Why is it Important to Maximize Your Cash?

Pretend for a moment that you just inherited $2 million. You have enough cash to go buy a self-storage property for cash. While this is a great investment, it may be better to leverage your money and buy several self-storage properties with loans instead. Why don’t we do a few examples with pretend numbers to give you an idea.

We are going to use an interest rate of 6% on these loans and assume that you got an SBA loan where you only had to put down 10%. We are also going to assume that you found properties with a 10% cap rate because that makes the math easy. In addition, each of these properties has an upside potential. We are going to ignore expenses and taxes and insurance for this example to keep things simple. This is just to make a point that sometimes leveraging your properties can be more beneficial than paying cash.

Let’s start with paying cash for one property. You go out and you find a $2 million self-storage property with a 10% cap rate. This means that the property is bringing in a net operating income of roughly $200,000 a year. Whenever we buy properties, they have an upside potential. This means that there is some way that we can go in and improve them to increase the net operating income. Maybe they need work, maybe they can be expanded, or maybe they have low occupancy rates. The point is that that property can increase in value. Over a three-year period of time for our example, we are going to say that this property increases in value by 25%. This means that the property is now worth $2.5 million. If you sell the property, you will have made $600,000 in cash flow and $500,000 in appreciation or $1.1 million. That is a pretty good return.

Now let’s look at what your return would have been if you had bought 10 properties instead. You would have had to make your monthly payment on your loans. Annually, your mortgage payments would be roughly $129,500 of which $20,000 would go towards principle on each property. This leaves you with about $70,000 a year in cash flow with $20,000 going towards lowering your principle. If we multiply everything by 10. The 10 properties would bring in $2 million a year. You would pay out $1.29 million a year and pay off $200,000 of the mortgages. If we have the same increase in upside potential, the properties will increase from $20 Million to $25 Million. If you sell after 3 years you will make $5 million off the sales of the self-storage properties and roughly $900,000 from the cash flow and loan equity. This means you would make $5.9 Million with the same initial investment.

If you have a nest egg, talk to your mortgage broker about the possibility of investing with an SBA loan. This is a great way to maximize your return on investment. Self-storage is a great way to invest your money. As always, happy investing.