JF1594: Expanding & Growing Your Strategy When Deal Flow Slows #SkillSetSunday with Paul Moore
Paul is back with us today to tell us about his pivot into self storage from multifamily. For anyone who wants to get into self storage but don’t have any knowledge this is a great intro to the major points on self storage vs. multifamily. If you do have some knowledge on the subject, it’s never bad to learn more! If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Paul Moore Real Estate Background:
- 2-time finalist for Michigan Entrepreneur of the Year
- Founder and Managing Director at Wellings Capital, they have over $500 million in assets under management
- Based in Lynchburg, VA
- Listen to his previous episode: JF809: Creating a $10 Million Fund, Building a Hotel, and Focusing on Multifamily
- Say hi to him at https://www.wellingscapital.com/
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Theo Hicks: Hello, Best Ever listeners. Welcome to the best real estate investing advice ever show. Today I’m your host, Theo Hicks, and I am speaking with Paul Moore today. Paul, how are you doing?
Paul Moore: I’m doing great, Theo. Thanks for having me on the show again.
Theo Hicks: No problem, looking forward to our conversation and learning more about what you’ve been doing since we last had you on, which — if you wanna listen to Paul’s first interview, it was two years ago this month as of the recording; so it might be a little bit over two years when you’re actually listening to this, but that is episode 809, entitled “Creating a 10-million dollar fund, building a hotel and focusing on multifamily.”
Today is Sunday, which means it is Skillset Sunday, so we’re going to be discussing a certain skill that Paul has, and we’re gonna be focusing on value-add self-storage. But first, a little bit of background on Paul – he is the founder and managing director of Wellings Capital. He was the two-time finalist for Michigan Entrepreneur of the Year. He’s based in Lynchburg, VA, and you can say hi to him at WellingsCapital.com.
Before we go into the specific skill in regards to self-storage value-add, can you tell us a little bit about what you’ve been up to since we last had you on the show?
Paul Moore: Absolutely. We have had a hard time — we are apparently not as good at acquisitions as Joe and his team, and admiringly watching Joe over the last 2-3 years and seeing his growth and his spectacular amount of deals he’s done, and the investors… I really admire him. We have not been able to pull that off. We have felt that the deals we have seen, mostly publicly marketed in multifamily, have been overpriced. The market is generally overheated, so it was hard for a guy who wrote a multifamily book called “The Perfect Investment”, which is still selling on Amazon and on our website, it’s hard to say “Hey, guys, we’re gonna expand into self-storage”, but that’s what we’re doing. We’re doing that for a number of reasons. One is the fragmented market.
Now, in multifamily there are only 7% of the 50+ unit apartments in the U.S. are owned by small operators, mom and pops. They’re almost all owned by more sophisticated, larger companies, 70%. But in the self-storage world, between 65% and 75% are owned by mom and pop or independent operators. There’s 53,000 self-storage facilities in the U.S. That’s the same as McDonald’s, Subways and Starbucks combined – I checked it myself – and about 40,000 of those are owned by independent operators and mom and pops, and they’re not maximizing revenue. They don’t need to. A lot of them bought or built these facilities a decade or two ago, and they’re clipping coupons, they’re happy to be 70%-80% occupied, or at the other extreme, they haven’t raised rates in years and they’re maybe 100% occupied and they’re happy. But there is a huge difference between a mediocre self-storage unit facility and a well-run one, and that’s where the opportunity is. This fragmented market is one of the reasons we jumped into this. That’s what we’ve been up to the last year or two.
Theo Hicks: Okay. And have you done any self-storage deals yet?
Paul Moore: What we decided is that self-storage is somewhat overheated as well, and we thought “Do we really wanna jump into this and take tens of millions of investor money before we have had experience in this?” So we decided the best way to do this would be for us to partner with operators who are already really good at this, who have gone through several market cycles. We spent the last 8 months actually interviewing and vetting sponsors; we’ve flown all over the country, I was in L.A. last week, Florida this week, I was in Atlanta several times before this, interviewing these self-storage syndicators, and we are actually co-investing with them. We co-invested almost three million dollars with one this summer, and we’re getting ready to do two more deals starting in the next month or so. By the time this is live, we’ll probably have a couple other opportunities available for investors.
