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Now let's get to business:

In July 2021, we closed on two self-storage facilities in Tennessee for $1,075,371.

In November 2022, one of them appraised at $3.13M.

Two weeks ago we sold it for $2.125M.

Let’s talk about it.

These were your classic value-add projects – totally mismanaged and ripe for turnaround.

The properties were located in Clarksville (2110 Golf Club Ln, click here for areal video) and Savannah (935 Pickwick Rd).

Both facilities were in terrible shape, with no website, no online presence, and an absentee owner who lived 600 miles away.

It was pretty obvious why these properties were underperforming.

The Savannah property was managed by someone who was likely struggling with dementia.

The Clarksville property was even worse – the manager was living on-site and pocketing cash from renters under the table.

Clearly, the first step was replacing management and installing professional systems to get these operations back on track.

Executive Summary of The Deal:

We financed this deal with bridge lender. Here is our summary of debt memo:

The Sale of Savannah

We moved quickly on Savannah.

We hadn't greatly boosted revenue. However, we made some updates: new paint, sealed asphalt, replaced several garage doors, and added new lighting.

Within six months, we sold it for $380,000, just shy of our original goal of $425,000.

The Clarksville Refinancing

Now, about Clarksville. We finished the renovation, got rid of nonpaying customers, and filled in with new ones within 12 months.

Once we stabilized the property, we hit 92% occupancy, with a net operating income (NOI) of $194,000.

The appraisal came in at $3.13M at a 6.25% cap rate. I remember feeling like this was really top of the market.

I thought, if I were buying it, I would value it at +-7.5% cap rate. That would price it at $2.58M.

Still, a 6.25% cap sounded great on paper.

This was mid-2022, when inflation was high, liquidity was very high, and CAP rates were compressed.

We refinanced the Clarksville property in November 2022 with a non-recourse loan at a 6.26% rate on a 7-year term with 30-year amortization.

The loan was $1.4M, allowing us to pay off our initial investment.

Decision to Sell

So why did we decide to sell if everything was running smoothly?

To put it simply, self-storage isn’t what it used to be.

1/ My partner Shea and I started noticing some trends in the market.

Institutional buyers had lost their appetite for self-storage facilities, especially buying on proforma.

2/ Occupancies across the sector are lower compared to few year ago, which made sense since self-storage is directly correlated with residential housing sales.

Fewer home sales mean less moving which means less storage demand.

3/ On top of that, the self-storage sector had become commoditized.

The days of finding mom-and-pop shops with no marketing or management are long gone.

Institutional buyers had optimized a big chunk of it – from paid ads and SEO to automated systems that handle collections.

Once these optimizations were in place, “10x10” became a commodity, like gasoline. There’s not much difference between facilities.

And from here, there will be competition on price only.

4/ We also realized that the next step to keep growing would be to aggregate a larger portfolio.

And then sell to an institutional buyer, but that requires 5-10-year patient capital, which our investors don’t have.

Most of our investors want to be in deals for 2-3 years, so we had to stick to that timeline.

5/ Finally, I follow a rule I learned from my mentor Scott Scheel: if you’re getting 10x your cash flow from a sale, it’s worth considering.

At Clarksville, we generated $35,000 a year in cash flow after debt, and selling netted us 14 times that amount upfront.

All this, and other opportunities in industrial small bay, said there is a better asset class for our capital and time.

The Sale

Now, on one hand, we had really handsome debt on it, non-recourse, 7-year term. But it came with a hefty prepayment penalty.

So instead of going on the market, we decided to look for a perfect buyer who can assume the loan.

My partner Shea pulled all deals that happened within a few hours from Clarksville within the last 3 years.

After some calls and a bit of negotiation, he found 2 interested buyers. We negotiated and closed the sale on August 21, 2024, at 9% CAP for $2.125M.

The buyer assumed our loan, saving us over $130K in prepayment penalties, which effectively made it feel like we sold at an 8.5% cap.

Takeaways

1. Refinance Value and Sales Price Are Two Different Things. The refinance value you get from an appraiser and the price you can sell for are not the same. Don’t get too fixated on the appraisal numbers when you’re refinancing – the market will tell you what your property is truly worth when it’s time to sell.

2. Everything in Real Estate is Cyclical. No market stays hot forever. Self-storage was the darling asset class for a few years, but like everything else, it’s coming back down to earth. Occupancies are dropping, and cap rates are decompressing. We’re moving back to fundamentals.

3. In the long run, I believe self-storage will settle back into its historical status. It will remain a viable asset class, but it won’t command the same premiums it did during the recent boom. The market is changing, and it’s important to adjust your expectations accordingly.

So, that’s the story of our $2.125M self-storage deal and why we decided to cash out.

Thanks for reading – if you found this helpful, please share it with your friends.

Be Well,

Saul!