JF2537: Why to NOT Invest in Self Storage with Jacob Vanderslice
After fixing and flipping nearly 1200 single-family homes, Jacob Vanderslice and his 2 partners focused most of their funds into self-storage investing. Now, their portfolio consists of $195M in real estate assets. Tune in to find out why they chose self-storage over other real estate, 4 ways to know if you’re getting a good deal, and why you may reconsider investing in self-storage.
Jacob Vanderslice Real Estate Background:
- Principal at VanWest Partners
- VanWest focuses on acquisition and management of self-storage centers
- Portfolio consists of $195 million in real estate assets
- Based in Denver, CO
- Say hi to him at: www.vanwestpartners.com
- Best Ever Book: In the Kingdom of Ice
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Ash Patel: Hello, Best Ever listeners, welcome to the Best Real Estate Investing Advice Ever Show. I’m Ash Patel and I’m here with today’s guest, Jacob Vanderslice. Jacob is joining us from Denver, Colorado. He is the Principal of VanWest Partners, which focuses on acquisition and management of self-storage centers. Jacob’s portfolio consists of $195 million of real estate assets.
Jacob, welcome. Before we get started, tell us a little bit more about your background and what you’re focused on now.
Jacob Vanderslice: Ash, good to see you, and thanks for having us on today. Yeah, born and raised in Denver. I’ve got two kids that are almost three and 18 months, so they keep us busy at home. We got started doing single-family fix-and-flips about 15 years ago. And we scaled that business up, we’ve done well over 1,200 all over the country, mainly in the Denver area. We got into commercial real estate in ’13 and ’14, and we started doing adaptive reuse retail projects. So basically repositioning old warehouses into multi-tenant experience-based retail; breweries, yoga studios, gyms, coffee shops. Held on to some of those and sold off a bunch of those as well. And then we got to self-storage in 2015 and kind of grew the platform from there, and self-storage is really our main line of business. We dabble in some residential development on the side. But we are mainly self-storage investors, owners and operators.
Ash Patel: Jacob – Denver, Colorado, I think you guys invented repurposing warehouses to mixed-use buildings.
Jacob Vanderslice: That’s right. We were a thought leader there for sure. Yeah.
Ash Patel: So 1,200 single-family homes… That didn’t happen overnight. Take me through that journey.
Jacob Vanderslice: I got started when I was in my early 20s, and just kind of experimented with a few deals and took a lot of hard knocks during the downturn. I learned a lot, I would do it again, and kind of grew the platform from there. Most of our deals we were sourcing at the trustee sales. And I would say that was probably 90% of our acquisitions were sourced on the courthouse steps. And that kind of dried up about three or four years ago; there were just less trustee sales, so we started doing more direct seller marketing that we learned about in our various mastermind groups, and scaled it up from there.
We’ve gotten a little further away from that business in the last year just, because inventory is so tight. We are mainly focused on our commercial line of business. But it’s a fun business. We know it and love it and came up from our roots in single-family, so it’s a great asset class.
Ash Patel: Jacob, who’s—who is the “we” that you’re mentioning?
Jacob Vanderslice: I’ve got two partners. One of my partners is Aaron Westphal. We go back to junior high together, high school, college roommates, and he joined me full time in real estate in 2009. He quit his job, he was a Qualcomm senior engineer. And we have another partner, Wade Buxton. So there’s three of us. And Wade used to work for us back in ‘11 and ‘12. And we got into the commercial world a little bit further, Wade had some expertise there and really helped us figure out the business. And we became three equal partners back in 2014, and going ever since.
Ash Patel: An almost $200 million portfolio – what’s the high-level breakout of those asset classes?
Jacob Vanderslice: We’ve got a handful of retail projects in Denver; I would say they’re probably $13 million or $14 million in gross value, so a relatively small piece of our portfolio. We’ve got a portfolio of single-family rentals, roughly a dozen of those, not very many, around Denver. And the balance of that is self-storage. We’re in multiple different states, we have facilities ranging from anywhere from 25,000 square feet up to 115,000 square feet, a bunch of deals in the Midwest and Southeast, and of course, here in Denver.
