Self Storage Case Study: 311% Returns?

Jan 25, 2024

This case study delves into a self-storage venture, providing a detailed analysis of a facility's performance over four years. The numbers showcase an impressive 311% return on investment, illustrating our strategic approach to achieving substantial returns without divesting or compromising the asset's integrity. The study unveils the financial dynamics, shedding light on the facility's progression.

Now, let's delve into the yearly returns. The facility, spanning 115,000 square feet, is situated in a smaller market adjacent to a second-tier market. Despite the absence of explosive growth in either market in terms of population, the facility exhibited promising traits—decent condition, minimal capital expenditure requirements, and a prime location. However, it suffered from inadequate management, lacking active engagement and revenue enhancement efforts. While lease management and customer satisfaction were satisfactory, the facility lacked marketing initiatives and overall improvement efforts.

Facility Overview:

  • Size: 115,000 square feet
  • Location: Smaller market adjacent to a second-tier market
  • Growth Scenario: No explosive population growth in either market

Promising Traits:

  • Condition: Decent
  • Capital Expenditure: Minimal requirements
  • Location: Prime

Management Issues:

  • Deficiency: Inadequate management
  • Challenges: Lack of active engagement and revenue enhancement efforts
  • Satisfactory Aspects: Lease management and customer satisfaction

Weaknesses:

  • Marketing: Absence of initiatives
  • Improvement Efforts: Lack of overall strategies for enhancement

311% Returns is Possible

Acquired for four million dollars, we invested slightly over a million dollars to address these shortcomings. Over the subsequent years, we witnessed the impact of this investment on our returns. The facility comprises 116,000 rentable square feet, with 487 units categorized into 373 storage units, 109 parking spaces, 5 office spaces (unutilized), and a single apartment. Upon acquisition, the on-site manager was residing in the apartment.

Let's now dissect each year and examine how our million-dollar investment played out in this self-storage venture.

In our financial analysis, the initial year spanned only two months, falling short of a full year. Consequently, this partial period is excluded from our calculations. Moving into the subsequent complete year, we generated $206,000 from our million-dollar investment, reflecting a return of approximately 19%.

Returns Year by Year

  • Year 1 (2 months, not a full year): $206,000 (19% return)
  • Year 2: $246,000 (43% return) 
  • Year 3: $300,000
  • Year 4: $2.5 million (311% total return)

Strategy

  • Clean up the facility and get rid of delinquent tenants
  • Market to find the highest-paying tenants in the area
  • Increase cash flow to increase the facility's value
  • Refinance to take cash out of the property (tax-free)
  • Move the financing into a non-recourse loan (meaning the investor is no longer liable on the loan and has no more risk in the asset)

Revenue Growth and Property Valuation in Commercial Real Estate

Upon assuming control of the facility, our primary actions included a comprehensive cleanup, addressing delinquencies, and eliminating tenants with payment issues. Simultaneously, we engaged in strategic marketing efforts to attract the highest-paying tenants in the area, optimizing the facility's utilization.


In the second year, our total revenue increased to $246,000, elevating our cumulative return on the million-dollar investment to $466,000, equating to an impressive 43% cash-on-cash return. In the context of commercial real estate, valuation hinges on the net cash it produces. Therefore, by augmenting our cash flow, we concurrently enhanced the property's worth. Within this second year, we witnessed a substantial increase in value, progressing from $3.9 million to $7 million.

In the third year, we added another 300,000 dollars, bringing the total to 775,000. Moving on to the fourth year, although it's labeled as the fifth year, it's important to note that the first year only spanned two months. So, during the full fourth year, we successfully generated an impressive cash flow of two million five hundred thousand dollars.

It's crucial to recognize the significance of this change. Increasing cash flow directly enhances the property's value. Consequently, we were able to refinance at the same debt-to-loan value ratio. Despite maintaining a conservative 70-30 loan-to-value ratio, we managed to pull out a substantial 2.5 million dollars from the property through the refinancing process.

What's even better is that this cash-out is tax-free. In just four years, our cumulative total reached 3.3 million dollars, with a remarkable 2.5 million of that being entirely tax-free. This translates to an impressive cash-on-cash return of 311%.

Strategies in Real Estate Investment and Non-Recourse Financing

Now, with the successful refinance, we've effectively pulled out all our invested capital. Moreover, we transitioned to a non-recourse loan, meaning I've extracted my funds and am no longer personally liable for the loan. This strategic move eliminated my risk in the asset while securing a substantial profit.

Even after this lucrative maneuver, the very next year brought in additional earnings, surpassing 138,000 dollars. Our success story continued as we kept growing our investment.

Our core strategy revolves around acquiring underperforming assets and implementing a comprehensive turnaround plan. By enhancing their cash flows and increasing their values, we position these assets for success. The subsequent step involves refinancing, allowing us to retrieve our initial investment along with a profit. We then transition the financing into a more secure non-recourse loan.

Crucially, despite extracting our capital, we retain ownership of the equity and the income-generating asset. This process results in what can be considered infinite returns. The true beauty of this strategy lies not just in the impressive returns but also in the ability to reinvest the extracted funds into another asset, perpetuating a cycle of wealth accumulation.

Our approach has proven effective since the early 2000s, enabling us to build a robust portfolio. The compounded growth of our wealth stems from continually reinvesting profits into assets that yield remarkable returns, exemplified by a 311% return in a four-year span. This strategy ensures our money keeps growing, all while maintaining ownership of income-producing assets.

Conclusion

In conclusion, self-storage is a smart investment opportunity that offers a relatively low barrier to entry and high returns. As the self-storage industry continues to grow, now is a great time to consider investing in a facility. By following a solid strategy and actively engaging in the business, investors can see significant returns without ever exiting or losing the asset.



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