Insights

In my previous post, I discussed what I believe are some of the most important pros and cons of investing in self-storage real estate.

As with most real estate sectors, self-storage features some terms that are particular to this property type — specifically in how owners describe occupancy: Unit Occupancy, Physical Occupancy, and Economic Occupancy. Let’s review them:

Real estate has probably been the best vehicle for building wealth since, well, forever – and income-producing real estate (aka rental property) may be the type of real estate that offers the greatest opportunities to small and mid-size investors.

But nothing worthwhile comes without a few potential pitfalls. You can and certainly should prosper as an investor, but to do so means being mindful of some mistakes that could derail your success. Let’s consider a few of the most important:

If you’ve gotten involved as a landlord or tenant with non-residential real estate, such as retail or office buildings, then you have probably encountered a phenomenon that may go by any of several names: expense recoveries, expense reimbursements, pass-throughs, or common area maintenance (CAM) charges. What exactly is this phenomenon and how does it work?

In Part 2 of our discussion of real estate expense recoveries, we looked at several different methods that property owners use to recover some of their operating costs from tenants:

Users of our Real Estate Investment Analysis program sometimes call us with questions that are not about the software but about the underlying analysis. If we had a “greatest hits” list for those questions the all-time winner would be this: “My cash flow goes up each year; the value of the property goes up each year; but when I look at the Internal Rate of Return, it goes down almost every year. What’s up with that?” To see how this can happen, let’s take a look at two very simple examples.

Regression – no, it’s not what your family and friends accuse you of when you want to trade in the mini-van for a two-seater stick-shift convertible (well, maybe it is, but that’s a topic for a different article). If you’re familiar with our RealData software, my online video courses, and my other blog posts here, then you know that I’m usually talking about income-producing property like multi-family, retail, office, or the like — seldom about single-family homes. And when we estimate the value of most income properties, we typically do so by looking at their income stream.

We usually think of Return on Equity (ROE) as a straightforward investment measure. That’s understandable, because the traditional method of calculating ROE is pretty clear cut: Take your cash flow after taxes and divide it by your initial cash investment.

One topic that often gets less attention than it deserves from real estate investors, however, is resale. Some tend be dismissive, looking at resale as speculation, but many others simply find it difficult to focus seriously on the matter of selling a property they haven’t yet purchased.It may take a little extra discipline to work a consideration of resale into your investment mindset, but it is just such discipline that often separates the successful investor from the sorry.