Feb 18, 2020
James: Hi, audience and listeners, this is James Kandasamy from Achieve Wealth True Value Add Real Estate Investing Podcast. Today I have Scott Meyers, who's one of the leading authority in self-storage investing education so I'm happy to have him here. Scott owns almost more than 2 million square feet in self-storage space and across 7500 units and is based out of Indianapolis, right. So hey, Scott, welcome to the show.
Scott: Hey, James. Thanks for having me. How are you?
James: Good, very good. Thanks for coming on. I really like
to focus on multiple different asset classes. I mean, I'm a
multifamily guy but I'm also a strong believer in the operator of
any asset class, right. So if you find the right operator, even on
the least popular asset class if you find the right operator, and
you know you can definitely make money out of it. Because there are
some people who are really specialized in the asset class and you
are one of them in self-storage. So I want to go deep into the
self-storage spaces, one of my two favorites, right, other than
multifamily even though I don't really do self-storage.
But I really like it just because of the asset class and some of
the research that I did on my own in terms of like, past 15 years
trend, right. So self-storage never went down on recession. That's
not data from any book or any papers but I did my own IRR report
data, which is Integra Realty Resources reports. Is that correct,
15 years?
Scott: That's correct.
James: Okay, good. Even though it was a bit hard to really
collect that data, because it is a bit sprinkle, it's not like a
huge asset class subsidies, not a huge asset class like warehouse,
industrial, multifamily. It is an asset class but it's more of a
specialized asset class. So, Scott, you want to tell our audience
something that I would have missed out about you?
Scott: Wow. Well, again I got started in the business the way
that many folks do by investing in single-family homes and that is
considered the easy entrance into real estate. And then get into
multifamily investing in office buildings, warehouses, cold
storage, parking lots and so, yes, I too have liked and invested in
multiple asset classes in real estate.
But when we landed on self-storage you know, the beauty of
self-storage is well no tenants, no toilets and trash. And although
I made a lot of money in single-family homes and apartments, you
know you got to slug it out and get to that place where you can
like yourself and like where we got to where we had property
management companies handling that.
And you get to that, you know, to the scale in which that changes
but that's kind of a tough row to hoe but once we get into
self-storage, not having those challenges, and then also when
somebody doesn't pay you, you lock them out because the law allows
you to do that we have lien laws versus eviction laws. And if they
still don't pay, then you sell their stuff off to recoup your
money.
And so, you know, those factors combined then we made that shift in
2005 to sell off our houses in our apartments and focus solely on
self-storage. And that makes up 99% of our portfolio now.
James: So what happened in 2005? Why was like hey, dumping
all the other asset classes, self-storage is the way to go? What
was that transition? What triggered that? What was that aha
moment?
Scott: Yeah, when I bought my first self-storage facility,
that's when I got into the business, I've been investing since
1993. And we had about 100 houses, about 400 apartments and yeah,
just wasn't, you know, it didn't have the passive income that I
wanted to nor the freedom at that level.
And I begin looking into self-storage and once we bought our first
one, that one just, you know, by every measure outperformed the
rest of our asset classes in terms of dollar per square foot and
just less management and headache and time and everything else. And
so that is the time we started investing and everything else and
then went on from there and growing to where we are now.
James: So in 2005 that is like three years, well it's not
three years. It's like one to two years before the peak of the
market, right, everybody was happy with buying houses. There was a
lot of equity being built, I'm sure the houses doing crazy. But I'm
not sure, what was the state of self-storage at that time? Was it a
hot asset class that the equities appreciating or was like a
diamond in the rough at that time that you think that I want to do
this?
Scott: Yeah, you know, it was still considered the stepchild
of commercial real estate or all of the real estate at that point,
it just, you know, it wasn't sexy. There's still a lot of folks
that just, they don't like it because it is a niche, they don't
understand it or you know, it's just a bunch of garages or sheds,
you know, put out in a field that's how people look at it.
So, you know, at that time when I began looking into it, I was just
looking for an asset class that was much simpler with less
competition and then I could see was on the upswing. And so just
when I started just digging into the industry and looking at the
statistics on it, it was pretty incredible. Again, in many ways
outperformed all other forms of real estate and other asset
classes, including the ones that I was heavily invested in.
So I think maybe because of the lack of information also, there was
more intrigued on my end you know. There wasn't a whole lot of
folks that I knew that were investing in it. There wasn't a lot of,
there wasn't anybody. You know we have an education company now
that was born out of me looking into this business at that point.
And, you know, along the way, we begin teaching people.
And now my second company, our education company is the largest
education company teaching people about investing in self-storage.
