America is seeing a financial instability that has not been experienced in 40 years. Should you sit out buying a storage facility during this period of uncertainty? That’s the topic we’re going to explore in-depth in this Self-Storage University podcast. Since your financial future hangs in the balance, it’s an issue that every investor should consider.
Episode 63: Should You Sit It Out? Transcript
Between the highest levels of inflation in 40 years and the fastest increase in interest rate since Ronald Reagan, it's easy to feel very uncertain about getting into investing right now in the self-storage facilities. This is Frank Rolfe with The Self Storage University Podcast. We're gonna be talking about, Should you sit things out? In light of all the things that are going on, all the troubling news in the world, should you just stop your search, just say, You know what, I'm gonna just stick my money safely in the bank or in my mattress, is that the better course of action? Well, here are some thoughts to consider. The first one is, you only live once. And there are no do-overs in life. Most of us lost two years of our life thanks to COVID. Businesses closed, schools closed, we all put masks on, we couldn't leave our house for months at a time. And we never get that time back. If you ask people, "So when's the last time you did this or that?" What do they always tell you, "Oh yeah, well, back in 2019." What happened in the years of '20, '21 even some of '22? Well, they're vanished. We don't get those back. And that's a lot of time to lose. Two years is a lot of time. That's half of the time you spend in college, just gone, just erased.
And if you now say, Well, you know what, I don't wanna deal with things when things are this unstable, this uncertain. Well, you're just gonna miss out on more time and you never get that time back. So you have to keep pressing forward. You can't just at every single thing that pops up, whether it's COVID, inflation, whatever, and just keep saying, "Oh yeah, well, I'll sit this out. I'll sit that out." You'll be sitting it out, you'll be 75 years old and still be sitting things out. So that's the first issue. When you have that mentality of, Oh, I'll just wait. Well, what happens when you've add up all that time you waited? What if you had kept working during the period, what might have happened? And if you're gonna move forward, here are some things you gotta get out of your storage deal today that makes it worthwhile to start. So let's get energized on good positive things you can do. Number one, just look for really, really good deals, deals that have a really good spread still between the cap rate and the interest rate. I know interest rates have gone up a lot, find deals that have even higher cap rates that still make it so it's not a big deal.
If you were trying to buy a storage facility, the three-point spread and the interest rates were 5% before and you could buy it in an eight cap, and now that they're six and a half and that's gonna be a nine and a half cap. There are still deals out there to be found, nine and a half cap, there's not as many. It's not as easy. You're gonna find a lot of sellers are gonna say, "Wait, I wish it was back like it was, oh, a year ago," but it's not. But many will start accepting that reality and find deals that you can buy not only at a low price with a good return, but still have plenty of room for improvement through the raising rates are filling, they get units or cutting cost. Those deals are still out there, just keep focusing on those. Also only go after deals that offer sensible debt. And what is sensible debt right now, it's low risk debt. It's debt that is typically gonna be five years or longer in term before it comes up for renewal, non-recourse should be preferable if you could get that. But don't do anything crazy right now regarding debt. Debt is very toxic. When times become very uncertain, what happens? Lenders become very unreliable. As a result, you don't know for a fact that you can get a renewal if your loan money comes due.
Particularly since we're going into a probably a major recession next year, and yes, we will then start seeing interest rates decline, but before they decline there'll be huge pain and suffering in the debt market that you don't wanna have a loan that you have to obtain when all the banks aren't making loans. So make sure that you only get into deals where you've got the debt covered. Now debt is still out there right now. Despite the fact of all this instability, you can still get loans, banks, from sellers, conduit lenders. They're still all still making loans, but make sure you only latch on to the really good products. Don't get involved in a hard money lending deal where you have to replace them in a couple of years or a seller deal where they only give you a three-year term. You gotta get at least five years or more. You gotta get it where it's sensible, and don't do any crazy dangerous, heavy turnaround projects right now.
You're just asking for trouble. It's okay to buy things that are not finely tuned, but at least they're running and then producing money. This is a very dangerous tide, where you're venturing into something that's a massive turnaround project. It's very unstable, you don't wanna have an unstable project that you're trying to operate in unstable times, it just rarely rarely works. And stick with more quality markets because when things get bad banks typically gravitate to what they call the flight of quality, or the flight to quality. And what that means is that remember the banks are not risk takers. When you get a loan at a bank what's the bank have to look forward to, just it's return of principle and interest, that's it. They don't have any carried interest in your project. It doesn't matter if your thing goes up 10%, or 100%, or 1000%. They don't share in that. They're not partners.
No, no, no, all they get is their money back plus the stated amount of interest. That's it. So when times get weird, what do they do? They only like to be in the more stable, safe deals. Banks are enormously non-risk takers by personality type, and they have every reason to be that way. And you would be too if you were a banker. So instead of fighting that, instead of bucking that trend, instead of being a pioneer in something, no, just follow the established pathway. Banks like things that are very, very safe. And don't forget that every day that passes you've got new sellers that wanna sell out. Remember that a lot of your sellers, they also watch the same news you are. They're also alarmed by how unstable things are getting, and they're gonna say, "You know what, I don't think I wanna operate a property anymore. I just wanna retire, I wanna get out of here. I don't like America anymore. I wanna move out to a small town in Vermont." And you're gonna miss those opportunities if you're not out there looking every day for new deals. Because the very things that you're calling, making things unstable and maybe you should sit it out, are the exact same factors that are making them wanna get out of the business.
When things are very unstable it actually creates a lot of opportunity. If you read biographies of people like J. Paul Getty, he loved recessions and depressions. He thought that's what gave all these kind of broken playing field opportunities for big, big advancement. So you need to wanna embrace these unstable times and not hide from and say, "Oh, I'm just gonna sit it out. I don't wanna get involved. I'll come back at a different time." No, you have to look at that and say, "Hey, this is my best opportunity to do something really big, because what's gonna happen now is people are going to want to sell." And remember there are a lot of these storage owners and sellers, they own this things basically free and clear. So even if they get a reduced price on what they could have gotten a year ago it's still a really big amount in their pocket. If they're gonna sell something for a million dollars and have no debt, and they could have gotten a million five a year ago where they're still having a good day they're gonna get a million dollars in selling it.
So as a result those deals are not going to evaporate, people, the sellers aren't gonna become during the instability and say, "Oh yeah, I'm gonna sit it out." No, they're more likely to, instead of saying, I'm gonna sit it out, they're gonna say, "Oh, let's go, go, go. Let's get that on the market. Let's get that sold because all the news out there is really, really depressing me. And don't forget if you can just hang in there a little while longer you're gonna start seeing the rates decline. Most US and world economists predict we're gonna have a major recession starting next year, right after the mid-terms. We're gonna slide right into 2023. It's gonna get all kinds of nasty. Now when it does, what does Jerome Powell at the Fed have as a tool to fix things? He's only got one tool, that's it. That one tool is to drop interest rates. There's no better feeling than owning income-producing real estate that you bought at a certain cap rate as the interest rates go down, that helps build your spread.
That's a delightful construction, if you're a storage facility owner to watch as every day your value goes up, not because you're doing such a great job, hopefully you are, but because values are going up because cap rates and interest rates are on the decline. The bottom line to it all is that it's not a good time now just to sit things out and it wouldn't matter what was going on. It just never makes any sense to say, You know what, I'm just gonna go and revisit this later because life moves on, sellers move on, opportunities move on. You gotta embrace and grab those now. You gotta go ahead and make your thoughts today. You can't say, "Okay, I just gonna go and sit it out." This is Frank Rolfe, The Self Storage University Podcast. I hope you enjoyed this. Talk to you again soon.