1) I WILL JUST FIND A TROUBLED PROPERTY, CURE THE PROBLEMS, AND MAKE A KILLING.

TRUTH: The troubled project is out there, but they are likely looking for a needle in a haystack. They are very hard to find! To exacerbate the challenge, you have to make certain you can cure the problem. If it is a location or market problem, the best you can hope for is you buy it at a low enough basis to minimize the problem.

2) FINDING A PROPERTY TO BUY WILL BE EASY.

TRUTH: There are numerous properties for sale today. HOWEVER, the institutional buyers of Self Storage projects snap up the best of properties at good prices because they can pay cash and close quickly. What remains in the marketplace are typically projects that are overpriced or have a serious defect.

3) BUYING AN EXISTING Self Storage PROPERTY IS A GREAT INVESTMENT.

TRUTH: A well-located, stabilized property for sale today is purchased at a premium, perhaps at a cap rate less than seven percent. This creates an investment with very thin returns. True, the risk is fairly low, but there are numerous factors not within your control which can erode profits, such as rising interest rates or discounted revenues as a result of matching newly developed competitors in a market.

4) A TYPICAL ACQUISITION ONLY REQUIRES 15% EQUITY.

TRUTH: You can borrow up to 85% of the purchase price of a stabilized property. HOWEVER, there are numerous hidden costs in the acquisition. As a buyer, you may pay your real estate agent’s commission. Buying a Self Storage property is not like residential real estate wherein the listing broker is almost always willing to split commission. As much as I detest dealing with listing brokers who will not pay us as buyers representation, they are a reality of the marketplace. Because willing and able buyers (the institutions) are able to quickly scoop up an available property, and the seller’s brokers have easy access to those buyers, one off investors are forced to pay their own brokers.

In addition to possible commissions, there are numerous due diligence and closing costs which drive up the cost of an acquisition. These costs can include:

• Books and Records Inspections
• Market Studies
• Environmental Assessments
• Surveys
• Legal Fees
  - Finance Costs
  - Appraisals
  - Discount or Origination Points
  - Lender Legal Fees

4) ALL SELLERS ARE HONEST

TRUTH: CAVEAT EMPTOR! The buyer should be aware of changing market conditions that can jeopardize the returns associated with a great Self Storage investment. Not all of these conditions are required to be disclosed by the seller. Examples include new competitors, road widening, deferred maintenance, changes in retail sales tax structures.

5) THE BROKERS PACKAGE STATES THE CAP RATE IS 8.1%, SO THAT ONE MUST BE THE CAP RATE.

TRUTH: Not only no, but hell no! The typical listing package is prepared by the seller’s agent or broker, whom has a fiduciary responsibility to the seller. Therefore, it is their job to paint the “rosiest” picture. When the buyer adds to the purchase price the closing and due diligence costs, they may only have considered the tip of the iceberg. Hidden below the surface may be:

• Deferred maintenance
• Huge increase in property taxes
• Huge increase in insurance costs
• Understated management fees
• Underpaid wages and salaries

When closing costs coupled with decreased net operating income are considered, an 8.1% cap rate can easily drop to less than 6%.