And so I think that's part of it, it was just kind of one of those
unknowns. It was an untapped opportunity that many investors
weren't familiar with or looking into. And so, you know, those are
the types of things that I personally seek out.
And so from that standpoint, once I dug in, looked at the numbers
and then bought and began operating my first facility, you know,
that I realized that you know, this is the road to go down. And,
you know, yes, money was inexpensive, it was cheap at that time.
The market was good and banks were lending on all types of asset
classes. But self-storage, I found was even easier because of the
fact that, as you just mentioned, it doesn't go down in a
recession. It's recession-proof and inflation-proof.
When things are bad in this country and people are downsizing and
businesses are downsizing, self-storage actually benefits from
that. So you know, every recession that we've gone through, since
the 70s, self-storage has benefited more than any other real estate
asset class because of the nature of the business and what happens
during the recession.
James: Got it. So coming back to that 2005 when you started,
you said you did some research and you found some statistics. Can
we go into that statistics and dissect a bit? What was that aha
moment that --? It's very hard to always find a new asset class,
right, like right now we are in 2020, right.
It's very hard for me to say this asset class is untapped, right,
unless I know someone is doing it, nobody knows about it and all
that. So I want to go back to your thought process and what was the
data that you were available to you, the aha moment, the statistics
that made you say I want to go and try out this or do this?
Scott: Yeah. So you look at, there was a study that was done
by the Multifamily Rental Housing Commission, I believe is the name
of it at the time. It's been a while since I've been out of that.
And then they looked at all the various asset classes in rental
real estate. And now they've looked at that the number of houses
that were available out there in the marketplace and there were
roughly 13 million, you know, again, give or take.
It's always changing apartment or excuse me, single-family rental
units out there across the country that investors are investing in
and everybody's investing in it. There were roughly 16 million
apartment rental units; individually units not complex and
individual units and there were multiple people that are obviously
investing including myself in multifamily.
And I can go into any room and ask the people to raise their hands,
who are investing in single-family rentals in any investment club
that I was involved in or speaking at. And you know, 80% of the
hands of the room would go up if they're investing in houses, for
apartments less than that but still a number of them. And then I
asked how many people are investing in self-storage; nobody.
I was like, the only person at the time, you know, investing or
nobody really looking into it. Yet, there are 24 million rental
units in self-storage compared to 16 million in apartments and 13
million houses at the time. So I couldn't find anybody that was out
there was investing in it or looking into it. Banks absolutely love
self-storage because it has the lowest loan default rate. It was
like it's a fraction of the default rate for single-family houses
and apartment complexes.
So, you know, at the time, both pre-recession in that 2005 and 2006
timeframe, the savings loans, credit unions, smaller banks, they
all wanted self-storage to add to their portfolio because they were
portfolio lenders. They were packaging these up and selling them
off to Wall Street. And they were strong and they knew that they
performed very well and they wanted them on their balance sheet
when the next recession hit.
Then little did we know, it did hit and then 2008 and 2009, I still
have banks that were clamoring for self-storage deals because
self-storage was going, you know, absolutely, you know, the hockey
stick as it does during a recession, doing extremely well, leasing
up, outperforming everything else. While the values of apartments
and single-family houses were all going down into the toilet.
So for those reasons, you know that's why I began looking into it.
And that's the reason why we continue to do so during the
recession. And, again, never say never but this is where I'm
staying. I can't find myself investing in anything else at this
point.
James: Yeah, it's an awesome discovery that you did in 2005.
Because I mean, up until even like until four or five years ago, I
didn't think so self-storage is a well-known asset class. I mean,
now, I think there's a lot of people who know somebody. I mean, you
are teaching and there is a lot more podcast and people are trying
to jump into right so. I mean, am I right? Like four, five years
ago, I don't think so self-storage just --
Scott: Yeah, I think well, I think our organization has a
little something to do with that, our educational organization. But
outside of that, I mean, it's Wall Street and you just look at the
stats. I mean, you start looking at the asset classes and
comparison from you know, the REITs down to the institutional
investors, year after year, consistently, self-storage just
outperforms all of the commercial real estates. I mean, the numbers
don't lie. And so yeah, self-storage is coming to mainstream and
there's a lot of folks that are wanting to get in on because it's
performing so well.
James: Yeah. I mean I know one of the biggest things that I
realized about self-storage is you know, it's easy to manage,
there's a value add because there's a lot of "mom and pop", am I
right? But you buy from "mom and pop" and you make it nice, you put
Uhaul and you make it a big business and after that, you probably
want to sell it to the REITs. I don't know whether that's a summary
of the usual business plans.
