation-dependent facility right as relocation stopped.

5 replies

3carlos_nunezActive

The concession spiral is the part I've lived. Free month promotions on a small facility are poison because your denominator is tiny. On 88 units, 12 move-ins a quarter at a free month is basically a whole month of one unit's annual rent gone, times twelve, and then half of them leave by month five anyway so you never recover the acquisition cost.

I'd argue that's your actual loss, more than the housing market. You had physical occupancy in the low 80s the whole time. A facility at 82 percent physical with clean economics should have carried closer to your projection. You paid for occupancy you didn't need.

What was your average length of stay on the promo tenants versus the ones who came in at rate?

1devon_pierce Get yoursPRO5

Disagree with @quarry on the cause. Concessions were a symptom.

@juniper, what happened to supply within about four miles during your hold? A town of 11,000 forty minutes from a metro is exactly where the 2021 to 2023 development wave dropped buildings, because land was cheap and everybody was underwriting the same migration story. If two facilities opened near you, your move-ins didn't just fall with home sales, they got split. And a new building runs concessions harder than you can because they have lease-up capital behind them and you don't.

I'm building a list right now and supply within a radius is the first filter I apply, before I look at a single financial.

2laurenkim53Passive

8 move-ins a month on 88 units is a 9 percent monthly turnover rate. That's the number that would have stopped me. In small markets I look at, 3 to 5 a month on that size is normal and healthy, and 8 means either the prior owner was churning people or something temporary was happening in that town.

So your realized 4.5 might have been the true baseline all along and the seller's trailing twelve was the anomaly. Did you ever look at his move-in counts going back further than twelve months?

3priya_n21PO1C

I want income without a second job, so this stood out to me. Were you running this yourself? Because the promo decisions and the delinquency chasing sound like someone reacting month to month, which is what happens when the owner is also the manager and watches the occupancy number every morning.

Would third-party management have made different calls, or would they have run the same promotions?

1jessreyes12AU1APRO8

How do you actually verify economic occupancy from bank deposits? Do you get 24 months of statements from the seller and tie the monthly deposit totals back to the rent roll, or is there some cleaner way? And what do you do about the fact that deposits include late fees, insurance commission, and lock sales all mixed together?

@juniper I'd genuinely find a walkthrough of that one step more useful than anything else in the post.

Sold an 88-unit facility at a loss after 26 months, the move-in assumption was wrong from day one

5 replies