The Storage Investor Show
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The Storage Investor Show
From $0 to $230 Million in Self-Storage with Fernando Angelucci
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DESCRIPTION
Fernando Angelucci, CEO at Self Storage Syndicated Equities, shares the strategies that took him from traditional real estate to self-storage. Fernando shares how he structures joint ventures and builds a deal pipeline with strategies that leverage education and investor engagement. You NEED this episode, trust me.
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Hey everybody, Welcome to the Storage Investor Show. My guest today is Fernando Andalucci. He's a senior managing partner at Self Storage Syndicated Equities. He's built a portfolio of 230 million in self-storage over the last six years. Fernando, welcome to the show. Thanks for having me. Chris, Give us just 30 seconds on how you got into the business about six-ish years ago.
Speaker 2:Just 30 seconds on how you got into the business about six-ish years ago. Yeah, so you know, I started real estate like everybody else. Read Rich Dad, poor Dad. Decided to quit my nine to five, started first in single family and multifamily developments and rentals. Got tired of the interference of the government in our business, as well as the challenges that come with having someone living in your investment, decided to sunset all of those companies and started up the self-storage company in 2016. And then we first started buying our buy and hold properties in 2018.
Speaker 1:That's great man. So how did you actually figure out the storage business? I was working for a company, you know, doing storage roughly kind of roughly about that time and there just wasn't much information out there. Fast forward today there's a lot more, but how did you kind of figure out what you needed to figure out to get into the business?
Speaker 2:Yeah, absolutely so. Like every other asset class that we've gone into, we first start off on the wholesale side. So, for those that are not familiar, you put properties under contract, you do all your due diligence and then you actually assign your contractual interest to another buyer for a spread over what you have it under contract for. That way I can test my thesis. Am I buying these properties right? Are people that have way more experience than me and way more money than me willing to buy these properties off me at a higher price than I got them for? If the answer is yes, it seems like our thesis is doing all right.
Speaker 1:Okay, got it. So you were. How did you find the properties to actually wholesale them? Did you find the lists, or how did you go about that process?
Speaker 2:Yeah, we literally the exact same way we did with the other asset classes. We bought lists, cold call, text message emails, going to industry events. We sourced over 90% of our properties off market, so being direct to seller was most important to us, doing some stuff that set us apart from others handwritten letters, follow-up thank you cards when they got off a phone call with us, just adding that you know that nice touch to build extra rapport okay, got it.
Speaker 1:So you did your first. If you can remember back, I know it's, it's hard, you get deal mesh over the years. But uh, what was that first wholesale uh deal like what was the rough pricing on it? And then how much did you guys actually wholesale it for?
Speaker 2:yeah, that property was, uh, in northern illinois. I don't remember the price or what we wholesaled it for, I'll be honest with you, but I do remember some very interesting things about it had almost 12 units filled to the ceiling with tires old tires. It looks like someone was renting units to basically dispose of the tires as opposed to paying the fees that you'd need at the dump and then immediately abandoning them. So that was a huge issue. We were able to, I remember, get a pretty solid price reduction when we got that and then that transaction took about three months from beginning to close to get paid on. That I think we made. It wasn't a very large fee, it was probably around like $50,000, $40,000, $50,000 on that deal, okay, well, that's.
Speaker 1:I mean, hey, you know what? $40,000, $50,000 is pretty good. Obviously, it's maybe not as large as some of the other fees that you've made over the years, but still, hey, that's nothing to be disappointed about. So that's great, that's right, okay. And plus, you're like taking your it off the table, right, so you're just basically wholesaling it.
Speaker 1:You got cash to put back in your business or whatever. Go to the beach and then go from there. Okay, so talk about real quick, so fast forward. We won't talk about every deal. Obviously, $230 million plus is a lot in the interim. How the heck did you like when will? I'm curious, when was the next deal, or the first deal that you actually bought for yourself? Like what? How did you feel? How did you get to that point of feeling comfortable, and what was that deal?
Speaker 2:like yeah. So we got a couple of wholesale deals under our belt. You know, being a wholesaler, one of the things that you need to do is not only find deal flow, but you also need to find willing buyers for those deal flow and you know, continue growing that. One of the things that we like to do is, anytime somebody comes onto our buyers list, they have to do an interview with me or with Steven and we ask them what their buying strategy is, what their buy box is, how they get things financed. So we were basically able to peer into their business, because they looked at it as us helping them find acquisitions. But at the same time, I was able to scrape information to see, hey, these guys run a pretty great business. These people don't. Let's look at the differences in their buy box, compare them and see which ones we want to pick and choose from those. So, after doing a couple deals, we said, hey, I think we're ready to do this. We went on.
