Self storage is considered commercial real estate. Commercial real estate is valued by its financial performance. One financial performance metric used when pricing and evaluating self storage is capitalization rate (i.e. cap rate). Cap rate is calculated by dividing net operating income (income after all expenses besides debt servicing) by purchase price. Usually what we're seeing is cap rate is a function of not only the quality of the property, but also the location of the property. On the premium side of the spectrum, you see properties that are in primary markets. Usually they're located in densely populated areas like major cities (i.e. Chicago). These properties are usually class A facilities operated by large real estate investment trusts (REITs). Big operators are usually a hundred thousand square feet or more. These types of properties are usually trading at 5.5% to 6.5% cap rates. On the opposite side of the spectrum, you have your first generation facilities or your class C grade properties. Usually these are located in tertiary markets or more rural areas. These types of facilities we consistently see at 9% to 12%+ cap rates. Pretty easily and pretty consistently. Now where we like to buy is kind of in the middle. We buy all types of self storage facilities but we like class B value add facilities the best. Click on the Facility Valuation button in the upper right corner of the webpage to receive a free valuation and offer on your facility.

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Seller financing is creative financing strategy. You say when maybe the deal doesn't make sense based off of your banks lending criiteria. Or say there is a large value add component that needs to be done. Maybe the property is not producing any income right now, or it's producing negative income. Usually banks, when they're lending on commercial properties, they're going to be lending based off of what's called a Debt Service Coverage Ratio.

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The Debt Service Coverage Ratio is a ratio of your Net Operating Income to your Debt Service or your interest payments yearly. Now, most banks want to see that you're making about 1.25 times the Debt Service in NOI. So what does that mean? Say that when I buy a property, the total debts that I have to pay in one given year is a million dollars in interest and principal. And a 1.25 DSCR, Debt Service Coverage Ratio. The bank is going to want to see that I'm bringing in after all expenses, at least a $1,250,000, so that you have a $1,250,000 NOI divided by a $1M of Debt Service. That gives you your 1.25 times that service coverage ratio.

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Now, if you can't hit that number, because obviously the property is negative cash flow, and you're not losing any income because it was poorly managed or the owner was negligent. Then what makes sense is to actually have the owner be your bank for a short period of time or a long period of time. So what we usually like to do is say, Hey, seller, you know, the bank's not going to lend on your property in the condition that that's at. Can you carry the paper? Can you be my bank for say, 18 months or 24 months while I turn this facility around? Once I get it up to the income that would make sense for the bank to lend on it, then that bank will come in and they will refinance you out of the property.

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And it's just like a bank transaction. The seller will get a mortgage. They'll get a note. Usually we'll have the seller's attorney prepare it so that they know they're being protected. And that is usually a win-win situation. Allows a seller to sell a property. That's usually not lendable and allows me as a buyer to buy a value add project that usually a bank wouldn't lend on today.

Many self storage facility owners are hesitant to sell because they do not know what to do with the proceeds of the sale. They don’t want the money just to sit idle in a checking account when they are used to experiencing the rental income from their property for so long. Often shifting from an active owner of a self storage facility to a passive investor in a self storage fund is a good fit. Owners of self storage have experienced the benefits of self storage and can continue to profit off of self storage without actively having to manage and operate. This also allows an owner of a class C or class B facility to upgrade into being an investor in class A self storage facilities. For additional information on investing in self storage funds, please explore the FAQ section for more frequently asked questions in regards to self storage fund investing and returns.

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When investing in one of our funds, people typically ask: How will I receive income? Is it going to be interest income? Is it going to be a return of capital? Is it going to be capital gains? So it depends on the type of fund that you invest in. So, the first type of fund that you can invest in is what's called a Debt Fund. A Debt Fund will pay a set amount of interest each month or each quarter or each year. Depending on how it's structured and all of that income will be classified as interest income to you.

