Day 9: The 3 Numbers That Determine If a Self Storage Deal Is Worth Buying

All right. Welcome back to day 9 of the Storage 100 series. I'm Joe Downs with the Storage Mastermind. And today we're going to cut through the noise and focus on what really drives value in self-storage. And I'm talking about the 3 non-negotiable numbers that form the self-storage success formula. These aren't just vanity metrics. They are the core indicators of healthy, profitable asset. If you can master these 3 metrics, you can accurately value any deal and manage any facility for maximum return. So I'm going to break down each one and show you exactly how they work together to create wealth. So let's start by looking at what the— looking at, sorry, why we even need to focus on data in the first place. So let's talk about the metrics, why metrics matter more than your gut feel when you're evaluating a deal. The gut feel approach is what gets new investors into trouble and causes them to overpay. I'm someone that goes by gut feel a lot, and Jack, my head of acquisitions, always has to direct me back to the numbers. And then I direct them back to the gut feel. Anyway, you'll see us go back and forth at some point in this series. But they look at the facility and say, someone who uses a gut feel looks at the facility and says, it looks busy, or the location feels right. And they make a massive investment based on emotion. And that leads to overpaying sometimes for an underperforming and ultimately losing money, underperforming facility, I should say, and ultimately losing money because you didn't do the math. The data-driven approach is the only way to make confident decisions and generate predictable returns. Then you can apply your gut feel. All right. So start with the data first. You need to know the exact occupancy, the revenue per square foot, and the growth in the net operating income over the last couple of years. These numbers tell the true story of an asset, not what you wish the story was. And even, by the way, the current— what you currently see is not necessarily always telling the true story of that asset. So that's why the numbers don't lie. All right. All right. Let's dive into the first of our 3 core metrics. Occupancy rate. The occupancy rate is our first core metric, and it's the foundation of your revenue. Occupancy is simply the percentage of your total units that are currently rented out. It tells you how much demand exists for your product in that specific market. If your occupancy is below 85%, you might have a problem either with demand or with your management. The sweet spot— I shouldn't say you might have a problem, you do have a problem, and it's either with demand or your management. The sweet spot is 85 to 90%. That's a healthy facility with room to But here's the key. If you're consistently above 95%, you're probably leaving money on the table. High occupancy means you have pricing power and you need to be raising your rates aggressively. Occupancy is more important— I'm sorry, it's more— it is important, but it doesn't tell the whole story. Which brings us to the second metric, which is revenue per available square foot, or as we say, RevPath. And this is where we separate the amateurs from the pros. RevPath is the true measure of your facility's revenue. Okay. performance because it accounts for both occupancy and pricing. You calculate it by taking your annual gross revenue and dividing it by the total rentable square feet. This metric reveals your true pricing power in the market, not just how full you are. A facility at 95% occupancy with low rates can actually be performing worse than one at 85% with premium pricing. RevPath is the best way to compare the 2 different facilities regardless of their size or unit mix. If you want to know if you're maximizing your income, look at your RevPath. But maximizing income is only half the battle. Next, we have to look at the bottom line. Our final and most critical metric is net operating income, or NOI. This is because what— because this is what determines the value of your asset. NOI is what's left after you take your gross revenue and subtract out all your operating expenses. This is the cash flow that the property generates before your debt service and capital expenditures. You need to know your expense ratios. A healthy facility should have an NOI margin between 65% and 75%, depending on the taxes. I, we've, we could, I'll even allow down to 60%. 