Speaker 2:Actually, the very first deal we bought was a real estate broker that had it. It hadn't been listed yet. It was in August of 2018 in Yorkville, Illinois. We got a call from this broker said come, take a look. So we went down there on Tuesday. He basically said hey, no haggling, this is the price, the price is the price. The owner has run this thing for 20 years, looking to retire. If you don't give me the price I want today, I'm listing this deal on Thursday. So we bought it for $975,000. It was 133 units, just shy of 16,000 net rentable square feet.
Speaker 1:Hey, that's not bad. That's not bad on the pricing. Obviously it depends on the rents and all that, but that ain't bad. Yeah, okay, it was 100% occupied.
Speaker 2:We were buying it at a 7% cap rate because, you know, interest rates were zero percent back then.
Speaker 1:So yeah, no kidding, ok. So I mean, hey, that's a pretty good deal. So you do that first one. Do you still own that, or do you guys sell that one, or what's the? What's the situation?
Speaker 2:on that. Yeah, so you know, one of our three strategies is to build up a large portfolio of mom and pop assets that typically institutional investors or sub-institutional investors would not be interested in. Do the value add, maybe expand upon the land that's available and then sell them off as larger portfolios of 10 to 20 properties at once. So that deal we ended up owning for just over three years. I believe we sold it as a part of a portfolio of properties either 10 or 12 properties in that portfolio and I believe the price allocated to that one was like 1.7 million. So over three years we went from 975 to about 1.7 million.
Speaker 1:Holy smokes, yeah, that's awesome, man. So almost doubling the value excuse me of the property. That's great. So your strategy nowadays let's fast forward a little bit. Your strategy nowadays is, like you said, uh, create a portfolio of properties that you can then sell off to maybe institutional or sub-institutional type of buyer. What is that? Um, that's a different ball game man. It's different, right.
Speaker 1:So I was talking to another guest earlier, john Farling. He's got a completely different. I don't know if you've ever heard of him, but some people might have. He's got a completely different strategy, right? He buys for himself. He has like 14 locations. He's been doing it for however long four or five, whatever years, five, six years and I mentioned on that episode that you and I had talked earlier this week and you said I'd rather own a slice of the watermelon than a grape right, than an actual entire grape myself, and he's of the mentality I want to own the grape. All right, it's just a funny contrasting thing. So I understand how he makes money. How do you guys do it? Let the audience know how this works.
Speaker 2:Yeah. So we have three main strategies. The first is that portfolio strategy we're talking about. The next is kind of these ground up developments, so much more opportunistic buy the land, put up a three-story, four-story monstrosity and then sell it as fast as we can to one of the publicly traded REITs. And then we have kind of this in the middle strategy, which is either adaptive reuse, conversions of you know, big box retail into storage, or these purchase and expansion place where we'll buy deals that are again sub-institutional 30,000, 35,000 square feet and then add to them until they're above 65,000 square feet and then sell them. The reason we are more of a flipper, if you will, than a buy and hold strategy is when you look at the return on an investment, the life of that investment, there is what's called a diminishing return curve right, or a Laffer curve is the original and what we've noticed is that initial three to five years where you're forcing a lot of appreciation through value add you know, revenue management, expense management, adding additional units that's where you make the majority of your value. And then after that the curve starts to go negative, because then you're really holding this as a coupon and because we are syndicators, which means that we go out and we partner with private investors or limited partners to raise funds and then do these deals.
Speaker 2:You have two different types of investors. They typically don't cross streams much. So you have your kind of high octane investor. They're looking for high teens IRR to mid-20s IRR. So they're really only interested in that initial three to five years of forced depreciation.
Speaker 2:Then they take their money out, recycle it and then put it into a new deal and if you can do that consistently, the rate of growth of your equity is, I mean, 20x what you would have if you were just to buy and hold for life. So you know there's two strategies here. You can either sell to replace that equity back to the investors and then start it all over again, or you can actually replace the equity, take out those high octane investors with some type of 1031 exchange or refinance events or even a sale, and then you can replace those investors with more of a let's say, a coupon clipper that is willing to take, you know, 6% annual return for the next 10 to 15 years because maybe they have 1031 funds that they were not able to put into a replacement property in time and they didn't want to get hit by that 20, 30% capital gains um by not being able to find that replacement property.
