“Buy low, sell high.”
It’s a maxim that we are all familiar with, but fail to apply. The real estate market typically follows predictable cycles every 7-10 years. Property values reach an all time high, hold steady for a short time, then the market levels off and eventually crashes. Understanding the various stages of this cycle is paramount when deciding whether to hold, refinance, or place your self storage business for sale. As far back as 1836, there has been a consistent trend of four recurring phases: recession, recovery (from the previous cycle’s end,) expansion, hyper-supply and recession once again.
During an expansion period, it can be easier to attract tenants as they increase their personal spending. Not surprisingly, it will also become easier to attract buyers. In large part, this is because banks “loosen” their lending standards during an expansion period. Loans that have a lower interest rate and less stringent lending requirements increase the price that a buyer could pay for your property. During an expansion period, buyers are also much more optimistic, and are willing to pay lower cap rates for a storage business for sale; which translates into a higher purchase price. Conversely, as interest rates rise, in order for a buyer to attain the desired return on his investment, they must pay less for an investment property.
If your goal is to maximize your return on investment when you put your self storage business for sale, you need to develop an exit strategy, which includes timing the market. The three elements of an exit strategy are:
Owning a property during a recession is like sailing a ship during a storm; the best option is hold on and focus on getting to your destination after the storm is over. Because of pessimism in the market, buyers will be unlikely to pay high prices, and banks are unwilling to loan at low interest rates. Refinancing your property means paying a higher interest rate, so if you want to prepare your self storage business for sale or refinancing, your focus should be on improving management functions.
After weathering the storm and making it back to smooth seas, it might be a good time to consider pulling money out of your property through refinancing. There is still a very important factor to consider, though: prepayment penalties. When a bank makes a refinance loan, they project a certain return on investment for their loan. If you decide to place your self storage business for sale before the term of the loan, then you’ll owe the bank a lump sum for the remainder of the loan. Because you’re no longer borrowing those funds from them, they eliminate owed interest for the remainder of your loan, but charge you a hefty prepayment penalty to hit their projected return on investment. If selling your property is a possibility in the near future, you’ll want to discuss the implications of refinancing with your accountant.
Right now the market is almost into the hyper-supply phase. Certain markets where a significant number of self storage developments are in the pipeline risk significantly reduced occupancy levels. Occupancy is the cornerstone of your property’s value, and new construction takes a sledgehammer to it. If you lose 10% of your current occupancy, your property’s value potentially drops 20%! It is probable that we’ll see the market peak, gently decline and plateau, then finally head solidly into a recession.
Buy low, sell high has one caveat when it comes to real estate. When the real estate market is in a recession, there aren’t very many people buying. High interest rates, restrictive lending requirements, and anxiety about the market makes it difficult to sell a property during an economic downturn. If you miss your chance to sell during the other three phases, you may be stuck holding the property until the market recovers.
How long do we have until the next recession in real estate values? Nobody knows for sure, but we do know that we’re in between the expansion and recession phases. It is an ideal time for a property valuation. If your future plans include selling your property, consider the timing. Now might be better for your investments.
If you’re ready to sell your self storage facility or are interested in purchasing one, contact us today and we will be glad to help you reach your goals. You can also request a Free Property Valuation of your self storage property at any time.