Mobile home syndication

JF1220: He Took His Money Out Of The Stock Market To Syndicate Self Storage & Mobile Home Parks with Hunter Thompson

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Hunter was always an entrepreneur. He started as a high schooler selling parking spots out of his backyard when there was an event going on. His first venture into investing was in the stock market. Hunter didn’t like that some many variables that were out of his control, could determine how much money he made or lost. Enter real estate. Now Hunter and his team syndicate opportunities, most notably self storage and mobile home parks. Today we’ll hear higher level tips and suggestions for investing in those two asset classes. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Hunter Thompson Real Estate Background:

Founder of Cash Flow Connections, a real estate syndication company

– Has helped investors allocate capital to over 100 properties, which have a combined asset value of $350MM.  

– Host of the Cash Flow Connections podcast, which helps investors learn from intricacies of commercial real estate

– Based in Los Angeles, California

– Say hi to him at: https://cashflowconnections.com/

– Best Ever Book: 4 Hour Work Week

 


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TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluff.

With us today, Hunter Thompson. How are you doing, Hunter?

Hunter Thompson: Joe, it’s an absolute honor to be on here. Thanks again.

Joe Fairless: My pleasure, and nice to hear that, that’s for sure. A little bit about Hunter – he is the founder of Cashflow Connections, which is a real estate syndication company. They have helped allocate investor capital to over 100 properties, which have a combined asset value of over 350 million dollars. He’s also the host of Cashflow Connections Podcast, and he is based in Los Angeles, California. Their website, where you can learn more about Hunter and his team, and their company and what they’ve got going on is CashflowConnections.com. There’s a link to that in the show notes page. With that being said, Hunter, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Hunter Thompson: Absolutely. My grandfather was a successful businessman in the ’70s and ’80s, and I learned a lot from him growing up, really from the legacy of just owning a business, investing in hard assets, and allowing compounding interest to create wealth. I was very much an entrepreneur at a young age.

I remember my parents lived next to a popular concert venue, and when I was about five or so these events were taking place, football games or concerts; parking the area would be just a complete nightmare and was really challenging, so I remember selling parking spaces out of the backyard for $10 or $20 and splitting the profits with my mom. That’ll kind of give you an idea of how I was growing up.

Then 2008 happened, obviously a paradigm shift for a lot of people. I knew that there was going to be an opportunity in financial assets just because price deflation had been taking place over all the sectors of the economy, but particularly financial assets. So my original interest was in stocks, but that later changed just because of the lack of predictable cashflow and the volatility in the market, and I remember — it wasn’t really until 2010 or so, that’s when the European debt crisis was taking place, and I remember watching CNBC, and the anchor was talking about the Greece bond yields; they were saying that if the Greece bond yields remained below 7%, that the S&P 500 was gonna be fine. But if the Greece bond yields went above 7%, the S&P 500 was gonna collapse.

I just remember watching the Dow Jones take 600 point intraday swings and thinking, “How is it the case that something completely complicated, unmitigatable that I just could never conduct due diligence on or control is playing a significant role in my financial well-being or my financial future?” and that’s what really led me into real estate.

In California in particular the market had been completely decimated, so when I started jumping in with two feet and going to 3-4 networking events a week, I was building relationships with probably 5-10 people at each networking event. But when the market recovered, I came to find out that because these were the people that had been able to weather the storm, they ended up being some of the most successful and influential real estate entrepreneurs in the state of California, and this is kind of unknowingly at the time, but that’s really what led me to start Cashflow Connections and leverage those relationships from my business and from my clients, and those relationships still play a huge role in my business today.

Joe Fairless: What is your business model?

Hunter Thompson: We syndicate opportunities for accredited investors. We identify asset classes that are poised to perform in either economic standpoint or demographic standpoint or something similar to that, and identify sponsors who are best in class in those particular asset classes.

Then we syndicate opportunities for our investors to invest alongside of us, and I invest in each opportunity, and basically provide a passive investment on a vetted passive opportunity in a vast amount of asset classes, particularly recession-resistant asset classes, most notably self-storage and mobile home parks.

Joe Fairless: I see on your website you’ve got properties across the country, and I’m looking at Recently Closed, and one’s in Fayetteville, North Carolina – I was thinking Arkansas – and you’ve got things across the country… How do you qualify these deals in all these different markets across the country?

Hunter Thompson: That’s a good question… A couple different things. First of all, from a geographical location standpoint, a market identification standpoint, we’re consistently seeing opportunities in the South-East in self-storage, and the reason for this is the two driving factors of really what makes a good market  – the economics and demographics.