Scott: That's the business model James. In the beginning, you
know, there was a lot more "mom and pop" facilities than there are
today. But yeah, the beginning when we were starting out, looking
at smaller facilities but ones that are still able to be managed by
a person or a management company and so yeah, exactly that.
The "mom and pops" that, you know, they just took their hands off
the wheel or they fell behind in terms of technology or the
marketing or even just, you know, the best business practices in
the industry you know. They've been doing well and making a whole
bunch of money, you know, without trying very hard. And then we
could come in and see the potential and the opportunity in the
facilities. And we would buy it when they're ready to sell at a
fair price and then we would take it up to the next level.
So you know everything we've done has been 'value add' in terms of
turning the management around, leasing of vacant units, adding
profit centers and then adding more square footage. If we can build
more buildings on that existing site or buy land next door or
across the street, we would do that. And then you know, so now fast
forward to the future, still looking at ‘value add’.
“Mom and pops” if we can but they could also be now conversions
looking into other buildings to buy and convert to self-storage and
then developing from the ground up. But yeah, everything we do has
been ‘value add’ to make money for ourselves and our are investors.
So again, just like your model.
James: Yeah, absolutely. And how do you I mean, self-storage
is very dependent on demand or supply of an area, right? So let's
walk through that process of underwriting a self-storage facility
that has already been built. Well, and later we go into developing
right. So let's walk through the process. Let's say today I drive
by a place here in Austin, Texas, I saw self-storage for sale,
right. How do I first I mean, without talking about numbers, how do
I analyze the location of it?
Scott: So yeah, beyond the numbers itself, the only way to
build value in these is to lease them up. And if you can't lease it
up because the market isn't good then it doesn't do any good to buy
it. There's, you know, we look at the supply index that's what we
call it in our industry and that just matches up the amount of
self-storage at square footage in a market.
James: Where do you get data?
Scott: Well, there are a couple of different ways. There is
software out there that we can buy. And there's a couple of
companies that we buy their data from and they'll draw a three-mile
ring or radius on that site and give you that information.
Prior to that, we were still doing on our own with Google Earth
Pro, looking at the facilities that are around it. And then we go
to ezri.com or we can go to the local city data, the local websites
for the chamber and find out the population and then we do the
math, pretty simple math. In five minutes, we can find out what the
supply index looks like.
So depending upon the market it roughly falls into right around
seven square feet per person is considered equilibrium in a
marketplace. So if we find that there are only four square feet of
self-storage per person, it's an undersupplied or underserved
market. If we're at 10 you know, we're going to go check those
facilities and shop them and see, you know, are they full or do
they have you know, a number of units available?
Some markets have a little high demand depending upon, you know, if
there's a lot of apartments, a lot of condos, track housing,
colleges or, you know, transitional type town military, there's
going to be a greater demand. So those supply index numbers may
vary a little bit. But ultimately, you know, we're kind of landing
on somewhere right around that seven square foot per person that
way we know whether it's either undersupplied or potentially
oversupplied in a market.
James: So how do you determine that? I mean, because the
other drawback to self-storage is it's very easy to develop, right?
So let's say you found that facility, you found like so for 4% per
square feet, right, but how do you make sure that someone else is
not building in that area in the next one year after you buy it?
How do you analyze that these new supplies potentially may not be
coming?
Scott: Right. Well, first of all, it is a little more
difficult to guard against that in Texas because you guys down
there, you're the wild wild west. Boards approve everything,
anything, and everything.
James: Yeah, we are business-friendly,
Scott: Extremely business-friendly. So, well, you know, other
developers, for the most part, you know, they're pretty savvy and
they're not going to go in and build it without doing that same
homework. And so you know we look to see what permits are coming
down the pike. And so we're always keeping an eye on that
throughout the process.
You know, as soon as we secure land or a building, if we're going
to convert it then up goes the sign, it says 'the future home of'.
So, you know, even if other developers are looking around that
market at self-storage, you know, they may potentially ward them
off or if they see, you know, the zoning and the permits and how
many square feet that we're going to buy, they're doing their
calculations.
And if our project, the addition of 100,000 square feet will bring
the market up to seven square foot per person, then you know, the
smart developer isn't going to go through all that risk and the
trouble of coming into market and then their facility is going to
be struggling during lease-up and potentially be in an oversupply
situation.
Now that's in a perfect world, right. So we still need to guard
against and if we do see that some people are sniffing around then
we may approach them and just kind of warn them against that. There
are some times when these developers, you know, usually they don't
have private equity behind them or a bank or, you know, the need to
go through a feasibility study or go in front of a lender to build
their business model. Because if nobody's checking, I can't stop
stupidity if somebody just has cash, they decided to build
something.
