Plan your self-storage exit strategy to leave profitably
In his book “The 7 Habits of Highly Effective People,” author Stephen Covey recommends “starting with the end in mind, which means starting each day, task, or project with a clear vision of where you want to go and where you want to go. , then continue by exercising your proactive muscles to make things happen.
As you approach your next acquisition, conversion, or development of your own storage space, apply this mindset to ensure exit with success. New investors tend to overlook this essential element of their overall strategy. They’re just too excited to to start up think about the Stop. To plan ahead, you need to consider several factors early on, including when and how you exit as well as the tax, financial and other implications that will shape your decisions from the start.
That’s why it’s essential to create a business plan before looking for a self-storage asset to acquire or expand. You need a clear vision that defines ownership structure, geographic focus, marketing strategy, capital stack, asset management, key team players, third-party vendors…and your strategy Release ! For this article, let’s focus on this last element because it fits into your overall approach to investing.
It’s easy to let the excitement of a new self-storage opportunity outweigh our ability to stick to the business plan. It’s easy to say, “I’m only going to buy value-added Class C facilities with over 150 units within a two-hour drive of my house and cash flow positive in six months or less.” I will then reposition them as class B properties, increase net operating income and sell the portfolio in five years.
In practice, this should define your research efforts. In reality, you’ll likely find a five-state, 90-unit self-storage facility that won’t have cash flow for a year and has $300,000 in deferred maintenance. corn it has a huge advantage! If your objective is to group several installations in the same area to exit at the same time, this advantage would not correspond to your strategy. You’d have to sell it separately, which isn’t terrible, but you’d miss the economies of scale while managing it as well as the compressed cap rate (cap) of selling it as part of a larger portfolio. When looking for an opportunity, it is important to know and aim for the goal.
Another important exit consideration is the overall return of a self-storage project, especially one with a longer-term game such as a new development or a struggling portfolio you intend to turn around. If you plan to use private capital to produce the returns your partners seek, there must be a cash event such as a refinance or sale on a pre-determined date. You need to project this cash event three to five years out to calculate the internal rate of return (IRR) your investors will receive, a formula that takes into account how long their money has been tied up in the project.
In this scenario, you need to consider the timing of the exit during the initial project assessment. The overall schedule includes the acquisition or development of the self-storage project, its rental until stabilization, then its sale at the expected value. It may take three, four or five years, so the plan should be backed by your own experience, with the help of a feasibility study and professional consultants.
Pay close attention to the timing of your exit during syndication, as these projections are part of the private placement memorandum that is shared with exchange partners and regulated by the Securities and Exchange Commission. As such, you need to make sure that you achieve your goals.
In addition to defining your self-storage exit strategy and timeline, you need to consider what plays into the projected value of your pro forma. In terms of forecasts, what will the economic climate look like with respect to interest rates and capitalization rates?
Our economy operates in cycles of seven to ten years. We tend to experience a recession, followed by seven to 10 years of expansion, before heading into the next cycle. When interest rates rise, capitalization rates also rise. If you exit at this point in the cycle, it puts downward pressure on values. Conversely, when interest rates fall, cap rates compress and values rise, which is the best time to sell.
Knowing this and planning your exit from the start will determine your overall profit for an individual project or portfolio. If you can’t exit in five years because you’re at a high rate point in the cycle, you may have to wait until cap rates match your assumptions. Remember that the TRI is essential, not only for yourself, but for all financial partners linked to the project.
All of this isn’t to say that you can’t be opportunistic while staying within the constraints of your business plan. For example, let’s say you’ve fired up your marketing machine, you have brokers looking for self-storage facilities that match your acquisition goals, and you have several options on your desk. Some don’t fit your overall plan, but that doesn’t mean you can’t monetize them with a separate exit strategy.
It can be as simple as getting a property under contract and giving it away to someone else. Perhaps you enter into a joint venture in which you keep a small part of the project. In this case, it wouldn’t require a lot of your resources. That would be outside of your core business.
Another wholesale opportunity could be finding land that you take through a right, with exit defined as selling a ready-made plot to another developer. There are many ways to exit profitably when you discover a profitable opportunity, without completely deviating from your initial business plan and its defined exit strategies.
Another possible exit strategy is to sell your self-storage facility or wallet, but assume the role of bank by financing the purchase. For example, you can offer your asset on the market and create your own loan, with a promissory note and a mortgage for a loan-to-value ratio of 60% to 95% on the new appraisal.
In this scenario, the buyer provides the down payment or equity. The deed crosses the table and you are no longer the owner/operator. If the buyer defaults, you have already received the initial capital and have the option to seize and take possession of the property.
Another benefit is that this strategy defers your capital gains since you only receive a portion of the sale proceeds at closing. This is a great tax strategy and a way to keep a stream of income.
For many self-storage investors, the primary strategy is to develop a portfolio of cash flow properties and sell them when the depreciation and tax benefits run out. Some owners choose to gift their properties to their heirs and place them in retirement or in other vehicles for asset planning purposes. Another way out is to make a 1031 exchange into other higher value projects.
At some point, you should set a cash flow target or dollar amount with your financial advisor that you can achieve and add to your overall approach and exit strategy as you build your empire. In practice, it is important to understand that there are several possible exit strategies. This will not only help you to be well prepared, but also to be extremely opportunistic once you step up and get into the game.
Scott Meyers, founder of Self Storage Profits Inc. and Kingdom Storage Holdings, has been involved in the self-storage industry as a developer, owner, syndicator and operator since 2005. He and his companies have bought, sold, developed and converted over 2.4 million square feet of storage nationwide. His website, selfstorageinvesting.com, provides information, software, and seminars to help people start and grow a self-storage business. To reach him, send an email [email protected].