The economics is such that in the South-East the cost of living is low enough to substantiate — if you’re making $50,000/year you have a relatively comfortable life and have the capacity to do the two things you need for self-storage, which is things to store and money to pay for the service. And you kind of compound that with the demographic shifts that are taking place, particularly in markets like Florida, where a lot of baby boomers are retiring and moving to that market. Baby boomers present an interesting data point with self-storage because social security checks are probably around the $1,300/month range, the average two-bedroom apartment is about $1,200/month, so a lot of these baby boomers that are retiring (10,000/day or so), they’re being forced to downsize. And when they’re downsizing, they’re very likely to keep their stuff. When you’re put in that position, you’re very much more likely to be a tenant of self-storage, so it presents an investment opportunity.

In terms of going and doing due diligence across the country, going on-site is probably the last stage of due diligence. We’re very heavily reliant on upfront due diligence in terms of not only markets and demographics and economic third-party verification in terms of verifying those data points, but when you go on-site you learn a lot… Not only in terms of the market – you can get a feel for things that can’t really come across on the spreadsheet, but also in terms of the previous property manager, which kind of paints the picture for where the value-add is gonna be in that particular opportunity.

Joe Fairless: Let’s dig in there. You said you do third-party verification prior to going on-site… What are those data points that you’re specifically looking for?

Hunter Thompson: I’d say with self-storage there’s a couple things you wanna look at. First of all, it’s really good to have 50,000 people within a five-mile radius; that is gonna provide you with a substantial economy, with a diverse employment group. Now, this is typically, right? Some things change, but that’s just a good data point to look at.

We wanna see 20-25 daily traveled vehicles per day, and something else to keep in mind is–

Joe Fairless: Wait, 20 to 25 thousand…?

Hunter Thompson: Thousand, yeah. That’s important. 20 is not gonna cut it. What’s equally as important as that extra times 1,000 there is that the vehicles have visibility to the facility. You can get caught up in that data point and inappropriately assess the value and the visibility by just looking at how many vehicles pass by.

In self-storage in particular, a lot of properties may be tucked away behind something like a Walmart, which makes it completely invisible. That needs to be taken into consideration. A medium household income is also very important, and that’s something you wanna look at in the three and five mile ranges. I like to see 50,000.

One of the things you hear a lot with self-storage is that the asset class is still relatively new, and it experienced a tremendous increase in its overall scale over the last 20 years or so. From about 1993 to about 2010 or so, the number of facilities more than doubled, from about 20,000 to 53,000. So right now there are more self-storage facilities in the U.S. than there are Subways, Starbucks and McDonald’s combined, which is just unbelievable.

Now, that paints an important data point in terms of the desirability of the asset class from an investor’s perspective, but more importantly, they’re easy to build. So you have to identify markets that are under-supplied, and one of the ways to do is to look at the national average, find the number of square foot per person in particular markets on a national basis, and find where that market sits in that space. So we underwrite deals typically to seven square foot per person, and multiply it by the population size and you get a good idea of the supply/demand equilibrium in that market.

Joe Fairless: Seven square feet of self-storage per person?

Hunter Thompson: Correct.

Joe Fairless: Okay. Because I’m slow, will you run that formula by us one more time?

Hunter Thompson: Basically, the number of people times seven in the market, and that will give you a good idea of the demand for square footage in the market. For example, when you create that calculation you will find a number of square feet, and if the number of square feet that’s already available in the market is above that number, the market is over-supplied. If it’s below that number, it’s under-supplied.

And just to add to that, one of the things you wanna look at is a typical self-storage facility is somewhere between 50,000 to 100,000 square feet. Those are the ones we look at, at least. So if you have a market that is 200,000 square feet under-supplied – which is possible – within a five-mile radius, that means that even if one was built next door to your facility that you’re considering buying, you’re still gonna be in an under-supplied situation. That’ll kind of give you an idea of some of the metrics that we look at.

Joe Fairless: And why seven?

Hunter Thompson: That’s just basically what the national average is. The national average is about 7.8, so to be conservative we use 7.

Joe Fairless: 7.8 square feet per person of storage facilities in that market?

Hunter Thompson: Exactly. And you wanna look within, let’s say, a five-mile radius.

Joe Fairless: Okay. That was my next question.

Hunter Thompson: Exactly. So  you wanna look at it on a radius-basis, and you can do this in particular markets, and it’s important to keep in mind that some markets, that supply/demand — that doesn’t paint the entire picture. So there are some markets – lakes, for example, where people are gonna be really likely to use self-storage because they’re using boats and jet skis and stuff like that, or they are more affluent markets etc.  There may not be a lot of population, but there’s gonna be a lot of demand for self-storage.

