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SHOW NOTES FOR EPISODE 573: SELF STORAGE INVESTING IN INFLATIONARY TIMES
In an inflationary economy, you need to be cautious and prudent in how you invest your hard earned dollars. In today’s podcast, real estate and self storage investor, author and Managing Partner of Wellings Capital Paul Moore shares how he is investing wisely and profitably in today’s economy with self storage.
What You Will Learn
- Why he chose self storage investing over multifamily investing
- 10 reasons why self storage is a great investment
- What’s the biggest challenge for self storage operators
- The buying criteria Paul uses to insure his self storage facilities are successful
- Four strategies to build a self storage empire
- Why self storage works well in bad economic times
- 7 possible paths you can take to get started in self storage investing
About Our Guest
Paul Moore
After a stint at Ford Motor Company, Paul co-founded a staffing firm where he was two-time finalist for Michigan Entrepreneur of the Year. After selling to a publicly traded firm, Paul began investing in real estate. He founded multiple investment and development companies, appeared on HGTV and completed over 100 commercial and residential investments and exits. He has contributed to Fox Business, the Real Estate Guys Radio show and is a regular contributor to BiggerPockets, producing live video and blog content.
Paul also co-hosted a wealth building podcast called How to Lose Money (of which I was a guest – but that is for another podcast – haha) and he has been featured as a guest on over 200 podcasts. Paul is a three-time real estate author and BiggerPockets recently published his new book called Storing Up Profits – Capitalize on America’s Obsession with Stuff by Investing in Self Storage. Paul is the Founder and Managing Partner of Wellings Capital, a real estate private equity firm. Wellings Capital designates a portion of its profits to thwart human trafficking and rescue its victims.
Previous Old Dawg interviews with Paul:
- 055: Why Apartments are the Perfect Investment December 5, 2016
- 080: Should You Pay For a Mentor? March 3, 2017
More About Paul
- He wrote a book called “The Perfect Investment” about multifamily investing
- He loves multifamily
- The demographics are phenomenal decades out
- The default rate is low
- They are recession resistant
- There are lots of reasons to love multifamily
- He met Doug Duncan, the Chief Economist for Fannie Mae, while sitting in an airport
- Doug explained why he’s been saying there is a growing supply and demand gap in multifamily that’s been going on for a long, long time
- He said, at best, it could take almost a decade to catch up
- Why is the demand so strong?
- An increasing amount of Baby Boomers are moving into apartments
- Millennials, Gen X and Gen Z all are going more and more into apartments
- Also, a lot of immigrants move into apartments more often and stay longer than most everyone else
- What Paul found out, however, was that “The Perfect Investment” isn’t perfect if it doesn’t make financial sense
- The space is extremely overheated
- The cap rates are at a record low, which means prices, of course, are at a record high
- 1031 Exchange investors and self-directed IRA investors are willing to overpay for a property
- Institutional and international money coming in at record pace
- Tax Reform Act of 2017 added fuel to the overheated fire
- The NURU impact – people who are new in real estate investing who call themselves “gurus”
- Leading other new investors
- Saying things like: “It’s different this time!” (referring to the economy)
- He’s not interested in investing in overpriced multifamily properties with his investors
- He just invested his own money ($250K) in an operator’s project as a test
- He has slowed down considerably in multifamily investing in the last 4 years
- Paul wanted to find an asset class that had more “meat on the bone,” more upside and more mom and pop operators and he found that in Self Storage
- He loves multifamily
Moving Into Self Storage
- He received a call in early 2018 from someone he thought was an investor – a guy named Chris
- Chris proceeded to tell Paul why he switched from multifamily to self storage
- He gave an incredible 30 minute pitch on why self storage is so powerful
- It so moved Paul that they had another 2 1/2 hour meeting, which ultimately resulted in Paul going out to meet with him at his new company headquarters
- He shared how he was raising money to purchase self storage projects
- Paul wanted to purchase a book on self storage to find out more but was disappointed to find that there was very little out there
- After he was already a year into the business, Paul decided to start writing a book on investing in self storage
- BiggerPockets agreed to publish the book in 2019 but, because of Covid, it was delayed up until recently
Reasons Why Paul Loves Self Storage
- 95% of the multifamily units are owned by multi-asset corporations
- 75% of self storage facilities are owned by independent owners, three quarters of which are mom and pop owners
- Mom and pop owners usually only own one facility
- The size of the self storage industry is Subway, McDonalds and Starbucks combined – about 53,000 facilities, half of which are owned by mom and pops
- There are lots of value-add opportunities
- The rents are priced “in elastic”
- For example, if you have a $1,000-a-month apartment and you want to raise the price 6%, the tenant might leave instead of paying the extra $720 a year
- If I have $100-a-month self storage unit, on a month-to-month lease, and the operator increases rent 6%, the tenant is not likely to go through the hassle to move everything out for an additional $72 per year or $6 per month because most people don’t think they will be there that long anyway
- Self storage has done fantastic when the economy is booming when people are filling up their Walmart and Amazon cards
- And self storage does really well during tough times
- During the pandemic
- Restaurants shutting down filled self storage units
- People shutting down businesses to work out of their homes filled units too
- Prices went crazy during the pandemic
- During the pandemic
- It’s easy to manage (that’s why there are so many mom and pop owners)
- However, you can buy a mediocre facilities, even pay top dollar, and convert it into a really powerful profit machine
- If you can portfolio a bunch of self storage facilities in a group, under a similar operating/marketing/website flag, you could potentially sell them to an institutional buyer
- No eviction laws (even during Covid)
- You can just change the lock and they will likely pay. If not, you can auction off the goods