But for the most part, again, you know, there are savvy developers
like ourselves that aren't going to take a chance, they do the same
bit of homework. And, you know, much like if I were to go into and
find that same thing, we found a perfect spot, you know, the
perfect building to convert. But in our due diligence, we found
that there's, you know, a Uhaul facility coming up or public
storage or extra space or even a national or regional player,
that's going to build 80,000 square foot, I'm not going to think
that I'm better or that we're going to beat him to the market.
That's stupid.
We're going to shoot ourselves in the foot. We won't get the
returns that we want. We'll have equity partners that are disgusted
and we have banks that will either be disgusted if we go through
with it or they won't give us a loan in the first place. So so
there's natural, you know, there are some natural barriers called
intelligent developers all looking at the same time, you know, to
keep that from happening.
So again, that's in a perfect world. But there are you know, there
is from time to time where you do have some folks in a market that
are entering and make it extremely competitive and difficult on
everyone.
James: Yeah, so there is no like one, well, it's a bit hard
to really predict that right, who's gonna build what right? If
you're under contract, sometimes you just wouldn't know whether
they're going to build one.
Scott: Sometimes you wouldn't, that's why you know, again,
even prior to closing I mean, that's one of our steps. Before we go
to the closing table the day before we're looking at, you know, the
zoning board and the office to see if any permits have been pulled
or if there's anything going on that we didn't know about.
James: Got it. And sometimes it is also like your facility
may not have certain features that the developers say hey, can
bring in that feature plus whatever you have, right, like cold
storage, right. Sometimes you probably buying a deal which is just
normal storage but somebody else might come and say I want to do
normal storage plus cold storage which makes mine more attractive,
right, that can be a bit dangerous too, right?
Scott: Absolutely, well, it could be dangerous but also if
anything that may help because there's you know, a place in the
marketplace for non-temperature controlled, you know, less
expensive storage, single-story without all the amenities. There's
always a place for that, the folks are looking to store something
inexpensively.
And even if another facility developer comes in and builds a
facility that is, you know, three-story and is all
temperature-controlled, and you know, security and you know,
everything all the bells and whistles, a class A facility, there
are people that are will only store their things in that facility.
And so, you know, that does help to ward off an oversupply
situation because there are somewhat segments of the
population.
But it's not exactly what you think the way you stated it where
people are going to say well, I don't want to store my stuff over
here in this non-temperature control, I want to put it over here.
They don't need to pay double, you know, to just store some of
their junk, I mean, their treasures.
James: Their treasures, exactly.
Scott: So there are the degrees of treasures and that'll
dictate that you know the budget as to where they'll put their
items. Does that make sense?
James: Yeah, it makes sense. Yeah, I think that's one of the
biggest risks I would say right in self-storage. Like for example,
a mobile home park. A lot of people do not want a mobile home park
in their city. So that's a high barrier to permits to build a
mobile home park, right. Whereas apartments and self-storage always
have you know, the supply things. I mean, in any asset class,
there's there's always a supply concern.
Scott: At the end of the day, it's a ''gotcha in any form of
real estate, you just got to do your due diligence, period.
James: Yeah, correct. The other thing on self-storage that I
found out that, it's not as easy, is just a different way of
financing it, right. You don't get a lot of [unclear19:42] concern
compared to apartments. I mean, there's pros and cons in both,
right, so do you do recourse loans or do you non-recourse? Does it
matter really?
Scott: Well, of course, we don't like, you know, if we don't
have to do recourse, we'd rather not. Again, the good news with
self-storage is we find a lot more non-recourse funding available
out there just because the asset class is less risky. The loan
default rate is the lowest compared to all other forms of
commercial real estate. So there are a lot more lenders that are
willing to do non-recourse just because the asset class doesn't
fail very often.
James: Okay. I was thinking maybe, the sources that I got
were a lot of recourse. But I think anything at lower leverage, you
should be able to get non-recourse so is that common for you?
Scott: Sure, yeah.
James: Okay, got it. Yeah, okay that's interesting. And what
about in 2005, I want to go back to 2005. You discovered an asset
class that not many people discover, right? So, if one of our
listeners want to recreate your success, they have to discover that
asset class right. So you found this self-storage, how did you do
your underwriting? Because there's no one there to teach you how to
underwrite this investment, right, that asset class, right?
Scott: Well, so it started with, you know, the Excel
spreadsheet that I used to underwrite my apartment complexes, you
know. So at the end of the day, it's still commercial real estate
and you --
James: Absolutely.
Scott: Income minus expenses and NOI and a cap rate. So then
what I had to do is I spent time with the consultants in the
industry who does feasibility studies and paid him to spend time, a
day with him to not only visit the facilities that he owned; those
that he managed for somebody else but then also spent a fair amount
of time underwriting and understanding.