Speaker 1:So different strategies there yeah, yeah, totally different strategies I'm thinking through. So you're right, you can recycle your capital quick not quicker, but um, you get better returns over time. Because, you're right, like once you do the value add portion, you're kind of there and then the market is what it is on rents like if it's going up, great, if it's going down, you can't really do much about that. You got to kind of meet the market where it is and backfill and all that stuff. But your your your value add there is the front end. What about the risk of doing that? Because if you're going to sell in a four or five year time period, or whatever the number is, three years, rates can be different, et cetera. I mean you could hold it longer, but then your IRR starts to go down if you do that. So how do you guys balance that risk reward trade off there?
Speaker 2:Yeah, great question. So typically, one of the very first things when you look at downside risk mitigation is your debt source. So one of the things that we never do is use bridge capital. This is what caused a lot of people to get in trouble. Now you know, we're in end of 2024.
Speaker 2:We're seeing a lot of guys in the multifamily office space business where they had a two or three year bridge, thinking that rates would be a lot lower than they are now, and now they're getting caught with their pants down. It's either you bring, you know, an extra 30 percent equity to the table in the next 60 days or the bank's taking your property. So that's what the very first thing that we try to do is mitigate our debt risk by getting medium to long term debt. The lowest we'll go is five years. Traditionally we're shooting for 10. And then in some instances we're getting 25-year fully amortized debt.
Speaker 2:In addition to that, you take lessons from the 80s, the Paul Volcker years, and you do a lot of seller finance transactions and maybe the seller's carrying all of the note, maybe the seller's in a second position with a longer term than your first position, so that you have some way to kind of blend not only the rate but the debt coverage as well. So those are some ways that we try to mitigate that risk of say, you know market timing, market cycle and if you have debt that is say, 10 plus years, yes, maybe when you're going to sell, the market's not where you thought it's going to be, but you can weather that out and it's a lot better to have a lower IRR than to lose your investors' equity. That is the you know death knell for a syndicator is if you ever have to do a capital call or if you, god forbid, lose all of the principle of your investors. I mean you're, you're basically done in the business.
Speaker 1:Yeah, not good. Um, okay, so if you're not, you're not doing any bridge debt. Uh, that makes a lot of sense. I've seen that twice from two different perspectives and I would have to agree to agree with you on a lease up deal. Do you guys ever buy a lease up deal? Because that's you're not. You're not covering enough for permanent debts. You got to get some sort of in-between thing. It's not a construction loan. Do you ever look at lease-up deals and if you do, do you try to go after those? How would you finance that if you did them?
Speaker 2:Yeah, we do go after lease-up deals. It depends on the level of where that lease-up is at. We're not really buying certificate of occupancy deals. Usually at a minimum. We want the revenue to at least cover operating expenses Doesn't necessarily need to cover the debt service at that point. And then the key is just to raise the capital for your runway between the point where the property is at now to the point where it becomes cash flow positive from a debt service standpoint.
Speaker 1:Got it Okay, so you won't take on the risk of, let's call it, 30% occupied. You're not quite covering your expenses just yet. Maybe it's around the corner, but not just yet. You won't take on that. But are we covering expenses? Is there an occupancy level where we're doing that at least, and then you know what's the raise look like? To get that debt service coverage ratio where it needs to be, or the debt yield, et cetera? Okay, uh, that that makes a lot of sense. With the seller financing piece, can you talk about a deal I know you've done a lot of them, but just a deal or maybe a scenario where you've done seller financing, a specific scenario, and what did that look like?
Speaker 2:Yeah, Nowadays where we're, you know, in a much higher interest rate environment than we were, say, three, four years ago. Um, one out of every two deals that we purchase has some component of seller finance, so I'll give you one that we bought on I'm trying to think I think it was the last day of the year of 2023. This was a very interesting one in Ohio, because it had kind of three different components of seller financing. Number one the seller. It was a deal that was already in pretty good occupancy, but it had a lot of land for additional units, so it was a construction component. So, right off the bat, we were talking with the seller and said listen, we want to buy this, we want to be able to give you your 50% down payment on the seller financing. The only way that we're going to be able to do this, though, is that you need to take a second position mortgage behind the bank, and the reason you're going to want to do that is because we're going to be improving your property, so not only if you know God forbid, worst case scenario we default, not only do you keep our down payment, you keep all of our monthly interest payments, but then, in addition to that you get a property back that is, you know, much higher value than when you originally lent that to us or put that B note.
