Self Storage Investing Newsletter

The stock market has become so volatile that swings of several hundred points have become commonplace. This is a wake-up call for many investors who have always been taught that stocks and bonds are the safe way to attain high returns. The truth is that there is no profit in today’s traditional investment options. To hit reasonable rates of return, you have to take the path less followed, and for many that’s investing in a self-storage facility. When you compare a 15% cash-on-cash return to a CD paying 1%, that’s 15 years of income in one year. And that’s a pretty compelling argument. There’s also the old adage that “before there can be return on principal, there has to be return of principal” – which means that you have to make sure you can get your money back from your investment before the rate of return is even important. Which would you rather have as collateral: 1) a self-storage facility or 2) shares of some company that you don’t even fully understand how they make any money? We think that all considerations point to the fact that the days of stocks and bonds are over.

If there’s one member of your team that is vital to success with a self-storage facility, it’s the manager. Yet many self-storage facility owners fail to grasp the importance of a good manager, or the necessity to retain them on your payroll.

What a good manager can do for you

A good manager can keep your occupancy high and your collections 100%. A good manager can keep your facility in excellent condition, and proactively manage your way around any liability. A good manager can keep your value high, your appraisal on-track, and your loan approved. A good manager can result in a great sales price when you go to sell.

What a bad manager can do to you

A bad manager can reduce your occupancy and destroy your collections. A bad manager can let the facility run down until you are in violation of your loan covenants. A bad manager can embezzle all of your revenue. A bad manager can get your loan placed into default. A bad manager can get you in trouble with city inspectors. A bad manager can make your property worth less than what you paid for it when you go to sell it.

How to keep your good manager on the payroll

We have found that good managers are driven by three forces: 1) the desire to make good money 2) the satisfaction of having autonomy in their timesheet and daily duties and 3) the innate will to do a good job for you and your customers. That being said, the most important thing that you can do as an owner is to set goals for the manager, pay them well, and then let them run the ship. It’s often hard to let go of something that you have a great deal of money invested in, but that’s really the only way to succeed.

But that doesn’t mean you don’t need systems to track the manager

When I say “let go” I simply mean not to micromanage. Let the manager do what needs to be done, but make sure to keep a tight handle on their performance using simple systems. Most self-storage facility managers focus on four areas: 1) occupancy 2) collections 3) property condition and 4) budget/actual/difference. The first two you already know. The third is achieved through regular filming of the property utilizing an HD video camera, such as the Polaroid Cube or the GoPro. The fourth is achieved through monthly meetings (by phone) on the budget for the facility, the actual performance, and a review of what’s making the facility not hit budget or, conversely, beat the budget.

How to ruin your relationship with your manager

If you have a good manager, then please don’t run them off. One way is to not fairly compensate them. You better bet that a good manager is always looking at their employment options, and if you don’t pay them a market wage, they will simply quit and go to work for a competitor. Another way to destroy your manager relationship is to micromanage them. Never call them up and say “so what are you doing today” or install video cameras to watch their every movement. This will immediately give them the impression that you don’t trust them, and they will start sending out resumes. The final issue is if you put them in the position of feeling as though you are not offering a great product at a great price. If the manager wants to give the customer a discount for the fact that the door broke, then run with their judgement. Never put them in the position of feeling bad about what they do for a living, or they’ll be gone.

Conclusion

Managers are the most important member of your team. Give them the VIP treatment they deserve. No football team can win without a quarterback, and the manager is your leader on the field of storage. Keep them around.

In 1776, the U.S. interest rates averaged 6%. In 1876 they had risen to 10%. Now is 2015 – nearly 150 years later – they stand at only around 4% on commercial loans. Our current interest rates are the lowest that have been seen since the age of your grandfather’s grandfather. And this once-in-a-lifetime situation has great impact on self-storage investing.

Understanding the interest rate cycle

Interest rates run in cycles. They go up and down. They never stay in one position forever. The weakness of the U.S. economy has resulted in very low interest rates for almost 8 years now. But that does not mean that they will not rise again. Just when you think they will never go up, they do. And just when you’re convinced they won’t go down, there they go.

How low interest rates effect cap rates

Cap rates are the measured return level of investment on a piece of real estate. They have always been tied to prevailing interest rates. When interest rates are low, cap rates are low. And when interest rates climb, cap rates climb. The reason is that most real estate investors use the concept of “leverage” which means basically buying properties using debt to make up around 75% of the purchase. When you use bank debt, the cap rate must be higher than the interest rate, or you will not be able to pay the mortgage.

How low interest rate risk can be mitigated

Since it’s a given that interest rates cycle, and today’s low rates will not always be this low, how can you protect yourself? The first way is to lock in today’s low rates for as long as you can. We have been placing all of our bank debt into longer term conduit loans, also known as “commercial mortgage backed securities” or “CMBS” debt. These conduit loans offer a fixed interest rate for 10 years. That’s two and a half presidential terms, and gives you plenty of room to maneuver.

The other way to mitigate interest rate risk is to only buy properties that will allow you to grow the cap rate through greater occupancy and rent increases. We would never buy a self-storage facility that is running on all 8-cylinders and at full market rents. You need the capacity to push the net income higher on your purchase to give you a buffer in case cap rates, and interest rates, climb.

What does the future hold?

We ask people all the time what the future holds in interest rates. Bankers, investment bankers and loan brokers – the most knowledgeable folks we know on this topic – all seem to believe that rates will go up about 1 ½ points when “quantitative easing” ends (that’s the Federal program to keep interest rates artificially low, started during the 2008 recession/depression). But after that, it really is a function of inflation. We don’t think that interest rates can return to the 10%+ period under Ronald Reagan for the simple reason that the nation now has 20 times more debt (about $18 trillion to be exact). If rates went up to a certain level, the U.S. government would become insolvent. That’s unlikely to happen.

Conclusion

The current interest rate environment allows you to lock on some unbelievable deals. But be sure to hedge the future volatility in rates as best you can.

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