You know understanding all the line item expenses in a self storage
facility and how to account for that and what those industry
averages are just to be able to see, you know, in a self-storage
facility when I look into it. "Hey, is this above or below average?
Or, you know feed me a line here? Is this you know, truly the
expense or where should I be as a baseline?" So, and again, as you
know, you know, underwriting for any asset class apartments,
self-storage, mobile home parks, you know, there are an art and a
science to it.
James: Absolutely.
Scott: Here's the underwriting for the lenders and the
industry averages but everyone is different. And then you also have
to, you know, we look at three sets of numbers you know. Here's
where it is right now. You know, we stress that NOI and send that
back with our offer to the seller, then there are our 30 days, you
know, here's what's gonna look like the day that we buy it or 30
days after we make some changes. And then here's what's gonna look
like in one year from now. And then obviously, our projections
after that.
So when I look at those three numbers for an acquisition, you know,
that's going to tell me where you know, we are going to land in a
purchase price and what this facility is going to look like. And
then obviously, in five years hopefully, there's a large value add
down the road. But learning it is, you know, again, like anything
else, I hired experts, I paid those folks and then did a lot on the
road, a lot of facilities. And then you just kind of begin to build
up that experiential math and your mind, you know, when you begin
to start looking at these saying what it's going to look like.
James: Was it easy to get deals in 2005, 2006?
Scott: Easier than than it is now, cats out of the bag. It's
a hot asset class, there's a lot of competition. And right now, I
mean, from where we're sitting right now, at the time of this
podcast, you know, there's, we've had a bull run, interest rates
have been low. And so if those sellers and cap rates are low, so if
those sellers are in a position to you know, sell for whatever
reason; to retire or if they just had built value in it, they were
going to trade in, trade up you know. They've sold off in the past
few years because we are at the top of the market.
So the ones that are out there, and there are still opportunities
out there, don't get me wrong. You just need to look a little
harder and look at the value to be created in the future, not just
immediately. And there are other folks out, you know,
competitors, there are other folks that have sent letters and
mailers and knock on their door as well asking them to sell their
self-storage facility.
So, but you know, at the end of the day, I'll say this to you and
your listeners the same as I do to our students at our events;
"Hard work wins in the end". And you know just going out to and no
offense against LoopNet or any other websites out there. But just
going to LoopNet and doing a few searches and then giving up is not
a strategy.
You do need to send the mailers out, you need to knock on doors, do
Google searches, you know, get your own database and work it and
continue to contact the folks in your market. You know until they
tell you to stop or they sell you your facility or they die, one of
the three. But if you keep after it, you'll find deals. Our
students are finding deals, we're finding deals all the time. Not
as easily as 2005, as you mentioned but they're out there.
James: Do you buy deals from, I mean, not you. I mean, common
people buy deals through brokers as well on self-storage?
Scott: Of course, yeah, the large brokerage firms, you know,
all the players. Most of the large ones have a self-storage
division or an arm to them. And then there are other commercial
brokers that specialize in industrial and in storage. And then
there's also I mean, you find from time to time, we've looked all
over the place in our search for facilities and so you'll see them
listed by business brokers as well.
Because there's a lot of "mom and pop" owners that when they're
getting ready to sell, they look at their facility, not as
commercial real estate but they look at it as they're selling their
business and so they may list it themselves on one of the small
business for sale websites or contact a small business broker. And
they'll put it on one of the small business brokerage websites as
well. So a number of avenues and places to be able to look for self
storage that comes available for sale.
James: Got it. What about the depreciation and tax benefits
in self-storage? How does that play out compared to like
apartments?
Scott: Yeah, cost segregation is our friend. We apply cost
segregation immediately to these projects, especially when we're
buying into building them and so. You know everything else is the
same and applies, same for tax purposes with the added benefit of,
you know, we can write so much off in cost segregation because of
the way that they're built; from the walls, the doors, you name it,
the lion's share of the facility can be written off using cost
segregation. So it's very advantageous.
But also going into these projects, it's much easier because
self-storage really started out as a land play and kind of a land
bank where, you know, years ago back in the 50s and 60s, people
would put up these storage buildings. Buy five acres way out on the
edge of town, even beyond the path of progress, build some
buildings and rent them out to pay for the property taxes until all
the growth came that way. And then they would knock them down and
sell them off to somebody else or build something else.