Speaker 2:So the first piece was there was a seller finance component in the second position. It was somewhere between four to five percent interest, interest only for seven years. The first position was the construction debt and then the seller also had a situation where when he went to sell he was going to have some pretty significant capital gains. So what we ended up doing is actually bringing him into the limited partnership on the new entity and then assigning bonus depreciation to him from our cost segregation study so that he could reduce that capital gains. But in addition to that he is now a regular limited partner. So he's going to make somewhere between 16 to 20% internal rate of return on the money that he already invested to offset his property tax or his capital gain tax from the sale. So I had some you know, a couple of different parts floating and it turned out to be a great deal understand how you structure it here, but did you get an attorney involved that understood all these things Cause?
Speaker 1:not many, you know I'm not going to say that many, but some just don't. They wouldn't be comfortable doing something like this. How did you find someone to help you with this process?
Speaker 2:Yeah. So it always comes back to education. I think the best investment you can make is an investment in yourself. So you know, we look back, like I said before, to the eighties, in the Volcker era, you know, when interest rates were 18% at the commercial level. Do you think real estate transactions just stopped? You know, going? That's not the case. During the 80s and the 90s there was a very high volume of commercial transactions, but those transactions were, you know, mortgage assumptions, wrap mortgages, seller finance, mass release with purchase option.
Speaker 2:So some really great resources that you can go check out would be. You know, if you want to go way back, you can go to uh, I believe his name was Carlton sheets no money down real estate. He had a great cassette tape bundle that you can listen to. More recently you have um Eddie speed who is, you know, king of notes. He's done 50,000 plus notes in his life and notes usually have some type of seller financing component to them. Mike Jake is another one that teaches this. And then, once you have the general strategy, you just go to a real estate attorney and say this is what we agreed to do from a verbal standpoint. Now you just go handle all the documentation. So the deal actually performs the way that we have agreed to between us and the seller.
Speaker 1:Yeah, that's fantastic man. So those resources are going to be great for folks to uh, for you guys listening, uh, to check out, please do. I'll try and have a link in the description to each of those. If they're, they should be out there. So, um, okay, let's talk real quick about pipeline, cause if you guys are doing a lot of deals like this, you have some other components to your business, uh, where you might bring in some deals that don't work for you. You kind of sell those to other people, um, and then you also have a business and this probably isn't open for everybody but where you'll maybe jv on something you didn't mention it, but maybe you'll jv on something that makes a lot of sense. Can you talk about just building out the pipeline of the deal flow, because I think beginning they want to understand that a little bit better. You know how do you build a decent pipeline, like the actual practical ways to do it.
Speaker 2:Yeah, absolutely Great question. So there's the traditional and the non-traditional. So the traditional stuff we do for pipeline is you know, buy a list, hit them from all angles social media, text messages, phone calls, emails, etc. Go out to brokers, tell them to send all the deals with hair on them to us. First, we'll make it. You know, we'll give you an offer in 24 hours if it's a yes or a no. But then the other side, what we actually decided to do, is create kind of like this free education platform. So if you look at all of our social media or all the podcast interviews that we've done, what we really do is we teach other people what we do, all for free.
Speaker 2:And someone from a scarcity mentality would say why are you trying to train new competition? But someone from an abundance mentality realizes that you know there's 50 to 70,000 self-storage facilities out there. There's no way that I'm going to be able to buy every one of them. So maybe I could teach other people how to do this. And what happens along the way is execution or lack of execution. So if you teach people how to do these deals and they actually go out and find deals but then realize, hey, maybe I don't have the net worth, maybe I don't have the liquidity. They say who's the one that taught me how to go do this? Was, you know, liberal with their time? And then come back to me and Steven and say, hey, I got a deal, looks like a good deal. There's a couple missing components that I don't have. Can you fill in that gap and do a joint venture for us? So now we have a pipeline.
Speaker 2:Almost 30% of the deals that we close on nowadays come from some type of joint venture structure where somebody originally found out about us or learned how to do this structure from our free courses or following our social media. What have you? And then brought those deals to us, and those are deals typically that no one else is seeing because of how recent the self-storage asset class is and you know by recent I mean within the last 60-ish years, which is a lot younger than, say, multifamily or single family residential. The land classification codes or the tax classification codes are typically wrong. So you can have guys that are hammering these lists that they buy from InfoUSA or you know, datamix or whatever, and they will never get to some of these owners that we're getting to because their land is classified as farmland or as Big bay industrial when it's really self-storage.
Speaker 2:But we have these you know, almost bird dogs, if you will that are going out driving for dollars seeing that there's a self-storage facility there, even though the tax classification code says that it's not a self-storage facility. And those types of sellers are not only not getting bombarded by phone calls from brokers every day, but also from our competitors. They're missing all of these types of deals. So that, I think, is a really great method where, by squashing that scarcity mentality and really operating from a place of abundance, you actually receive a return on your time abundance.
