Question #
How should benchmark returns be set before evaluating self-storage deals?
Answer #
For example, today, a minimum return an investor or partner may demand in a self-storage deal is, let’s say, 8%.
Fifteen years ago, I used 12%.
But I always had a number before I looked at a deal.
What the benchmarks are specifically may be different for different people.
For me, for example, given I was raising money from passive investors, I had a cash-on-cash benchmark yearly (or after a value-add play was completed), I had an IRR number (return on their investment over a certain time period, which was the life of the investment), and an equity amount that needed to be created from a value-add play (the amount of the equity I raised as a minimum).
I would underwrite the deals, and the deals would either reasonably appear to work or not work.
If they didn’t, is it reasonable I could buy the property at a price that would work for me given the benchmark numbers I had?
If it was a no, I moved on.
If it was a yes, I dug in until I either (1) found out why I was wrong or (2) controlled the property through an LOI or contract and then did my due diligence.
As much as possible, I tried not to (1) get emotionally attached to a deal, and (2) put myself in a position where I had to close even if the deal didn’t hit my benchmark numbers after replacing my assumptions with real numbers from the due diligence (one of the reasons I chose never to do a fund model).
For the most part, I was able to stick with this rule, although I discussed last week one deal I didn’t.
Those were just my benchmark numbers.
Yours may be very different depending on where you are in your career and how you are organized.
Some people are more concerned with a monthly net cash number.
Some are focused on paying debt down or off before retirement.
Source: Five Decisions I Made That Created My First Million Dollars of Wealth