Theo Hicks: Great. Can you talk about the numbers on the self-storage deals? Because people know how fix and flips work, and smaller rentals, and even larger apartments, but how does the process of analyzing the deal, what types of return metrics do you look at? … things like that, for that specific deal you’ve invested in.
Paul Moore: Absolutely. What we’re looking for in a deal is we’re looking for a property that’s on a major road, with a lot of traffic; it’s visible on that road, it’s not behind another building or down in a valley, and we’re looking to draw a radius around the facility and we’re looking at the population density versus the number of square feet in that radius. We like a 3 mile and a 5 mile radius. So we’ll draw that circle and then we will see where we’re at with that. Our goal is to be under about seven square feet of storage per person in that three or five-mile circle. If we’re under that, we’re likely under the national average, which means we’re likely in an under-supplied market. Now, I say “likely” because it’s not completely scientific. Places like Florida, Texas and California – they use more storage, they have virtually no basements, and they don’t use their attics often for storage, because especially in places like Florida, it’s really hot and it can ruin your stuff. So there’s a higher demand for stuff around Florida, especially around the coast, where there’s more income and more recreational toys.
So we’re looking to be under 7 square feet per person. As far as the metrics, it could be a development deal, and that would be different, but if it’s a regular value-add, cash-flowing deal, we’d be looking for 5% to 9% return to the investors annually, and then look for an appreciation in principal paydown, which brings the total return to about 18%-22% annually. That’s what we’d be generally looking at, and it’s very similar to where multifamily has been, especially in recent years passed.
Theo Hicks: Thank you for going over those specifics. Let’s talk about value-add, because you mentioned it a little bit before we went live that you were surprised that there was such a thing as value-add self-storage… Do you wanna talk about your discovery of this asset class, as well as some of the main things that are a value-add on self-storage?
Paul Moore: Well, one of the benefits of self-storage is you don’t have to deal with things like toilets, tenants and trash, but when I looked at self-storage – and I actually looked at it 19 years ago originally, in 1999… When I looked at it, I thought “Wait a minute… It’s just concrete, steel, and rivets. That’s all it is. What are the value-add opportunities?” I didn’t know what that was in 1999, but then in the recent years I did.
Apartments have carpeting, or hardwood flooring, and lighting, and paint, bathrooms and kitchens to upgrade, appliances – all these beautiful things. Self-storage is steel boxes, so where’s the value-add? I was surprised to find that there really is a significant set of value-add opportunities, that an experienced, really good operator can take advantage of. Some of these, by the way – they’re policy and procedure changes that add tremendous income and value.
For example, you can add U-Haul. U-Haul (or Penske) has all these independent distributor agreements with facilities, and they will often [unintelligible [00:09:33].09] will sign a deal with a self-storage facility. I was at one in Florida this week on Tuesday, and they were making $5,000/month in revenue from U-Haul. It took a little bit of extra work, but it wasn’t enough work to hire an additional person; so it didn’t cost much, and they were getting $5,000 in commission income. Well, multiply that by 12 – that’s $60,000/year, divide it by the cap rate, and let’s say that cap rate is 6,5%, that adds almost a million dollars in value to that facility.
Now, if it’s a five million dollar facility and you just added a million dollars, it sounds like a 20% appreciation, and that’s true at the asset level… But you know what, Theo? That’s not true at the investor level. At the investor level, because of leverage, that 20% appreciation looks more like 60% appreciation in a typical leveraged deal. That’s a pretty amazing thing from just changing a policy and produce and adding U-Haul. But there’s a lot of other stuff you can do. You can add a nicer showroom, more point of sale items like boxes, scissors, locks and tape. You can sell insurance, you can have administration fees, late fees… Typically, mom and pops don’t like to do that.
You can also do a lot better job marketing. 50% as of a year ago – 50% of people who found a self-storage facility reported that they found it by driving by. They might have seen it on their iPhone or on Google maps first, but they drove in and that’s how they found it. Well, that’s a huge opportunity because using the online world, getting digital, having a website, doing Facebook marketing, Google AdWords, other online outreach is an opportunity to get in front of some of those mom and pop operators locally who are doing a terrible job marketing.