Speaker 1:You actually receive a return on your time. Yeah, that's so true. Now, with the different AI platforms, you go to ChatGPT and ask it how to close a self-storage facility and it will give you the high level points Maybe not every single nuance, but every deal is different anyway. So you can ask Perplexity AI the same thing and it'll pull all the released resources it can find online and create like a PDF for you that explains the entire process, give you a checklist and all that stuff. So, yeah, it's there's, the information is out there. So if you're willing to share things like the stories, like what you're doing right now, and tell them the stories, you know, ai isn't going to provide that firsthand information, of course. So that, I think, is valuable for people and that's where you can differentiate yourself by putting yourself out there, just like you're doing on the podcast right now. So that's a virtuous cycle, right? So you, I was going to ask you about the lists and how you guys actually found those.
Speaker 1:I've talked about Yardi Matrix in the past and I've bought lists like that. They're very tedious to go through. It's really difficult. Yardi costs money. So, like, what do you do? And, like you said, you create that content platform where people come back to you later on and say, hey, you know, fernando, I found this deal, blah, blah, blah, can you help me out with it? And now you have that other side of the business going. Okay, so, with the joint venture thing. So if somebody finds a deal that maybe makes sense but they're not really sure they bring that to you, how does that look Like? What? Like, what can they hope for? If they were to do that, can they own the deal with you? Did they just sell it to you? Like? What does that look like?
Speaker 2:yeah, there's, there's multiple options and we really put the options on the person that brings the deal. So you say, hey, do you just want to do, you know one and done, get a wholesale fee, take your cash and start building, you know, put it back in your business to continue building, or do you want to retain equity in the deal? Maybe it's not a deal for us, but it is a deal. Maybe we can co-wholesale it. So you bring the deal to us, we'll underwrite it, we'll put it under contract, try to get some creative seller findings on there, and then sell it to our list of 3,500 plus off-market self-storage buyers and whatever our fee is, we'll split that fee after costs. So there's multiple options when it comes to the joint venture business.
Speaker 2:Now what I feel you asking is how does the actual structure work when you're retaining equity in the deal? What does it look like, partnering and going through the full life cycle? So again, very easy, and I actually sent you one of the Excel sheets that we use. I send an Excel sheet that breaks down all of the important roles that are needed, from finding a deal to finishing out that deal and paying all the investors back, and then each one of those roles has a certain percentage assigned to it. So these can be things like know phase one environmental property condition assessments. This can be, you know, for ground up developments. It could be geotechnical, it could be planned architectural engineering, et cetera. So whoever puts up the risk capital, they get a certain type of return back for that because of the risks that they're taking.
Speaker 2:Balance sheet guarantor. So maybe you have a good net worth and you're not very good at putting deals together, or the opposite Maybe you have no net worth but you're good at putting deals together, and so there's different parts that you can work with people the ability to bring limited partner capital to the deal that also has a lot of value. The ability to oversee and perform construction management or the development process. The ability to either self-manage a facility or, for these larger facilities, manage the third party manager. So there's a lot of roles that can be served and what we say is hey, here's the sheet, tell me which roles you can and want to serve and we'll fill in the rest. We'll fill in the gaps and that will change the ownership percentages on those deals.
Speaker 1:Yeah, that was good man. So I want everybody to reach out to Fernando. I don't want to give you guys the numbers and all that stuff. That's not fair, but I did notice that the capital race side of things was, you know, it was a good portion of that, or GP percentage or whatever you want to call it. It was a good portion of that. Why is that? Why is and you don't have to justify it for me, I'm just trying for the audience why is like, finding the deal not quite, as I don't know it doesn't bring quite as much value as bringing the equity to the deal. I've heard it both ways right, so no deal and no equity, but then no equity, no deal. It's like, so like, how do you see that?
Speaker 2:Right. So you know the example I gave is okay. You know we find Marcus and Milchap listing a deal Great. Hundreds of people have found that deal, but who has the capital and the speed in which to close on that deal? That's the person that gets the deal.
Speaker 2:So finding a deal, in our eyes, is less important than being able to execute and actually close on that deal. And the reason that's so important is because everything else factors on. If you're not able to raise the equity in time to get to closing, guess what? You just lost all your earnest money, all of your risk capital, but at the same time you've just lost a bunch of credibility. So next time that broker or that off-market seller brings you a deal, they're going to be kind of hesitant and be like well, the last deal we were relying on you to close on X date and then, when it came to X date, you kept asking for more time because you couldn't pull the money together. So that's the reason why we have. You know, brokers always ask for a proof of funds right off the bat because they want to make sure they're not dealing with someone that's broke and has no ability to close on that deal. It's just a tire kicker.
