Has the lack of development capital left you wondering how to get into commercial real estate?
One strategy is to invest in small, Class C Self Storage facilities. Many can be bought for less than the cost of a single-family house.
Class C Self Storage facilities are generally older properties in need of repair or updating. They’re often single-level sites that might be unfenced, and they typically lack security features and amenities commonly found in Class B or Class A Properties.
And they may suffer from having poor access and limited visibility, so rental rates are lower than Class A or Class B Properties.
This may not sound so appealing to the masses, but many savvy investors are turning these “Cinderella” facilities into the belle of the ball. Some investors and small companies have made a small fortune focusing on investing in Class C Facilities and improving them to solid Class B contenders. It’s not as tough as you may think.
Though the leap from Class B property to Class A property is difficult, you’ll find that the jump from a small Class C property to a Class B property is quite simple and needs very little work or capital.
How do we find these diamonds in the rough?
Uncovering these gems is no more difficult than finding a good single-family fixer upper. Sometimes, it’s even easier.
Some Self Storage facilities are listed with commercial real estate brokers, business brokers, or on commercial and self storage websites. You can get a comprehensive listing of all facilities in a given market by purchasing directly from list brokers who have the names and addresses of all the facilities in a geographic area.
Create a relationship with the brokers to help find properties that meet your criteria while simultaneously contacting the owners directly with a mailing campaign–or just by cold calling the facilities (in person or by phone) after “Googling” the facilities in your target market.
Where do I find the funds to purchase small Class C properties?
Contrary to popular belief, banks are still making loans on Self Storage facilities. Historically, Self Storage has the lowest loan default rate of all commercial real estate, compared to apartments, office buildings, and retail strip centers. And banks are taking notice, especially local community banks, credit unions, and savings & loans.
Banks are in the business of making loans, and thanks to the strong performance in the Self Storage sector, investors are being welcomed with open arms. Banks have increasingly moved away from making “speculative” loans on development projects in favor of making loans on income-producing assets with an historical track record. With a solid business plan and thorough due diligence to back it up, you may be pleasantly surprised how easy it is to acquire local funding for this asset class.
How can I upgrade a small Class C facility to a Class B?
Start with curb appeal. What are the colors compared to the newer facilities in the area? Are all of the buildings weathered? Have the roof, walls, and doors all faded to “gray” or “tan”? A color change by a painting contractor who specializes in steel buildings and doors will do wonders.
The addition of a new sign along with color-coded flags, banners, and “bandit” signs will draw attention to your paint job and raise awareness of the changes you have made.
The smart investor will immediately assess the highest and best use of any vacant land at the site or adjacent land that can be purchased. Once you’ve improved the look of the facility and made some management improvements, you’ll be rewarded with higher occupancy and the possibility of building additional units at the site.
Don’t forget to look at the existing boat/RV lot. The return on constructing additional buildings on that land generally outweighs the ROI of leasing out parking spaces. If you’re out of room, ask the neighbors if there’s an opportunity to purchase additional land/buildings for expansion. This is the best way to increase the value of your facility while simultaneously “scratching your development itch.”
The laws for success in the Self Storage industry are always changing, and buying these small Class C facilities has quickly become a viable addition to an investing strategy that can be very profitable!
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