I have written and talked a lot about buying self storage.
I figured it was time I wrote about selling self storage along with my number one rule for selling a project.
As many of you know, I talk a lot about your “why.” The reason you are getting into self storage, and how any particular deal fits into your overall strategy?
Same for selling.
How does disposing of a particular asset now (or whenever you contemplate selling) fit into your overall strategy?
That is my number one rule. Have your sale be part of an overall strategy.
Example One:
Brian (not his real name) has a strategy to double his net worth every three to five years.
That may change in the future, but at this point, that is the strategy. Storage is one of the assets he uses to achieve that goal.
So, by design, he is not going to be a long-term holder of any facility.
What do you think he focuses on acquiring?
Mostly conversions or new construction.
Given the strategy, in underwriting, he looks at where he thinks he will be in three years or so, then sees what the future value will most likely be.
Will he double his money in three to five years or not?
On his last deal, by year three, he had not started phase 2. The current NOI and CAP rates would not have him achieve his double goal.
However, he asks his Broker to let him know what buyers would pay for newly constructed units, but no tenants in them.
The broker gave him a psf number for what the newly constructed, vacant units would be.
With the value on phase I based on income and CAP rates, and the psf value on phase 2 je could potentially reach his “double” the money goal. So, he constructed phase II and it went on the market when construction was complete.
Had the market not paid enough for the vacant units, he would have had to lease them up then sell, but his goal was to dispose as fast as possible then take that “doubled” money and do the same thing again in a larger project.
Yes, he could have received more by waiting and leasing up phase two, but in Brian’s strategy, he would rather take his doubled income and get it deployed into another deal sooner so he can stay on time track.
What I admire is the fact he has a plan, knows exactly where he is in the plan, then sticks with it and is not pulled here and there by potential of “more money.”
The Number One Rule for Selling a Self Storage Project: Have a plan for disposing of an asset and stick with it.
Example Two:
Our a few years ago our strategy was to do value add plays in the form of expansions and conversions. We would use investor money, paid them a preferred return while their funds were invested in our deals, then refinanced or sold when the value-add play was complete giving investors their money back.
Our commitment was to maximize investor value.
If we refinanced, they would stay in the deal and a 30% to 35% partner, enjoying the cash flow and sales proceeds when we sold.
We purchased a 34,200 sq ft facility in the Texas market for $1,895,000.
We added an additional 24,480 net rentable square feet for 41,283,486.
So, we had a total of $3,178,486 in the deal.
As you know, CAP rates were very low from 2016 through last year, so when our value add play was completed, we called a REIT, explained what we had and asked them what they would pay?
We ended up getting a low 5% CAP offer at a value in year four at a value we had projected closer to year nine on our ten-year cash flow in the $5 million range.
So rather than refinance, we sold to maximize investor value.
Yes, I would have liked to keep it longer, but given our strategy, it made since to sell then.
The Number One Rule for Selling a Self Storage Project: Have a plan for disposing of an asset and stick with it.
