With nearly 50,000 facilities totaling more than 2.1 billion square feet nationwide, self-storage is no longer a sleepy little industry that goes unnoticed. Every day, there are bound to be people considering a facility sale or purchase. If you’re one of them, it’s important to understand your true objectives and how to execute them if you want to maximize your investment.
Following are situations in which you might find yourself if you are an owner (seller) or buyer. See which applies to you and things to consider before taking the plunge.
Should You Hold?
Self-storage is a very good business with a bright future. If you agree and are sure you want to own and operate your facility for the next five to 10 years, then you’re a “holder.” If you fall into this category, you must follow these three important rules:
- Lock in a low interest-rate loan for at least five years, longer if possible.
- Have enough money to weather the up and down revenue swings all income-producing real estate experiences over an extended period of time.
- Make sure your facility is positioned to be a market leader and you have the flexibility to adjust quickly to changing demand characteristics, such as lowering rates, free rent, etc.
These rules should enable your investment to capitalize on improving market conditions and remain viable when circumstances deteriorate.
Should You Sell?
There’s a difference between thinking about selling and actually becoming a seller. To clarify the difference, it’s important to understand your objectives. At some point, almost everyone will become a seller. Thinking through the following factors and understanding the current market will help you determine how close you are, and give you some options to maximize your investment.
I’ve recently had discussions with five facility owners who are selling or thinking about selling their properties. All are in this position because they face one or more pressing issues: retirement, divorce, estate planning, partnership problems, liquidity challenges, desire to relocate, health concerns, or worries about capital-gains tax.
These are just a few of the things that make owning an investment property difficult. About 80 percent of all self-storage sales are a result of personal issues rather than what some would call “taking advantage of the current market” or concern for the future market. This proclivity to make the final decision based on personal concerns is entirely appropriate, but with a little planning and realistic thinking about the market and what the future may hold, it can be very rewarding and lead to a higher return on investment.
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 [email protected].