Self Storage- Economic Outlook- Positioning

[Henry Clark]

My personal assessment of the overall economic risks has hit a tipping point.  

Decided to sell 4 of our Self Storage locations.  They are great cashflow investments.  But my overall investment strategy and Risk/Reward needle is leaning negative for the overall economy.  Want to move to a really great Debt/Equity position.

Paying off debt goes against both REI strategy of leveraging debt and also inflation, paying off with cheaper dollars and having hard assets to ride the increase in value due to inflation.

Our strategy. 

a.  We are retired so no concern on the W-2 side.  

b. We were already in a great Debt/Equity position but will solidify further by selling the 4 locations. 

c.  Stocks, moving out of any overseas investments.  

d. Control more cash in MM or CD's so we don't take the full inflation bite, holding cash.  But liquid to ride any waves or take advantage of any buying or development opportunities.

e. Gold??  Have to research further.

f.  If Farm ground comes up near us that also has development potential will take a look at that.

g.  Teak farms- this already fits our risk strategy since this is a 10-to-25-year play.

h.  Pulling out of building additional buildings we had planned.

i.  Inflation- still have plenty of hard assets and development land sites, to ride any high inflation moves.

Let me know if you recommend any changes/adds to the above action items.  Thanks.

Start small and Make Your Big Mistakes Early.

The above sale move could be a mistake and it will be another lesson I learn.  But my risk/reward needle for me personally is in the red for the overall economy for the next several years.  Either way, we still are in a great position.

[Steve Vaughan]

@Henry Clark I think 'your thinking' is sound.  I moved 90% from RE equity to debt in '22.  I had MF and saw what I thought was the peak with rising interest and cap rates.  

I'm mostly in cash as well, other than the mortgages I'm holding.  We earn the rate of inflation risk-free and effort-free. 

While paper equities had a great run in '23, I find the indexes very frothy and reduced out of those as well in my retirement accounts over the last couple weeks. 

4 SS facilities sounds like a lot to sell.  What will you do for tax mitigation?   I sold my largest MF on contracts, otherwise my tax bill would have been enormous. 

[Henry Clark]

Pay the taxes. Got to do my part to pay the $34T plus the $110T.  

Have done 1031 before.  Prefer to pay the taxes.  Our returns are high enough to recoup the tax impacts with future investments.  Our “last” and “final” deal I will look at avoiding all taxes.  

[Scott Mac]

Quote from @Henry Clark:

Our strategy. 

d. Control more cash in MM or CD's so we don't take the full ...

e. Gold??  Have to research further.

 d. Thinking more granular about these banking products- Add to the safety you seek.

What I mean is this Money market at Bank of America pays for instance 4%, the money market local Bank of Bricktown Pays 4.5%, an online outfit is offering 5%.

When the SHTF, The local bank, and the online bank may be more likely to fail. In the past I have seen the FDIC telling people they will not be able to touch their money for 20 years in such instances. In fact the money is gone when you need it.

I'm saying be careful where you put it, because if you make the wrong choice you could lose your home due to not being able to pay the taxes, etc...

e. McDonald's will not sell you a cheeseburger for gold. Must have some pocket change for that. 

When the SHTF You might see gold buyers setting up card tables in front of closed businesses or inside grocery stores buying all forms of gold.

They're not paying top price for this because they have more Sellers than buyers.

If you do not take the gold for delivery and have some sort of representative interests in the gold- look up what happened to Iceland during the banking failures. What are known as strips.

Sometimes when successful men fail at their business, the MRS becomes very upset about this and decides this is a good time to fly the coop. Meaning you will pay both sides attorneys fees as well as end up with other possible costs going forward in your life and possible court forced asset liquidations and kicked out of your home. Avoid this situation if you can't at all costs.

No one has a crystal ball.

Good Luck!

[Scott Mac]

Quote from @Scott Mac:

Quote from @Henry Clark:

Our strategy. 

d. Control more cash in MM or CD's so we don't take the full ...

e. Gold??  Have to research further.

d. Thinking more granular about these banking products might add to the safety you seek.

What I mean is the Money market at Bank of America pays for instance 4%, the money market at the local Bank of Bricktown Pays 4.5%, and an online outfit is offering 5%.

When the SHTF, The local bank, and the online bank may be more likely to fail. In the past I have seen the FDIC telling people they will not be able to touch their money for 20 years in such instances. In fact the money is gone when you need it.

I'm saying be careful where you put it, because if you make the wrong choice you could lose your home due to not being able to pay the taxes, etc...

e. McDonald's will not sell you a cheeseburger for gold. You must have some pocket change for that.

When the SHTF You might see gold buyers setting up card tables in front of closed businesses or inside grocery stores buying all forms of gold.

They're not paying top price for this because they have more Sellers than buyers.

If you do not take the gold for delivery and have some sort of representative interests in the gold- look up what happened to Iceland during the banking failures. What are known as strips.

Sometimes when successful men fail at their business, the MRS becomes very upset about this and decides this is a good time to fly the coop. Meaning you will pay both sides attorneys fees as well as end up with other possible costs going forward in your life and possible court forced asset liquidations and kicked out of your home. Avoid this situation if you can at all costs.

No one has a crystal ball.

 Good Luck!

[Henry Clark]

@Scott Mac

Thanks for next level thinking.

Got a bank top 25 safest banks in the US.  Stayed open thru the depression.  Friends with them.  Our second bank is both family and 70 year family friends.  All within 20 miles.  

Mrs is taken care of.  She knows the plan and she is in control.  

Got the pocket change already.  

Thanks for input.  Still have a few things to do.  Plus any holes I find.  