Ash Patel: So you’ve seen a lot of different asset classes, and I’m assuming you’re getting the highest and best return on your money with self-storage.
Jacob Vanderslice: We like self-storage because it’s historically resistant to downturns. We started studying the asset class around 2014, thinking that a recession was coming, and it was a while before that happened, and obviously, say no more there. We like the scalability of the asset class as well, and we like the predictable, repeatable income streams; that’s really why we got into it, and it’s been a good place to be the last couple years, especially in 2020.
Ash Patel: Is it the highest return, or is it more hedge on a possible downturn coming and still having a secure investment?
Jacob Vanderslice: It depends on how someone might define return. If return is total multiple, like a big home run in a short amount of time, it’s probably not the best use of your capital. If return is more of a calculation of a balance of income and upside, we think self-storage is a great vehicle for that. We’re very income-focused investors, and one of the main mistakes we’ve made in our real estate career is often transacting too quickly, meaning we buy a deal, make it better and sell it. And there’s a good gain on it and you move on, but then you have tax liability, you have downtime on your cash, and you’ve got the risk of a new investment to redeploy your cash into. That’s why we like the longer-term hold that self-storage offers with the elements of income, but as well as capital appreciation.
Ash Patel: Do you syndicate these deals?
Jacob Vanderslice: We have two different things; so we do single asset syndications, and then we have two self-storage funds. We closed our last self-storage fund in August of 2020, we launched another one in December of 2020. And that fund is underway; that’s a $30 million capital raising target and equity, which will equate to about $100 million in total cost. And year to date, we’ve deployed just under $30 million in total costs. We’re about a third of the way through. We’re hoping to close that out by the end of this year.
Ash Patel: Jacob, what kind of returns can a passive investor get, cash-on-cash returns?
Jacob Vanderslice: As I mentioned, we’re very focused on income. So within the context of our funds, we’re not doing any heavy lifting value-add, like ground-up development or a big major expansion. So we’re basically buying existing storage facilities, implementing a nominal capital improvement plan, and then really leveraging our management platform to grow income and grow NOI. So we have an 8% preferred return, and then after the eight, investor capital accounts are paid down to zero with any subsequent distributions, so equity is returned, and then every distribution thereafter is 70/30.
So we’re targeting a cash-on-cash yield along the way to investors of 8-10 percent, and then 16-18 percent net over the life of the fund. So roughly half of that return is from distributions, from operational cash flow, and the balance of that is either from a refinance or from a sale.
Ash Patel: So once you buy this storage unit, is there an end of life after 5, 7, 8 years? Or do you just hold it and see how the market reacts?
Jacob Vanderslice: There’s two types of funds; one fund type is an open-ended fund, and that means the fund is constantly raising new capital at new valuations and making new acquisitions, and there’s a closed-ended fund, which is what we are. And a closed-ended fund merely means that there’s a defined period to raise the equity and deploy the capital, and once that period’s expired, you’re not raising any additional equity or buying new deals. The fund continues to operate, but it’s just closed to new investment.
In terms of the life cycle or the life period of the fund, we don’t have a specific date where we have to liquidate the asset base. And we really did that by design. Let’s say we were going to put a line in the sand of five years from now, for example. Well, if the value of the assets for some reason deteriorates, but we’re still getting great income and great dividend yield, it would not make sense to have to sell into a bad environment. So we’re forecasting a 6-8 year lifecycle for the fund. And with distributions along the way, pay down in capital accounts and then obviously hopefully a pop at the end when we dispose of the asset base.
Ash Patel: Got it. So self-storage – it seems like everybody’s chasing these deals. How do you find self-storage deals?
