A successful self-storage investment takes three things: money, expertise and time. What if you lack one of these key components but still want to become a self-storage owner? Get creative! We’ll explore that in a minute.
First, let’s establish the fact that you’re going to need at least two of the three. If you have money and time, you can learn to be an expert or hire one. If you have time and expertise, somebody with money will want to partner with you on an investment. If expertise and money are a long suit for you, a broker will find you a property in a hurry!
In the past, most self-storage owners and investors lacked all three of these success ingredients for their first transaction, or any transaction for that matter. They were successful because they found or created a way to make it happen. Let’s look at how you can be creative to achieve your goal of owning a self-storage property.
Money
The first question buyers or investors often ask is, “What does it take to buy a self-storage property?” The standard answer is 25 percent of the sales price as a down payment and a loan of 75 percent of the value, typically from a local bank. This works great if you have $100,000 to $1 million in your checking account and a banker with lots of money with whom you play golf every Friday. If that’s not the case, what can you do?
Typical creative money strategies include borrowing against your assets such as your home, business or investment portfolio for the down payment; or borrowing from your parents or relatives. Be careful at holiday dinners if this strategy doesn’t work out. There’s a lot of risk in these options.
If you don’t want that level of risk, partner with someone who has the money. Maybe an old college buddy who’s done well? Your doctor or dentist? Maybe you know a professional who doesn’t have the time to find a good deal or manage an investment such as self-storage. You need to bring value to the partnership through your time and expertise and let your other partner(s) contribute the cash.
Expertise and Time
A few of you may have money to invest and an understanding of real estate investing but lack time to acquire and manage assets. Maybe you own real estate now and want better returns, less risk or less hassle from your tenants. This is for all of you who’ve owned houses or apartments and dealt with countless complaints and issues.
Or perhaps you’ve heard about self-storage and are looking to invest, but need the expertise to find a good property and manage it well. Here are some professionals you’ll need to enroll in your self-storage investment activities:
- Self-storage broker
- Self-storage management company
- Real estate attorney
- Accountant
- Loan broker
- Environmental consultant who’ll conduct the phase I environmental study on the property you’re considering to ensure it’s clean and free of any contamination
- Appraiser
- Construction and/or maintenance company
- Industry mentor or advisor
Now for the creative part. I’ve seen many strategies for making the transaction work for the buyer and seller in a resourceful way. Following are some examples for you to consider.
Start Small
We all read about the $100-million-dollar transactions and dream of having the wherewithal to make one someday. Even the million-dollar property would be wonderful to own. For most, however, the value of these deals might just be too large for our current circumstances. So think small.
My first self-storage facility was one I built from scratch. My father and I paid $13,200 for 2.5 acres in the middle of nowhere Pennsylvania and borrowed $90,000 from Wells Fargo to build one 30-by-220-foot building. We leased it in nine months and had it appraised at $250,000. Then we refinanced the property with a 75 percent loan and had $90,000 cash to go buy our second property!
If you’re not interested in the risk and amount of time necessary to develop a facility from the ground up, consider buying a small existing one. A number of smaller self-storage properties sell for $50,000 to $250,000. These would need a cash investment of $10,000 to $62,500. They might be rows of garages in a city or a number of portable-storage units on a lot in a rural part of the country. Either way, it gets you “in the game” and puts your investment capital to work.
Seller Financing
Let’s face it, banks and other lending institutions are a pain to deal with. In some cases, you may find a seller who wants to finance the purchase of the property. He earns the interest the bank would normally receive and may get a higher price for the property since the buyer won’t have to pay bank fees. The transaction can also close in a much shorter time.
Upside With Management
Some of the greatest returns in the self-storage industry come from buying properties that are mismanaged or undermanaged. Would you pay a 6 percent capitalization (cap) rate for a property on current net income if you knew you could increase the revenue and decrease the expenses in 12 months so the purchase price would then be a 9 percent cap rate? There are a number of these properties on the market at any given time. Lots of opportunity exists here.
Leased Properties
Yes, there are self-storage properties on leased land or in buildings leased from the owner. These properties are priced much lower than those on fee simple land and offer greater cash-on-cash return since there’s no potential upside in the appreciation of the real estate for the self-storage owner. The tax benefits are really good as well.
Properties With Expansion
Adding rental units to an existing property is one of the least risky and most rewarding ways to add value to a facility and equity to your balance sheet. In our industry, the value of an occupied unit is two to three times greater than the cost to build it! So any opportunity to buy a property with expansion potential should seriously be considered.
Lease to Own
There aren’t many of these opportunities out there, but they do exist. Sometimes the seller wants to get away from the daily operation of a property, yet doesn’t want to transfer the title (estate taxes) or hire a management company (controlling personality). This creates an opportunity for a buyer to take over operations and pay a lease payment each month vs. a loan payment. Lots of complexity here, proceed with caution!
Buyer and Seller Benefits
The toughest part of a creative transaction is finding a seller or buyer who’s willing to be imaginative. It takes a lot of trust and concrete benefits for both parties. Here are the potential benefits for each side of the transaction:
Today, we have a strong seller’s market in self-storage. Fewer than 5 percent of the transactions are “creative” in some meaningful way. Be prepared to look long and hard for these opportunities, but also be ready to profit greatly when they do come along. Good hunting!
John H. Gilliland is president and founder of The Investment Real Estate Group of Cos. Since 1997, he’s brokered more than 300 storage transactions and built 2.5 million square feet of storage space. He currently owns and operates 16 facilities in Maryland and Pennsylvania. His company serves Connecticut, Delaware, Maryland, New Jersey, New York, Pennsylvania, Virginia and West Virginia. He’s a past president of the Pennsylvania Self Storage Association and past chairman of the national Self Storage Association. For more information, e-mail [email protected]; visit www.irellc.com.