Speaker 1:Yeah, that makes a ton of sense. Okay, sure, does it change at all?
Speaker 2:Yeah, absolutely Absolutely. So you know, for us, we just want to make sure that everyone is being compensated accordingly to the roles that they're playing. And the reason we started sending out this Excel sheet is because people would come to me with a deal and they say, hey, I got this great deal. I have no money, I can't sign on the debt, my credit score is 500. I don't know how to operate these things, I don't know how to build them.
Speaker 2:I want you to do all this, but I want to retain 90% and, fernando, you get 10%.
Speaker 2:So you know, I spent so much time doing all this underwriting and after wasting, you know, 30 hours, I realized that there's never going to be a partnership here, so it just doesn't make sense. So now what I do to kind of also get rid of the tire kickers is I say, hey, before we even look at this deal, here is our how we partner with people. If this works for you, then we'll spend all the time and resources because I have overhead. You know I'm doing all this stuff on your behalf with no, no promise of compensation. You know, multiple underwriters, acquisition managers, structure, creative financing that's all very expensive, if you are okay with the rough numbers that we use to do partnerships, then I'm willing to spend the time and spend the resources on that. If you are not, then I just saved 30 plus hours of overhead and you can go find some other chump that's willing to give you, you know, the majority lion's share of the deal for doing no work.
Speaker 1:Yeah, that makes a ton of sense. Okay, that's kind of funny. Yeah, we found a deal. You can have 5% of the deal. You're gonna do all the work for me.
Speaker 2:So okay, and I'm not, I'm not being you know, I'm not being a hyperbolic here Like these are actual examples of people pitching me deals where they wanted me to do all the work and then I just realized that not now with.
Speaker 2:You know how efficient we need to be with our time because we run a very lean organization. We just had to find ways to to put filters in between us and and deals that are potentially good and those that aren't good, and not the deal itself. But you know, like the actual property is good, you know, is the structure going to make sense for everybody involved? Because you know, look at, I always like to work based off of incentives. So if I know I'm partnering on this deal where I only get 10% of the profit but I'm doing 100% of the work, and then I have another deal where I get 50% of the profit and doing 50% of the work, which deal do you think I'm going to prioritize? Which deal do you think I'm going to spend all my effort on and make sure it's running appropriately? The one where I'm being compensated for, I'm being incentivized for the work that I'm doing.
Speaker 1:Yeah, that makes a ton of sense. I think Freakonomics, the book that came out a long time ago, talked about incentives and there's a documentary on it too. Yeah, it's a documentary as well. You can get that on wherever Netflix or Hulu or something like that.
Speaker 1:Yeah, yeah, oh, I forgot about that. And podcasts yeah, incentives make a huge difference. You're absolutely right. And when you have it written down like that, so you send a sales spreadsheet and you can see the numbers right in front of you, it gives you a stronger position, right, because it's like written down no-transcript it.
Speaker 2:We can send it to one of our investors, we'll do all the work and then you get half of the assignment fee for just bringing us a lead. You know, that can also be pretty lucrative as well. So it just depends on the person and what are their short-term and long-term goals.
Speaker 1:Yeah, that makes sense. In some cases it is better to actually wholesale it or, in essence, you know, quote unquote, broker it to you guys, because then you can't take that fee and build it up and build out your business etc. So, very good man, yeah, so how do you? What do you think of like coaching programs and mentoring and all that kind of stuff? What are your thoughts, generally speaking, on that? Because I know that there's a lot out there. I have some stuff that I'll end up selling here pretty soon because I want to monetize the podcast in some way, shape or form. But just, you've been around for a while. What is your thought on that whole industry for self-storage?
Speaker 2:Yeah, Like I said before, the best investment you can make is an investment in yourself, and education is one of those perfect examples around that. So I'm a voracious reader. I find that as one of the reasons why I have an edge over some people that do not read as much as I do, because I have more ideas, more. You know. This is how I learned how to do all of these creative financing structures. Was the reading books? Going to seminars, going to coaching classes, buying you know the guru. You know three day weekend, you know seminar I'm a big proponent, especially if the price is within reason.
Speaker 2:You know, if someone wants to charge me, you know, $500,000 for a couple hours that's going to be a little ridiculous. But if I can buy, you know, a primer on how to do self-storage from zero to say maybe 70 percent, and it's only a couple thousand bucks. That is a huge return on your time and your effort and even your money. I mean, you know, in the last six years we've done two hundred forty million dollars of self-storage. That all started with a couple thousand bucks in classes and books and seminars. So that was a huge return for us right.