Jacob Vanderslice: Deal flow has been increasingly challenging, like it has been in a lot of asset classes. But the number of investment shops out there that had capital allocations to like hospitality, retail, office, and those have obviously taken big hits in 2020… So they’ve shifted their capital allocation to self-storage, because it’s been fairly defensible and have performed well last year and continues to, so deal flow is tight.
So to source deals, we do a couple different things. We do a little bit of direct to seller marketing; we’ve placed about $10 million off a direct mail, maybe $5,000 in direct mail. That was basically a business letter saying, “Hey, we’re not brokers. We want to buy your storage facility, you might be surprised with our offer.” And then beyond that, it’s a lot of broker networking. I hate using the term off-market deals, because sometimes an off-market deal was worse than a marketed deal. But we have gotten some good off-market deal just with broker relationships… So yeah, typical deal flow practices, just direct to seller marketing and networking with national brokers.
Ash Patel: So a lot of our Best Ever listeners may have graduated from single-family, some duplexes, triplexes, smaller multi-families, and they come across the self-storage facility near where they live or invest. And let’s say it’s a smaller unit – what’s small, 50-60 units?
Jacob Vanderslice: Yes. In terms of unit count, it varies. But in terms of square feet, I would say a pretty small deal is about 25,000 square feet.
Ash Patel: Okay.
Jacob Vanderslice: Yeah.
Ash Patel: What’s your advice to them? What do you look for? I think a lot of people think that self-storage is kind of hands-off, like car washes and laundromats, which are not by any means passive. It’s a job. What advice do you have? And I’m in the same boat, I’ve looked at these deals and I don’t know what’s involved with running a smaller one-off self-storage unit?
Jacob Vanderslice: Yes, self-storage is not passive and it’s not hands-off. Building wealth in real estate is not easy, regardless of the asset class; there are really very few fire and forget deals out there. So self-storage is very operationally intensive. And I would like in self-storage – it might seem like a stretch, but I would like it most to hospitality, in that your rates are constantly changing, you have peaks and troughs of demand based on the time of the year, [unintelligible [00:10:24].16] higher demand in the wintertime for example – and you constantly have customers moving in and moving out every day. So in self-storage, all the leases are month-to-month. So you have folks stay there for three months, they move out, somebody else moves in. So you have this constant churn. And customer service is really important as well. So good Google reviews, keeping people happy, solving customer complaints, like if the gate system goes down, or whatever might have happened, you have to have a good operations team overseeing that.
But if you’re looking at a deal in your backyard and you’re considering buying it, the first thing you need to look at are supply ratios. Self-storage is very local supply-sensitive. So we tracked supply ratios in a one, three and five-mile trade radius. Nationally, there’s about seven square feet per capita of self-storage. Once you get into a sub-market over 10, you start to see a decline in rates and occupancy. And then on the other side of that, once you’re below maybe six square feet per capita, you start to see more buoyant rates and more consistent occupancy.
So the first thing you’ve got to look at is the supply ratio in the one, three and five-mile trade radius. And if that makes sense, you’ve got to think about how you’re going to operate it. And you’ve got two options there – you can hire a third-party management platform, which you’ll pay for. And we’ve found over the years — there’s a lot of good third-party platforms out there, but we’ve found that nobody cares about your deal more than you do, which is why we self-manage, it’s very simple human nature. As an owner, you care more than a third party, no matter how great the third party might be. So you’ve got to think about how you’re going to operate it. So you could hire a third party and you could have a higher expense load because of that, because you’re paying them fees and marketing allocations, or you can manage it yourself.
And a number of self-storage facilities out there today, including deals in our portfolio, with the technology that’s available, you can run these things effectively without having a full-time on-site staff member. If not having an on-site staff member at all, you need somebody for repairs and maintenance and quality control checks. But it is possible to connect the gate system, for example, to an internet connection, have your customers lease their units online and not have to have a person in there. So it’s by no means passive, but if you set up your platform well, you can effectively run a facility without having to pay somebody full-time to be there.
Ash Patel: A lot of questions on that advice. Thank you for that. Is there a website or somewhere you can go to get those metrics on the supply side?