We looked at a self-storage facility in Raleigh (Raleigh, of all places), very hip and trendy city, that didn’t have a website. The lady said, “Why would I need a website? I’m 100% full.” Well, that says a lot right there. But anyway… Other things you can do is you can raise rates; that’s obvious, but it’s not necessarily as obvious as you may think. If you have $1,000/month apartment and you raise the rate 6%, somebody’s thinking “I’m gonna be here for years. That’s an extra $60, $720/year… I don’t wanna stay”, and they might move for that $60. But if you have $100 storage facility, they’re probably not gonna take a Saturday, pack up a rental truck, go and hire a few friends to move all their stuff down the road because you raised the rent by $6. So the tenants are inherently sticky.
Another factor with that is most tenants in self-storage think “I’m only gonna be here two or three more months.” You can survey them and they’ll say that, “I’m just waiting till I can sell this stuff on eBay” or “I’m waiting till I move to that other house” or “I’m gonna put it back in my basement’, but often because it’s hitting their credit card, they don’t care as much, and it’s honestly there for years.
One investor we talked to in self-storage says “I decided to invest. When I was thinking about investing, I realized I had a self-storage unit for seven years I hadn’t even thought of. It’s just been hitting my bank account/credit card, and I hadn’t give it a thought.” That’s when he decided to invest. So there are lots of other things that can be done as well, but those are some of the main value-add drivers.
Theo Hicks: Okay. And then how do you actually find these self-storage deals? Are they on LoopNet, is there an MLS for these things, or do you have to be more proactive with your lead generation?
Paul Moore: Yeah, it’s probably somewhat similar to apartments… There’s letter writing campaigns, there’s driving by and stopping in; that sometimes works, but it’s a lot of work though. There are actually brokers just for self-storage facilities, and like in the apartment world right now, those brokers don’t want [unintelligible [00:13:41].00] they’re gonna be going to their friends, they’re gonna be working with people they already know, who will close, people that won’t embarrass them… So this is kind of the “Rich get rich, poorer get poorer.” Kind of what Joe has done with apartments – he’s got an inside track on lots of off-market deals; well, the people who are experienced in self-storage have a great inside track and a great benefit over beginners in this space, because the brokers are gonna call them first.
I just hung up the phone before this podcast with a guy named AJ Osborne. AJ Osborne was on the Bigger Pockets podcast that came out July 4th, 2018, and he talked about how he had 7,5 million dollars invested in a Kmart, and he had converted it to self-storage and he was on the verge of getting an offer (possibly within a day or two) for 25 million for that Kmart that he had retrofitted – while he was in a coma, by the way – and that’s only 40% leased up.
Guys like AJ are going to get deals that most of the rest of us will never see, and that’s one of the reasons we’re partnering with people and we’re raising up a fund to invest in other operators like that that have great experience.
Theo Hicks: You kind of touched on this already, but I wanna ask you anyway, so we can get a more detailed, specific answer… What advice would you give to someone who is listening to this podcast and they’re like, “Oh, self-storage sounds interesting to me. I wanna learn more. That might be a future potential investment vehicle”? What would your advice be to them in order to get started?
Paul Moore: Well, there’s actually seven ways to get started in multifamily or self-storage, and I go over this in a lot of detail on other venues. Quickly, they’re being a deal-finder, being a money-finder, just jumping in at a really high level, working your way up from really small to larger, going and getting a job for another operator and learning the business, or finding a mentor. I think that’s all seven.
I would recommend that you pick one of those and go for it. Become a deal-finder, for example, and take those deals to another company and say “Hey look, I’ve found this deal, and I’d love to partner with you and learn the ropes along the way.” Another thing you can do is you can find a mentor. There’s a guy named Scott Meyers in Indianapolis, and he’s got a great mentoring program. He teaches people to do self-storage. Apparently, they’ve had about 75-80 people go through their masters level program, and a lot of those people have become millionaires in a very short time. So those are two of the things I would do…
Oh yeah, the seventh way to invest (I thought I missed one) is to invest passively. That is to learn the ropes by investing, let’s say, 50k or 100k with another syndicator who’s doing the business, and ask them if you can learn from them along the way… Or maybe you just wanna stay passive and keep investing, and that’s a great way to do it, too.
Theo Hicks: What is the biggest difference you found between multifamily investing and self-storage investing?
