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 --
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.
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?
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?
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.