Self Storage Investing for Beginners

hello everyone out there this is Peter Harris from commercial property advisors and author of this book commercial real estate investing for dummies as well as coach a mentor to many commercial estate investors all across America the subject and title today's video it's called self storage investing for beginners so let's get started I'm going to go over with you eight different topics number one why invest in self storage facilities number two how to find some source facilities in investing number three the three main types of self storage facilities that exist today and number four the two main types of deal scenarios that you're going to find out there number five I'm going to give you things to watch out for these are seven specific things that as a self storage investor beginner you need to watch out for okay number six funding your deal who are the sources of the funding to purchase your very first self storage facility alright number seven the two most common myths myths I have seen as a coach a mentor and advisor out there and people investing in self source facilities and lastly we're going to analyze and break down a real-live deal okay all right so let's get started okay number one why invest in self storage facilities well let me share some things with you if you were to get married would you necessarily throw yourself out no you wouldn't you will put it in storage now when one of our brave young men in military go off on a tour of duty and they go away for a year or two or three do they throw their things away no they put it in storage when our economy tanked a few years ago people were forced to downsize unfortunately and what did they do with their stuff they put it into storage now as the economy comes back up and people buy extra things where do they put the extra or their old things into storage all right so there's a huge demand for storage and it's growing let me share some facts with you all right number one one out of every ten people in the u.s. actually use Self Storage that's incredible and there are roughly three hundred and fourteen million people in this country waters alright number two the Self Storage business there are fifty thousand self stores facilities in the US can you believe that fifty thousand and growing back in the year 2000 there were only there were roughly thirty thousand fast forward to today there are 50,000 self storage facilities in the u.s. currently fact number three the Self Storage business is a two hundred and twenty billion dollar industry that's billion with the beat all right so it's a huge industry and wall street has even taken notice all right fact number four did you know that 80% of all sub source facilities are owned by mom-and-pop operations by small and medium medium sized companies or or just singular investors 80% of all 80% of these 50,000 are owned by mom-and-pop operators the 20% are owned by the big firms by the big companies by the institutions that 80% is where you and I plan that's huge alright next is what is the greatest attribute of sub source facilities for me it's simple it is cash flow let me explain if you were to get your own very your your own your very own self storage unit space to store your things some of us are thinking oh I'll just keep a nerve just for a few months and they'll clean up later but that's not the case the last thing you want to do in a Saturday is go down and clean out and cancel your cell storage unit and put it someplace else last thing you want to do so what happens what normally happens in self storage is very typical is the average stay in a self storage facility is actually one year to three years that's the average some companies that either stays three years in the apartment business the average stay is six to seven months so in the self storage business the average stay is one to three years huge difference and why is that huge difference that's because the turnover cost all right in all commercial real estate one of the biggest costs we have besides real estate taxes are the turnover costs turnover calls of the costs you incur when you get the unit or the apartment or the self storage unit or the commercial space ready for the new tenant that can cost in the thousands of dollars in the self storage business all the text is a broom and a dustpan to get you unit ready alright so there's a saying in the self storage in business no toilets no trash and no tenants and that is so true in this business here alright the last thing I'm going to share with you is you may be wondering as an investor what is the difference between a single-family home investment versus a self-storage facility investment the answer is very simple all right if you were to have a single-family home and that tenant moved out what would be your income for the next month it will be zero right for a self-storage facility let's say you have 200 units and even ten people move out or five percent of all new tenants move out you still have you know tons and tons of income coming in to still pay all the bills all right so you get an efficiency with with self-soothe facilities by the sheer number of people paying you income all right so that is the biggest difference all right okay so next we're going to do is part two we're go into how to find self storage facilities okay number two finding self storage deals all right I'm going to share with you three different ways and once you do this number one is to go online go on to the internet there's plenty of deals there to begin looking alright I listen out here a few websites for you to just begin your search and probably the most two most popular websites out there and they are subscription-based but they're very popular and have majority of the listings online they are loop Netcom and cole Starcom obviously again the two biggest ones