So it’s something to keep in mind, but it’ll give you a good idea on initial due diligence in terms of that [unintelligible [00:12:48].01]

Joe Fairless: Is it possible to search publicly how many self-storage units there are within a five-mile radius?

Hunter Thompson: To get accurate data you have to use a paid program. It’s possible to estimate it based on looking on Google and estimating the square footage of each property, but to get accurate data you have to use something like Costar or something in that range, $2,500 or $5,000 a month.

Joe Fairless: Is that what you use?

Hunter Thompson: Yeah, and this is in conjunction with our sponsors, as well.

Joe Fairless: Okay. That’s how you identify the opportunity with self-storage. Now, you mentioned — the other thing I’d like to learn more about is you said “going on-site is the last part in the process.” You do a lot of preliminary upfront work… What are some of the things when you attend that walkthrough for the first time that you’re looking for?

Hunter Thompson: There’s a couple of things to take note of. First of all, the real opportunity — and this is just my opinion; people have different opinions about this, but in my opinion, the real opportunity in self-storage is in value-add. The way that value-add is created is two-fold. You have a very sticky tenant base. These facilities are usually highly occupied, but there can be a significant discrepancy between the physical occupancy and the economic occupancy. This is a term that is used in other asset classes, but I’ve never found an asset class where it’s more important in self-storage.

For example, you can have a property that’s 90% occupied, going along, cashflowing, that’s 67% physically occupied. The discrepancy there, the delta is due to things like low rents, mismanagement, or management being overpaid, concessions being too high, prepaid rental rates etc. And you can also look at things like U-Haul. U-Haul is a strategy that we implement in conjunction with our sponsors where we have a relationship with U-Haul, we allow U-Haul to park their trucks on the facility; they park 15-40 trucks, depending on the site of the facility. We rent those trucks out to the tenant base and get compensated from U-Haul for facilitating the transaction.

The reason this is key is that on a risk-adjusted basis this is really favorable because there’s no capital expenditure there. We’re not maintaining the trucks, we’re not buying the trucks; they’re just simply parking the trucks there, and I have personally invested in facilities where this one line item has gone from $0/month to $3,500/month, directly to the bottom line, just from those commissions. So if you’re looking at $3,500/month times 12 divided by 7-cap or so, you’re talking about $600,000 worth of equity, and on a risk-adjusted basis, again, very favorable.

There’s several other strategies similar to that, but that’s the one that’s very simply implemented, and very favorable.

Joe Fairless: What’s number two?

Hunter Thompson: In terms of those strategies?

Joe Fairless: Yeah.

Hunter Thompson: Mandatory tenant insurance is another good one. So you can advertise rates by saying “$120/month for climate-controlled units.” Then when the tenants get on the site, you say “By the way, we have to have mandatory tenant insurance for all of your items, so that in the event that something goes wrong, all of your items are insured, you get paid out.” Very similarly, you facilitate that transaction and get a commission for facilitating it, and this again can add something close to $1,500/month directly to the bottom line, which is $200,000 or $300,000 in equity.

I think the key there is you’re just really padding your equity position so that in the event of a capital market correction, or something like we saw in 2008, your equity position is better solidified and your loan-to-value is more stabilized and secure.

Joe Fairless: That’s the value-add component, and that can help some Best Ever listeners make a whole lot of money in self-storage. I appreciate you sharing that. I wanna go back to the question of what you look for when you’re on-site at the property… So what are some of the things you look for?

Hunter Thompson: First of all, we’re looking for the lack of the implementation of those strategies that I just mentioned. One of the things that we wanna find is signs that it’s run by a mom-and-pop operator. You can see little things — for example, we were on-site a few years ago and the manager was renting scissors. They had one pair of scissors that he was renting out, because people use boxes when they’re moving etc., so he was just renting out these scissors to the tenants, for free. Now, that isn’t really gonna affect the bottom line, right? We’re talking about $7 worth of margin, of maybe 50% or so – it’s not really gonna make a huge deal on the spreadsheet, but the key there is the mindset that this person was going about his business with. It’s thinking of it as a business, as opposed to just thinking of it as a way to make some cashflow, and that’s the key. The business operates much more like a fully-functioning business than a cash-flowing passive investment vehicle… Though it can be profitable both ways.

Joe Fairless: So when you arrive on-site, you’re looking for signs that it’s run by a mom-and-pop operator… But wouldn’t you already know that it is or isn’t run by a mom-and-pop operator, since you’ve done all this due diligence before you get there?