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Another type of fund is an Equity Fund. An Equity Fund is where you invest capital as a partner. So you have equity in whatever deal or deals are being done in that fund. And that equity can be returned in one of two ways. The first way, which is the tax advantaged way. And that the way that we like to do it is, we will return your capital and classify it as a return of capital. So it's not actually income to you. It's not a gain. And that allows you to pay no taxes on that income until you've returned all of your money to you. This is usually typically used in a, say a large development deal. Where it's not going to be spitting off a lot of cash flow. Maybe just a little bit throughout the period. And then you're going to get a big windfall of capital when you sell the asset or you refinance the asset.

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So those are kind of the two ways that you can get income back. And then once you've made all of your money or returned all of your capital back, anything above that will be considered capital gains. Now, depending on how you invest in that fund, you can get around some of those taxes by either using, you know, retirement accounts or rolling it through special type of tax advantaged entities, like a charitable remainder trust, or using a third party and mixing it with a type of annuity, if you will.

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So those are some different ways that you can get your capital back and how they'll be taxed.

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Who should consider investing in our funds or any self storage real estate fund? What we found is that, investors that are dissatisfied with the returns that they're getting in paper assets, such as stocks and bonds, or are tired of the volatility of the stock market, going up and down with these massive swings based on, you know, news headlines, or, you know, what earnings came out versus projected. You know, these are the types of investors that would like the type of real estate funds or self storage funds that we create. We really like them because number one, they're backed by a physical asset. It's because a physical structure that you can go feel and touch and know it's there, you know it's value.

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The second thing is we will do deals that are classified in two regards. One is going to be your Income Funds. These are going to be the funds where it's categorized as a core or core plus, meaning that there is not a lot of value add as far as substantial increase in valuation, but it's kicking out consistent cash flow on a monthly or quarterly basis. Those are good for investors that are looking to supplement their income. Maybe they're not exactly to where they want to be yet. As far as an income level.

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The second type of fund is what we call Growth Funds or Opportunistic Funds. These are funds that usually do not kick out a lot of cash flow in the beginning. They may kick out cash flow later on in the fun life, maybe three, four, five, six years later, but where the major windfall is or where you get the majority of your returns is when the asset is either disposed of, you know, sold or in our case, we usually sell them to REITs or larger regional players. Or we go and actually refinance the proceeds out with a cash out refinance, which returns all of the capital to the equity investors in a tax free way. Because when you do a cash out refinance, it's considered a return of equity, not capital gain.

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So those are the types of investors that were typically looking for. They're ideal in our eyes. And we have found that the types of structures that we set up are pretty ideal for the investors that are tired of the stock market and the bond market.

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How many investors typically invest in a single syndication or a single fund, close ended fund? Well, it really depends. On average, our capital raises are going to be anywhere between $3million to $10 million. So on the smaller deals, we're typically around five to seven, maybe nine investors. On those larger deals we got closer to maybe 15 or 20 investors. It really depends. Now to have enough investors so that every time you do another syndication or fund, you're not going to the same people.

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You really have to start developing a large list. So right now our list of investors is about 2000 to 3000 strong. And the reason you need a large list is as soon as one investor invest into a project, usually these projects on the short end are going to be at least 18 months until the capital is returned. And on the long end, it can be all the way up to 10 years for say like an income fund. When the capital can be returned. So that investor may not have any more additional discretionary funds to invest into your next, you know, your second, your third year, fourth syndication.

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So it's important to build out a large list. And then it's also important to when those investors come into your database, that you call them, introduce yourself. Usually they already know a little bit about you at that time. And then start to really gather their personal investment preferences, right? Are they looking for income right now? Or do they have enough income and they actually want to grow say their retirement account? You know, income is not always a good thing. There are times when getting just an additional $10,000 or $20,000 or $50,000 in that year, it can push you into a higher tax bracket where you'll actually be making less than when you originally were making. So it's better to shift that income out as a large windfall and then figure out a way to receive that income in a tax deferred or tax advantaged way.