Self Storage- Big Hat, Little Cattle, or the Cattle Cycle

"“Build” Self Storage in Texas, California, Oregon and Washington.”

One dot means nothing, two dots is a possible trend, three or more dots in the same direction is a trend.

Hindsight is always 20/20. You can’t read the future (actually you can, read the Cattle Cycle). Etc, etc.

Forget the politics, this is about Real Estate.

Couple of things occurred in the last month around me. Most of you probably have known this for years. California, Oregon and Washington folks are either moving themselves or their money to Texas and Colorado; and I have no clue why, Ohio.

A:

Occurrences or Dots:

- Tonight a prospective renter called to confirm they would have two 10 x 20 units available. Talked with them for a little and asked where they were coming from, California. Said they and their kids are selling two houses and moving back to where they were raised. Will miss the climate, but couldn’t wait to get out of the state.

- Joined Bigger Pockets a while back. Building our last Self Storage location and thought I would share our experiences. Normally don’t do social media or forums; and just watch the local news. This whole movement of people and money became evident as I browsed through posts.

- Went down near San Antonio to help a friend get into the Self Storage business. I was expecting prices to be cheap down there, because they are going through an "Oil Bust" period right now. Been through one before, when I lived in Houston and Dallas, thus I have personal experience. But I was amazed that houses were super high and land was super high. They should be dirt cheap. Talked with three different banks and they all required LTV 40%. I can get 25% any day of the week where I'm at. The 40% actually made sense, since these banks are invested in an Oil economy, thus they need to be more conservative in a down cycle. Here is the catch. Texans, can't be supporting these high prices because of the Oil Bust, it has to be coming from outside.

- Was talking with a business acquaintance in Austin. I always ask folks how is business going. Said his business is doing great, but personally he just got up-ended. Young couple, just had a baby and decided they needed a house versus apartment. Made an offer $10,000 above asking price. Called the Realtor 2 days later to see what was up. They had 17 offers above the asking price and it was probably going $100,000 above list price. He knew he had been priced out of the market in his home state.

- Another friend down there was talking about valuing his house. He knew current sales, he should be around $650,000 to $700,000. But the Realtor with comps only was showing $400,000. Didn’t make sense in an Oil Bust economy.

- Talked with three Texas banks on financing. They all wanted 40% LTV. I told them I can get 25% all day long in Iowa, what's the deal. They said different market. Probably since all things are oil based in Texas, they have had to get conservative and increase their LTV%. Which means unless you bring money (California/Oregon/Washington) into Texas it will be hard to get finance.

Conclusion or Perception:

It should always be great when your house value is rising. The young people won’t like it though, because it is harder to get into the market. The old folks/fixed income won’t like it when their tax valuations start to increase. So who likes it? People who sell a small condo or house for $1mm, and then buy a huge house and acreage for $700,000 in the country side, with no state income tax.

B:

Being a TEXAN: Message- Be Careful investing in Texas Self Storage.

First of all, I’m not a Texan. Grew up in Louisiana. All of my relatives are from Texas. Baytown, Goose Creek, Clute, Angleton, and Freeport. Blue collar, oilfield, construction and military.

-What's it like to be a TEXAN. If you ever go to the San Jancinto monument, you will see a big concrete STAR at the top. Knowing your grandfather was the one who figured out how to put it up there. Knowing that when the “PC” folks come to take down the monument, that it won’t happen. What do all of those STARS on peoples houses and businesses mean around Texas? A lot.

-Being the Fire Chief at the Tokyo fire station at the beginning of the Korean War. Knowing you had a cush job and could stay there while your fellow soldiers went to the Korean War. Going down and requesting transfer orders to join the Texas outfits heading off to war, because you had to go with your Texas boys.

-Going on a Sunday picnic in your Model T with your young wife. Getting yelled at by a young man across the Trinity river, about what he would do to your wife if he was over there. Being 5ft 5 inches and 140 pounds and telling him to stay right there and you would be over to talk with him. Swimming the river, and killing the man with a knife. BIG HAT, LITTLE CATTLE loud mouth. Finding out he was a local politicians son and having to leave your family the next day and go to “No Mans” land between Texas and Louisiana and start another family.

Why did I tell you about being a TEXAN and not a Californian, Oregonian, or Washingtonian? I want to stress these are two totally different markets. As you look for a spot to build Storage in Texas, Be Careful.

““Build” Self Storage in Texas, California, Oregon and Washington.”

C:

Cattle Cycle:

Seeing Texas market and prices booming and California/Oregon/Washington money moving out; it made me think of the two ends of the Cattle Cycle. I want you to understand you can “Tell the Future”.

The cattle cycle is one of the true golden investment cycles of all time. You can actually read the future. It has held true since the 1800’s except for a miss in the 2000 era.

Doesn’t matter where you start in the cattle cycle, it just loops around. The following cycle is based on an increase or decrease of just 5% of the national Cow herd (breeders).

- Price is going up, start feeding more heifers to butcher. Herd at 95%.

- Prices continue to go up, then start pulling out heifers to breed. Herd at 100%

- Takes the heifer to get to two years to reach breeding age. Then 9 months to calve. Then the calve takes 18 months to slaughter. Total cycle takes about 4 years.

- Price then goes down. After everyone has decided to breed heifers, then there are to many cows. Herd at 105%.

- Price continues to decrease. Young steers and heifers still in the pipeline, driving down prices. Start selling off old cows. These extra cows butchered, make the prices go further down. Herd at 100%

- Price continues to decrease. Start selling off younger cows. Selling off younger cows, heifers and bulls, makes the market go down further. Herd at 95%

-Cycle then starts over.

““Build” Self Storage in Texas, California, Oregon and Washington.”

D:

So what is the point of me telling you the cattle cycle?

Self Storage runs in a cycle. If the economy is going up or if it is going down, Self storage is great. Actually a stagnant economy is the worst time for a Storage business.

Texas is going up.

California/Oregon/Washington are going down.

These are prolonged trends, which makes it a great time to “develop” Self Storage in those states.

The reason I am stressing for you to build, is you get a greater return when you are a “Developer” and you are not paying a premium in a hot market. Part of the reason is you are taking on a greater risk. In the Self Storage business, as a Developer, you are taking on the risk of “will they come?”. With these trends, you are able to “See into the future”. Keep in mind Self Storage is still a “LOCAL” business, within a 1 to 3 mile radius, no matter what the trends are.

E:

So which states should you build in?

Texas- is on the positive upswing (in the middle of an Oil Bust, see the Cattle Cycle story above), although downswings are just as profitable for Self Storage.

- No personal income tax, but high property taxes.

- Texas banks are running with 40% LTV. So you need to bring money/collateral to the table versus 25% LTV. Unless you do SBA 10%.

- So I have been saying BE CAREFUL in Texas. In the Counties there is “NO ZONING”. See the old guy in the old pickup, he’s worth $50million (oil). His Accountant just told him he needs more write offs. Normally “NO ZONING” sounds great. But from a Risk management standpoint, every neighbor along the road could do Self Storage. You have to evaluate and protect against that happening.

California/Oregon/Washington- are on the down swing. Don’t worry, sunshine, ocean and mountains will always draw people. Don’t worry, its a loop (Cattle cycle).

- high taxes

- here is the kicker, which is true for all states. The major risk to Self Storage owners from a Government is “Self Employment” taxes. As these states continue to come under financial stress they will look for more Taxing authority. If your going to build there, factor that into your equation.

““Build” Self Storage in Texas, California, Oregon and Washington.”

Use another post or forum for Politics.

Start small and Make Your Big Mistakes Early.