How Are Interest Rates Affecting Self-Storage Investing?

We all know that interest rates are rising. We know that the FED is doing it to reduce inflation. But how is it going to affect self-storage? If you are using bank money, then it will make a huge difference on what deals will actually work and which ones no longer make sense.

When interest rates were 3% and 4% then you could afford to pick up a property with a lower cap rate and still cash flow. Now that interest rates are higher, you will have to make sure that a property has a much higher cap rate in order for it to cashflow.

How will this affect the self-storage market? Will prices go down or will they remain stable? More than likely, what will happen is that the people who have cash and can use other people’s money, will be able to offer more for a property than someone who is using bank financing. This gives people with cash a better chance of getting an offer accepted.

For example, you are looking at a property with a gross income of $1,000,000 annually and you anticipate 40% in costs, you have a net operating income of $600,000. (Costs will vary around the county and depend on your management style.) If you want an 8% cap rate, then the most you can offer for the property is $7,500,000 minus any upfront costs you anticipate having. This way you can afford to get a loan in todays market and still have cash flow. However, if you are using other people’s money you might be willing to get into a property at a 6% cap rate because of the upside potential. This means that you could offer $10,000,000. There is a huge difference between those two offers. Remember that cap rate isn’t the only deciding factor on a property – there is also upside potential.

This is a great time to be using other people’s money. They are getting less than 3% in the bank. There are a lot of people who are looking for solid stable investments in our rocky world. Don’t be afraid to talk to people about partnering with you. As always, happy investing.