Prior to spending a lot of time and money on a new self storage site or purchasing your next stabilized asset, it is important that investors understand area demographic data, sub market rental rates, market demand, competitor supply/market saturation, new development pipeline and allowable facility size. Self storage sites, especially in over supplied markets, need rigorous scrutiny to make sure the facility can capture an adequate market share and withstand a potential economic downturn to meet financial objectives.
Understanding your exit strategy forces the question, “if I had to sell this property, are the minimum market fundamentals met that will make this an attractive asset to the investment community?” You may say “I’m not a seller, I’m a 10-20 year hold”. Life changing and/or economic events outside of your control may change your long term strategy to a point where you want or need to dispose of the real estate.
If for example newly developed competition comes on line, raise your return expectations to account for the increased investment risk. Internal Rate of Return (IRR) is a percentage (%) return on your investment based upon how much equity is invested, when it is invested and how much and when the equity comes out of the investment. Operational net cash flow or net income achieved between the purchase and sale of the property also contribute to that return. There are also other financial performance measures used to gauge the probable success of your project.
When and how much you’re going to gain through the sale of your asset is complete speculation, especially in year 10 of ownership. However, if you’ve planned your exit strategy by ensuring the basic market fundamentals accounting for risk, then you’ll be better prepared to deal with events around you that could negatively affect your operation. Projecting income in a strong market is easy, planning for the downside requires research and planning.
I receive many calls from investors seeking opinions on deals and although a perfect day is obtaining the absolute maximum price the industry will pay my client for their self storage asset, I am always pleased when I can help someone on the acquisition side see the risk and realize this deal is the best deal they never made.
article by Thomas K. Gustafson CCIM
Senior Vice President | Principal
National Director | Self Storage Group
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