Quick note before we dive in:
I'm hosting several free online workshops over the next few weeks.
If you register, I'll send you a copy of the recording even if you can't attend live.
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How to analyze a commercial real estate deal on the back of a napkin:
I’ve bought over $100 million worth of self storage at my RE PE company Bolt Storage. It took looking at over 5,000 deals to get it done.
What I’m about to tell you is not a full underwriting process. It is not comprehensive. This is the back-of-the-napkin work I do to see if a deal is worth spending more time on.
You’ll learn really quick in real estate that a TON of time can be wasted going to see properties and working on deals that simply have no chance to happen.
Mainly because the seller is fishing for a stupid-high offer and has no actual plans to meet the market and sell to a reasonable buyer at a market price.
Saving that time in the beginning is invaluable. Waste less time with unreasonable sellers -> spend more time hunting for more deals -> you’re more likely to find a deal that works.
This is a numbers game. You can’t get emotionally attached to any one deal. And you can’t waste time. Stick and move.
1. The warning
The real estate market is complex. Some areas are booming and others are struggling. But overall, the cost of capital has gone up which has put pressure on various parts of the system. Interest rates on new loans have gone from 2.75% to 7% in a few years.
In my opinion properties are worth 20-40% less than they were 24 months ago. Sellers who don’t REALLY need to sell aren’t going to sell right now. Many of them are still hunting for 2021 (peak) pricing and aren’t able to find it.
If you don’t know what you’re doing and you aren’t well capitalized (with a lot of cash on hand or access to it from investors) I would be careful before buying a deal.
Additionally, managing a self storage facility is hard. It is a small business. You have hundreds of tenants. Billing. Collections. Evictions. Repairs and maintenance. It is not passive.
2. The information I need
To do my back of the napkin analysis I need two things:
- Pricing expectations (how much money the seller wants in order to sell)
- Revenue per month (achieved revenue per month – what the facility is producing in monthly revenue)
Regarding pricing expectations – this is key. Until you have it, do not waste time visiting properties or having meetings. Many times you’ll have sellers say “Make me an offer.” and I always utilize the other two pieces of information to do what I call the old “college try” with sellers.
“Are we talking $3 million?”
I always shoot low based on the following analysis and and I always form this as a question.
Then I get quiet and let the other person talk. They’ll always give you a hint that lets you form rough pricing expectations.
Revenue per month is tricky because a lot of storage owners will give you a figure based on 100% occupancy and 100% paying customers at street rates.
That is impossible and I always sniff this out. Gross potential revenue is that figure, and I know that achieving anywhere from 60-90% of this is realistic depending on how well managed it is.
3. My analysis:
I want to stabilize at a 9 cap in a rural market, 8 cap in a better market, and 7 cap in a high quality market in today’s economic conditions. When I say “stabilize” I mean end up at year 2 or 3 after working my magic and operating the facility well.
If you aren’t sure what a cap rate is, take this free mini-course.
Questions you need to answer to do a back-of-the-napkin underwriting:
1. What will my expense ratio be?
Another critical assumption: Expense Ratio.
Expense ratio means the ratio of expenses to revenue. $40,000 of annual expenses compared to $100,000 of annual revenue means a 40% expense ratio.
A farmer with a few storage units out behind his barn can operate at a 15% expense ratio. No management expenses, no marketing, does all the work himself.
My storage portfolio consisting of 1.9 million square feet, 62 properties and 50 employees operates at a 40% expense ratio. Meaning for every $100,000 of revenue I spend $40,000 to run it.
This includes marketing, on site labor, insurance, property taxes, management expenses (we pay Bolt management separately out of each deal), software, snow plowing, lawn care, and so on.
This is what it would cost to manage a self storage facility if you were totally passive.
Okay so I know its going to cost me, on average, 40% of revenue in expenses to manage a facility. That can help me calculate what I can pay if I want to stabilize at an 8 cap.
Note: This is back-of-the-napkin. During the full underwriting process we analyze these expenses one-by-one and I project them on a month to month basis for a specific property.
2. How much can I drive revenue?
This is the million dollar question.