Well, now, self-storage is the highest and best use, but when we go
to buy these, we will buy them with two separate purchase
agreements; one for the land and then one for the business and the
buildings. So from that standpoint, we can lower our tax basis when
we go into these projects because the assessor's office recognizes
that it is a land bank. These are buildings that can be taken down
and the business, it's only a single-use, you know, when you have a
storage facility, you see all those doors and it's one use, that's
it.
So it's really easy to go in with to purchase agreements and then
also win that battle or the negotiation with a tax assessor as to
the reason why that we have an assessment for the land and the
building separately.
James: Interesting. What about your funding sources? I mean,
I'm not sure whether, I am presuming you do syndication nowadays,
right?
Scott: Right.
James: So did you guys do that in 2005?
Scott: No, we didn't. That was our partners and you know a
few folks that would come alongside us that had some retirement
funds and they would be partners in the deals. We did do some
[unclear27:11], some syndications but just with the family, you
know, true family, you know, friends and family at that point, just
one or two people.
But at that time, we were still using local lenders, credit unions
savings and loans, community banks, 75% LTV and then we would bring
the down payment or our partners would or we would do a lot of
seller financing. Those "mom and pops", the owners they would have
built these years ago or bought them years ago and they paid it
down and paid it off and they didn't want to pay capital gains
taxes.
And so they would stay in the deal and sometimes, you know, stay in
for the amount of the down payment. And then we would just bring a
small amount to the closing table and layer that on top of a 75% or
80% LTV loan. These days, we're using mostly the SBA for underlying
debt but also still credit unions and local banks. But then yes,
syndicating the rest of the funds and setting up a Reg D filings,
five or six days and five or six years time to layer the money on
top of an SBA loan or traditional lender.
James: Got it. And how did the negotiation terms have changed
from 2005 to now? I mean, in terms of like, how many days you have
for due diligence, you know? How many day one hard money? How is it
then and how is it now?
Scott: I don't think that has changed too much, James, maybe
we asked for a little bit more. And so we're getting a little bit
longer time frames just because we were too afraid to ask back
then. But pretty standard, I mean, we tried the traditional
existing facility should be up and down in 90 days. So you know, we
give them 10 days to give us their books and records maybe two
weeks. At the end of 30 days, we'll have our discovery period and
look and then we may have another 30 days once we have our
financing in place for them to do third parties and then closing
another 30 days later.
Again, we can get up and down in 90 days sometimes less than that.
Now if we're doing an SBA loan, they just it takes longer and just
flat out takes longer. And so we start at 90 days, then we asked
for an extension for till 120 or sometimes 120 and extension to 250
days just because that process lasts a little bit longer and for
raising private equity. We'd like to have a little longer runway to
be able to do so. So as long as the seller agrees to that, then you
know those timeframes are a little bit longer with the SBA.
James: Wow, that's awesome. I mean, in the apartment world we
are seeing day one hard money you know, five days due diligence and
the potential of you making mistakes is very high, right?
Scott: We just won't do it. I won't put ourselves in that
position. You know, you take away all leverage and ability to
perform and yeah, we would just --
James: Yeah. And then it's a one year lease and I mean, just
pros and cons and everything but it's just become so hard now. The
sellers and brokers asking for more crazy terms nowadays, right so
happy to know that in self-storage is not that bad yet, hopefully,
it never got there. But --
Scott: But some are, I mean, we've got some crazy, you know,
terms and we just, you know, they want to see proof of funds and
say, well, we got to get a deal first. I can't, you know, no lender
is going to prove anything until we have a contract and I can't
take anything to my private equity partners until we know paying
for and do some due diligence.
And so, you know, things like that are just, that's some of the
ridiculous things that we just will always deal with. But we just
can't perform under those terms. And so, you know, we've got
terminology that we use to combat that and then also our
relationships and then our track record performance that they
shouldn't have to worry. And you know, our money will go hard when
we're done with due diligence, we'll make it short.
But you know, we got to take a look under the hood, not going to
give you $100,000 non-refundable, you know, deposit on this thing
without a chance of looking at your books and records and
inspecting the property so.
James: Yeah, you'll be surprised to see how many people are
paying like half a million dollars without looking at the property
right now for an apartment.
Scott: Well, what is the difference between if I give you $1
for earnest money or if I give you a million dollars for earnest
money and the purchase price is 1,000,001? At the end of due
diligence, if there's something I don't like and your numbers are
fudged then I'm getting it all back, whether it's $1 or a million
bucks. So I don't know why everybody is still making a big deal out
of this, you know, that large earnest money deposits just doesn't
make any sense. It's all coming back.
James: Yeah, I think it's just the way the market is so hot
right now.
Scott: I know, and we have people out if you have the ability
to do that, then you know, they know that you're a serious borrower
or buyer if you have that money, so I get it, but yeah.
