Buy, Sell or Hold? To Maximize Your Self-Storage Investment, Understand Your Objectives

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Should You Buy?

Buyers might think that with prices starting to stabilize, this is not an ideal time to invest in self-storage; most buyers want to buy when prices are down. However, it’s a good time to buy if you’re able to follow the three rules for “holders” mentioned above.

It’s also important to consider that interest rates will likely rise at some point. The rate of cash-on-cash return goes down much faster with rising interest rates than when prices fall. The reality for a buyer in a period of rising interest rates is he winds up paying more interest than he saves on price—and by a large margin.

For example, a $1 million loan at 8 percent costs an owner $380,000 more in interest than a 6 percent loan over 25 years, not to mention the majority of the interest comes in the first few years of the loan. In other words, a buyer has to get a giant discount to make up for the rise in interest rates.

Rates of return work the same way. A project that has a 16 percent cash-on-cash return with a 6 percent loan would only yield a 12 percent cash-on-cash return with an 8 percent loan. Thus, even though prices are at stabilized levels, now is still a good time to acquire. Buyers should remember the seller isn’t getting the benefit from your new low interest-rate loan, and that’s what’s creating the increase in cash flow. Sellers take note: If it’s a good time to buy, it’s also a good time to find a buyer.

If you’re waiting for interest rates to rise so you can take advantage of lower prices, you’re engaged in a losing proposition. If you’re thinking of buying, now’s the time to capture the low interest rates still available and realize the benefit of arbitrage.
 
Ben Vestal is president of the Argus Self Storage Sales Network, a national network of real estate brokers who specialize in self-storage. Argus provides brokerage, consulting and marketing services to self storage buyers and sellers and operates SelfStorage.com, a marketing medium and information resource for facility owners. For more information, call 800.55.STORE; e-mail bvestal@argus-realestate.com.

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