Self Storage Investing Newsletter

Thanksgiving is a time to give thanks for all our blessings. And self-storage investors have much to be thankful for this year. Occupancy remains high as Americans continue to prove to be huge acquirers of material objects and needing more storage than the rest of the world combined. In addition, although up for the year, interest rates remain historically low. Meanwhile, lenders continue to embrace our business model and the fact that we have the among the lowest default rates of any type of real estate loan, and this has led to easy lending on good deals. And if that’s not enough, the industry has received a good deal of positive press in 2018, some publications even declaring that storage may be the solution to the vacant mall space in the U.S. But most of all we’d like to give thanks for everyone who reads this newsletter and participates in the self-storage industry.

Have a Happy Thanksgiving!

Even though you have an interest in self-storage investing, there may be something blocking you from moving forward. That happens to everyone. The key is to identify and acknowledge what the problem is, and then to take steps to overcome it. Here are some of the standard roadblocks, as well as the solution.

Understanding how the business model works

If you have failed to move forward because you don’t have a full handle on what the key drivers are to profitability, or what the key dangers are in due diligence, then you’re smart. Not knowing all the facts regarding how to make money with any investment is an unacceptable risk. If you need to know how to correctly invest in self-storage, we would suggest you look at our course here. It’s a college-styled immersion in the self-storage business model.

Finding a deal to buy

There are several different ways to find a storage facility to buy. The key is to focus on volume: do all of these efforts simultaneously. The buyer that looks at 100 properties has ten times the luck of the one that looks only at 10. So what are the key ways to find a property to buy?

• On-Line. These are listings that you can find on the internet at two prime sources: 1) www.Self-storages.com and www.Loopnet.com. These are all listings that include the key details and the asking price. There are typically several hundred to look at.
• Cold-Calling. This is a simple plan. You get the owner’s name and address from the property tax records, and then find their phone number through Switchboard.com or a similar website. You simply call the owner and see if they want to sell.
• Direct Mail. Same plan as above. Only instead of phoning the owners you send them a letter or postcard and have them call you. This is ore effective on some owners who don’t like somebody invading their personal space.
• Brokers. Real estate brokers are an extremely effective way to find a self-storage facility to buy. Build a list of all industry brokers and call them at least monthly to see what listings they may have that fit your criteria.
• Personal Visit. This can be extremely time-consuming, but also can yield some real luck-outs. You simply drop by the owner’s home or business to see if they want to sell. This technique is not for everyone.

Having sufficient down-payment capital

You will need roughly 20% to 30% of the purchase price for a storage property in cash. If you do not feel that you have enough capital to buy the kind of property you are interested in then consider joining forces with a partner. You will find that there are many people out there with IRA funds that are going nowhere and want to try something new. It costs around $500 to have a standard IRA converted to a Self-Directed IRA (SDIRA) which can invest in Self Storages.

Obtaining a loan for the purchase

This is one of the easiest pieces of the storage puzzle. If you have a decent deal and decent credit, you can easily get a storage loan in today’s market – thanks to the fact that storage has one of the lowest loan default rates in the nation. And if you have bad credit, you can still buy a storage property via seller financing, which is pretty common in some markets. If you deal is at least $1 million in size, you can even use a loan broker to get the loan for you. The best one in the U.S. – in our opinion -- is M.J. Vukovich and you can reach him at 612-335-7740.

Fear of signing up a contract

Most of this fear is abated when you have the correct contract form. You never want to sign a contract that does not have a due diligence provision as well as a financing contingency. This gives you two outs in the event you decide you don’t want to buy it. When you realize that the contract can always be cancelled during due diligence (if you have that in the contract ands worded properly) you will rapidly lose this fear.

Confronting fear of risk

Nobody is more risk averse than we are. However, you can’t get anywhere if you take no risk. The key is to properly define what the risk is and then mitigate it. We like to make a grid that shows the worst case scenario, the best case scenario, and the realistic scenario (somewhere in between). If you can survive the worst-case scenario, and the best case is impressive, then you should not fear the deal. That being said, you make your own luck in performing great due diligence. Benjamin Franklin once said “diligence is the mother of good luck”. He was completely right.

Conclusion

Everyone hits roadblocks at some point in their investing career. Simply identify what’s holding you back and learn the truth about how to defeat it. It’s a solid strategy.