out there other ones that are free you can just peruse and browse on is self storage is calm Castleman s self storage is calm mm-hmm another website I like I'm frequently on is called biz buy sale calm bids by sell calm a couple more useful ones are Argus - sub storage calm it's a pretty popular one too and lastly self storage brokers of america.com so what a long website but yeah self storage brokers of america.com so these are just a few of the websites you can again to look for a deals on self storage facilities number two the broker community alright number two is about relationships real estate particularly commercial estate is about building and nurturing relationships here's the goal you want the goal to be when you're when your favorite commercial estate agent gets a new listing or gets a new pocket listing or hears of a seller who wants to sell right you want him to think of you so you want to be on his a list the only way to give us a list is that pick up the phone and begin nurturing a relationship ship with them all right do not be intimidated they are just like you and I they put their pants on one leg at a time they get dressed just like we do they're just like us and basically people want to work people they like all right so be genuine when you talk with them a build up their relationship what I want you to do with this broker community is I want you to focus on commercial estate brokers that have a focus on this niche market of self storage facilities you need that expertise do not use a a residential agent to purchase a sell source facility you need expertise alright okay number three is which is my favorite is to do a direct mail marketing campaign basically random mail letters directly to the owners to the sellers of property all right and these are not going to be major corporations of firms we're going to mail their specifically to the mom-and-pop owners all right the medium-size owners of self source facilities all right people we're going to actually speak to they have authority to to sell you can expect probably a two to four percent response rate on those letters alright so that's how I want you to do that so these top three internet began with internet this is the easiest way to go number two start building up and nurturing your relationships with the brokers and three start the process of getting your direct mail campaign in in in process okay number three and four three main types of substance facilities you're going to find out there once you begin your search and secondly the two main types of deal scenarios you're going to you're going to run into as you begin search as well okay number one you're going to find three different types of properties in terms of classes all right Class A Class B and Class C let me explain Class A and you guys know this class a are the beautiful properties the brand-new profits and the best locations they're there you're built is from year 2000 to present they're in prime retail locations they're they're made of brick and glass store multi-level they're beautiful they have great sinus they're and they're mainly owned by the big institutions all right by the big companies somewhere we don't want to play very high price facilities price out of our price range for the typical investor cap rates very very low and your competition it would be institutional type of buyers and players in again some place where we don't want to be alright that's Class A Class B is where you want to be Class B is right below Class A this is these facilities are built in the 80s and 90s and they're primarily owned by the mom-and-pop operators alright these operators that we can speak to we can't speak to these guys these are the institutions but we can call them and speak to them on the pop operators and get them to sell us their facilities alright so again this this Class B is where you want to be they their looks may be similar to Class A but they're not as beautiful they're probably not in the best location but they're stable they have stable neighbor numbers they have an operated well for years so great opportunity for cash flow great opportunity for just to own something very stable and run walk right into it hardly any different maintenance just very stable okay so I will say Class B is a working-class type of self storage facility where you want to be again alright the third class is Class C these facilities are older much older than built in the 60s and word of caution here okay word of caution here is do not play in the classy arena until you have experience or unless you bring an experienced partner into your business all right classy will be maybe the gravel driveways all right maybe no gates maybe no security all right it may have some different maintenance and maybe the paint job may need a new driveway and maybe updating and for example Class C maybe a few years for being completely obsolete and if not remodeled will become completely obsolete and shut down that's classy that's why there's a word of caution here all right this classy probably has the most up side but the upside is realized if you have the expertise to do so all right okay next is the two main types and deal scenarios the first deal sanaa we're going to run into is the turnkey or the stable life steel that will be primarily your Class A and Class B all right these are ready to go turnkey deals you buy your own and you cash flow there's really nothing else to do there all right so but they're stable all right easy to get financing good areas just very stable outlook is great on the other hand another side of the turkey deal is they turn around deal this is where the property is going to be distressed all right you don't have to turn around into a stabilized or turnkey deal all right and the reason why it's distress or a turn around deal is because it has poor management or no management