Investment Opportunities in Self-Storage: 5 Keys for Owners/Sellers and Investors/Buyers

By Ben Vestal Comments
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Buyers

Self-storage buyers are also presented with a number of compelling scenarios. In the last few years, new investors wanted to dip their toes in the self-storage industry. Now most of them want to dive in head first. With most of these investors experiencing an above-average return without all of the volatility of the stock market, small and large investors are taking advantage of our industry's stable nature. Below are compelling reasons why a self-storage investment makes sense in this year.

The self-storage REITs outperformed all other property types in 20101. This will continue for the foreseeable future.

  • With interest rates for 10 year loans ranging between 4 percent to 6.5 percent, depending on the loan to value, and overall cap rates ranging from 6.5 percent to 9.5 percent, we are seeing spreads between interest rates and cap rates of 250 to 300 basis points. This “arbitrage” that an investor can enjoy has motivated buyers to take action.
  • With the ever-present cloud of inflation hanging over the U.S. economy, we have seen investors find comfort in real estate assets and the flexibility the self storage owners have to raise rents. Keep in mind that this strategy has not always worked out during past inflationary times. Only time will tell how it works out this time around.
  • With the cost of debt for most deals hovering between 5.5 percent and 6.5 percent, and cap rates hovering between 8 percent and 9 percent for class-B and -C properties, it's worthwhile to do a little math. The accompanying chart outlines a very basic cash-on-cash analysis to consider. Note the class-B/C property enjoys a 58 percent greater return than the class-A property.
  • With the continued expansion of the U.S. apartment industry and the volatility of the U.S. housing bubble, self-storage is positioned to capitalize on the increased movement of the American population.

Self-Storage Cash-on-Cash Analysis Class-A vs. Class-B/C Facility***

Self-storage investors/buyers should take a closer look at their investment criteria. By thinking outside the box and considering investments that are passed over by some of the larger buyers, a savvy investor will be able to achieve a meaningful increase in his return. This will have a compounding effect as the industry continues to strengthen, and will lead to a very profitable investment.

Clearly, there is value in understanding what affects cap rates and property values in today’s market. Buyers should remember that sellers are not benefiting from low-interest-rate loans, which are creating increased cash flow and helping to make buyers' numbers work. Sellers should note: If it's a good time to buy, it's a good time to find a buyer. Barring any natural or financial disaster, the market will reach equilibrium this year, with buyers and sellers coming together on a number of deals.

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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