Day 42: Self Storage Red Flags That Should Make You Walk Away From Any Deal

All right, welcome to day 42 of the Storage 100. Of course, I am Joe Downs of the Storage Moguls Mastermind. And folks, it's not all sunshine and rainbows out there. So today, we're talking about the deals you should never touch, because searching for deals isn't always about finding the perfect deal. Sometimes it's about avoiding the catastrophic one. And we need to identify the red flags that scream walk away before you even spend money on phase 1. So we can focus on protecting the downside because that's where fortunes are lost. Today, we're going to look at 5 critical areas where deals go to die. And let's start with the one that can literally wash away your investment. The flood zone is where deals go to drown. You must understand the FEMA codes before you even look at a property. Zone A and Zone AE are high-risk areas where you will face mandatory flood insurance And potential damage claims. This one hits especially hard for me because we literally just had to kill a deal within 20 minutes or so left in the due diligence period when we learned at the very last minute that we were in, we were in a new FEMA-designated 100-year flood zone. Man, that sucked. We loved the deal, but we had to walk away. Nothing you can do but walk away. All right, Zone V is the coastal high hazard zone. That is an absolute no-go for storage. Water destroys inventory, and when that happens, tenants sue you and your, your reputation is ruined forever. We only want to invest in Zone X. That's the minimal risk area. If you see anything else, you walk away. This is a simple pass/fail test, folks. But water is not the only hazard we need to worry about. Sometimes the hazard is the people around the property. So let's talk about the crime map for a second. If your customers are scared to visit the facility at night, they will not rent from you. Crime is not just a social issue, it's a direct hit to your net operating income as well. High crime means constant repairs, broken gates, cut locks, and the expense of replacing stolen catalytic converters. Maybe safety is the number one amenity in self-storage. If you can't provide it, you can't charge premium rents. Check the local, local police reports and the crime index. If it's a 9 or a 10, you're buying a headache. But even if the location is safe, you still have to worry about the competition. The competition mode is where you're going to find out if you're fighting a battle you can't win. You might have a 20,000 square foot facility with a limited budget and a desperate need for cash flow, but you're competing against the REITs. They have 100,000 square feet, let's say, and they can afford dollar move-in specials and they have an infinite marketing budget. You can't win a price war against a publicly traded company. The rule is simple: if a REIT is building a new facility within 3 miles of your site, run. You'll be crushed by their scale and their capital. We need to find markets where we can dominate, not where we're just a small fish. And speaking of things you can crush, let's talk about the hidden hazards in the ground. The environmental hazard is the silent killer of deals. If you buy the dirt, you buy the problem. Those problems can cost you tens of thousands, Even millions to fix. Look at the history of the site. Was it a gas station with a leaky underground storage tank? Was it a dry cleaner where solvents seeped into the groundwater? Was it an industrial site with manufacturing waste? These are massive liabilities. You have to get a Phase 1 environmental site assessment. Costs about $2,000, maybe up to $3,000, $3,500, but it's worth it. It can save you millions in cleanup costs and legal fees. Never skip this step. If the Phase 1 comes back dirty, walk away immediately. Don't let your love of the deal waste any more time or money spent on it. This is another critical way to protect your downside. And one of the biggest traps in buying a property that is, is legal nonconforming. This means it was legal when built, but the zoning changed later. You think you're safe because it's grandfathered in, but here's the disaster scenario. If that building is destroyed by fire, hurricane, tornado, you're going to lose your grandfather status instantly. If you lose 50% of the structure, you must rebuild to the current code. And if the current code doesn't allow self-storage, you can't rebuild it. You just lost your entire investment. The only way to protect yourself is to get a zoning verification letter. This is a non-negotiable part of your due diligence. It's how you're going to protect from the downside here. And speaking of protecting the downside, let's talk about the physical structure itself. Staying focused on protecting the downside, the structure failure is a fast way to lose money. This isn't value-add, this is a money pit. You need to inspect the foundation for sinking slabs, large cracks, uneven doors even will tell you its story. If doors don't close right, you might have a foundation problem. That's a deal killer. Then look at the roof. Active leaks, rust holes, or sagging beams are massive red flags. Water destroys tenants' goods instantly, and that means lawsuits and bad reviews. Finally, check the walls. Bowing block walls or rusting metal panels are signs of structural stress and a safety hazard. These fixes are not cheap, and they're not a simple renovation. They could be massive capital expenses that will eat away your projected profit. You need to spot these issues before you buy the deal. If you miss them, you're relying on the seller to be honest. And that brings us to the next nightmare. While the structural issues we discussed are often hidden, the seller knows about them. And that's why you need to understand the cockroach theory of due diligence. If you see one cockroach, you know there are 100 more hiding behind the wall, maybe hundreds more. If you catch the seller in one visible lie, you have to assume there's 100 more lies. The visible lie might be something like, oh, that tenant pays cash, or, and the hidden lies could be in the fake leases, the broken systems, the hidden debt, or the structural issues we just talked about. But if you catch them in one lie, you probably need to walk away. Your gut is telling you something important. Don't try to negotiate a discount. Don't try to fix it. Just walk away and find a clean deal. That's how you protect your capital. Okay, so like I said, it's not all sunshine and rainbows out there, and I know this wasn't a happy-go-lucky money-making episode, but we want to keep you out of trouble in the Storage 100. I want to keep you from losing your money, and focusing on how to protect your capital and avoid the traps is important. All right, next up we are moving from defense to offense with Day 43, the Value Add Playbook. Uh, I don't blame you if you didn't like the content today. It's the downer part of the business, but it's important to like the this episode if you didn't like it. It's actually really important that more folks know about the red flags. So subscribe so you don't miss tomorrow or the live episode coming up a little less than a week. And share this with a friend who always ignores the red flags or is endlessly optimistic about things just working out. They will thank you later for walking away from a bad deal. They'll thank you later from doing the deep— from forcing them to do the deep due diligence. And most importantly, they will thank you later for protecting their downside.