By John E. Barry
Whether mild or extreme, real estate cycles have historically been five-year periods of relative highs and lows. Unless your self-storage business plan has always been to maximize long-term cash flow, pay down debt and leave the property to your heirs (with a stepped-up cost basis to avoid capital-gains taxes), you should consider some important issues to determine how you’ll exit the business at the most opportune time and in what manner. Without an exit strategy, you are a ship without a sail.
Understand Real Estate Cycles
Real estate values are cyclical, and this article could be written at any point in a cycle. This time, it’s easy—we’re at the very top of a strong cycle of real estate values and self-storage property valuations.
Property values based on existing cash flow have increased by more than 20 percent in the last three years, and we’re experiencing all-time highs in our industry. But most economists forecast higher interest rates in the next several years, and the increased cost of money will negatively affect property values. Higher tax rates are now in place, and with continued budget pressure at all government levels, it’s unlikely they’ll decrease any time soon. The bottom line is right now is an opportune time to sell income-producing real estate.
Plan for the Long Term
Away from the current up cycle, put a long-term plan in place and start right away. It’s important to seek advice from your circle of professional advisors for financial, tax, retirement and estate planning. It's also important to seek industry advice on how to optimize facility operation and maximize future sales proceeds.
Also, install or update buy/sell agreements with investment partners, and create a capital expenditure budget so your facility maintains a competitive edge physically and technologically. Running the business in a passive manner with the status quo will ensure an unhappy exit when the time comes.
Know Where You Stand
For most self-storage owners, facility value is significant in terms of their overall balance sheet. It’s easy to read your brokerage statement and know exactly what your stocks, bonds and cash are worth. The same holds true for the value of your home; most people know of comparable sales in their neighborhood. Similarly, it's wise to place a value on your self-storage property each and every year. Self-storage brokers can be a fine resource for this task.
In most cases, you have some debt on the property that needs to be repaid. Will the value of the property cover it? When is the debt due? When will the interest rate need to be refinanced? You should know the answers to all of these questions.
Evaluate the Longer-Term Holding Period
If you plan to hold the facility for a longer time, then ignore the noise and optimize the operation for maximum cash flow and value. You should focus on increasing revenue and minimizing expenses.