Day 19: How to Read a Self Storage Feasibility Study Without Being an Expert

Alrighty, welcome back to day 19 of the Storage 100. I am, of course, Joe Downs with the Storage Mastermind, and we are talking about the gatekeeper of every great deal today. Gatekeeper and/or cheerleader, the feasibility study. This document is either your launchpad to millions or a very expensive piece of toilet paper. Now, it's never that. But it is the key to learning how to read it. There is a key, I should say, to learning how to read it without needing a PhD in finance. You don't have to be an expert. You just have to know what the expert is supposed to be looking for. So don't get overwhelmed by the sheer volume of data and miss the 3 or 4 key things that actually matter. All right. But first, what is a feasibility study? I promised I'd tell you. Well, its primary purpose is to answer the question, should I do this deal or not? In plain English, feasibility is a third-party analysis that answers one question: will this self-storage project work in this specific location at this specific size at these projected rental rates? It's essentially a market detective report that examines number one, supply— how many competing facilities exist within a 3 to 5 mile radius, or as we now know, 10 to 15 minute drive time? What's their occupancy? Are new projects in the pipeline? Number two, demand. Who lives and works nearby? What's population density? Household income? Housing types? You know, apartments. More apartments, obviously, the better. Business density and growth trends. Number three is pricing power. What are the competitors charging? What can you realistically charge at your facility? And then four, absorption timeline. How long until you hit stabilization, which is typically eighty-five to 90% occupancy. And that's where your dreams meet the reality of the situation. So why are they non-negotiable? Why do you need these things? Well, number one, lenders, they're going to require them. You got a lender, they're going to want a feasibility study just like they want an appraisal. No, certainly in a construction loan. So no feasibility study, no construction loan, period. You might find banks that'll allow you to bypass a feasibility study if they're comfortable with it. And there are full feasibility studies and what we call desktop. So a lot of times the bank will just require desktop, which is just a light review, almost like a BPO, if you know what that is, a broker's price opinion. But the banks aren't really in the trust me, but trust me business, I should say. Why else would you want a feasibility study? 'Cause they kill bad deals early. So what's interesting is usually if whoever's performing the feasibility kills the deal, they give you a negative review or a no, they're probably right. It's the other way that you need to be careful with. But, you know, a $3,000 to $5,000 study, even if they kill it, is fairly inexpensive insurance compared to what could be a $2 million mistake. So it might be the best deal. The best deal you do might be might be the deal you don't do. That's a saying we often have in commercial real estate. So they're very important. They also validate or destroy your assumptions. So you think the market can absorb 50,000 square feet, for instance, but the study says no way, Jose, 25,000. That's not bad news. I mean, it may be bad news for your ego, but that's a gift. That helps you understand, it helps you reset your expectations. So, but look, even then, Don't just run with the study you paid for as gospel. Challenge everything. Challenge all these assumptions yourself. Trusting but verifying what you get back in the study will make you that much better of a self-storage investor that much faster. I'm going to cut through all that noise for you right now and show you exactly where to focus your energy on these things, because this is about protecting your capital, making sure you're only chasing deals that really have a chance of success. So let's dive in and let's talk about the first things you need to see to keep you reading. All right, so of course we want to know about the market first. So what are the signs of a killer market? Why and what do they matter? Right? Well, they matter because these are the green lights that tell you the market is hungry and ready to pay you. So one of the first things we look for in there is what is, what is the market? What is the occupancy? And I mean, like, we want high occupancy, hopefully across the board for the market. So if every competitor is full, Means the demand is already proven and customers are literally waiting for you to open their doors. And again, we went 90% plus across the board. Second, you got to see rental growth rate, ideally 5% year over year. It depends on what we're trying to do in this market. But if we're building, certainly this will prove that the market's healthy. Customers are willing to absorb the price increases. Obviously, that's how they're going to crush that pro forma. And then finally, look for any real barriers like tough zoning or scarce land, barriers to entry, like any moratoriums on building, anything like that. These are the obstacles that actually protect your investment from the next guy who wants to come and build right across the street. So if you see these things, these 3 things, then you know you have a pretty nice runway before the market gets saturated. But just because the market looks good, Doesn't mean the numbers are right. So we need to challenge those assumptions. And we know what a good market looks like, but you can't just trust the consultant's numbers who prepared the feasibility study just because they got their logo on it, right? And that's what they get paid to do. They get paid to write reports, but that doesn't mean they're perfect. So you've got to be the skeptic who protects your investment. First place they could get it wrong is lease-up velocity, for instance. They might be modeling, if you're building a new facility, they might be modeling filling 20 to 30 new units a month, or sorry, filling 20 to 30 units a month. In reality, you might be in a market where filling 10 to 15 would be a huge win. So if their entire financial model collapses because you didn't fill, you know, 20 to 30, you only hit 15 a month, then that deal I would think would be too risky. Second, you need to scrutinize the comparables section. So Did they compare your, your Class A facility you're building to a rundown Class C facility nearby just to inflate the rates? You need to verify that they included the brand new REIT, for instance, coming in 3 miles away. That's going to be your, you know, your new competition. And then finally, you know, challenge the rental rate accuracy. Web rates change daily and the date they use might be 60 days old. So you need to call the competitors yourself and just verify that the street rates they're using, not only stated but in their pro forma models, are actually accurate and current. So that's really going to be— could be, I should say, the difference between a great deal and a disaster. So, all right, broke down the feasibility study into 3 critical components. Let's put this in action. So you need to start— or sorry, you need to stop being intimidated by these huge reports, right? And start treating them like a checklist because that's what they are for you. So, and they're often, they are, I mean, it's the best way to say it. They're often on checklists because there might be things, especially if you're new, that you didn't even realize that that's a thing, right? So first action step is to get a sample study from broker. They've got dozens of them just sitting around. Ask a broker for, you know, facility that's already closed. Then ignore everything except the executive summary. It's usually the first 3 to 5 pages. That summary about that deal is going to give you the 3 key metrics you need to focus on, right? Supply-demand ratio, Current rental rates, and for a new build, projected lease-up velocity. If those numbers don't look right, then you don't need to read the other 95 pages. But that, I mean, if you understand how this works, that's how you're going to become a deal flow machine. So tomorrow we're going to dive into one of the single most important indicators for long-term growth, the population growth indicator. But before you go, 3 favors. One is for you. If you're done trusting pro forma numbers blindly because of what you just heard tonight, you're ready to become a smarter investor, please hit the like button. That simple click, believe it or not, I was just reading this the other day, tells me that the content— it tells, and also tells YouTube that the content is valuable. And that I, I should continue to keep delivering it. Next, subscribe. That's for you again, so you don't miss out on any of the daily drops of the new recorded sessions like this one, the little minis I call them. And also, more importantly, when I do a session or section recap with the lives. And you don't want to miss tomorrow, day 20, because we're going to talk about that population growth. And then lastly, share this video with a friend who thinks Excel spreadsheets are magical. When they realize they can cut through all that noise, focus only on the numbers that matter, they will thank you later.