James: It just put a lot more on a risky side, right.
Scott: Right, yeah.
James: And how do you do your offerings? Is it liked deal' or
you do a fund basis kind of thing?
Scott: Yeah, we don't have a fund yet James, we're heading
towards that. I think when you know when we see signs of the market
are going to turn and there's more opportunity to buy existing
facilities where you know, that owner hasn't done a good job and
it's time to refinance at higher interest rates and lower LTVs,
we'll look to do a funder. Right now everything is a single asset,
single entity LLC, we do a capital raise for each project right
now.
James: What is the average raise that you're doing? I mean,
I'm sure it depends on the size.
Scott: It does, I'd say we're probably falling in that $3
million mark or so, you know, as low as 500,000 but most of them
and others are 3.5 million, 3.7 million. So I'd say yeah, somewhere
around the $3 million mark is what we're raising.
James: Do you see a lot of passive investors interested in
investing in self-storage?
Scott: Oh, my gosh, more than we can supply deals for. I
mean, they're just like investors, you know, if they're just doing
it passively. Everybody wants a piece of self-storage right now. So
we're just trying to supply the deals to them.
James: What would you advise to a passive investor who's
looking at a deal, right, a genetic deal? What are the steps that a
passive investor should take to analyze that deal at a very high
level for passive investing?
Scott: Yeah, well, I think they need to learn about the asset
class. First of all, so you know, however way, shape or form they
can do to educate themselves in the market space and understanding
self-storage is helpful. But, again in the beginning stages, you
know, they need to look at the sponsor, and, you know, what is the
sponsors' experience level? And have they successfully purchased,
created value and exited? And you know, did they hit their marks in
terms of the projections that they had made to, you know, their
investors in that project or those projects? You know, how well did
they perform? Do they always fall short? Did they exceed the
projections going into those? Are they still untested? This is
their first deal or they bought and they're building value, but
they haven't exited and created any value for their folks. So I
think that's probably the main thing is you need to vet your
sponsors very well.
James: Got it. Yeah. I mean, I agree. I mean, the operators
and the sponsor are the biggest factors in any deal, right.
Scott: They are the factor.
James: They are the factor, correct. They are the investment
return is I guess.
Scott: Correct, yeah.
James: So that's awesome. So what would you tell a newbie who
wants to start in self-storage investing as an active sponsor?
Scott: As a sponsor as the primary?
James: Yeah.
Scott: Again, go out and learn the business, have somebody
come alongside you, or at the very least, you know, check your
underwriting and your due diligence in self-storage is maybe even
more so important to look at the market and the supply index that
we discussed. You know, if you're a value add investor and you're
looking to take a facility from 60% occupancy up to 85% occupancy,
you need to be sure that you can do so.
Because if you shop the competition all around in a five-mile
radius and they're all at 60%, then guess what, the market is
stabilized and so is your facility, you're not going anywhere. So
you need to look into the market, make sure that you can raise
occupancy, raise rates or there's the growth coming or some
compelling reason that allows you to hit your marks if you're going
to create value in it.
But then get real good at underwriting and get some help or
assistance or even hire somebody to look over those numbers
because, in commercial real estate, you know a $10,000 mistake in
underwriting is a is more than $100,000 mistake in valuation at
today's cap rates, it's more like $120,000. And it's really easy in
a five million dollars deal to miss $10,000 in expenses and, you
know, just shoot yourself in the foot to the tune of $120,000 or
more.
So give me a good at that side and then yeah, hit the ground
running with a property management company, if you can or make sure
you hire a rockstar manager to manage the facility. Do not hire the
gal at Great Clips because she's nice and you like the way she cuts
your hair. That person is not the person to manage your $1 million
investment. You wouldn't put her in charge of a $1 million stock
portfolio, this is no different.
So you know, do your due diligence and then make sure that you're
managing that asset once you buy it to the best of your ability,
evaluate it. So I mean, there are lots of others, but those are the
main.
James: How critical is asset management in self-storage?
Scott: Well, so we're on the same page. I mean, there's
property management which encompasses the marketing and the
bookkeeping of the asset itself. There's the onsite payroll, the
person behind the counter. You know we look at asset management as
managing the investor or the overall investment, meaning the
private equity piece. And so, we take that very seriously.
And we didn't do such a good job of that in the beginning. And we
didn't realize how much our investors wanted to be communicated to
by sending out the regular reports. And we thought that monthly
reports of the performance and our quarterly webinar was enough and
they want more than that. And K1s on time, obviously but just you
know, timely and over communication to our investors is key.
Getting those K1 out on time but then in an organized fashion.
