4 Steps for Protecting the Value of Your Self-Storage Investment

The following was written by guest blogger Scott Meyers.

Now that you have your dream self-storage facility, you want to make sure you can keep it.

[Want to learn more about getting started with self-storage investing? Read this.]

Unless you paid cash for your facility, you may want to refinance the property every five to seven years. Market conditions at that time will dictate the loan restrictions imposed on you. You want to make sure your property has enough value that the banks will be jumping all over themselves to refinance your property at a great rate.

Four ways to help protect the value of your self-storage property:

• Current capitalization rate (CAP rate) for your area. This will ultimately determine what your property will appraise for.
• Commercial interest rates. This can have a big impact on profitability.
• Net operating income. You want to make sure you are not only utilizing every inch of your property, but that you are offering as many value-adds as possible to increase your net operating income.
• Key maintenance: Make sure you are not deferring key maintenance on the property.

Let’s explore each of these factors:

1. CAP rate

First, the value of your property is determined by the CAP rate in your area. To determine the value of your property, you divide the net operating income by the average CAP rate. If your property is operating at top occupancy levels and has very few competitors, there are not a lot of places within a five-mile radius for new competition to be built, and you have a maximum net operating income, you can get a great CAP rate.

On the other hand, if you have a lot of maintenance that needs to be done, you have a lot of vacancies and there is a lot of competition within two miles, you are more than likely not going to get the best CAP rate. You want to make sure you are managing your self-storage facility in a way that you can always demand the best CAP rate for your property.

Understand that when you buy a property, you want to get a high CAP rate because that helps your return on investment.

When you are selling a property, you want to get the lowest CAP rate that the market will bear so that you can get the maximum purchase price possible. However, you cannot sell a property for a CAP rate lower than the current interest rates. No one can make that profitable.

Every area has a different CAP rate. In some areas, the CAP rate is around 5 percent; in other areas the CAP rate is around 7 or 8 percent. If the property is in disrepair, you can sometimes get a double-digit CAP rate. The lower the CAP rate, the higher the value of your property. Again, the buyer is going to try to get the highest CAP rate possible, then you will negotiate to meet in the middle.

For example, if your net operating income is $100,000 and you want a 5-percent CAP rate, the value of your property is going to be $2 million. On the other hand, if your buyer wants to get an 8-percent CAP rate, that same $100,000 net operating income is only going to create a value of $1.25 million.

You must understand what the market will support for your property in your area. Even within an area, the CAP rate varies depending on the property. You want to make sure you can demand the best CAP rate for your property because you are operating at max capacity.

By keeping your property performing at the best rate possible, you will be able to get your property to appraise for the highest price possible when it is time to refinance.

2. Current interest rate

The next thing that affects the value of your property is the current interest rate. If you can borrow money for 3 or 4 percent, and a property had a return on investment of 6 or 7 percent, there is a profit to be made.

However, if interest rates are 7 percent, there is no way to make a profit when the best rate of return is only 5 or 6 percent. Not even the best businessman can find a way to make that deal profitable.

If interest rates are higher, buyers are going to demand higher CAP rates. That means your property value is going to go down. When interest rates are lower, you can demand higher prices because buyers can still make a profit. Deals that may once have looked unreasonable at your asking price are suddenly realistic because the price of money is so much less.