315: Self-Storage Investing Strategies

SHOW NOTES FOR EPISODE 315: SELF-STORAGE INVESTING STRATEGIES

The Self-Storage industry is booming!  Understanding the industry, market and operations is important for anyone wanting to move into the space as a buyer or investor.  In today’s podcast episode, 20 year self-storage executive and expert Scott Krone shares insider information and insight on the industry, as well as commentary on how to identify good investments from bad.

What You Will Learn

• Market shifts and the relationship to real estate investment strategies
• The critical value of feasibility studies for any new project
• Why self-storage is better than single or multifamily properties
• How to assess if a market is a good self-storage market
• Determining the right mix for sa elf storage facility between consumer and business usage
• What kind of returns you ca expect when investing i self-storage
• How to weigh risk when investing in self-storage facilities

About Our Guest

Scott Krone

Scott Krone is the founder of CODA Management, a company that teams up with investors to purchase under-valued warehouse space and converts the space into climate controlled, self-storage facilities that are managed by a top 3 operators  (Extra Space, CubeSmart and Life Storage).  With over 47 syndications, and 400,000 sq. ft  with 2,750 storage units under management, Scott has over 25 years of development and design building experience.

More About Scott

• His family had a very successful family business that Scott’s great grandfather started in the die casting industry in Chicago
• Made aluminum die castings for big companies like Ludwig drums, Schwinn bicycles, Ford, the military, and Harley-Davidson
• They were awarded “Small Business of the Year” and were given a tour of the White House
• He was the forth generation and he always assumed he would just step in and take over the family business when it was time
• His father came to him in his senior year of college and asked him what he planned on doing upon graduation
• Of course, Scott assumed he would move into the family business and he said, I’m going to be working for you.”
• But his father said, “You’re not going to do that.”
• Scott immediately thought he did something wrong
• But it wasn’t Scott.  His father had made the decision to sell the business.
• The market was changing and die casting was going off-shore and Scott’s father saw that it was time to sell
• They were a $3 million business and saw that the market was changing
• It was a major paradigm shift for Scott and his family
• Scott had always had an interest in architecture and his father asked why Scott didn’t just go into that area
• But Scott had a degree in history and not architecture
• Scott decided to go for a master’s degree in architecture
• This whole experience gave him a glimpse of market shifts and market timing
• He was learning how to find those indicators to better anticipate market shifts

Moving into Real Estate

• Scott’s first year in graduate school, Scott realized that the people really making the money weren’t the architects but that it was the real estate developers
• One of his professors owned a real estate development company where he controlled the entire process – from the development, to the architecture, to the contracting
• Scott became his professor’s TA (teacher’s assistant) and began working in his business office with him from 7am-12pm.  He’d go to class until 7pm.  And from 7pm to midnight, he would work on projects for his professor’s business
• Scott was now learning real estate development
• He saw that there was more opportunity to control the process and company growth within the development business, as opposed to depending on someone else giving you a job
• He saw that as a developer, you create the work and can control more of your own success
• Scott also had an advantage in that he was not coming from an architecture background and was more proficient in “reading and writing” skills
• Instead of working on design boards, he worked directly with the CEO and CFO on things like:
  • Negotiating land contracts
  • Condominium decs
  • Loan docs
  • Working with buyers
  • Bidding things out for the sub-contractors
  • More involved in financial performance and modeling out the revenue side
• So Scott continued his work as a real estate developer working for his professor’s company
• His professor’s company was a top 20 US developer in the multifamily development space
• Scott’s Master’s thesis was a $100 million development with 400 units (converting an old Sara Lee factory)
• He worked mostly on ground-up development but also did apartment conversions to condos
• Worked at that company for about 6 years
• Was asked by the CEO to go with him to start another development company in a level of higher responsibility
• The new company had its own challenges
• After 6 months, they announced that the project he was working on was not going to be as successful as they would have hoped
• He proposed to the company that he would work part-time for the company while he starts his own business

Becoming an Entrepreneur

• Started CODA Management (this was 20 yeas ago)
• His first real estate deal was buying a house for $300,000, tearing it down, building another in its place, and selling it for over $1 million
• They were working with investors to help fund there projects
• Went to small multifamily projects, condos and grew from there
• For the first 18 years, their focus was around the Chicago market doing single family, multifamily, mixed use, churches
• Within the last 3 years, his company has expanded beyond Chicago to greater Illinois, Wisconsin, and Ohio
• They were predominantly in the residential area until the big crash in 2008
• But when the banks stopped lending, they began buying distressed apartments and other distressed commercial properties
• It was at that time that he became family with the self-storage industry in 2013

Moving Into Self-Storage

• He started to become familiar with financial milestones, projections and the processes necessary in order to make it work
• Took there new model and started to apply it to projects throughout the Midwest
• Exactly the same in many ways to apartment developments, minus the toilets and the showers – a simplistic version of an apartment building at a fraction of the cost
• He looks at how can he create a better and more effective use of this property/space by changing the use
• He had to go to “non-traditional” banks to get the financing for their projects because lenders were still reeling at the time
• They were also working with private investors
• The private investors were very please with their returns and told Scott, “Do it again.  Just don’t tell anyone else.”