Hunter Thompson: Yeah, absolutely. That would be in late stages, but those things can paint a very good picture, but it’s hard to look [unintelligible [00:18:22].08] So the reason I’ve mentioned that is that when you’re looking on a spreadsheet, people may pass on opportunities that are absolute goldmines.

I mentioned earlier that a facility may be 90% occupied; most investors that are listening to this podcast for sure will probably say, “My money’s better spent in other places, where there can be significant value-add”, but because of that and the combination of the tenant base, which is very sticky – it’s definitely something I should touch on – because there are monthly lease renewals and the gross dollars is relatively low… So if you raise rents by, let’s say, 6%, that may be something like $6 or $9/month to the tenant base. So the question really becomes “Is this tenant gonna take the time off work, move down the street where they’re probably going to do the same thing, just for the $6/month or so?” Overwhelmingly, the answer is no. So those value-add strategies can be implemented very quickly because of the sticky tenant base and the monthly lease renewals and the low gross dollars amount.

Joe Fairless: Now taking a step back, looking at your business, when you put together a deal, how do you make money?

Hunter Thompson: We’re compensated based on performance above a pref. So our sponsors get compensated and we create an LLC, and our accredited investors invest into that LLC, and we get compensated based on the performance above a pref… A share in the proceeds above a preferred return.

Joe Fairless: Okay, and what are the typically fees that are charged?

Hunter Thompson: We kind of looked at a couple different structures out there, and I’m very much aligned with — incentive alignment is like a driving factor in my perspective on investing, as well as a business owner… So the 2 plus 20 is the typical private equity firm… They’re incentivized to raise money, and that’s how they make money; that 2% assets under management fee is gonna be paid regardless of performance. Now, the reason they do this is because it’s scalable and predictable etc., but we have foregone that and will continue to do so as long as possible.

So in replace of an 80/20 plus 2 or something like that, we usually implement something close to a 7% preferred return with a 70/30 split thereafter. This results in something that’s very competitive with the other platforms or private equity groups out there, but the key is that 90% to 100% of the compensation is based on performance. So when you compound that with the fact that I personally invest in each opportunity… We’re not doing a lot of deals; we’re doing deals that I’m personally confident will perform, for my own portfolio, and that’s really the way that I like to set everything up.

If something goes sideways and someone says “Hey, this is going sideways”, trust me, I know; I’m gonna be on top of it more than anyone else… And I like that. So that will give you a good idea of the fee structure there.

Joe Fairless: Okay, great. And do you also have an acquisition fee?

Hunter Thompson: To this day, we have not been paid cash for any acquisition fee. We can be compensated and typically are compensated in shares, again. So it’s performance above a preferred return. That’s something that can be deal-dependent, obviously, but I wanna have as much exposure to these opportunities as possible, so that’s the way that I prefer it.

Joe Fairless: Got it, okay. So there’s something like that, but instead of dollars, it’s additional ownership shares in the deal.

Hunter Thompson: Exactly, and I think that’s important, and it’s a really important question to ask how is the compensation being presented, because earlier I mentioned there’s a co-invest. Well, if I said there was a $100,000 co-invest and I have a $200,000 acquisition fee, there is no co-invest, to say the least, and I’m incentivized to just do deals. So I don’t like that. I like being very picky, and I’d be happy to do four deals a year for the rest of my life. So that’s what I look for.

Joe Fairless: Based on your experience, what is your best real estate investing advice ever?

Hunter Thompson: I’d say focus on education. Programs like yours – you’ve had hundreds of millions of dollars or billions of dollars of information from your guests come on your program and talk to your audience for free, and it’s crazy the amount of content which is available, that was not available when I was going to those networking events I mentioned is unbelievable.

When you build relationships with people  that focus on education, they’re always in it for the long-term. That’s why they’re focusing on helping educate their clients, and that is totally the game in real estate. Building relationships for the long-term, building life-long relationships based on aligned incentives is really the key.

I offer a  free podcast as well, I had some very sophisticated individuals… I very well could turn that podcast into a course and charge $1,000 for it, but I just like helping people, so that’s kind of been my motto.

Joe Fairless: How do you qualify deals across multiple asset classes? Because I see on your website that you’re in multifamily… We’ve spent most of our time or all of our time on self-storage, but I see also mobile home parks, performing real estate notes, office space etc.

