J Darrin Gross
I'd like to ask you, Ryan Gibson, what is the Biggest Risk?
Ryan Gibson
Yeah, so I would say your biggest risks are external threats. Things like cap rate expansion, you know, property values declining, really can't control that. Interest rate, risk, etc. But I would say my focus that I'd like to share is five main things that I look at, in underwriting a deal. In I can do this in 10 seconds. I look at revenue growth year over year, and is it reasonable? Does the business plan, identify if that revenue is achievable based on the market study that you've done, somebody else has done or an operator's done? The second thing I look at is insurance. So insurance costs are not going down. So if you have not pro forma added, that your insurance expenses are going up, I usually don't like the deal anymore. As much. The second thing that I access risk, or the third thing is property taxes, property taxes are not going down, property taxes are going up. And if you're not planning on property taxes, at least doubling over a five year hold period, I don't think we've assessed the risk and the opportunity. The third thing I look at is expense to gross our revenue to expense income. So Egi, expense to gross income ratio, I guess there's another way of saying it Egi. That's if you make $1 of revenue, what percentage will be your operating expenses. And so in self storage, I'll look at a deal. And I'll say, you know, I expect to see between 35 and 40%, expense to gross income ratio, meaning that if you're collecting $1, I expect to see 35 to 40 cents for that dollar and expenses, and all your utilities, insurance, property taxes, all that stuff before debt service. If I see that number 20%, or 15%, I don't think there has been enough assessment in the underwriting to really accurately depict the worthiness of that deal. And the last thing I look at is cap rate. Because cap rate, you know, we love to everybody loves to think that they're the best operator, they have secrets and things like that. But at the end of the day, cap rates drive the value, they drive, the value, they drive, the exit strategy they drive, the market really drives where a lot of these assets can perform. And yeah, we can control and do our best. But that cap rate really makes an impact. I mean, one $1 on a 6% cap rate means $15 evaluation. So yes, operating income can do that. But I like to see an investment where you can stress test it. And that you can actually show the cap rate getting worse than what you bought it for. Not from your operations, but just market cap rates. So if you buy something going in cap rate at 5%. In today's market, I'd like to see that it can exit at a market cap rate of 6% and still be profitable. So when I assess risk, I look at those five things and underwriting and I and I really kind of stick to my guns on that. That's how I can look at a deal in 30 seconds. No, have they adequately assess the risk? Of course, there's tons of more things that you need to do beyond that, but those are kind of my five quick checkboxes on any opportunity.