it could be in a very bad area it could be in location where the demographics are not good meaning not enough customers it could have looked for maintenance it could just be nothing it just could be completely obsolete and needs to be turned around all right so turn around buy me the turnkey deal it's stabilized the turnaround deal you can run into is distress what are the two you can run into okay number five number five is seven things to look for as a beginning investor for self storage units now these seven things are absolute must these are things that you must know before you can get before you can move forward okay they are number one is size you have to know the size of the of the sub source facility in fact you should have a goal for about thirty to forty thousand square feet of sub storage units a sub storage space in order to make it worth your while in fact you need about thirty thousand square feet in itself just to afford a full-time manager and by the way that's about about to about two hundred self storage units all right so number one is size you get the minimum size however if you are going to self manage and you must start really really small in doing all the management yourself you can buy a small a smaller self storage facility just make sure the numbers work out for you okay all right secondly unit mix what I mean by unit mix is you need to have a mixture of the size of sub storage units if you have a cell sort of facility where they're all the same size what's going to suffer is you're not going to have enough variation to offer your client major customer base so your occupancy is gonna be very very low incomes me very very low and you will suffer alright so what I what you have here is a mixture of unit size some 5x5 some five by ten some ten by thirty s some ten by twenty so I have a mixture of sizes of your self storage units all right number three very important is location all right in the self storage business we focus on name one three and five mile radius of demographics you are going to pull about ninety and of your customer base is going to be within is one and three and five mile radius so radius so wherever your if your self storage facility is here if it's right here you're going to draw a one-mile radius to three mile radius and a five mile radius all right so in this erred in these areas here this is we're going to pull most of our nearly all of your your customer base so you need to research on this radius here to make sure you have enough potential customers all right next is on location it is the area growing or is it shrinking all right is it growing or shrinking you can find it out quickly by driving over there and asking some of the local merchants and and ask them the question is this area growing or shrinking is that simple okay nothing complicated there next is are you in the path of progress all right wherever you're looking to buy yourself sorts facility are is the city expanding in your area or away from the area all right it was going away from me earlier I want you to think second about buying that sub source facility it was coming near you or towards you that's a good sign alright next is competition you have to know your competition right if you have someone who's right near you with the same prices all right but his facility is much newer he's going to get customers before you so understand who your competition is within there's one in three five mile radius all right next is traffic count all right what I mean by traffic count is how many cars how many trucks how many motorcycles how many people are driving by or walking by your facility every single day all right it's a very important number in commercial real estate in fact these days to get started you can even Google in traffic count with an address and Google will begin to tell you what the traffic count is alright alright so Nick so number four trump account number five is signage and visibility alright people must know where you are in order to frequent your self storage facility all right so signage a lot of times is dictated by the local laws in the city so make sure that you really understand if you can or cannot put up a larger sign all right visibility you're going to make sure you don't that you're not locating area where we had to make four right-hand turns to find your facility you know to me Maya right next is management all right you really should understand how this place is being run is it managed by the owner did they hire a property management company you know do you how do you plan on managing it are you planning imagining yourself or having a live-in person are you going to what are you going to do there so understand what the current management situation is alright lastly drainage I put this here because of personal experience alright not having poor drainage in any area in a self source facility will cause you to not be able to rent out those spaces all right and if you do if there's a flood it could go in and flood the contents of that so storage not good nothing all right so drainage you can walk around and get an initial look at the drainage issues if there are and but when you do your due diligence are you when you do do due diligence and your your property inspector we're probably giving more details on any potential drainage issues there all right okay so again these are seven things to look for when you are beginning to look at sub source facilities as an investment okay number six is how to fund your self storage facility investment okay alright let's talk about the basics all right now in any income-producing let me repeat any commercial real estate as income-producing in order for a bank to lend you money they would acquire three things and these things these three things are in cement because gone are the days where you could back in the day you