Hunter Thompson: Yeah, sure, it’s a good question. I’d say that a lot of people that are successful in business say that you have to be laser-focused, and if you try to be too diversified in your focus, you’re not gonna accomplish anything; you certainly won’t be an expert in anything… And people may look at the portfolio, and look at my own personal investment portfolio and say “How do you have an edge?” Well, the reality is I’m hyper-focused in the passive syndication space, and my value-add is identifying asset classes and identifying sponsors that can be complete experts in their particular field.

My expertise is by really conducting a significant amount of due diligence on sponsors, and going through those underwriting assumptions on a line-by-line basis, trying to figure out who I’m dealing with, going on-site (like we mentioned earlier), and that’s really the value-add there.

When you’re able to leverage other people’s expertise, time, access to credit, liability etc., you can build a diverse portfolio without doing what a lot of people may do when they try to spread themselves too thin.

Joe Fairless: Are you ready for the Best Ever Lightning Round?

Hunter Thompson: Let’s do it!

Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.

Break: [[00:24:30].25] to [[00:25:19].24]

Joe Fairless: Best ever book you’ve read?

Hunter Thompson: The 4-Hour Workweek.

Joe Fairless: Best ever deal you’ve done?

Hunter Thompson: You know, we mentioned it earlier… That Fayetteville, North Carolina deal is definitely up there. Bought for 6, it’s gonna be sold for 9,6 very soon.

Joe Fairless: Over what period of time and how much did you put into it?

Hunter Thompson: It’s been about three years… As I said that, another one came up – there was another mobile home park deal we bought for 9 and sold for 20, and I think it’s probably gonna outshine that one. That was taking place about four years.

Joe Fairless: On that one example, the Fayetteville one – bought at 6, selling at 9,6, right? Did I hear you correctly?

Hunter Thompson: Yeah, something very close to that.

Joe Fairless: Something close to that. Three years… How much did you all put into it?

Hunter Thompson: We put in a total of about 200k on that one. We obviously partnered with other capital partners to take down the entire equity stack.

Joe Fairless: You mean for improvements — not your equity into it, but in order to get it from six to nine I imagine there was some cap-ex money that was put into it. How much of that was put into it?

Hunter Thompson: About 800k.

Joe Fairless: Okay, so you’re all-in around seven, and you’re selling it at about 2.5 more than that… What would you attribute that to primarily?

Hunter Thompson: Well, it’s not exactly about the return there, it’s about the risk-adjusted basis. So all those strategies I was mentioning earlier – none of them were being implemented. So the way that that was able to happen was just implementing those strategies. Not building a new facility, not expanding units etc., but just implementing those strategies.

Joe Fairless: Cool. And you went through those value-add strategies earlier. I appreciate that. What’s a mistake you’ve made on a transaction?

Hunter Thompson: Well, I made a bet on an operator that didn’t have a lot of experience, in an asset class I don’t think is very scalable, which is single-family houses. Fortunately, the operator was me, so it didn’t cost me very much money, but I learned my lesson.

That was one of the first things I think a lot of people do – invest in houses that are $30,000 or $50,000, thinking that they’re gonna perform as they do on paper. I made that mistake early on in my career.

Joe Fairless: How much did you lose?

Hunter Thompson: About 30k.

Joe Fairless: What’s the best ever way you like to give back?

Hunter Thompson: I am very much a fan and a proponent of capitalism and free markets, so this is an important question, because it’s challenging to answer without tampering with markets… But I think that disaster relief is one of those instances where you can make a significant difference without tampering with the market. Team Rubicon is someone that specializes in those particular situations.

Joe Fairless: How can the Best Ever listeners get in touch with you?

Hunter Thompson: Feel free to e-mail me at any time – HunterThompson@cashflowconnections.com. I also have the website, CashflowConnections.com, and we have a podcast — if your podcast listeners out there love to get your perspective on the show, it’s The Cashflow Connections Real Estate Podcast.

Joe Fairless: I think we have a lot of podcast listeners, and I am very grateful, Hunter, that you spent some time with us. You got very specific, which we always love to hear, about how to evaluate the demand for a self-storage facility, talking about the number of people times that by seven, and that gives you the demand, and it’s the number of people within a five-mile radius.

Obviously, there are variables in play, like with any generalization like that, but that is a good rule of thumb for us to get started, and how to evaluate demand. If it’s over that amount, then it might be over-saturated or over-supplied; if it’s under, then it might be under-supplied… That’s the seven mark.

Then also the way that your company makes money, as well as ways to add value for self-storage facilities, and you gave a couple tips there.

Thanks so much for being on the show, really grateful. I hope you have a best ever day, and we’ll talk to you soon.

Hunter Thompson: Awesome, Joe. I really appreciate it.

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