Self Storage- Just Built. Sell or Not?

This is not your situation, but just to walk through the different thought processes in Holding/Selling that a friend of mine is going through.

Helped my friend get into the Self Storage business and walked him through the whole process from evaluating the market, selecting a site, developing the site, systems, financing, insurance, etc. He is now in rent up mode and is at 20% occupancy after 3 months during the slow season. Has about 180 units, with ground for another 40. Nice size to start with, but not large.

His particular situation is he can retire in 12 months with significant pension payments and 401k funds, at the age of 56. Kids are out of the house and college is covered. Life is financially good even without doing Self Storage. After watching my wife, son and I build our 8 locations over the last 7 years, he finally got the itch and said hey, help me get started.

Already posted the process he went through on another post developing the location. As we were doing, this, I kept telling him Self Storage right now is one of the top Real Estate investments out there and there is a lot of CASH chasing Self Storage investments. Jokingly he asked during the process what price would be a good price to sell at if someone asked him to sell.

Well he has gotten several calls, but one actually threw a number out before they have done the due diligence, that got his attention. The location all in, cost him X; he got an appraisal for the bank from CBRE national firm of XX and now the firm who called him mentioned paying XXX. Thus, he is pretty excited and it has stuck in his head. The following are concepts I threw out to him to consider:

A. Don’t sell. If you want to grow further sites, it will go better with finance relationships if you already have a track history and are in the business.

B. Don’t sell. The market is crazy right now and will be for the next 2 to 3 years due to inflation devaluing the dollar, inflation increasing new building costs. “Lot of Excess Cash” trying to find a home before it gets devalued and before Interest rates go up further for future development.

C. Don’t sell. You don’t need the money and you then have the problem, where are you going to invest it and it will be devaluing if it stays as cash.

D. Don’t sell. What are you going to do when you retire. Self storage based on a self service model can be done while your golfing, out fishing, or traveling. Work today or don’t work today, it’s great for retirement.

E. Don’t sell. Increase the occupancy rate to 80% or higher over the next 12 months to increase the value. Plus there are many buyers out there. You can sell anytime.

F. Don’t sell. You will have to pay higher personal income tax rate, versus waiting till after one year for lower Capital gain tax rates.

G. Don’t sell. He built the office into a home also. Regular storage building look on the outside. Marble counter tops, textured floor, etc on the inside. Looks wonderful. He would need to find a place to live, which would take money off the table for collateral in his next deal. Don’t ever tell your banker you plan to live there. They won’t finance you, since bankruptcy laws allow you to keep your Residence.

H. Don’t Sell. Don’t sell to an individual asking. Go through a broker. Yes it will cost you 4 to 7% commission, but you will have more buyers, don’t have to worry about the legal transaction process, and you will never question if you got top dollar after you sale.

I. Don’t Sell. Don’t want to pay taxes on the capital gain. Wait till you “Die” to transfer to your kids. Yes, that depends if the “Step Up” rules still exist.

J. Sell. Would need extra capital to do his next deal anyways, thus now he would have collateral to do two or three deals.

K. Sell. Make this your business model. Develop and sell. He already has 4 other properties that interest him to develop into Self Storage or Contractor buildings. Normally “Developing” gets a higher return than Buy/Hold due to the Occupancy risk. A lot of the Risk of “Will they Come” or “Will this Sell” is out of the Self Storage market right now.

L. Sell. Ask to stay in the office for 18 months rent free while he buys/builds.

M. Sell. Since he is a “Cash” taxpayer and not accrual. Take the payment in 2 or 3 payments. First one to pay off both Bank debt and get back initial collateral. This would be taxed at High Personal income tax rate. Later payments if after the one year anniversary would be at Capital Gain rates. Have your Tax CPA do Income averaging in later years to recoup taxes paid out at higher tax brackets when you sold.

N. Sell. Sell the property and not the Business. This is a large National Self Storage company, thus they don’t want your Business name, website, etc. Keep the business, to make it easy for you to start your next project.

O. Sell. Don’t sign a Non Compete Agreement. If they want one, then make it time sensitive- only for x years; location sensitive- within xx miles of the existing facility; make them pay for it, on top of the property value.

P. Sell. If they want you to stay on for x months to help make the transition, have them pay you.

Q. Sell. They don’t want to pay that much. Recommend multiple payments. No interest. With inflation and the devaluation of the dollar, your future payments won’t be worth as much, which they know. Thus even if they say they will pay you X, Y, Z each year. They know that Y and Z payment will not be worth that much in the future. They may not want to do this if they are using a Bank to finance, since the bank will want “First” lien position and you won’t want to do “Second” position. Make sure they add you as an “Additional Insured” on this locations insurance.

R. Sell. Who cares about the taxes. You didn’t have this value just 6 months ago, thus its new money.

S. Sell. Don’t Sell. Recommended he went through the due diligence process just so he can understand the process and how his property gets valued. Do it in good faith, thus if they offer his magical number, take it.

The above are just thoughts, issues and approaches. Each of us are in a different situation and have different Risk Tolerances. 70% of us are Mom/Pop locations, thus will probably only Sale once in our lives. Think it through.

Start small and Make Your Big Mistakes Early.