The Challenge of Self Storage
- The biggest challenge is the competition
- He purchased a facility in Tampa, Florida
- Two big national competitors popped up next door, or within the same mile
- It really hurt the lease-up of this fairly new facility
- They can afford to underprice for extended periods until they put a little guy out of business
- The way they position themselves today to avoid those situations is to:
- Invest in good markets but where the very biggest don’t go
- Tertiary type markets that meets their criteria but doesn’t attract the the big boys
- The big boys of self storage are usually only found in major MSAs like Dallas, Los Angeles, etc., not Beeville, Texas
- All they need is the right number of square feet per person in a 3 mile radius
- Invest in good markets but where the very biggest don’t go
You Need the Right Criteria
- To be successful you need to acquire a facility that meets the following criteria:
- On a main road
- You need high visibility on that road (not behind a hill or a Walmart)
- You’ll need to do a market study to see how many competitors you’ll have and how many feet of self-storage is in your market (within a 3 mile radius, typically)
- You need to me in a middle to high income area, in general
- You’ll also need a great operator/syndicator (more important than the facility)
How Self Storage Does in Bad Times
- In general, people don’t want to lose their stuff, regardless of the economy or difficult situations
- People will downsize during tough times which means storage demand will grow
- The following FOUR “Ds” is when storage does best:
- Death
- Downsizing
- Divorce
- Dislocation
- Since Covid, people are moving in mass out out of New York City, Chicago, California to places like Texas, Tennessee and Utah
- A lot of those moving are using self storage
- The great thing about self storage is that you are completely flexible with your rental rates
- You have one month leases
- You can raise rates 3 times a year, at 5% each, tenants are not likely to leave
- This allows you the flexibility to adjust to inflation rates as needed
- That’s not the case with warehouse space or multifamily space
- You have one month leases
Four Strategies to Build a Self Storage Empire
- Buy a coupon clipper
- Buy a self storage facility that is already operating well and get your 6% return in your mailbox
- Mediocre
- Not what most real estate investors would want to do
- Build from the ground up
- Highest risk
- But potentially highest return
- Building costs have doubled
- Retrofitting an existing building
- RJ Osbourne (a friend of Paul’s) bought an old Super K-Mart
- Cut it in half
- Sold the parking lot off to apartment developers
- Had $2.5 million in cash in the deal, $5 million in debt – $7.5 million in the deal
- Upgraded it to state of the art storage facility, in two buildings
- He had it 40% leased up
- He received an offer of $26 million (which he turned down)
- Value-Add Strategy
- Paul’s favorite strategy
- Examples of value-add measures
- Adding U-Haul
- Paul has a friend in Florida that added U-Haul
- He receives $5,000 per month in U-Haul commissions
- This increases the value of the property exponentially
- Virtually no expenses
- If, for example, you only generated $3,000 per month from U-Haul for a $2 million facility, you could increase your net value $600K
- Offering other ancillary items like locks, tape, scissors, boxes
- If you have extra land
- gravel or pave the land
- add RV and boat storage
- Raise rents
- You can increase rents 15% and it would increase the value of your facility by 20%
- Increase occupancy
- Adding climate controlled spaces
- You can add:
- ATM machines
- Billboards
- Propane filling station
- Cell tower
- Value-add on mom and pop distressed facility
- Bought a 607-unit property in Beeville, Texas
- Parents died and kids fighting over the place, running it into the ground
- On the market for over $5 million
- Delinquency was high
- No marketing being done
- 80% occupancy
- Bought it for $2.4 million
- Added a bunch of value-adds
- Increased marketing
- Kicked-out bad tenants
- Increased rents
- Got an appraisal at $4.4 million just 3 or 4 months later
- Put debt on it a $2 million at only 43% LTV
- Took it down to about $500K in equity
- They sold it for $4.6 million a year later
- Adding U-Haul
Seven Paths to Get Into Self Storage
- Beginner’s Path
- Buy a small facility
- learn the ropes
- Improve it
- Leasing it up
- Increasing the rates
- Sell it
- Upgrade to bigger facility
- Repeat
- He knows a guy selling a “starter” facility
- In Kentucky
- Selling for $650,000
- 150-units
- $40-50 a square ft
- If you could increase it to $70 per sq ft, you could double the investor’s equity
- Become a Deal Finder
- Try to find good self storage deals
- Direct marketing
- Hand the deal over to a syndicator to get to learn how to do the business
- Raise Money for Other People’s Deals
- Need to be SEC compliant
- Must be partner in the deal
- Get a broker/dealer’s license
- Need to be SEC compliant
- Jump in Big with a lot of Money
- Get a good team around you
- Hire great asset management people
- Get a great third party property manager
- Buy your own facility
- Get a Job in the Industry
- Get a job as a property manager, asset manager, broker or other self storage related job
- Learn the business
- People
- Terminology
- Operations
- Then, look to buy your own facility
- Find a Coach or Mentor
- Popular in multifamily space
- There are a few in the self-storage space
- Sometimes they will partner with you
- Be a Professional or Semi-Professional Passive Investor
- Find a fantastic operator that you can trust
- Ver their deals
- Vet their company
- Carefully analyze their debt structure
- Do criminal background checks
- Invest heavily with them
- This is where Paul’s company comes in
Wellings Capital
- His company are professional passive investors who also invest in self storage facilities
- They partner with investors who invest in their deals
- They go out and find the best deals they can to invest in
- They follow the very best operators
- They follow the Warren Buffett model
- Partnering with the very best management teams with a great product
- And trusting them to grow the business
Get a Free Report on Self Storage
- WellingsCapital.com/resources
- Get Paul’s free special report on self storage and another report on mobile home parks
How to Buy Paul’s Book on Self Storage
- Click here to buy Paul’s book Storing Up Profits: Capitalize on America’s Obsession with STUFF by Investing in Self-Storage
Find Out More About Wellings Capital
- Website: WellingsCapital.com
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