Cap rates are up. Prices are down. Interest rates are just a little higher. Competition is down. And, best of all, cash-on-cash returns—the Holy Grail of investing—are up!
It certainly appears that some real opportunities exist for experienced self-storage owners to pick up some nicely priced, quality built, well-occupied properties, earn a handsome cash-on-cash return and yet have significant upside potential when the market improves. However, it is not a time for amateurs. One really needs to understand the self-storage business to be sure that the underlying business value is there.
Many of you may ask, “Is this the bottom?” No one knows for certain, but we know one thing for sure: This isn’t the top. If you do have your eye on a property, many other questions need to be posed:
- Will the facility maintain economic viability well into the future?
- Can it be improved or better managed to secure long-term viability?
- Is the cash-on-cash return significant enough to warrant the current investment?
- Do you have the experience and knowledge to recognize the risks and potentials of the investment and the talent to manage the property in an effective manner?
As you answer these questions, listen to both your gut and brain, making sure they both answer “yes” before you decide.
A Closer Look
To gain better insight, let’s look at some numbers that illustrate the recent history of self-storage real estate. As you may have noticed in the example, provided below, the price is down, the loan is smaller, relative leverage has dropped and the cash-on-cash return on equity is up a whopping 77 percent to 9.4 percent—not a bad tax-sheltered return.