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Investor Insights Blog|4 Steps for Protecting the Value of Your Self-Storage Investment

Real Estate

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

self storage interior

The following was written by guest blogger Scott Meyers.

Scott Meyers
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.

Ultimate Real Estate Investors Resource Guide

3. Net operating income

The next thing to do is make sure you are maximizing your net operating income. The best way to make sure you get the best value for your property is to keep your net operating income as high as possible. There are several ways you can do this. Obviously, you want to keep your occupancy levels as high as possible.

However, there are other things you can do to create profit without adding a lot of expense:

  • Offer moving packages to help renters get into your units. These can include boxes, locks, tape, bubble wrap, etc.
  • Offer rental trucks to entice people to go to your property. Any value you can think of to increase your net operating income is a good thing.
  • If you have additional land available, you can rent it out as RV and boat parking if that is applicable in your area. Do not leave an inch of your land unutilized.
  • If you are in an area where there is demand, offer pickup and delivery services.

The higher your net operating income, the more you can ask for your property. Find as many ways as possible to increase your net operating income.

4. Maintenance

Finally, make sure you are not deferring maintenance. If your property looks ugly, you will have a hard time getting renters to choose your property over another nearby property. You will also have a hard time convincing a buyer they should pay top dollar for your property. Certainly, an appraiser will not give you a top value when it is time to refinance.

Remember that once you have your property, it is the time to start adding value to your property. You are in the business of real estate now, so you need to make sure you follow the market. Make sure you maintain your property at peak performance so you can always demand top dollar should you decide to sell.

Finally, you are in the self-storage business; make sure that you are managing your facility so that it is performing at the highest level possible.

Self-storage is a great business to be in. Make sure you are doing it right.

About Scott Meyers

Scott Meyers is known as the nation’s leading expert in self-storage. He is the principal in 16 facilities totaling over 7,500 units and over 2 million square feet of storage. He is also the Founder and President of SelfStorageInvesting.com (Self-Storage Profits, Inc.), a leading Self-Storage education company that offers courses, live events, and mentoring/coaching. His company was started in 2006 for the purpose of acquiring, developing and operating self-storage facilities, and has raised over $20 million in syndicates and private equity partnerships to fuel their growth.

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Am I restricted to only purchasing residential property with my IRA?

You are not limited to residential real estate. Your IRA can hold various investment properties such as commercial buildings, vacant land, condominiums, mobile homes and apartment buildings, in addition to residential property.

Scott Meyers is not an employee of Equity Trust Company. Opinions or ideas expressed are not necessarily those of Equity Trust Company nor do they reflect their views or endorsement. These materials are for informational purposes only. Equity Trust Company, and their affiliates, representatives and officers do not provide legal or tax advice. Investing involves risk, including possible loss of principal.

Equity Trust Company is a directed custodian and does not provide tax, legal or investment advice. Any information communicated by Equity Trust is for educational purposes only, and should not be construed as tax, legal or investment advice. Whenever making an investment decision, please consult with your tax attorney or financial professional.


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