Take the money and run or in it for the long haul???

Question

I close on Friday on two buildings (30 storage units) and a small office space.  Currently ill-managed with 27% vacancy...while the area is about 98% occupancy on storage.

Anyhow, have another buyer interested in picking it up from me after closing.  Guessing could potentially pick up $20+k...property is closing at $243k, so it's not a huge investment to begin with.

...or stick with original plan and clean it up a bit, with projected rents producing $700-900/month net income after pretty conservative numbers.

I was looking for a cash flow property as I have a couple I'm holding for their equity positions...don't cash flow well and don't need to dump them right now for the cash.

Also, I'm in the military and out of the area, so doing management through family "partnership."  I'm sure it will work, but not without moments of relational stress.  I've been looking forward to learning by doing and getting involved in commercial...of course extended family is a bit more supportive of taking the money and running...to the next project.

I'm sure a bunch of you have run into this situation before.  Curious on your thoughts...

Thanks and have a blessed day!

Bob Mason · Answer

if you were in the area, I'd say gotans execute your plan. Being out of state and doing things by proxy with family members, I'd say take the wholessale fee and run.

Btw, thank you for your service!

Nate B. · Answer

Well put.  Getting it there (proven cash flow) will take a bit of time, but might be worth it.  I was assuming an 8% cap rate...which is also what the appraiser used.  They had difficulty finding comps, as you stated; however, they used some of my projected numbers for valuation.  Where we differ a bit is in expenses.  Theirs seemed high, and included some I know I won't have, bringing NOI to $18,800...also that way the value is close to sales price.  God forbid an appraisal doesn't come in within 2% of contract price!!  The prospective buyer sees the potential, and that's what counts in the long run.

Thanks for getting me back on track with cap rate comparison!

Jonathan Towell · Answer

@Nate B.

You might check with your local self storage realtor expert to see what cap rates other self storages are going for. 30 units is on the smaller side, so it might be harder to find comps.

At 8% cap rate, your facility would be worth $315,000 at your projected NOI. So, you could sell it for a quick $20k. Or you could do the work to get it full, then sell it to net around $72k (assuming 8% cap rate is good, and not including expense to fix the place up if necessary).

Nate B. · Answer

Yep.  That would be net in my pocket after everything.  NOI is projected around $2100...then mort and CAPEX to get to 700-900.

Jonathan Towell · Answer

@Nate B.

Does your $700-$900 net income projection include your debt service? Or is that net operating income (NOI)?

Nate B. · Answer

Hey Guys!

Thanks for the feedback and sorry for the delay....and it's a privilege to serve...I'm sure @Bryan C. can attest to that!

Being absentee certainly creates hesitance; however, the fam is on board.  There seems to be an opportunity for on-site management with the current tenant in the office space...simple stuff, opening units, etc.

After closing, we will likely drop a number to the prospective buyer and see what plays out. I appreciate @Jerry W. 's hold approach and would welcome if the property doesn't sell right away.  For the right price, it's worth a shot.

To answer Jerry's questions:

- Property values are increasing...albeit not crazy fast.  Sellers experienced about 8% annually over 5 years of ownership...the area is generally 3%.  There's a $15M road project taking place next year out the front door of the property, increasing traffic flow once complete....already about 20K cars per day.

- Occupancy rates in the area are about 98% for storage.  New ones going up all around.  This one is ill-managed with zero advertising, no accountability for accounts receivable, and is sitting at 75% with rates at up to a 50% market discount.

- Property is on a 25 year mort to keep payments down right now...may/may not push for payoff if I can get cash flow up a bit.  Want to hold cash for other projects.

- Conservative numbers, I'm anticipating clearing the $20K in about 24 to 30 months...not including any appreciation/principle buy down...just net cash.

Hope that gives some context.

Thanks and have a blessed one!

Jerry W. · Answer

@Nate B., thank you for serving.  As to my thoughts on your investment property I am a big hold and rent person.  We need to know more in order to give good advice.  Are property values going up in that area?  Is the storage unit rental market strong?  How long will it take to pay off your loan on the property?  How long will it take to recoup the $20K in profit from rents.  It should not take too much to rent out 30 storage units.  Same is probably true of the office unit.  Either way you choose to go good luck to you.

Bill P. · Answer

@Nate B.

Sounds like a great deal on your end but it might be a lot to handle absentee. Unless family members have experience in real estate. If not, I'd consider your lucky stars and see if the guy would buy it from you +$50,000 but be willing to come down for a quick sale. You never know until you ask.

Bryan C. · Answer

Wish you the best.  Also Military investing out of state.  Not easy and would love to hear your story as this progresses and see what areas you did well and where you could improve.

Take the money and run or in it for the long haul???

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