In a hot market where self storage is booming and people are renting units like crazy we could drive revenue 30%+ in the first year. Meaning if a facility was doing $10k a month we could end the year doing $13k or more. But that is when houses were selling at record paces and storage was hot.
In 2021 we could raise rents 25% and nobody would move out. We remained full. Times were good!
As of May 2025, this is not the case. We’re working harder to drive revenue and we’re lucky to get 10% growth year over year.
So we assume, today, that we can drive revenue 10% year 1, 5% year 2, 5% year three on most of our back-of-napkin assumptions.
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So there we go. We know where we want to stabilize a deal to buy it and we know how much we can drive revenue through proper management. We have all the pieces of the puzzle to do this quick, back-of-napkin underwriting.
Example 1
Let’s say we have a storage facility in a Tier 1 (very good) market doing $10k a month in revenue and the owner wants $2 million.
I know I want to stabilize at a 7% cap rate.
I know I can increase revenue 10% year 1, 5% year 2 and 5% year 3. So the annual revenue will go from $120k at acquisition to $132k year 1, $138,600 year 2 and $145,530 year 3.
At a 40% expense ratio I’ll have $58,212 in expenses (40% of $145,530). That means I’ll generate $87,318 in NOI (net operating income).
To stabilize at a 7 cap I can afford to pay (all-in with closing costs and CAPEX reserve) $1,247,400. Setting aside $150k for closing costs and a reserve account that means I can pay $1.1 million.
If you’re confused by the NOI calculation and what that means for value, take this free mini course.
This deal is a pass. He wants $2 million and we want to pay $1.1 million. We are not close enough to warrant spending any more time on this deal.
Note: We can afford to pay 110x monthly revenue for this facility with a Tier 1 location / market.
Example 2
Let’s say we have a rural property doing $20k a month and the owner wants $1.5 million.
I know I want to stabilize at a 9 cap.
I know I can increase revenue 10% year 1, 5% year 2 and 5% year 3. So the annual revenue will go from $240k at acquisition to $264,000 year 1, $277,200 year 2 and $291,060 year 3.
At a 40% expense ratio I’ll generate $174,636 in NOI (net operating income). To stabilize at a 9 cap I can afford to pay (all-in with closing costs and CAPEX reserve) $1,940,400. Setting aside $200k for closing costs and a reserve account that means I can pay $1.74 million.
He wants 1.5 – so this could be a buy.
I’d get the unit mix, management reports, etc and get started on my full underwriting procedure.
Note: We can afford to pay 97x monthly revenue in this Tier 3 location / market.
The nuance
A few bits of nuance it takes years to learn:
I pay attention to the multiple of monthly revenue. I know without doing any of this math I want to target 80-110x monthly revenue. If the pricing expectations are near that, I generally move on to a full underwrite.
I can afford to pay a bit more for larger facilities because I know my expense ratio will be lower, on average, for larger facilities with more revenue (economies of scale).
The market rents matter. As part of my 5 minute analysis I generally google self storage in the area and look at a few competitors rents. If I see a $120 10×10 and know I can buy a facility at $50 a foot that is a very good sign. Because I know those numbers work out well for me because of all of my experience.
The management also matters a ton.
How competent is the current management team? If they’re bad, it is more of a turn around project and year 1 revenue could be significantly LOWER than the previous owner said it was. This takes skill to sniff out.
High property tax states, snowy states and high insurance states (coastal risk) are more expensive to run.
These all add additional line items to an expense ratio calculation and I know most of these factors by heart. If you told me you had a facility doing $20k per month of revenue in Raleigh NC I would be able to tell you that I could run it at about a 36% expense ratio. A facility in high tax and high snow upstate NY? My ratio would be 45%.
Debt analysis is an entirely different ballgame. Interest rates are HIGH and expensive.
You can’t afford to buy a deal that will stabilize at a 7 or 8 cap with 60% leverage. It won’t cashflow. I’ll talk more about this later but I highly recommend you take this quick mini-course on debt and cashflow.
If the high level math checks out, you move on to a more robust due dilligence process but this will save you from wasting a lot of time. You can generally do this math in 10 minutes or less once you know the current rent roll, what other units are renting for and the owner's pricing expectations. Hopefully this helps.
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A few posts to check out:
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Onward and upward,
Nick Huber
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