Speaker 1:Yeah, that makes sense. It's funny because sometimes we look at that as like I'm not saying, like you said, like go pay half a million dollars or whatever. The number is exorbitant amount of money for something that isn't a lot of value, but it is okay to trade some cash for an education. I think that was one of the best things I ever did in my own life was doing that very thing, and this isn't a plug. Yeah, go ahead, go ahead.
Speaker 2:An example I use for this is you know, I always tell people there's two ways to do things. You can go to school or you can go to the school of hard knocks, and sometimes one or the other makes sense. So, for example, let's say you try to do something on your own and you stumble through it. Yeah, you're going to figure it out, but it may take you five years to figure it out and you may lose money on that deal to learn those lessons, versus if you, you know, pay a couple thousand bucks and you can get all of the major pitfalls that season investors spot from a mile away. Now you're learning from someone else's experience, but you're compressing their experience of 20, 30 years in the self-supported storage space into a weekend. You know that is a huge return on investment.
Speaker 2:The only time I you know I look at some of these courses or these groups and I say, hey, maybe this is not worth it, is when the cost of the coaching program or the cost of the seminar is enough money for me to put a down payment on a deal. Then it's too much money, because why am I going to pay for that course to then pay the equivalent amount to actually learn that deal. So that's where you know sometimes it makes sense to go through the school hard knocks, where you know if you got to put up 100K to learn it, to learn how to do self-storage, versus just putting a hundred K to do self-storage. You know you can go get an SBA loan up to 90% leverage and now you just bought a million dollar facility with that a hundred K versus.
Speaker 2:Hey, maybe you spend let's use some egregious number. Let's say you spend 30 grand or 25 grand to get all the pitfalls out of the way. And I can go after larger deals because you've learned how to syndicate, you've learned how to set up deals, you learned how to find them, you learned how to creatively structure them. So I think somewhere in there I don't know what the trade-off is, it's personal for everybody but somewhere in there there's a trade-off where it makes more sense to pay for it versus to learn from the school of hard knocks actually that's a really good point, uh, that break even, wherever that is, or whatever you want to call it, the tipping point, uh to to determine whether something is worth it or not.
Speaker 1:That, I mean that makes a ton of sense, because I've heard of some programs out there whether it be stealth storage, multifamily or otherwise where they are like you know, a hundred thousand dollars or more, uh, for access to whatever. They guarantee an outcome, which is great. But you, you know like, okay, you're right, you could have taken that money and put it as an earnest money deposit, at least on something. Back when the first year I did, our earnest money deposit was $5,000 on a $1.3 million-ish deal, so it wasn't like we were putting a lot down to tie up a deal. That's changed since then, but still that's. The whole idea is like, hey, I could have tied this deal up and, you know, ran a little bit of due diligence and then brought it to you guys for, you know, probably less than twenty five thousand dollars, um, you know small deal. So that's a great point, man, let's wrap everything up.
Speaker 1:Let's get to the final four. I really enjoyed, uh, the conversation. I wish no longer um, and get into more of the story and all that stuff, but I think we had a ton value here. Let's talk real quick about a high point in your career and what did you learn through that experience?
Speaker 2:Yeah, the very first time I sold a portfolio of self-storage, that is when I realized that the sum is greater than the parts. We saw a pretty large increase in valuation on an individual basis. Those properties, they were all tertiary market deals, class C deals like most self-storage people start with. On an individual basis these things would have traded at, you know, between a 7% to an 8% cap rate. But because we were able to put them into a portfolio of you know, 220,000 square feet 250,000 square feet it traded 150 basis points below what the parts would have traded for individually. And that's because what I learned very quickly is there's this feeding chain in the self-storage world and there is this movement for consolidation that we've been seeing A lot of big companies buying other big companies or big companies buying medium-sized companies. And it's because of the scale. So the farther up the food chain you go, the cheaper the combined cost of capital for that buyer. So let's use Extra Space as an example.
Speaker 2:Back in the day, you know, they had a very reasonable debt source. That was, you know, much lower, probably half the cost of what any of us can get. And then for their equity, you know where my equity is costing me anywhere between 16 to 25 percent internal rate of return. What they did for their equity was they went and issued a bond in Europe and they got all their equity for less than one percent, you know. So now all of a sudden let's say their combined cost of capital is 2% If they go out and buy a four cap deal. They just doubled their money, whereas my combined cost of capital is much higher. So I need to get much, you know. I need to get better home run deals to make sure that I am creating value for my investors.