could get any loan for any commercial estate so long as a cash flow so those days are done now it's back to normal here it is alright so the banks are going to have three qualifications free their first qualification is they're going to look at the properties income and expense all right properties income and expense how much is the property making how much are you expenses and what is left over alright so they're going to base the loan on what's left over because what's left over pays for the mortgage okay all right got it so they can look at that number one number two any banks will look at the properties condition and its location all right in the property's location condition what you're looking for doesn't need a roof doesn't need parking lot doesn't need a a ping job you know what does the property need at this point to make it look nice to make the bank feel safe and happy that they want to make a loan on it alright next is the property location again location is very important in commercial real estate right you can fix the property but you can't fix a location so to bank locations very important okay next is the the third thing the bank will look at you the third qualification is they're going to look at the borrowers they will look at you and if you have partners they can look at your financial strength to see if you have good credit see if you have any uh any savings to see if you have any other real estate investing experience all right so banks going to look at those three things and once they feel comfortable with those three things they will most likely make you along okay of some sort alright so next is sources of money for you to finance your social facility here are several you can have you can go to local and regional banks okay Savings and Loan all right you can go to credit unions credit unions love self-storage all right you can go to the SBA the Small Business Administration all right they have a couple of lending programs specifically tailored for self storage all right and in fact the loan programs are called hope you read the fine print here the there's a there's a loan program called the 7a loan program and the 504 program 7a and 504 lending programs specifically tailored for self source facilities and in these type of loans you can come down with with as little as 10% down so 10% or less down okay and the local basic credit unions they're asking for about 25% down on so far interest rates interest rates today or excellent apartment lenders love apartments and sub stores the same we can get apart of those very cheaply same with self storage because it's a cash flowing instruments banks love stabilized properties that produce cash flow self storage including all right the last part you can go to private investors or you can do up seller financing where the seller becomes the bank for you and basically how that would work I'll explain to you in this common scenario here alright so in all my years of coaching and closing on the sub storage deals here is a very common scenario I'll just use a name investor Jill okay embrasure Joe is a student or client in or he just some investor who wants to buy self storage facilities he doesn't have the down payment and he doesn't have the net worth the financial strength the bank is looking for alright he just has a time and a desire which which goes a long way so what he does is he goes out and he gets a credit partner okay who has strong credit and he has great net worth he goes out and he goes to private investors and raises private money for the down payment combines the two all right he goes the bank with himself with his dead partner with his credit partner they get the loan in a closed on a deal all right in exchange joel pays his his investor and his in credit partner in exchange for you know their money and their their credit he gives them a fixed rate of return and a part of the deal and Joe keeps a portion for himself all right so we do a lot of that in our company here but we teach that in fact but that's a pretty common scenario all right okay so now you understand funding and how it works for self storage facilities okay number seven I'm going to share with you the two biggest myths the two biggest myths of Self Storage investment okay they are number one the biggest in the dough number one is that it's a hands-off passive income business it is not it is not some people teach you some people teach out there that you can automate everything in self source facilities and you cannot it's impossible you can automate some of them but you can't automate everything in a socialist facility if you do you're going to ready to be in trouble let me tell you the truth here so in any commercial real estate business that's income producing you need what I call the four M's to be successful let me show the four ends are the four em you need to four ends to run any commercial listed business profitably and successfully for a long time unique systems of handling the money any system some handling the marketing even system to handle the management you need a system to handle the maintenance all right look what happens if one falls down let's say that the system for the money isn't all that great what happens is if lack of money will make you do a lack of marketing lack of marketing will bring in will cause a lack of money a lot of money means like a maintenance and the spiral begins all right I can pick another one let's say you have a lock management all right lack of management means that you're not doing any marketing you're not healthy money well you know how to arrange as well downward spiral okay so I can pick any of these four amps any one of these right and if one spirals the other three begin to spiral as well okay so the myth number one is busted so it is not a hands-off passive income business the better you are and managing your