It is challenging today to purchase existing self storage—no doubt about it.
But can we small investors do so. And do it in a way that cash flows and gives us the returns we need?
Yes, you absolutely can. It is done every day. However, it requires more work than it did a few years ago.
You need to have a clear understanding of exactly what you are trying to accomplish and how to do it.
Let’s discuss that.
Overview
When I first got into self storage, it was a different world.
It was considered by many banks a “specialty product” and was hard to get financed.
There was no SBA for self storage.
No funds were chasing it, and information on it was sketchy. None of the major retail sectors claimed it (industrial, multi-family, retail, or office).
It was usually listed under “special use.
Then 2007 through 2009 hit, and boy, self storage began receiving attention.
During the great recession, three real estate types were the “shining stars” according to the CCIM (a commercial real estate organization and designation) organization.
- Self storage
- Medical Office
- Student Housing
There is a big difference between these three real estate types. Intuitional grade medical office and student housing can cost well over $200 per square foot to construct, not to mention the ongoing capital expenses to keep it going.
Institutional self storage can cost $80 per square foot or less (ours cost in the $50s) to construct. There are very few ongoing capital costs to keep the income flowing.
In essence, to get a perspective, we have a steel wall and concrete floor generating apartment-type rents.
And here is the kicker: boom times and recessionary times generate demand for self storage.
Occupancy has gone up for most self storage facilities during COVID.
I wonder how student housing faired in 2020 through 2021?
The recessionary resistance of self storage caught wall street’s eye during the recession of 2007 through 2009, and big money has been chasing it ever since.
Combined with a long economic expansion and low-interest rates, the ground was set for 6% CAPS, now as low as mid 4’s.
Crazy.
What’s a person to do?
Well, “let’s build instead of buy.
And boy, did that happen.
Just look at some of these statistics of projected self storage square-foot growth in the construction pipeline as a percentage of existing supply according to the SSA (self storage association 2019):
- Denver 5%
- Miami 6%
- Nashville 7%
- Boston 9%
- Orlando 4%
- Austin 2%
And the list goes on.
Now given self storage is such a submarket product, in other words, there are trade areas in Denver that still have demand, but even there, the amount of new space tends to have a downward pressure on the rental income.
I am sure wherever you are, you have said to yourself before, these facilities are popping up everywhere.
Now new construction is a valid approach to getting in or growing your self storage business. However, if you are new to the industry and/or new to construction, along with the uncertainty of the economic climate and the fact we have had one of the longest expansions in history; you need to know:
- According to the SSA, it takes 36 months on average of lease up to stabilization in new self storage construction today.
- Any bump could slow that down (like new facilities opening up in your trade area during your lease up), can increase the length of time to hit stabilization.
- You could easily be two to three years away from breaking even on a new ground-up facility (i.e., negative cash flow for two to three years or more).
I am very hesitant today to build ground-up unless it is a smaller project, and I can phase it in.
You can’t usually do much phasing in on multi-floor projects.
So given where I am and many of the people I work with, I recommend two ways to get in or acquire your next project:
- Expansions (which means buying existing self storage).
- Conversions (buying existing buildings and converting their use to self storage).
For this article, I am going to focus on expansions.
This leads us to the question and title of this article, “How In The World Can I Buy Self Storage Today Given The Prices?”
Shameless Plug
This article will overview the process, but I do have a Self Storage Bootcamp, and the next one is going to be virtual, over two full days Oct. 8 & 9, 2021 (a Friday & Saturday). More information and registration about it here.
I tend to limit the class size because I don’t want more than one person in any given market area or part of the country in it, so as not to create perceived competition among those in the class.
But here is an overview of the four-phase strategy we cover and how you can purchase self storage today given the crazy pricing and low cap rates.
“How Can You Buy This Project At A 4.6% CAP Rate?”
This is what someone asked me in an email recently and sent me the OM.
Well, in most instances, I can’t.
But there are some instances in which this deal could actually work for us. Just know it won’t be a 4.6% CAP rate for me (or you).
Where do we start?
By the time I usually start working with someone, they are very frustrated, angry to some degree, and almost challenging me to prove to them it is still possible to get in the self storage business.
I assure you it is. It just takes something on your part.
It takes three things in my opinion (and in this order of importance):
- A good (success or abundance type) mindset.
- A clear self storage business strategy.
- Knowledge on how to analyze self storage.