Jacob Vanderslice: Yes, they’re available in a couple different places. One of them is CoStar, which is kind of the commercial MLS. Another one is Crexi, which is similar to CoStar. All you’re looking at really, if you want to do it manually without using a third party website, you research the number of storage facilities in that given sub-market, you figure out how many square feet roughly those storage facilities are, and you do that with aerial mapping, and Google Maps measurements. Then you figure out the population in that one, three and five-mile trade radius, and you just do some quick math and you figure out what the supply ratios are.
Ash Patel: Thank you. So if I buy my neighborhood self-storage place, five miles down the road, is there a minimum number of units or square footage that a management company would take on? And I’m assuming there’s national management companies that do this.
Jacob Vanderslice: There are national management companies that do this. So large publicly-traded REITs not only operate their own portfolios, but they do third-party management. While their call centers and their technology are very robust, we’ve found that their expense loads are rather bloated. And we’ve also found that within self-storage, there are a number of ancillary revenue streams that really add up to be a meaningful percentage of your top-line revenue. And some of the third party, bigger operators that third party manage, do not allow their owners to participate in those revenue streams. So you’re leaving quite a bit of money on the table.
If you want a third-party management, I would recommend researching a smaller operator in your market, engaging them to run your facility. If you bring in one of the big guys, especially on a small deal, your expense allocations and your loads are just going to make it really tough for you to make any kind of rational income stream.
Ash Patel: Yes, that makes a lot of sense. So if Best Ever listeners buy one of these starter facilities, let’s call them, am I assuming that we’re putting in a full-time employee or a part-time employee?
Jacob Vanderslice: You will need somebody over there; whether you run it completely remotely with your technology platform, you’ll still need somebody there to go do quality control checks, verify, do unit walks, make sure that customers have moved out and moved in like they said they would. You need to monitor the security system, the camera system… But unless you’re buying a larger facility – and by a larger facility, I might mean a fully interior climate-controlled facility – you’re likely not going to have to have a full-time staff member there answering the phone and doing movements.
Ash Patel: So a lot of automation can be—
Jacob Vanderslice: A lot of automation is available out there for sure.
Ash Patel: Similar to multifamily is when you have 40 or 50 units, it’s hard to get a full-time maintenance person. You get over 100, you get some economies of scale. What are your challenges with self-managing your facilities?
Jacob Vanderslice: Well, we’ve grown our management company by leaps and bounds in the last three years. And just like growing anything, it’s been somewhat painful; we’ve learned a lot along the way.
One of the challenges we initially encountered is we thought it would be easy to remote manage our smaller facilities without a full-time staff member there, and basically have [unintelligible [00:17:36].01] who you pay hourly to go by and do checks. We’ve found that over time, that not having control over your employees was kind of a detriment to the performance of the facility. So we brought on full-time W-2 employees and we amortized their wages across multiple locations. So that was a big challenge initially.
Another challenge we encounter pretty consistently is when we buy a new facility or a portfolio of facilities, the transition from the old management platform to ours – there’s often a lot of friction there. So you’re getting hundreds or thousands of customers converted over. Now you’re making your payment here, you’re not making your payment here, and you’re also coordinating upgrades, maybe you’re doing door swaps where you have to coordinate with your customer base to make sure their contents are in place when you swap the door out for them… That’s kind of a consistent source of friction for us, and we’re getting better at our transitions.
We just bought a $20 million portfolio yesterday in Michigan, and we shipped our operations team out there. We’ve got two deals outside Detroit and three in Grand Rapids. So they’re onboarding our new employees out there and getting them trained up, installing new signage and just kind of getting everything transitioned over. But that’s always a challenge, whether it’s any asset class- new management/transitions can be difficult.
Ash Patel: You’re right, this sounds a lot more like the hospitality business than it does passive investment.
