As I’m sure you are aware, the market has been quite shaky as of recent.
Interest rates have risen dramatically, the S&P 500 and NASDAQ have both lost a material amount of value, and residential real estate prices have come down quite a bit. However, we at Safe Storage Investors are extremely eager to continue investing in the self-storage space. Here’s why:
For these reasons – and many more – not only have we continued our search for properties, but we have doubled down on our efforts.
As we scale, one very important metric we look at is our underwriting criteria and determining what makes a particular self-storage investment attractive. We believe the way in which we scale into a property – coupled with our ability to operate – provides us and our investors an above average rate of return.
Let’s dive in.
In-Place Rent Assessment
Whenever we consider a prospective property, we always like to get a grasp of the downside scenario. The way in which we do that is conducting an in-place rent assessment.
How many units are currently occupied? How many tenants are on-time with their payments? Of the tenants that are late on payment, how much money is outstanding in arrears?
We always underwrite to in-place income. Meaning, when we look at a property, the deal must work if the property stayed exactly the way it is – even if we always plan on leasing up vacant units and raising rents.
We also consider late tenants as vacant tenants. So, even if those tenants don’t ever pay what they owe, the property will still be profitable. This creates a tails, I win, and heads, I win, scenario.
If we are making money whichever way you look, higher interest rates and inflationary pressure won’t impact us nearly as much as it will other operators.
When analyzing a property, we always consider market rents. If the property we are purchasing can’t withstand immediate rental increases to match the prevailing market rents, we pass.
We conduct a thorough analysis of neighboring properties as well. We walk the streets of the area, talk to nearby operators, and compare every rental price with every type of storage unit we are considering buying.
We want to make sure that the property makes money now, but that it can also make money when we raise rents as soon as we take the keys.
Conservative Expense Management
Expense management is what defines a strong operator. We pride ourselves on the ability to take over an asset and immediately conserve our investor’s capital. When investors entrust us with their hard-earned funds, you best believe we do our very best to ensure we are only spending when we need to.
A big area we likely to cut back on is management and on-site payroll. Mom and pop managers typically pay themselves excessive amount for the work that they do. When we purchase their properties, we utilize our economies of scale to immediately reduce that cost.
For instance, we are under contract to purchase a property in Maine. We already own a variety of properties in the surrounding area. Thus, we plan on utilizing the same staff members to oversee each of our facilities. Additionally, we like to install cameras and monitoring systems to ensure each unit is well protected – enabling us to monitor the security from afar without having to pay someone to always stay at the property.
Attractive Purchase Price
On top of ensuring the property has adequate in-place cash flow, we also like to purchase the property at a very attractive going-in capitalization rate.
The capitalization rate (or the cap rate for short) is a number that reflects the percentage of net operating income the property generates relative to the value of the property. For example, a property that generates $100,000 in income and is selling for $1,000,000 would have a cap rate of 10 ($1,000,000 / $100,000).
As interest rates rise, cap rates tend to rise as well. To combat this, we always ensure we are purchasing the property at an attractive cap rate. By entering the property at an attractive multiple, we ensure we’ll make our investors an attractive rate of return even if cap rates rise over our holding period.
We cherish investor capital very dearly. We also put our own capital alongside investors in every deal we invest in. If we don’t think we can make our investors a 15% – 20% annual return on investment, we aren’t interested.
Investing in self-storage is not without its hurdles and challenges. We at Safe Storage Investors go through a rigorous underwriting process to ensure we are always entering the right deals. We understand that we are the stewards of your capital. You should find comfort in the fact that we always underwrite conservatively, we always put pen to paper and due a thorough analysis, and we always account for the downside – ensuring our deals will be profitable in all macro environments.
We are actively in the market for more deals. Feel free to gloss through our website to learn more about our experience, track record, and investment criteria. Let us know if you’d like to participate in our next investment opportunity!