6 Red Flags to Look for During Self Storage Due Diligence
When you’re adding self storage facilities to your portfolio, it’s easy to get caught up in the excitement of a new acquisition.
But not every facility that hits the market is a good deal. Even if the numbers look promising, due diligence can reveal issues that erode returns, require costly fixes, or even turn the asset into a liability.
In this article, we’ll highlight the red flags in due diligence that experienced operators and investors should watch for before purchasing another facility.
Self storage due diligence is a process buyers undertake to analyze the major aspects of a facility and its submarket as part of an acquisition deal. This is a critical step in the acquisition process because it allows buyers to make an accurate assessment of a facility and its business potential.
The major areas to inspect include:
1.Financial Performance
2.Site Review
3.Market Analysis
4.Legal Review
Due to the amount of detail, the process typically takes 30 to 60 days. Within the span of time, buyers will cover a huge amount of (figurative) ground as they examine every aspect of a facility.
Within that span of time, red flags may arise that give you pause about whether or not a particular facility is actually a good deal. Here are six warning signs to look out for when you’re considering your next acquisition.
One of the biggest mistakes investors make is taking the seller’s numbers at face value. This is not to say sellers are inherently deceitful, but always take a “trust but verify” approach.
That’s the only way to minimize your risk and make absolutely sure you have an accurate understanding of the numbers before you buy. On the financial level, the following scenarios could be red flags:
Always request three years of P&Ls, tax returns, and current rent rolls. Then reconcile them against bank statements to get a clear view of the property’s performance.
High occupancy may seem great at first glance, but the number may be an illusion. Sellers are incentivized to inflate this metric when they put a facility on the market because it implies the business is healthy.
To get the truth, you need to look deeper. Here are a few ways to analyze occupancy:
Look at economic occupancy
Occupancy comes in two flavors: physical and economic. Physical occupancy is a superficial measure of all the units rented. Economic occupancy measures the rent that’s currently being collected at the facility versus its total earning potential.
One way sellers can inflate occupancy is by refusing to evict delinquent tenants. So the number of rented units looks high, but the actual revenue being brought in is mediocre.
A facility claiming 95% occupancy but collecting only 80% of potential rent is a red flag that revenue is not what it seems. Use economic occupancy to get a real pulse on the health of the business.
Hidden maintenance needs can quickly turn a promising facility into a money pit. Repairs and updates require an influx of cash that may not be in your budget, and they can also push out your timeline for bringing new units online.
Here are common issues that you should look for when you’re onsite:
Deferred maintenance can quickly turn into unplanned capital expenditures. What looks like a high-yield investment today may have six figures in hidden costs tomorrow.
The market will make or break a facility. This is one of the trickiest areas of due diligence because there are a number of different signals to look out for within any submarket.
Here are major warning signs to look out for when you’re doing market research:
Oversupply
In secondary and tertiary markets, even the addition of one or two facilities can radically alter demand. Using a metric like storage square feet per capita is a good way to understand the supply and demand in any given market.
Below seven is considered a healthy balance, while above eight could indicate oversupply.
Declining population growth
Industry research shows 50% of self storage utilization is tied to moving, and the other 33% is driven by storage limitations.
These stats will change by market, but if the population in the area surrounding a facility is declining, that indicates that demand for storage will also decline. If people aren’t moving to the area and new apartments aren’t being built, your pool of customers is shrinking.
Lack of economic diversity
Stable markets are strong markets. If a significant number of the population in a market work for the same employer (like a manufacturing plant or a rural hospital) that is a negative signal.
If that business closes down, then a huge swath of your potential customers could be out of a job. And that means your facility has far less earning potential.
Pair your financial due diligence with a robust market study to avoid surprises.
Think of finding the right self storage unit mix as a product / market fit problem. If a facility has non-standard unit sizes — especially units that the competition isn’t offering — then it may be more difficult to rent that inventory.
The product (units) that the facility is offering doesn’t quite fit the needs of the market.
This issue is most common with older facilities, but it can turn into a CapEx issue if you need to remodel certain units to make them more appealing to prospective customers.
Technology has become a fundamental part of self storage. (See our article on essential self storage technologies.)
So a facility that still relies on manual processes isn’t optimized for customer acquisition and quickly leasing new units.
Be wary of facilities with:
A dearth of technology doesn’t have to be a deal breaker, but it does signal a need for investment and operational restructuring. Optimizing how a facility runs can yield significant returns, but it might also require a lot of leg work.
Whether or not it’s worth it depends on the potential of the property.
When acquiring another self storage facility, the question isn’t just “what does this property earn today?” It’s “what will it take to maximize returns tomorrow?”
Red flags in due diligence don’t always mean you should walk away, but they should adjust your valuation and underwriting. A facility with deferred maintenance, inflated occupancy, or market challenges may still be a good acquisition — if you account for those risks and have the operational expertise to fix them.
If you don’t want to solve all the issues at a new acquisition yourself, third-party management may be the best option. That way you can enlist storage experts to overhaul the facility and enjoy higher returns.
Schedule a demo with our team to learn more about our management services.