Jacob Vanderslice: Yeah. Yes. You can do it in a passive way and you can certainly make your life easier. But once again, creating wealth anywhere is not simple. There’s operations involved, there’s risk. We’ve got homeless problems in some of our facilities, especially our urban in-fill locations… So we’ll have guys sleeping in the unit sometimes, they’ll be plugging in their iPhones into a power source and staying there when they’re not supposed to. We even had a guy order a pizza once to one of the storage units, which was… Never seen that before. Yes.
Ash Patel: What’s the average length that somebody rents a storage unit?
Jacob Vanderslice: Have you ever leased a self-storage unit, by the way?
Ash Patel: In college, over the summer…
Jacob Vanderslice: Okay.
Ash Patel: I put my stuff in there that I didn’t want my parents to see.
Jacob Vanderslice: Sure. Sure. Yep. Same here. So most of our customers think they’re going to be there for less time than they actually stay. So our average duration of tenancy right now within our portfolio is about nine months. And most people think they’re going to be there for three, but it hits their credit card every month, it auto drafts, their stuff is out of sight, out of mind, they don’t want to deal with it, they don’t want to deal with moving into somewhere else… So by and large, folks stay longer than they think they will. So it’s around nine months on average, for us.
Ash Patel: And the so-called eviction process – is that a big deal? Or is it just very systemized, where if somebody doesn’t pay, there’s a process?
Jacob Vanderslice: Yes. I’m going to sound like a dirty capitalist here, but there are no fair housing laws in self-storage. So if you don’t pay, our first line of defense is your gate code gets shut off, and you can’t get into the building or into the facility. If that goes along enough, you get an overlock on your unit. So if you do get in, you can’t get to your contents. And then if it goes a little bit further, there’s an auction process where you publish something in the local news publication saying we’re auctioning the storage unit, auction buyers come in and make bids on stuff. If there’s more proceeds than they owe in rent, it goes back to the customer, but that almost never happens.
So the point of the auction’s really—is not so much getting income from their contents, it’s getting a non-paying customer out, getting their contents out and getting a paying customer in place of them.
Ash Patel: And how long does that process typically last?
Jacob Vanderslice: It’s—if you’re doing it fairly efficiently, it’s 30-45 days from when they roll over for the first time to when the auction might happen.
Ash Patel: Okay. So when you look at new deals, obviously, the supply metrics are significant. What are the other elements that you look for to figure out whether it’s a good deal or not?
Jacob Vanderslice: Well, primarily, beyond supply, it’s just good nuts and bolts real estate. So it’s their density, it’s their population growth. Is it a state with an oppressive tax situation or people fleeing? Like for example, not to knock New York and California, but like New York and California. So we like states with growth.
At the sub-market level, density is more important than income. Some operators say that there’s a relationship between self-storage rents and income. Some say it’s 2%. So if a household is making 100 grand a year, they can afford $2,000 a year in self-storage rents. We haven’t really seen a direct correlation with that. But we’ve certainly seen a correlation with density. So you need to look at locations with rooftops and people nearby. We stay away from locations that are overly rural, or kind of in the middle of nowhere; even though they might have a very high yield on cost, there’s not a lot of buyers to buy that facility down the road. So even if you’re stabilizing to a 10 cap, you might not sell it for any more than a 10 cap later, because there’s only two or three guys out there in small town in Kansas who would buy it from you, versus an urban in-fill location in, say, Memphis, Tennessee.
Ash Patel: And does the age of the surrounding population have an influence on the storage units?
Jacob Vanderslice: We haven’t seen a direct correlation with that. Not exactly. It’s primarily rooftops and density.
Ash Patel: Okay, so boomers versus people in their 20’s.
Jacob Vanderslice: So our millennial customers are typically keeping their seasonal gear in there, or maybe they have a small apartment where they can’t fit their stuff in, so they keep their skis and their mountain bikes and their tents and their camping gear, and their golf clubs in their storage unit. They come and go as they please, to get it out. And our boomer population, a lot of them are kind of moving, maybe they’re downsizing. So really, our customer base covers all the demographics, for the most part.