You know, we've now taken it to the next level and last year, we
have a portal that we built out a portal so you know, we look like
the big guys. I guess we're getting as big as the big guys now. But
you know, we have, you know, we look like Fairway Capital when you
log into our portal or, you know, Realty Mogul or, you know,
[unclear37:02] Fundrise. The reporting and the information that we
have is every bit as good as the big guy.
So never underestimate that or else, you know, you'll spend a lot
of time answering questions from them with phone calls and emails
that you wouldn't have to do that if you just communicate with them
regularly. And they'll keep coming back to you as long as you
perform and you've been easy to work with and communicate with them
and they will invest in your next deal and your next and your
next.
James: Yeah, I have a portal as well and my investors love it
too, centralized and all that. The other asset management part that
I'm pretty well versed in [unclear37:39] the strategy to increase
the rent, to keep on making sure that they are having the business
plan being executed. For example, in your case, you need to get a
Uhaul company service agreement. I mean, how complicated is that
business plan execution?
Scott: It's key. That's another layer that we've added. You
know, it's one thing to vet the property management companies in
the interview and make sure that you get a great property
management company in place to manage the facility for you. But at
the end of the day, you and I both know nobody cares one percent as
much about your facility and your apartment more than you. So for
that degree, we've added a layer we've added another person who
manages the management company and it may sound like overkill or
redundancy.
But, you know, here's the plan and they're meeting with the
property management company on a monthly basis saying you know,
here's what we set out to do to make this thing perform. So what
have you done to add attended insurance program and have you raised
rates by this percent and how is the revenue been affected, what's
the marketing plan this month? And is it in line with this quarter?
So you know, we don't just, it's not a set it and forget it
business by any stretch. Yeah, we need to manage management
companies and drive the performance and then drive the value.
James: Got it. And at a high level, what is stabilize the
self-storage cap rate that's being sold on the market right
now?
Scott: It all depends, you know, Class A, Class B, Class C
and you know, and what market you're in. But, you know, gosh, when
everything was hot and you know, two years ago the Class A
institutional-grade facility so they were selling a below a 4% cap
rate, I think those have now stabilized on closer to five, five and
a half percent cap rate.
The projects that we're looking to produce to the REITs or to the
national players to buy their Class A facilities and, you know,
we're looking at an exit strategy of six. We certainly could push
to get a little bit lower than that but, you know, that's how we're
those are trading. Class B; seven, seven and a half cap rate and
then Class C, obviously, depending upon the, you know, occupancy in
the market and how rural it is, you know, seven and a half and
above.
James: And is it based on your built for the classes?
Scott: I mean, all things considered, yeah, there's, you
know, first-generation whether has climate control. You know,
what's the market; is it rural? You know, rental rates, how is it
managed; is it big enough to be managed by a management company, is
big enough to be managed by a REIT? You know the security system in
place regular, you know what is the rental rate history; has it
been spiking, population spiking in the market? You know the path
of progress, you know all those things so.
It's not only where it is today and where it's been but also the
upside in it as well. And what we have seen James is these things
perform, you know, we put still more blinders on in self-storage
than we do with apartments or some of the other asset classes when
we look at as a performing asset. Let's look at the underlying you
know, where we're going to take it, it doesn't have to be
beautiful.
You know, we can get these Class B facilities that are operating
very, very well and traded a cap rate that is closer to the class a
facility is more of the institutional-grade just because it's so
predictable. And you know, we know what's going to happen in the
marketplace and if it's a high barrier to entry, it's going to be
a, you know, solid investment that we can hang our head on without
too many variables.
We have in an apartment, housing, you know, dental offices, mobile
home parks, there's always going to be something that's going to be
bright and shiny, nicer and people want to live there or they want
to 'office' out of the nicer places. And so you'll see the, you
know, first-generation or older generation get affected by that.
Self-storage, it's largely excluded from that phenomenon.
James: Got it. Well, awesome, Scott. So why don't you tell
our audience how to get hold of you and your education platforms,
of course.
Scott: Yell really loud right now. selfstorageinvesting.com
is the way to get in touch with me. And there are lots of free
resources on the industry if you're looking to get into it or just
learn more about it on the passive end. You know that is the best
place and the best resource to start.
James: Okay, awesome. Well, thanks for coming on to the
show.
Scott: My pleasure James.
James: You are the only guy I think, yeah, you're the only
one who has talked about self-storage in this show. And I like to
focus on a lot of asset classes even though we have a lot more
multifamily, really like talking about the different asset classes,
how is your return? Because I believe as I said, you know, there's
potential in all asset classes as long as you find the right
operator in that asset class who is the best class in that asset
class. So, thanks for coming in.
Scott: My pleasure, James. Thank you.