We’ve all seen the crazy characters on Storage Wars, battling it out on each episode to buy the auctioned contents of storage units and then selling the contents for a profit. But what impact does this show have on the industry?

Brings attention to the many things you can store

It’s unbelievably the variety of items that are found on each episode. Household contents as well as business. Complete estates and specialty collections. One episode even uncovered a fortune in artwork. One benefit of the show is that it reminds the viewers of all the items taking up space in their home that could be put in a storage unit at a fraction of the per-square-foot cost of their home.

Gives pause before you don’t pay your rent

Every episode is a painful reminder of what happens if you don’t pay your monthly rent. Imagine how that person feels that lost the roughly $1 million collection of artwork that was auctioned off at one point. It’s a cruel world out there, and self-storage has one of the most severe collections methods known to man, namely the complete loss of your stuff if you default on rent.

Creates a solid market for unpaid unit auctions

Of course, the biggest impact of the show is in creating excitement and a ready market for such non-payment auctions. Although real auctions rarely end as well as those shown on television, nevertheless there can be no doubt that the show has created a much stronger bidder market.

Conclusion

Storage Wars is a great show. But it’s also become a part of the self-storage industry’s public persona. It’s for sure a great piece of free advertising for storage facility owners everywhere.

There are many great loan products out there for storage investments of $1 million and above. To learn about the options ranging from CMBS to Agency debt, contact M.J. Vukovich at Bellwether. He’s who we use on all of our larger deals, and M.J. has a sterling track record in obtaining great terms for storage investors. So give him a call today at (612) 335-7740 and let him tell you what he can do for your property, or email him at [email protected]. Let him know Frank & Dave sent you for VIP treatment!

Our Home Study Course is not like anything you have ever listened to or read before. We do not fill it with a bunch of fluff on how your are going to make a million bucks with no money down. We tell you the whole story... the good, the bad, and the sometimes ugly.

Click Here for more information.

It would be a perfect world if you could simply throw out a price to a storage facility owner and they’d immediately say “I’ll take it!”. However, the reality is that there is typically a give and take in negotiating price, and sometimes the seller will not agree on where you want to take the price. But can you overpay and still make money in the end?

Where you want to be

In a perfect world, you want to buy a storage facility at a 3-point spread over the interest rate on your loan, which would get you a 20% cash-on-cash return. If the loan interest rate is 5% then you’d want to buy the property at an 8% cap rate.

Where you sometimes end up

The seller wants a higher price than what you want to pay. You say $800,000 and they say $900,000. And they are completely inflexible regardless of your rationale. As far as they are concerned, it’s their price or the highway. So, to go forward, you’d have to “stretch” to meet their price.

Understanding “stretching”

“Stretching” means just that – paying more than you want to and then trying to rationalize how you can do that. It’s never something that you want to do. Instead, it’s your instinctual alternative to simply in trouble by terribly overpaying.

What you can and can’t stretch on

All “stretches” are not created equal. There are those that can be accomplished with a solid strategy and those that should not be attempted. Here is a breakdown of what you can and cannot do as an investor:

CAN STRETCH:

• Cut costs by firing employees or other strategic moves.
• Mild increase of occupancy through stronger marketing.
• Increase revenue through sensibly raising rents in keeping with the market.

CAN’T STRETCH:

• Expansion of the facility unless you already have the permits in hand (these expansions often fail to gain the necessary approvals).
• Huge increase in occupancy or rents (you’ll never hit those lofty goals initially).
• The seller gives you short-term seller financing (this will only get you into trouble if you overpay as you still have to get regular bank debt shortly thereafter and you’ll never hit the appraisal amount).

What’s wrong about “stretching”

The biggest problem with “stretching” – even when you can do it – is that’s it’s simply not fair to you as the investor. Those gains you make in rents and occupancy and cost cutting should go to your bottom line and not the seller’s. If it was easy, they’d have already done it. Don’t get in a position where you regret the position you’ve put yourself in, working really hard just to rationalize what you’ve paid.

Conclusion

Stretching may be great before you go for a run, but you have to be very careful when you do it while buying a self-storage facility. It’s OK to work hard to put a deal together, but don’t get too aggressive with your own money.