Joe Downs breaks down self-storage P&L statements using a three-bucket framework: income, expenses, and NOI. Focus on net rental income, use a 35-40% expense ratio as your benchmark, and watch the big three costs: property taxes, insurance, and management fees. Always adjust for owner lifestyle expenses and verify the seller's numbers.
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Hey folks, welcome to day 50 of the Storage 100 series. That should mean we're about halfway through, but we are not because it's 106 days. It's the way the belly buttons. Uh, I'm Joe Downs with the Storage Moguls Mastermind, and as promised, today we are diving into a crucial skill: reading a self-storage P&L. Um, folks, understanding these financial statements can help you spot opportunities and red flags. And today I'm going to break down how to analyze them in under 10 minutes. And this session should give you the tools to confidently assess a facility's performance. So let's jump into the core components of the self-storage P&L. To make the P&L analysis easy, let's use a simple 3-bucket framework. This framework simplifies the complex financial data into understandable parts, and hopefully you'll realize When we're done, it's not that complex. I'm only saying complex because for those of you who don't know how to read a P&L and understand it, it seems complex, but it won't be. Trust me. You ready? First, we have income, which is all the money coming in, then expenses representing all the money going out, and then finally net operating income, or as we call it, NOI, which is what's left after the expenses. This structure helps you quickly see the financial health of a property. It's a straightforward way to evaluate performance and potential. All right. So let's first talk about income and why the real numbers matter. Many P&Ls show gross potential rent, which is often a fantasy number. What you really need to focus on is the net rental income. This is the number that reflects economic occupancy or what's actually collected. It tells you how much money is truly flowing into the business. Always look for collections, not just potential, to gauge the actual performance. The distinction between the two is crucial for an accurate financial assessment. All right. Let's move to the second bucket and let's check the expenses and the expense ratio. So if we don't know the actual expenses and frankly, even if we do, you can't really rely on them. Some of them we can rely on, but some of them may just not be applicable to how we're going to operate the property. So We want to use a quick benchmark rule of 35 to 40%. This means that total expenses should ideally be between 35 and 40% of total income. If the ratio is too low, let's say 30%, you might be missing some expenses. If it's too high, like over 50%, it could signal management issues or inefficiencies or wait for it, opportunities. This ratio gives you a fast way to flag potential problems or again, Hidden costs. It's a powerful indicator of operational efficiency and helps us move towards the calculation of our NOI. So with regard to expenses, let's zoom in on the big 3 first. Big 3 expenses, which often drive most of the expense ratio, and the first of which is going to be property taxes. Can't do anything about them, but we always want to ask if they're likely to increase after sale or will increase after sale. Second would be insurance. We want to verify with an insurer what the current rates are and understand the potential changes. So when you get a quote from insurance company, you can get a quote from the one that seller is currently using or new one. And then third is management fees. Compare the costs for offsite versus onsite management. These three categories categories can significantly impact your bottom line. So understanding them helps you project. future profitability more accurately. All right. Let's talk about those little sneaky lifestyle expenses that can deflate a seller's reported NOI. And that's bad for them. Good for us. These are personal costs that often get mixed into the business financials. So you look for things like personal auto or truck expenses, travel, meals. Keep an eye out for vague consulting fees that might be the owner paying themselves. When you find these, you get to add them back into the NOI, remove them as expenses, if you will. And they instantly increase the property's value for you, not the seller. This adjustment reveals the true profitability of the business, not the owner's personal spending. And understanding these helps you get a clearer picture of actual operational costs. So after lifestyle expenses, the next area to scrutinize is repairs and maintenance. This line item can be a real trap if you don't look closely. Sometimes the numbers are suspiciously low. This could signal deferred maintenance, maybe that you'll have to pay for later. Other times they're too high, and this might mean the seller is fixing major issues that probably should be capitalized if they have nothing to do with the operation of the facility on a month-to-month basis. What you want to see is consistency of expenses over the last 12 to 24 months. Those are going to be your true operational costs. Any big spikes or dips are a red flag that you need to investigate further. Again, could be good, could be bad. This protects you from inheriting costly immediate repairs on the one hand, but it might also signal that facilities operating stronger than the P&L reflects, on the other hand. So how do you bring all these adjustments together to find the real number? Well, we start with the seller's reported NOI and then we get to work. First, we adjust taxes up. Your purchase price will likely trigger a reassessment, so the taxes will go up. Second, we adjust insurance up. Maybe your new policy probably carries— probably more expensive than the seller's old one. Not necessarily, but it might be. And then we add back in all those personal lifestyle expenses we found. And this process will give us the true NOI. This is the number you should be basing your offer on, and it's going to reflect the property's actual earning power, which is what you're buying. So caveat there is if the seller has deflated their expenses and they're not aware of it or inflated their expenses, deflated their NOI, and they're not aware of it, we don't base our offer on that. We base it on the NOI they gave us. All right. Let's wrap this up with the most important mindset. to have during this process. After all this analysis, my closing thought for you is very simple: trust but verify. A profit and loss statement tells a story, but it's not always the whole story. So trust but verify. It's your job to read between the lines and find out what's really going on. The sellers will always represent— if they know what they're doing, they will always present and represent their property in the best possible light. If not, sometimes they do themselves a disservice and present to you, the buyer, an even better opportunity if you know how to spot it. Digging into the details of every expense is how you're going to protect yourself from, uh, from your— protect your investment and yourself, and also, or, and, and/or also find opportunities. This will ensure you're making decisions based on facts and not just a good story. Always question, always investigate, always confirm for yourself. All right, before we go, please like, subscribe, and share this content. It helps us reach more people who are serious about self-storage investing, and when you're raising capital, your network will know you're in the game. Next up is day 51, and we will finally explain cap rates. Uh, all right, please like this video if you've ever found misleading expense on a P&L. We all have, right? And share it with someone who's analyzing their first self-storage deal, if they are, and tell them to subscribe because proper due diligence is always cheaper than a bad deal, and they will thank you later.
