Thanksgiving is approaching. What does the storage industry have to be thankful for in 2019? One item is the continued embrace of the lending community who offer good rates and terms. Another is the continuing stability of the U.S. economy, which offers a steady market of demand for storage. A third is the fact that new storage construction remains constrained in many markets (although oversupply in some “hot” markets is worrisome). Finally, there are still good opportunities for storage acquisitions when mom and pop owners are wanting to pass the baton to the next generation with good prices and terms. We would also like to thank those who read and support these newsletters, which gives us a mountain of satisfaction to produce each year. Have a Happy Thanksgiving!
Memo From Frank & Dave
Be Extremely Careful About Market Selection Right Now!
Be Extremely Careful About Market Selection Right Now!
A recent study has shown that self-storage rents declined in a staggering 42% of the top U.S. markets. The cause? Massive overbuilding by overzealous storage developers. As a result, the average rent nationwide has decreased 1% for non-climate controlled and over 2% on climate controlled. This is a very dangerous trend if you invest in these markets where the construction crane is too active.
Let’s Look At The Markets That Are Declining
Here is a list of the top 30 markets that are in decline, by order of most decline to least.
- New York
- Twin Cities
- San Jose
- Washington, D.C.
- San Diego
- Las Vegas
- Dallas – Ft. Worth
- San Antonio
- San Francisco
- Los Angeles
- Inland Empire
How Can You Still Make Money In Such An Environment?
We have long told anyone that would listen that the best way to make money in any sector is to buy what is not popular and hold it until it becomes popular. That means investing in markets that are not on the radar screen of the big operators, as well as in sizes that are smaller than the institutional players thrive on. We were talking recently to an older operator who had compiled 12 storage facilities in more rural areas and successfully paid off the mortgages, generating an income of nearly $500,000 per year. That’s the type of contrarian thinking that smart storage investors rely on.
Following The Pack Is Never A Good Idea
One of the worst investing strategies has been to follow the pack. These are areas that are prone to over-building – and that’s the death of storage investments. You will note that the list above contains virtually none of the “flyover” states. That’s because they don’t get the media publicity of the coastal markets. But don’t confuse “popularity” with “profitability” – there’s no correlation between the two.
There is significant self-storage overbuilding going on in many U.S. markets. Avoid these like the plague. Go where the money is, even if those markets are not what’s described as “hot” by the masses.
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The Art Of The Self-Storage Deal: A Primer
In 1987 now President Donald Trump published his best-selling book “The Art of the Deal”. But what would “The Art of the Self-Storage Deal” look like? Let’s review.
Buy Solid Infrastructure
The whole point of self-storage is the protection of the goods stored. That means that the roof doesn’t leak, the electricity doesn’t catch fire, and walls don’t collapse and the floors don’t flood. You want a property that is built strong and correctly. And that will not require expensive capital repairs in the future.
Buy A Solid Location
What works for a storage facility? Plenty of nearby population to fill the units, coupled with a stable amount of available storage so the demand is constant. Do not buy in areas that are clearly in the midst of overbuilding yet be in places that have high levels of occupancy. And select locations that are in the path of growth and that will one day be hugely valuable simply by the expansion of the surrounding area.
Buy Properties That Are “Liquid”
One of the most important traits of any storage property is the ability to sell or finance it at the drop of a hat. This liquidity allows you peace of mind that your investment is safe and can be tapped in the event of emergency. Good properties are desirable to both buyers and bankers.
Buy At A Cap Rate “Spread” That Gives You The Desired Return Level
Your cash-on-cash return (the amount of money earned on your down payment cash) is predicated on the spread between your cap rate and the interest rate on your loan. Most storage buyers want a 2 to 3 point spread, as that gets them a rate of return of 15% to 20%. What you have to guard against are deals where the spread is too low, such as 0 points, in which your return may be around 5% or so. And in times of cap rate compression, the rate of return could actually be negative.
Buy With Upside Still On The Table
Smart investors want to buy properties that will demonstrate ever-growing net income and rates of return. This is accomplished if you select a market that becomes stronger over time, as well as not saturated with competition. If rates go up only 3% per year, that will equate to a compounded increase of 34% over ten years – and that’s enough to boost your value by a huge amount of money.
When you buy your storage facility, you have a budget. Your job is to make sure you hit or beat that budget every month. And that means selecting the right manager, staying on top of the numbers, and making the tough decisions to keep the property on track. Execution is a key part of being a smart investor, although the selection of the right property is equally essential.
When Seasoned, Sell Or Refinance
To maximize your return levels, you want to watch for the opportunity to sell or refinance your property at the right time and at the best prices. One of the best investing models is to refinance your storage property once the rents and occupancy (and values) have increased and get your down-payment back out (called a “cash-out refinance”). This gives you an infinite return on your investment and allows you to re-use the same money over and over to grow your portfolio.
And that’s how the art of the deal works on self-storage. It’s not super simple, but it’s a winning game plan that’s easy to understand and has been around for decades.
If You’re Looking At Storage Deals Over $2 Million, Then Have A Professional Work With You To Obtain The Best Loan Possible
M.J. Vukovich is a capital consultant for self-storage loans. And he’s one of the best in the business. We’ve been using him for years and are firm believers that having a professional obtain and negotiate your loan is the best way to go in today’s lending environment. Here’s what a capital consultant can do for you:
- Create your loan package.
- Create the list of potential lenders based on current appetite for these type of loans.
- Meet with these lenders and obtain offers.
- Give you an array of offers and point you in the direction of the best one.
- Negotiate the terms for you.
- Shepherd the loan to completion.
All of this costs a small percentage of the loan amount and is only paid upon performance.
Call M.J. for a free consultation and discuss your lending needs and options with him at (720) 758-9227 or email him at [email protected]. You’ll be glad you did.
Preparing Your Storage Investing For The Next Depression
Many economists predict that he next U.S. recession is right around the corner – the general prediction is in 2021 (which is still one of the largest runs in economic history, since the last recession was 2007). What re the preparations that smart storage owners want to complete before the next U.S. recession?
Revenues Should Be Steady But Keep Your Foot On The Accelerator
In the 2007 Great Recession, Americans seemed to rent more storage units than they had in bad times. This was because they wanted to safely store their goods while they travelled the country looking for work or downsized their housing. There is every reason to believe that the next downturn will have the same effect. So the key is to keep your marketing foot on the pedal and don’t let down your guard.
Potential Manager Hires Should Grow In Scale And Quality – Upgrade Your Staff
As the economy falters, many good workers lose their jobs, and this frees up more potential hires for your property. Right now – with unemployment at record lows – you have to go with what you can get. But in the next recession there should be more people looking for work and you should advantage of that potential and upgrade your staff. Since a good manager can make all the difference with your property’s performance, you should see the next recession as an opportunity.
Be very careful of lending
The most dangerous element of a recession is lending. That’s because banks hate times of instability and will stop all new loans if they feel uncomfortable with the direction of interest rates or the risk of repayment. If you feel a recession is coming on, you need to be ready to cease getting new or renewal loans until banks get comfortable again. The typical period of bank retraction is roughly a couple years. If you have a loan that is coming due soon, it might make sense to go ahead and get a renewal ahead of schedule so you don’t have to worry about it.
Self-storage is a strong performer in times of national economic recession. The key item to watch for is the timing of your lending. Give yourself plenty of time for renewals and obtaining new loans.