Luckily I’m probably being Chicken Little.  Doesn’t matter whether I’m right or wrong.  Good either way.  

Thank you.  

[Ronald Rohde]

Do you think you optimize towards your self stress/sleep at night?

The single digit percentage optimization is not worth balancing on razors edge all the time.

[Henry Clark]

Quote from @Ronald Rohde:

Do you think you optimize towards your self stress/sleep at night?

The single digit percentage optimization is not worth balancing on razors edge all the time.

Normal investments and life we are fine..  All of our assets have significant cashflow, large built in capital gains, great LTV position, Loans are at 7 year, 10 year and 20 year balloon terms.  

My view of world economics has solidified over the last year.  Possibly Chicken Little, but it impacts my world risk tolerance.

Not trying to sell my view point.  

The U.S. dollar is the Fiat currency but we have told the world it is not.  We have taken Russia, Iran, etc off the system.  Sounds good but it signals to other countries they can be excluded.  We have told Saudi Arabia we are moving away from petroleum.  They have no reason to live up to our agreement with them to do petroleum dollars in USD.  Defense they can get from China and Russia without our questioning their social and political alignments.  They have joined BRICS.  

US national debt. We are past the tipping point.  We are not at war, but our budget is greater than national GDP.  Keep in mind GDP is not income and taxes, thus we are far above our economic spending level.

Drunks, drug addicts and gamblers have to hit bottom before they will self correct.  Our government and Federal Reserve must let our economy free fall so our free economy system will self correct.  Other than the depression of 1920’s no government has had the wisdom and discipline to do that.  

China is no longer the world’s low cost producer and all of those production facilities have to make a move along with the distribution channels. That will be a disruption for the next 29 years.  

Immigration issues. The bottom 1/3 of our population has to pay with a lower standard of living until????  Our social costs will be overwhelmed.  Means we get taxed more.

One or all of the above trip my trigger.  

[Scott Mac]

Hi Henry, 

Tony Robbins  talks about looking  for red and brown. 

You might find it interesting.

https://www.youtube.com/watch?v=Yr7Wkz7W7Vs

 Good Luck!

[Henry Clark]

@Scott Mac. Thanks. Nice exercise.  

I’m always worried about seeing red or brown.

On our deals we always do rental rate, occupancy percentage, cost, and finance stress tests.  

In this post type of concern  I ask my circle of influence (bankers, insurance, contractors, fellow storage owners) their perspective on the economy and also their sphere of influence.  

The video is both a great message and approach.   Thanks. 

[Henry Clark]

We closed on the sale of these storage locations.  Ended up getting asking price.  Being a “C” market there was a lot of interest but few offers.  A local Storage company bought it.  Will be a great deal for them since they will control 80% of the market and can elevate rates.

Not trying to sell anyone in my personal Risk Reward thoughts.

World outlook has not changed. Saudi Arabia has moved away from the U.S. as the petro dollar.  Foreign governments are moving their gold inventory back from the U.S. to avert seizure by the U.S.   Even our friends.  Niger has kicked the U.S. military out and China will take over the facilities.  One of the downfalls of China is its population decline which can’t be stopped. They are addressing this by their Roads program into Africa.  Plus the resources Africa supplies.  

Doom and Gloom.  But not worried about BRICS currency.  All dominant world fiat currencies have been supported by gold reserves.  Although the U.S. is off the gold standard we have more gold in reserves than I believe the next 5 countries.  Plus the BRICS countries although they are buying gold, they are so far behind the U.S. and our ally reserves they can never catch up in the near decades.  Plus as they buy more, the price of gold goes higher making it harder for them to purchase and increasing the value of our reserves.  

Letting the dust settle, allocating the cash proceeds.

Problem. I intentionally turned my REI brain off. But now that we have less locations and work. Started doing some site analysis and found 2 great locations or opportunities.

1.  A second country subdivision location. The owner inherited the land 2 years ago. Due to stepped up basis ni big tax issues.  They are 78 and thus are probably considering estate planning.  Would be about $650k in and gross $1.4K out. Little development cost.  Just selling lots.

2.  Another storage location. Cornfield with proper zoning for sale.  2 miles away from an “A” market.  Would do cargo containers and parking.  $1.6k in.  Good cashflow.  At a 7 cap a $4.8mm valuation after 2 years getting occupancy up.  

 Problem- we are supposed to be retired.  Maybe the situations will still be there if my son gets out of the Navy in 2 or 3 years.  Can help him be worth $3mm in 2 years.  Plus he would get to learn developing a storage location and then could Scale if he wanted.  

[Zack Gill]

@Henry Clark, not exactly applicable to your start of this post but in response to this last reply, do you think its better to build still than to buy existing? Obviously you just sold but seems like you still see value in developing SS. 

[Henry Clark]

Quote from @Zack Gill:

@Henry Clark, not exactly applicable to your start of this post but in response to this last reply, do you think it’s better to build still than to buy existing? Obviously you just sold but seems like you still see value in developing SS. 

I would always prefer to buy first.  This allows me to get a higher percentage of the market or chain locations together to raise the price.   At this time unless I get a value add deal the market prices are to high.  The investors who bought from us, already own in the market.  They will have 80% of the market and all the towns around are full.  Now they can raise rent $10 and make $50,000 per year just mailing a notice out.  This creates $600,000 of value.  This is in a C market.

Building cost for traditional storage has almost doubled in the last 4 or 5 years.  You can still make a profit in C markets. But it’s not high enough.  A and B markets you can still build. 

I will do a separate post. We will upgrade from a C market to an A/B market.  Plus we will go with all Cargo containers and parking.  Now our money will produce a higher cash flow but also a greater appreciation than if we had stayed in our C market property.