We have become addicted to the show “Storage Wars”. Not because we really care how much money you can make from buying a unit at auction and then selling off the contents one item at a time. And not because we really like the stars of the show, or their rivalry. What we like is the diversity of items that people have in storage units. Even though we know that it’s likely that the show is a little rigged (ever notice that every unit has a hidden item that is hugely valuable and unlikely to ever be found in that collection of debris), we are nevertheless always fascinated with the odd assortment of items to be found. To us, it demonstrates the endless penchant for American materialism. It also illustrates that many Americans store virtually worthless items just out of sentimental motives. Regardless, we’re more than happy to store anything they want to keep. And to watch what happens on Storage Wars.
Memo From Frank & Dave
How The Current Interest Rate Environment Is A Huge Benefit To Self-Storage
Interest rates are as low today as they have been at any point in American history. In 1776, at the founding of the United State, interest rates were at 6%. At the end of the nineteenth century, in 1899, interest rates had escalated to 10%. Now, 116 year later, interest rates stand at around .01% -- that’s 100 times less! So what’s the real impact of these insanely low rates on self-storage investing?
Rates are so low that they have become a joke – a not-so-funny joke if you are trying to invest
It’s hard to get motivated to do anything at .01%. On a $1 million investment, that would yield you $10,000 per year. On a $100,000 investment, that would yield you $1,000 per year. And at $10,000, it would yield you less money than the gas it would cost to sign the papers at the financial institution. For a generation brought up on the expectation of 10% returns on investment, there are IRAs all over America that have failed miserably to provide that comfortable retirement. And think of all the seniors who have watched their interest income fall by 90%+. The traditional forms of investment are a complete failure.
Self-storage investments offer returns that are massively higher
So if a self-storage facility can obtain a 10% cash-on-cash return, that is 100 times higher than many CDs. So how hard is it to obtain a 10% cash-on-cash return? The answer to that is in the “spread” between the interest rate on your loan and the cap rate on the property. Here’s an example. If the self-storage facility is priced at a 8% cap rate on $80,000 of net income, then it would be $1,000,000. If you put down $200,000 and borrow $800,000 at 7% (a mere 1 point “spread”) then here’s the cash-on-cash return metric: $80,000 [net income] minus $56,000 [$800,000 at 7%] = $24,000. If you put down $200,000, then $24,000 is 12% return on your money. So even a 1 point spread would beat 10% cash-on-cash. And if you can hit a 3-point spread, you’d break a 20% cash-on-cash return – that’s 200 times higher than some CDs.
And the spreads have never been higher
Only a decade ago, the spreads were typically 1 point. But with the ridiculously low interest rates right now, 2 and 3 point spreads are very common. In fact, real estate spreads have never been higher in U.S. history. So that means it’s a great time to buy self-storage facilities, with cash-on-cash returns that your great-great-grandfather could have only dreamed about.
Low interest rates are a sign of a lousy economy, and that means more demand for storage
It’s also important to note that the low interest rate environment is a product of a weak economy which, in turn, helps fuel the demand for self-storage units. Studies have shown that, during recessions, the public tends to downsize or move to new areas to find jobs. During these times of upheaval, people need to store their belongings until they get back on a solid footing. So basically the low interest rate environment not only gives self-storage facilities higher returns, but also fuels higher demand.
The current interest rate environment has caused a massive upheaval in expectations of return on investment. Except for self-storage investors. While all traditional forms of investment have crashed, self-storage facilities continue to offer outstanding return on investment scenarios. Self-storage has become a reliable hedge to a troubled U.S. economy – and one that shows no signs of abating.
The Most Valuable Item Ever Found At A Storage Unit Auction
While the most valuable single item ever found on Storage Wars was a copy of a comic book that later sold at auction for $2 million, it was later found to have been stolen property. So the most valuable item ever found in a storage unit auction – that remained the property of the winner – occurred in 2011. A private buyer used Dan and Laura Dotson’s American Auctioneer’s service—the same one the show uses—to bid $1,000 on a unit without having any idea what was inside. Upon winning the auction, the buyer came across a box that was so heavy it took three people to remove it from the unit. Inside the box, he found what was described as “Pieces of Eight” and “Spanish Gold,” dating back to the 16th and 19th centuries. Upon appraisal, the cache was said to be valued at just over $500,000. The buyer has requested to remain anonymous, as he is fearful of the original owner trying to get it back. There has never been any rational explanation for why the gold was in the unit in the first place.
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