Ash Patel: And then do you have to advertise in this business or is it just drive by traffic that sees you?
Jacob Vanderslice: Yeah, it used to be mainly drive by, and now, I think well over 75% of our customers have their initial reaction with us online. Even my parents, who are almost 70, if they’re going to look for a storage unit, they’re probably going to get on their phone, get on Google Maps and look at reviews. So most people find us online. There is a visibility component, too; it’s obviously better to have a facility with a big sign on a major thoroughfare or a major highway, that doesn’t hurt. But most of our customers find us online. And really, the three nuts and bolts of self-storage are clean, safe, secure. So clean facility, feels safe, it’s well lit. And the security aspect – you see cameras up on the walls, you see a nice gate system, you feel like your contents are secure. Those are really the three things we’re trying to achieve.
Ash Patel: Jacob, some of our Best Ever listeners – let’s say they’ve done a few years of real estate investing, they’re doing well. Would you recommend they go into self-storage? Or is it that much of a specialty where you have to go all or nothing?
Jacob Vanderslice: Yeah, I would not go into self-storage and buy one facility. If you end up buying just one facility, that’s okay. But if I was going to go into the business today, I would want to have a more programmatic business plan where I can acquire maybe five facilities within a couple years in a given sub-market. And like we talked about earlier on multifamily, operating a storage facility has a lot of fixed costs, and you can amortize those fixed costs more effectively in a larger portfolio than you can on a single asset.
Ash Patel: That makes sense. Jacob, what’s your best ever real estate investing advice?
Jacob Vanderslice: Pull the trigger. Don’t think about it too much; analyze it, obviously, do your math, mitigate your downside, but the easiest thing in the world to do is nothing. Go out and do a deal.
Ash Patel: Great answer. Jacob. Are you ready for the lightning round?
Jacob Vanderslice: I’m all set.
Ash Patel: Awesome. First, a quick word from our partners.
Ash Patel: Jacob, what’s the best ever book you recently read?
Jacob Vanderslice: So I am, unfortunately, a historic non-fiction addict. I don’t read a lot of business books or real estate books. And the best one that I’ve read recently is a book by Hampton Sides, who’s an historian, and the book is called “In the kingdom of Ice.” It’s a great survival story.
If you ever think you’re having a hard day, read this book. The stuff these guys went through… Frozen in the ice, walking 1,000 miles into Siberia on foot… A lot of them survived, a lot of them didn’t… But I was so inspired by the book, I bought copies for the entire office. And even folks in our office who aren’t big readers were just like, “Man, that was a great book.”
Ash Patel: And it makes self-storage look easy.
Jacob Vanderslice: It does. Anytime I’m complaining one day about whatever issue is out there, I just think about what the alternative could be, and I feel better.
Ash Patel: Fantastic. Jacob, what’s the best ever way you like to give back?
Jacob Vanderslice: For about 10 years, I did Big Brothers Big Sisters. It was a great experience. It’s a huge time commitment and it’s an emotional commitment as well. I want to get back into it with a new kid, because my kids are all grown up now. But that was one of the more rewarding programs I’ve ever been a part of. It’s been great.
Ash Patel: That is great. Jacob, how can the Best Ever listeners reach out to you?
Jacob Vanderslice: You can hit me via email, which is email@example.com, or go to LinkedIn, Jacob Vanderslice, or go to our website, https://www.vanwestpartners.com/
Ash Patel: Jacob, thank you again for being on our show today. You’ve given us a great walkthrough with your journey, from starting with single-family homes, going into the redevelopment of warehouses and your incredible journey with self-storage. You’ve added a lot of value. I’ve learned a lot, where this mindset of maybe it’s passive or maybe I’ll just do this one that’s down the street… So thank you again for sharing all of your advice with the Best Ever listeners.
Jacob Vanderslice: Thanks for having us on today, Ash. I appreciate it.
Ash Patel: Yep. Have a best ever day, Jacob.
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