The capital flow of equity and debt has increased dramatically over the past few years, helping self-storage become the “golden child” of niche real estate. Delivering higher returns and a more stable cash flow than other investments, the industry is well-positioned for the time being.
A wise real estate investor once told me, “You’re not in the self-storage business; you’re in the real estate business.” While storage facilities have an extremely reliable income stream, the real estate aspect has more to do with property value than the operational side of the business. With that said, how can an owner protect his asset value? Following are four strategies that will help you preserve it.
1. Regularly Review Your Financing
Even though your facility’s operational performance may fluctuate, the financing market affects your value more than day-to-day operation. Today’s buyers and sellers are enjoying the low interest-rate environment. This has allowed buyers to grow their portfolios and sellers to achieve very aggressive pricing.
It would be prudent of all self-storage owners to regularly evaluate their current financing to ensure they’re preserving their cash flow and property value. Depending on your investment horizon, locking in long-term, fixed-rate debt may be a wise move. However, maintaining flexibility with regard to prepayment penalties, trapped equity and the ability to sell when the market presents an opportunity might be more valuable.
2. Watch Your Operating Expenses
It’s important for every owner to understand the effect of each dollar of net operating income (NOI) on property value. Every dollar saved in operating expenses adds one dollar to the NOI, which results in $12 to $16 in facility value. For example, if you’re able to reduce your trash expenses by $50 per month ($600 per year), you’ll have increased the value of the property by $7,500 to $10,000.
At one time or another, we’ve all procrastinated our review of operating expenses. However, these need to be reviewed regularly to ensure the property value stays intact.
3. Know Your Market
The secret is out! Self-storage is widely considered a viable investment opportunity and is being considered on nearly every vacant piece of ground. Due to the success of the sector over the last five to 10 years, we’re now seeing new development nationwide. This will have a meaningful impact on the operational performance and value of existing properties as new competitors come online.
If you’re operating a self-storage business, take the time to understand your market and know what new projects are likely to compete with your property. You can do this by talking with your local planning department about any inquiries and submittals that have been made. Also research which pieces of land have the appropriate zoning for storage. This will give you an idea of what to expect as industry developers and brokers canvas the country for good sites.
4. Know Your Investment Horizon
The value of your self-storage asset goes up and down as market sentiment and debt markets change. To truly understand the value of your investment, you must at some point sell it. Obviously, your investment horizon will vary depending on your individual objectives. However, to maximize value, you should consistently evaluate the current market, including its risks and opportunities, to see how these dynamic factors impact property value. This will allow you to make the best decisions and appropriately position your asset.
Prices have never been higher and the uncertainties of the world never less settled, so if you’re at or near one of those personal crossroads, it’s time to get serious about maximizing your investment value. Talk with a qualified, local broker to get the necessary information to make an informed decision.
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. It also offers panel discussions in which brokers from around the country share their insights on self-storage market fundamentals and economic trends in their regions. To access recordings, visit www.argus-selfstorage.com/presentations.html. For more information, call 800.55.STORE; e-mail [email protected].