Strategic Focus

• His company has two businesses:
  • A design-build firm where they help their clients design, find, acquire, title, finance and build properties (from single family houses to churches)
  • Investment business that only does self-storage
• They have sold off apartments, stopped doing single family
• They have converted lots of different types of large commercial space into self-storage facilities (i.e. warehouses, office buildings, etc.)
• They have invested heavily in feasibility studies before going into a venture and will not go into a project without verifying its viability
• Assessing the demand in a market for self-storage
  • Their most basic metric is the number of square feet of lockers per capita
  • Where supply equals demand is around 7 square feet of lockers per capita
  • If they buy well below that metric, they know that there will be a natural buying pattern where they can model it out and is very predictable
  • Conversely, once they approach or surpass the metric, the law of supply and demand kicks in and your lease time won’t be as long and you won’t get as much revenue because everyone will be fighting for the same dollars
  • They recently were looking at a potential site in Arizona but it would have taken them above the 7 square feet and there would have been too much risk
  • The projects they have purchased were between 1.6 and 3 square feet – they always make sure that they are well below where supply meets demand
• Target audience
  • Two different audiences: consumers and businesses
    • Businesses use self-storage to store off-season stuff, extra inventory, supplies
    • But majority of there facilities are geared to the consumer or residential market
    • For example:
      • Toledo, OH – 50/50 mix of consumer to business/industrial
      • Chicago or Milwaukee will have a higher percentage of consumer/residential lockers because of the higher populations.
  • Median income and the demographics of a consumer market dictate the configuration of their lockers
• Demand – Once they know there is a demand for self-storage, then they need to determine what to fill the demand with
  • Average square footage of the lockers
    • In more affluent communities, they will build bigger lockers and they will pay more per square foot
    • In less affluent communities, consumers will pay higher premium for smaller lockers
      • Higher percentage of smaller lockers – from average 90 sq ft per locker to 70 sq ft
• The presence of schools and universities also is a factor to how they lay out the building

Biggest Mistake

• Got involved with people who were not good for the company
• What he learned: They importance of having systems in place in order to
  • Monitor performance, to make sure things are being done well, properly and appropriately
  • Be able to remove and free yourself up and allow others to take on some of your jobs
• That allowed them to properly expand the company, allocate resources and training to get the right people into the right jobs

Biggest Success

• Being able to survive the 2007-2008 recession
• To be able to adapt their company to succeed in both a downturn and upturn market
• They only had a few properties at that time

Advice for Old Dawgs Interested in Self-Storage

• The first thing you need to be able to do is assess the level of risk associated with self-storage as with any investment opportunity
• Ways to assess risk:
  • CAP rate
  • Underlying concepts and economics
  • What is the market?
• Partner with someone who is already doing it successfully to utilize their strengths to enhance your investment, make sure it’s safe and that it will grow appropriately
• There are different levels of risk depending where you invest, from building or buying your own to investing in some else’s project
• Expected returns:
  • If you buy an existing facility that needs some work at let’s say a 9 CAP, you should be able to get it to a 7.5 or 8 CAP.  That’s for more of a rural, drive-up with garage door type facility, may be paved or not, no climate control
  • Class A properties, are fully climate controlled facility, where you drive into them, you’re never outside, you unload your car or truck totally inside the building, are giving anywhere from a 9 to 15% return
  • When his company does speculative work, they need to get 20% or greater returns for their investors

The Future of His Company

• His goal is to get 10 top class facilities in 10 years to unload to the REITS
• The best time to sell real estate is when you don’t need to sell to get the most for them
• Wants cash flowing facilities that are generating a good rate of return.
• They are buying existing facilities well below replacement cost
• Their goal is to have a cost basis of 65-70% of value.  That way  they can refinance out their investor’s equity and still cash flow the properties so their investors stay in the deal
• If they can be cash flowing and have no equity in the deal, and decide when is best to sell them, that is their ultimate goal
• They are half-way through their 5-year plan and are already working on their 6th facility that will be in that portfolio

Rap-It-Up

• Favorite real estate book: The Road Back to You by Ian Morgan Cron
• Favorite business book: The Stairway to Success by Nido R. Qubein and any of his other books
• Most valuable web site for success (other than your own): https://eig.org/opportunityzones
• Favorite app: HubSpot
• Favorite quote: “Divide your life into thirds – one third of learning, one third of success and one third of getting” – Dr. Qubein
• If you had to start all over, knowing what you know, and you only had $1,000, what would you do to launch your real estate investing business?  Invest in education to see how I could do things better. He had a similar experience after the recession.  Double down on my education.

How to Reach Scott

• Their website: www.CODAMG.com

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