Speaker 1:Yeah, that's a great point. I remember looking at one of the it was like the 10 Ks for CubeSmart or somebody and they had a uh combined cost of capital of like 4% or sub 4%.
Speaker 1:It was like 2% for something and then something else I forgot. But uh, but you're right, like, and at that time you know rates were whatever above that, somewhere above that. So that makes it pretty tough to compete with that kind of thing. So, yeah, there's, there's other groups out there that have, like you said, you put the portfolio together and then sell up to somebody else who wants something like that With the portfolio. Did you find that you had to have them kind of be in the same or similar markets, or was it okay if they were kind of spread out a little bit, or what did that?
Speaker 2:Yeah, this portfolio was spread across multiple states, not even states that touched each other.
Speaker 2:What you find is, you know, there's a lot of people out there that are very good at raising institutional capital you know, institutional capital or not like your retail or high net worth individuals that are writing 50 to $500,000 checks.
Speaker 2:They're like, hey, we want to give you a $50 million check and now you got a new problem. Now you got $50 million, you know burning a hole in your pocket that you have to pay prep on, and if you don't get that deal on the street or that cash on the street immediately it is, it is negatively performing. So you have people that come in with large sums of capital and no deal flow and they're willing to do whatever they can to just put money on the street. So that's what happened with with our you know, our very first portfolio. We had a buyer that just raised an insane amount of capital and they needed to get on the street and they were having a hard time piecemealing deals together. So they just were just looking for portfolios and they didn't really care if the portfolios were all. You know, the prop is all 30 minutes from each other.
Speaker 1:That's very interesting, man. That's a good point. Talk real quick about a low point in your career and what did you learn from that experience?
Speaker 2:your career and what did you learn from that experience? Yeah, so this would be back when I was doing multifamily properties, bought a couple buildings that had some really tough tenants in a challenging area. Unfortunately, some of these tenants knew how to game the system and this was actually a low point that turned into a high point in in my career. Uh went through an eight month eviction. That tenant caused so much damage to the apartment building that it negated all of the profit for the next five years. Um, and that is when I realized I don't want anyone living in my investments and then I turned to self storage.
Speaker 1:That's pretty funny. I went through the whole eviction thing back in 07, 08, 09, actually doing the evictions I didn't own the properties but doing them. So that was a pretty tough time. So I completely understand that Now I say auctions over evictions. That's much more interesting to me. All right, so give us a business or investing resource that you would recommend for the listeners.
Speaker 2:Man, I knew this question was coming. There's so many, chris, first books. Read as much as you can. Try to get through one to three books a week, ideally books on business ownership, how to run businesses, how to raise capital, and then biographies or autobiographies on people that have done the things that you have done. So, for example, sam Zell, who ran equity companies at the time the largest office investment company in the world, has a really great book called Am I being Too Subtle? And then he references in his book Steve Schwarzman from Blackstone, who also wrote his book, his own book called Whatever it Takes. And these guys.
Speaker 2:This is where I started to learn about the other side of the deals. Everyone thinks real estate is doing deals. That's only one half or one third of actually doing real estate. The other two thirds are raising equity and structuring debt, and in most cases those two pieces are more important than the actual deal itself. So you know, read as much as you can, get mentors that are ahead of where you want to be, but not too far ahead, and make sure to to put those, those concepts that you learn, into action. Speed of implementation.
Speaker 1:That's great man. Yeah, I have read Schwartzman's book. Uh, listen to it. I have a hard copy of it as well. It's a very good book. Also, rayio's book uh, completely different, yeah, completely different. Um, you know, genre or whatever but it was a really good book. I enjoyed that one as well. Um, all right, how can people we were talking a lot here, so how can people get in touch with you? Uh, if they want to learn more, they want to do a deal, you know, kind of kind of go from there yeah.
Speaker 2:So I believe in speed of implementation and reducing the amount of friction points between getting to your goals. So the fastest way to get ahold of me is not going to our website. You know sssecom. It's not following us on social media. The fastest way to get ahold of me is to call or text me on my cell phone. That number is area code 630-408-8090. I will respond usually within 30 minutes to an hour.
Speaker 1:Awesome man. Thank you for doing that. I will not put that in the description because you'll get a lot of spam on that one, chris go for it. I've already done it for eight other podcasts. Oh, okay, okay.
Speaker 2:You're not going to be the straw that breaks the camel's back. Okay, good.
Speaker 1:Then I'll give it a shot and we'll see what happens. Fernando, I appreciate you being on the show man. Hopefully we'll do another one, I want to do a long form interview and you're on the short list. Thanks, Chris.