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For self-storage operators, understanding NOI as a key financial metric is essential. Guy Varble, a seasoned self-storage operator and fund manager of Momentum Wealth Fund LLC with Avestor, highlights the critical importance of Net Operating Income (NOI).
[Guy is a seasoned real estate investor known for managing and transacting over 10,000 units worth more than $220 million. His portfolio spans self-storage, single-family and multifamily rentals, residential flips, and commercial properties. He specializes in ground-up self-storage developments, repurposing big-box stores into storage facilities, and optimizing existing properties.]
Mastering this metric, along with recognizing potential pitfalls can be the difference between a successful investment and a costly mistake.
In this blog, we will explore this key metric and help you avoid common pitfalls.
Understanding Net Operating Income (NOI)
At the heart of self-storage investment analysis lies the concept of Net Operating Income (NOI). NOI represents the revenue generated from the property minus operating expenses, excluding interest, taxes, depreciation, and amortization.
Essentially, it’s the cash flow before financing and accounting complexities are factored in.
NOI is often likened to Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) in broader financial analysis. It gives you & your investors a clear picture of the property’s operational profitability.
For self-storage operators, NOI is the cornerstone metric used to evaluate the viability of an investment.
Why NOI Matters?
NOI plays a pivotal role in determining the value of a self-storage facility. Lenders and appraisers often rely on this figure to assess the property’s worth, which in turn influences financing terms.
Investors may also use NOI to project future cash flows and potential returns, making it a key factor in both the acquisition and eventual sale of a property. In some cases, investors may pay 100% cash for a facility, focusing solely on the returns generated from the NOI over a few years.
The bottom line is that NOI offers a straightforward metric to gauge the health and potential profitability of a self-storage investment.
Revenue and Expense Management
NOI is influenced by two primary components: revenue and expenses. Understanding how these factors interplay is crucial for effective due diligence.
Revenue
Revenue in self-storage operations typically comes from rental income, but can also include ancillary services such as sales of packing supplies, insurance, and other tenant services.
Ensuring that the facility maintains high occupancy rates and competitive rental rates is essential for maximizing revenue.
Operating Expenses
Operating expenses in the self-storage industry generally account for about 35% of revenue, although this can vary depending on the size and efficiency of the facility. Key operating expenses include property management, maintenance, utilities, and insurance.
For smaller facilities, the operating expense ratio might be higher due to the inability to spread fixed costs over a larger revenue base.
Common Pitfalls in Due Diligence
One of the red flags in self-storage is an abnormal operating expense ratio. According to Guy, if the expenses are disproportionately high—say, around 50% of revenue—it’s a clear indication that something is amiss. This could signal inefficiencies or hidden costs that need to be addressed before proceeding with the investment.
Conversely, if operating expenses are too low, such as 18%, this could be equally concerning. It might suggest that the current owner has not accounted for all necessary expenses, such as management labor or maintenance costs.
As a self-storage operator, it’s crucial to understand these figures to reflect the true cost of operations, particularly if the current operator has been heavily involved in the day-to-day management, as this expense will need to be outsourced once the property changes hands.
Ready to Step Into the World of Self-Storage?
If you’re considering building or scaling your self-storage business, raising capital is a critical component.
At Avestor, we offer comprehensive support to guide you through every step of the capital raising process, from fund set-up to managing investors and their capital. Our experienced team can help you structure your fund, navigate complex regulations, and ensure you’re positioned for long-term success in the self-storage industry.
Ready to get started? Reach out to us at https://www.avestorinc.com/demo to book a call and learn how we can assist you in building a profitable and sustainable self-storage fund.
