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Henry Clark#5 Commercial Real Estate Investing Contributor
  • Developer
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Self Storage- Subdivision as Collateral

Henry Clark#5 Commercial Real Estate Investing Contributor
  • Developer
Posted May 16 2021, 12:47

We have continued to grow in the last 7 years with our Storage business.  We are now up to 8 locations.  Most are at 100% occupancy.  4 have land to expand, and we will next year.  Focusing on our last locations 7 and 8.  Our last piece of purchased ground should go on line this month, subject to inspections which are almost complete. 

As you grow, you use up either your liquid assets or your Assets that can be collateralized.  You could stop and pay down on your existing Storage locations and build up equity for your collateral.  We have chosen to push forward, and our locations have gotten larger with each addition.  Other funding solutions could be to get partners, hard money lenders or to syndicate.  We have chosen not to go down these routes since we have decided "Enough is Enough" with Self Storage and are winding down our "Growth" mode.  Our son is 20 and not ready for Real Estate Development, so no need to keep growing.

Realize most posts are talking about how do You invest with Zero Cash.  How do I start in real estate.  Is now a bad time to get into Self storage or Real Estate.  Thought I would show you some back end logic for a business reaching its peak investment target/levels.

Based on the need for more funding, we decided to take some of our non-liquid Assets and use as collateral.  We have taken our 80 acres where we live and set up a Subdivision.  More of a country subdivision with lots in the 2 to 21 acre sizes.  This is just road entrances.  We did the numbers and it was a lot riskier if we did a true Subdivision with concrete driveways installed.  Also the lots would have to be 1 acre and smaller to make the math work.

After we laid this out and did the Subdivision work, we were able to use this "increased value" as a subdivision versus farm acres as the collateral for our latest expansion in Self Storage.  Most families would never sell off the ground around their house; and would say let their children deal with that.  We decided to keep 20 acres for our house and sell "now".  Probably the same in your area.  Housing shortage, builders can't keep up with demand, not enough lots are available and Interest rates are low.  Being in Iowa, you wouldn't think it, but we are getting a lot of buyers from out of state.   Decided to sell now.  Can't tell when in the future all of these data points (low interest rates, housing shortage, Builder shortage, Lot shortage, migrating investors, migration from city to country, family RE knowledge) will come together.

The process of subdividing created value from $6,000 farm ground per acre to $50,000 per acre for the 2 acre lots.  This really helped with the appraisal and the banker giving 65% collateral value.  Thus we did not have to come up with Cash on our latest project, using this subdivision as collateral.  

As we sell a "lot", the cash is transferred directly to the Bank, since they have a lien on the property.  We are allowing them 100% of the cash since we are doing Early Depreciation write offs on our new locations, which is helping to offset the Capital Gains on the land sales.  Them getting the 100% versus the 65% collateralization will help relieve our debt burden really fast.  Basically we are taking farm ground that earns about 1% and converting into both high yielding and Value increasing Self Storage.

On part of the land we are exiting a prior 1031 sale/purchase.  We had a separate 48 acre spot we sold and then bought part of the 80 acres about 15 years ago.  Decided to exit into cash, versus doing another 1031 sale/purchase so we can use the funds for a more valuable asset, Self Storage.  Key is to keep your transaction documents on file and document the transaction path for your CPA tax preparer.

4 of the lots have sold in the last 2 months.  We actually don't need to sell all of the lots to cover our last Self Storage funding needs, since the cost versus sales price on the lots is so great.  Not getting into details, but the location is great.  We put "stupid" money price on the lot next to us, since we don't want anyone to buy it.  But you never know.

To increase both the property value even further and to speed up the sales, we are currently building a two acre pond and will do some large boulder landscaping at the entrances on some of the lots.  There is only so much you can do to a bare lot to increase its value,  prior to the house site being determined.  We installed concrete driveway entrances, versus leaving as dirt.  10 to 15 years ago we planted a lot of evergreen and oak trees.  Took these and transplanted them next to the lot property lines, along road ways for sight and sound barriers, and around the lots, where they would not be in the way of the home sites.  Transplanted about 150 trees.  Did not cost that much since we owned the trees and the Tree Spade did not have to travel far.

Realize everyone doesn't have additional assets to collateralize, but wanted to show you a different path.

Below are some of the actions we have taken.

Lot 5 which is not shown is our house, which isn't for sale.  Did a youtube for each lot noting its special features.  Really helped with people at home due to Covid, online shoppers and from out of state.

Putting Tube or culvert into one of the lots.  Wanted it in place so the potential buyers could visualize the entrance, versus waiting for them to pay.  Had my son dig out and put in culvert.  Can do a lot of work with a skidsteer.

Creek behind our house, between most of the lots.  We are clearing trees and will dam for the pond.  It has eroded about 8 feet since we bought the place.  This actually helps out, since the dirt is drier and we can dig further down, prior to hitting the creek level.  You will note how large the dam is relative to this creek.  Only once, but I have seen it 200 foot wide after about 2 months of rain and then we got 5 inches of rain in an hour.

There is very little "valley" here.  Thus it is a "dug out" pond which is very expensive.  To help reduce the cost, my contractor waited till he had a buyer for the rich top soil.  About 5 miles away there is a Miracle Gro dirt bagging center.  You might be buying some of our dirt.  This is dug extra deep so we could get Clay for the "key" way part of the dam.

The dam is in place.  Still need to put the drain tube in.  A smaller plastic tube is in the creek allowing the water to flow through.  When all of the dirt and pond has been excavated we will tear out the mouth of the tube and plug up.  Allowing the dam to fill.

Supposed to rain tonight.  Worked till about 10 pm getting the grass seed spread.  My son is rolling out and pinning the grass mat with staples.

Just back from his first year in college.  Has three job applications at local stores to work. Until then working on Self Storage.  Hopefully he learns 8 to 5 and no control; versus Self Storage and freedom over his schedule.  Something we are all learning the difference at 30 to 60 years old.

This pond project will help sell the two larger and more expensive lots.  Just called the realtor and increased the price.  Three of the lot sales prices have been increased and will pay for the pond.  Plus I finally get my fishing pond.

Basic decision was to take a non-liquid asset and convert to funding for our Self Storage growth.  Another option if it fit your lifestyle would be to sell your house and make a larger than normal office/home as part of your self storage location.  If we were at our "downsizing" stage, that is what we would do.

Start small and Make Your Big Mistakes Early.

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