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September 1st, 2014

Memo From Frank & Dave

Self-storage has been the hottest REIT on Wall Street recently. Extra Space CEO Spencer Kirk recently commented “Self-storage has come out of obscurity. It’s no longer the goofy real estate class. It’s the real estate class that, during the recession, did better than any other”. Why is self-storage so successful during the worst depression since 1929? People are downsizing and uncertain about their living arrangements, and they choose to store their goods rather than lose them or worry about them. That’s what really got the industry of the ground to begin with, as it all began in Britain where officers who were sent to war wanted their home contents secured while they were out of the country. There is no question that self-storage has been a huge recipient of good luck from the Great Recession, and there’s little doubt that America will remain as screwed up financially for decades to come.

How To Convert A Cash Sale To Terms

It’s a little known fact that having sellers carry the financing on their self-storage facility is a win/win. Once you understand this process, it is not hard to convince sellers of smart option seller carry can be. But you can’t sell the idea if you don’t believe it yourself, so here’s how it works.

The focus on income for seniors

Most older sellers of self-storage facilities are not looking to buy a giant yacht, a ski chalet or a McMansion. They are focused on monthly income. They want to retire and have a nice amount every month to live on, as they enjoy their recreation. This is a major difference between younger sellers and older sellers. While the younger seller wants cash to play with – or lever again into a new deal – the older seller thinks long term and simply desires a good monthly cash flow.

The low interest rate environment

With a focus on monthly income, the big hurdle for most older sellers is how to create that with an interest rate environment in which CDs and Treasuries pay about 1% to 2%. For example, a $1 million CD at 1% pays out only $833 a month. However, if the seller carries the financing, they can receive a comparable interest rate to a typical bank loan, which will be 4% to 6% -- basically 400% to 600% more than the CD. Under this scenario, that same $1 million would yield a monthly $3,333 to 5,000 per month.

The lack of security in the collateral in most investments

Some seniors will argue, “well I can get that much from a junk bond instead of a CD”. That’s true. But there’s an old expression “you have to have return of principal before you can have return on principal”. In other words, a junk bond – and similar high-yield offerings from your local stock broker – are incredibly risky. The reason junk bonds have such a high yield is because they are “junk” and subject to bankruptcy and loss of principal. The self-storage facility paper, by comparison, is a first lien real estate note secured by actual tangible property – and a property they know well and have confidence in.

The tax savings

Tax is paid upon receipt of the money. As a result, seller financing also has a tax benefit. If you pay a seller $1 million, they have to pay around $200,000 in tax (federal and state and based on the amount of recapture from depreciation) and then invest $800,000. If the seller carries, however, they only pay tax as they receive it, so they can essentially invest that same $200,000 and earn income on it until they ultimately have to pay the tax. That’s a huge swing.

The worst case is not that bad comparatively

If you default on a seller note, they get to keep your down payment and get the property back free and clear. Is that really a bad day? Who wouldn’t want to get a 20% or so down payment in cash to put in the bank and then get the property back later, to sell all over again? Compare that to the worst case scenario with junk bonds. What a difference.


Seller financing makes huge sense to the senior seller. Educate them on this. Urge them to take the path of greater return and security. You will be doing them – and yourself – a huge favor.

The Best Current Article On The Self-Storage Industry

We read a lot of articles on the self-storage industry, but this one in the Washington Post is the best we’ve seen in giving a current update on the industry and its future. Check it out.

Click Here To Read It

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