Paul Moore: Well, that’s a hard question… I’m trying to think of a major difference, there’s not a lot. They have a similar Sharpe ratio, which is the return versus the risk ratio, and I talk about that a lot in my book. They have fairly similar value-add opportunities. Some of them start at 5%-10% cash-on-cash return, and then they have a total of, let’s say, 20% return, where multifamily lately seems to be a little bit lower, because it’s overheated somewhat, as we have all seen.
I’d say one difference is there are more ground-up development opportunities in self-storage, which can be great, but it can also be a curse. So if you get in on a ground-up opportunity in self-storage – and you can do that in apartments, too – you might not get your first distribution check for a couple years, but then there’s a really strong windfall on it. And of course, that’s possible in multifamily, but it’s not the kind of multifamily that I think Joe or I do, which is more of a momentum play or a value-add, stabilized class B multifamily.
But like I said, some of the self-storage deals we’ve been looking at and starting to invest in are like that Kmart that AJ has, where there’s no distribution at all for, say, 1,5 to 3 years, but then there’s a very large payoff after that. But there’s more risk with that, as well.
Theo Hicks: Is there anything that we haven’t talked about as it relates to entering the value-add self-storage investment industry?
Paul Moore: Yeah, just like multifamily, I think it’s really important not just to jump in. It’s a rough time in late 2018. Interest rates are higher, cap rates are staying low, which means the values are staying very high, and it’s a time for a newbie to get burned. So I would say be really careful. If you’re gonna invest passively, invest with a pro, somebody who’s been through several market cycles, which is, again, what we’re doing… And if you’re gonna do it on your own, be very, very sure that you have really evaluated it carefully and that you are in a situation where you’re not gonna get burned by paying too much.
Don’t let a banker and don’t let a broker tell you how much this is worth. You need to figure it out on your own, and if you’re not qualified yet, then make sure you are partnering with somebody who is.
Theo Hicks: Great advice. Paul, I really appreciate you joining us today on this Skillset Sunday. To summarize what we discussed – you explained the reason why you expanded into the self-storage industry, or at least one of the reasons why; it had to do with the fragmented market, and that a very small percentage of multifamilies over 50 units are owned by small operators, whereas a larger percentage – I think you said 65%-70% – of self-storage are owned by small operators… So it opens up the opportunity for more of those value-add deals… And you mentioned that you got started with a partner who is very experienced, rather than jumping in on your own.
In regards to what you look for in deals, it needs to be visible on a major road, and then you draw a 3 and 5 mile radius around the self-storage facility and you wanna see a population density of under 7 square feet per storage per person…
Paul Moore: There are tools online that do that, that already draw that radius for you.
Theo Hicks: And then you mentioned the returns for the value-add plus appreciation plus principal paydown. Then you mentioned that a really good market for self-storage is Florida, which I can agree with, because I live in Florida now and I don’t have a basement, so we kind of just shove things into closets… And once we have kids, I’m sure it’s gonna get more and more difficult.
Paul Moore: Absolutely. And the deal we just invested in, by the way, this summer, is just South of you by a few miles… It’s in Lakewood Ranch area.
Theo Hicks: You also explained some of the value-add opportunities [unintelligible [00:20:41].06] You said add a U-Haul, a nicer showroom, more points of sale, like scissors, and tape and boxes, sell insurance, better marketing, and you can raise the rates.
How you find these deals – pretty similar to multifamily: direct mailing campaigns, driving for dollars, and brokers who work specifically with self-storage facilities… But like multifamily, they’re likely gonna go to their friends first, so you have to build rapport with this broker, and we’ve got plenty of episodes and blog posts about how to do that.
Then lastly, you went over the seven ways to get started as a self-storage investor, which was be the deal-finder, the money-finder, jump in at the high level, education-wise, start small and then work your way up, work for another operator, find a mentor or invest passively.
The biggest difference between self-storage and multifamily is that ground-up development – there’s more of that in self-storage, but besides that, the two asset classes are fairly similar. And then lastly, your advice for others who wanna get started is to 1) don’t just jump right in, because we’re at a point in the market where a newbie could definitely get burned… So if you want to become a self-storage investor, make sure you’re working with a pro, and do not rely on the bank or the broker for the valuation of these self-storage facilities. Make sure you figure that out yourself.
Paul, I really appreciate you talking with us today. Have a best ever day, and we’ll talk to you soon.
Paul Moore: Alright. Theo, thanks… It’s been a real honor to be on the show again. I hope you have a great day.