By Garrett Byrd
When it comes to new self-storage development projects, two key metrics that investors often focus on are the target Internal Rate of Return (IRR) and the target Equity Multiple. Let's break these down in simple terms.
Target IRR: The Annual Growth Rate
Think of the target IRR as the annual growth rate you're aiming for on your investment. For self-storage developments, which are considered higher-risk projects, investors typically look for an IRR in the range of 15% to 20% or even higher
Remember, the IRR takes into account the timing of cash flows, so it's like an annualized return that factors in when you receive your money back.
Target Equity Multiple: Your Total Return
The target Equity Multiple, on the other hand, tells you how many times over you expect to get your initial investment back. For self-storage developments, a target Equity Multiple might range from 1.5x to 2.5x or higher, depending on the project's risk and duration.
The Equity Multiple is simpler to understand than IRR because it doesn't factor in the timing of cash flows. It just tells you how much money you expect to get back in total.
The heavy lifting in self-storage is through develpment, it takes time to find land, get approvals, get development, and get leased up to become a mature facility. Not everyone has the patience or the capital needed to inject without seeing an immediate return.
In the example below you can see why developing a new self-storage facility can be attractive real estate/business investment to the patient investor.
Project Overview (*Example Purposes only)
Total Project Cost: $11,000,000
Owner's Equity: $1,650,000 (15% of total project cost using a SBA loan)
Loan Amount: $9,350,000 (85% of total project cost)
Mature Facility Value: $16,000,000
Annual Cash Flow: $200,000
Investment Period: 5 years
Key Metrics:
Equity Multiple
The Equity Multiple for this project is 4.64. This means that for every dollar invested, the owner now expects to receive $4.64 back, including the initial investment.
To break it down:
Initial Investment: $1,650,000
Total Cash Flow: $1,000,000 ($200,000 × 5 years)
Project Profit: $5,000,000 ($16M final value - $11M initial cost)
Total Return to Owner: $7,650,000 ($1,650,000 + $1,000,000 + $5,000,000)
This Equity Multiple indicates a strong return on investment.
Internal Rate of Return (IRR)
The IRR for this project is approximately 33.22%. This represents the annualized rate of return on the investment, taking into account the time value of money and the annual cash flows.
Interpretation
These figures suggest an exceptionally successful self-storage development project:
The Equity Multiple of 4.64x shows that the investor more than quadruples their money over the five-year investment period. This is significantly above average for self-storage developments and represents an outstanding return.
The IRR of 33.22% is extremely attractive, far exceeding the typical 15-20% range for these projects. This high IRR indicates a rapid and substantial return on investment, factoring in the consistent annual cash flows.
The addition of $200,000 in annual cash flow significantly enhances the project's financial performance. This steady income stream not only provides regular returns to the investor but also demonstrates the operational success of the facility.
It's important to note that these calculations assume consistent cash flows and achievement of the projected $16M valuation at the end of the five-year period. While these numbers are impressive, investors should always conduct thorough due diligence and consider potential market fluctuations or operational challenges that could affect actual returns.
Storage Authority Franchising is all about owning your own local self-storage business, supported by professional systems and expertise. We like to say, "You're in business for yourself but not by yourself." If self-storage is on your mind, don't hesitate to reach out to me, Garrett Byrd at Direct: 941-928-1354 or Garrett@StorageAuthority.com to learn more about the Storage Authority Franchise opportunity.
If you would like to learn more and start your journey to self-storage ownership click the link here: http://www.storageauthorityfranchise.com/opportunity2
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