75%, you are humming. If your expenses are consistently above 35% of your revenue, you have an operational problem you need to fix. And I'll put an asterisk on that because you can't really control your taxes if that's what's taking you above the 35. The reason NOI is so important is that it directly determines the value of your facility. So your facility's value is simply your NOI divided by your market's cap rate. We've covered the 3 metrics individually, but next we'll see how they work together to create a powerful investment strategy. I'm pausing a little bit there because I also want to say, your NOI divided by your market cap rate, your market cap rate might also be influenced by the type of facility you have, whether you're Class A, B, or C. So just keep that in mind. All right. So putting it all together, let's see how the occupancy, rev path, and NOI interact in the real world. The big takeaway here is that high occupancy doesn't automatically mean a better deal. Look at the example of Facility A and Facility B here. They are the same size, But B is the clear winner. Facility B has a 7% lower occupancy, but its RevPath is significantly higher, meaning they charge more per square foot. And this pricing power translates directly to the bottom line. So Facility B generates almost $200,000 more in NOI. We're not chasing high occupancy just for the sake of it. We're chasing high NOI. This is why RevPath is so critical. It forces you to focus on revenue generation, not just filling up the building. All right. Now that we know what a good deal looks like, let's talk about warning signs you need to watch out for, whether you're buying or operating a facility. So we just saw what a healthy facility looks like, but you need to know how to spot the bad ones quickly, whether, again, whether you're buying or operating it. So these red flags are the things that should make you stop your analysis and walk away from a deal or start talking to your manager or look in the mirror if you're the manager. First warning sign is high occupancy paired with low RevPAR. This is the classic full but cheap problem. It means current owner— the current owner has no pricing power. They have to keep rates low just to stay full. That's a tough turnaround or an opportunity. Another major red flag is declining NOI even when the occupancy is stable. If your revenue is holding steady but your profit's dropping, it means expenses are out of control. Take a look at your insurance, your labor costs, etc. Could be your taxes. Finally, watch out for wildly fluctuating occupancy over a few years. This instability suggests a volatile market, poor management, or maybe aggressive competition that's stealing tenants. Knowing these red flags saves you time and protects your capital. So, all right, let's talk about where you actually find these numbers. All right. So we've covered the 3 metrics and the warning signs. So now how do you track it all? You need to know where to find the data and how often you should be monitoring it. All right. So when you're evaluating a deal or your own facility, start with the offering memorandum and the seller's P&L statements. The broker package should give you a trailing 12-month snapshot, but you need 3 years of P&L to see the trends. Once you own the facility, your property management software becomes your real-time dashboard. This software gives you instant access to your occupancy and your revenue data. You should be tracking occupancy weekly. You want to spot move-in and move-out trends immediately. Calculate your RevPath monthly to measure if your pricing— to measure— mouthful— to measure if your pricing strategy is actually working. And review your full NOI quarterly to make sure your expenses are staying in line. This consistent tracking is how you're going to measure your investment, not just own it. All right, let's wrap this up with action steps for today. As we've covered a lot of ground in this series, so let's put some knowledge into practice here. Why don't we go out and we'll first start simply memorizing these 3 metrics, right? Watch this again if you need to. What is your occupancy? Why? What is it? How does it— how is it impactful? Why does it matter? RevPAC and NOI. Write them down. Understand it. What does each one reveal about a property's health? Get to know that this is important. You're going to be in this business. You have to know this. Next, practice calculating them. Find 3 storage facilities for sale online. Try to estimate the metrics based on the data you can find. What we're trying to do here, you're not buying these facilities, or maybe you are, I don't know. But what I'm really trying to get you to do is build your analytical muscle in this part of the business. All right? And then lastly, let's start tracking facilities in your target market. Let's create a simple spreadsheet, compare the occupancy, RevPath, and NOI. This is how you're going to build your deal flow pipeline, right? So, Whatever's for sale in your market, whether you're online or you're getting, you know, deals in your inbox, just start tracking it. Just start getting a feel. All we're doing is practicing. Like I said earlier, we're building muscle. All right. If you found this data-driven analysis helpful, please hit the like button for me. It tells YouTube this content is valuable and helps us reach more unsuspecting but aspiring self-storage or Storage Mastermind members. Of course, subscribing is a no-brainer if you want to get all 106 days to the Self-Storage Mastermind series. Oh, and tomorrow I'm going to cover why self-storage does so well in recessions. And then finally, share this video like nobody's watching. They will thank you later.