I am not going to fucus on mindset or how to analyze here (I have many episodes on those and they are covered in detail in the Bootcamp), but let’s look at a business strategy.
This is what I almost always see missing.
When someone throws an offering memorandum like the 4.6 CAP’er at me, I will ask them, “well, what are your benchmark numbers?”
Or said another way, what are the minimum returns you need to get in a self storage deal.
The reality is, very few people can tell me.
Look, if you are looking for a “good deal” or “to make a lot of money,” you are probably not going to be getting into the self storage business in today’s environment.
You need to be clear, crystal clear on what you are trying to accomplish.
Odds are you will never see that deal anyway, and if it is out there by some chance, it will be gone before you ever see it.
I haven’t seen that self storage deal since about 2009. But I have been involved in $50 to $60 million of self storage since 2009.
What is a good deal?
How much is a lot of money?
Those are my next questions.
I usually won’t look at a deal with someone until we have flushed this out.
My business transformed when I got clear on what my benchmark numbers were.
And they are different for everyone.
Given I was raising money and what the competition for investor money was in 2007, when I started back in the self storage business then, investors were expecting a 10% to 12% preferred cash-on-cash return, and most deals that they were looking at during that time gave them their money back in 3 to 5 years.
So, because that was how I had to get in the business (because I didn’t have a lot of money at the time), those were my benchmarks numbers:
- Be able to create enough equity to refinance by year five or less and give investors their money back, and
- Average a 12% cash-on-cash return in years 1-5.
Did that mean I had to buy something with a 12% cash-on-cash return year one?
No.
I just had to be able to have a clear path towards averaging 12% per year over years 1-5 (how to analyze comes into play here).
I also had to have a clear strategy on creating enough new value so I could refinance (or sell, but our strategy was to refinance), put on a new loan, and give the investors their money back.
Wha-la.
Every time I looked at a package, I analyzed it to see if those numbers could be hit. If not, at what offering price could they be hit?
You can do the same.
For some people, it is not 12%. It could be having a free and clear asset when they retire. So they analyze a deal, ask themselves, “can I put all available cash after loan payment and reserves towards debt reduction and have it paid off when I retire?”
Real simple.
It is either a yes or no. If no, at what price does it work and does it look feasible, and would the Seller consider and offer at that price?
If not, go on to the next one.
Today, I would be offering 8% cash-on-cash and still five years on capital return.
Now, there is more to a business strategy we cover, and you need to work through it, but this gives you a sense of how critical it is before you even consider your first (or next) facility.
So, let’s go back to the 4.6% CAP’er.
Could we buy that one?
I am not saying it could work, but here is how it might work.
Let’s say it is 34,000 existing square feet of self storage, and 1.5 acres of parking on a gravel lot (I actually bought this before in the Houston area).
I would:
- Check the submarket for the self storage health of the sub-market or trade area.
- Per square foot of self storage per capita.
- Rental rates stats.
- Pipeline projects.
- Assuming these are positive, I would next figure how much new self storage I could put on the 1.5 acres.
- I would analyze the new project I would be putting in place, using my numbers, not the ones in the offering memorandum, based on how I am going to run the facility, then see where I am in relation to my benchmark numbers.
Expansions are our bread and butter today.
Not every deal we look at works, obviously. In fact, 1 in 20 may actually work, but they are out there, and myself and many people I work with are finding and buying them.
Now here is what is interesting, that facility may work for me but never work for you.
And vise versa.
It is all a function of what your business strategy is and what benchmark numbers are.
Do you see why we start there?
Specialized Knowledge
Getting in the self storage business today just requires a clear understanding of what you need to achieve, then looking for those types of facilities that will possibly provide it, along with some specialized knowledge on how to analyze and run the projects.
The good news is it is not that hard to learn.
This episode attempts to close the gap between where you may be now and getting your first or next facility.
In the Bootcamp, we go from wherever you are now, all the way to putting your first (or next) self storage facility into service.
All my training, and the Bootcamp in particular, is designed to speed up the process and give you relevant strategies, information, numbers, and data reflecting today’s world, so we can speed up the process of closing the gap of where you are now and being in (or growing) your self storage business.
Remember, a clear business strategy will inform you what type of projects to look for and how to analyze them.
So, now you tell me, what is the answer to the question How In The World Can I Buy Self Storage Today Given The Prices?