business the more money going to make the better sleep you're going to get and the longer that you will last in this business all right okay myth number two is that self storage is a quick turnaround business okay that is a myth all right let me give you a comparison any apartment business all right if we were to purchase a 40 unit apartment complex and we have to rehab the entire complex that may take us up to a year depending on the rehab and I'm talking getting everything in getting it fixed up and getting a new tennis back in we go we can do that all within a year all right now in a sub storage business because it is slower moving all right let's say you have your your rehabbing a even a 40 unit facility so source facility rather small but let's keep it in an equal terms forty unit self source facility it can take three years to get that facility stabilized three years so it is not a quick turnaround business all right it's going to take for MS and constant money's managing of the money constant marketing constant oversight and management and constant making sure a maintenance is s up cap all right okay all right so those are the two biggest myths of the Self Storage business okay so the last part of this training is we're going to analyze a real deal I found this deal on loop net and I remove the name of the deal just so we can keep the private the intact okay all right so the location of the deal is it's in a small town in Georgia it's 270 self storage units spread over 32,000 square feet and it's over 3/2 1/2 acres so sizable property it's currently 80 percent occupied is 20 years old it's gated in last year their property brought in 79 thousand dollars so the question is well first of all that's all we know that's all that's given on online as as information and the second question is is is this a good deal all right so however you determine is a good deal or not is we're going to look at the properties annual cash flow and what the cash on cash return is okay that's going to be our standard all right so let's get started here all right for the sake of time I did some pre compilations on my notes here okay so I can save some time here all right now when you analyze any commercial real estate property you need three things number one is you need the annual income number two you need the annual expenses the operating expenses remember does not include the mortgage okay number one to income number two the expenses number three you need to know the debt services what the debt service is is the mortgage payments times well so the annual mortgage payment so again income expense and debt service so let's start off with those three things all right number one is the income and it's get actually given to us as seventy nine thousand dollars per year okay given to us now we need to find out what the expenses are to operate this property all right now on the online information the expenses are not given however in the self storage industry we do have a rule of thumb that we use to calculate expenses on a facility of this size what we do is we take 40% of the income as the expenses okay so we take 40% of 79,000 and we take that as the expenses I have that calculator up here that comes out to be I rounded up the number comes out to be $32,000 per year all right so we have an annual annual expense of $32,000 per year all right so next is income minus expense equals your net operating income your Noi okay so that gives us $47,000 okay so what that means with this Adaline number means is after we collect all the income we've had all the expenses what's left over to pay the mortgage is $47,000 now after we pay the mortgage what's remaining is cashflow you got it okay so income minus expenses all right equals you're in a why did we pay the mortgage and what's left over gold in your pocket that's we're going to figure out alright so next we got to figure out the ink we have the income we have expenses next is debt service all right so you know I forgot one thing over here I'm sorry for the asking price they were asking 485 thousand dollars okay and for the sake of simplicity we're going to take that is our offer price as well alright so now to figure out what your debt service is going to be a monthly mortgage payments times 12 is to find out what your mortgage balance is going to be right so in commercial we usually pay have a down payment of 25 percent of the purchase price twenty-five percent of four hundred eighty five thousand dollars alright so we have a down payment 25 percent of four hundred eighty five thousand dollars is a hundred and twenty one thousand two-fifty okay that's 25% down okay after you make the down payment up here we're going to subtract the down payment from here to figure out our mortgage balance so we're gonna have a mortgage balance again I already have it all figured out my sheet here of three hundred and sixty three thousand seven fifty okay so after you make our gum payment was left to make payments on it's going to be three hundred three hundred sixty three thousand seven fifty hey I'm going to use a typical prevailing mortgage rate of five percent advertised over thirty years to figure out what payments would be alright so my mortgage payments will be is going to be nineteen hundred and fifty two dollars and sixty nine cents that's based upon an interest rate of 5% okay and a 30-year amortization alright okay those two things that's my payment that's them that's the monthly payment now we since we have an annual income in an you expenses and you know why we need an annual payment so we multiply this number by 12 okay so this times 12 equals twenty three thousand four thirty two okay so if you were to make these monthly payments over twelve months you have spent your debt service of being twenty three thousand 432 okay so now if we call it in the beginning I said you need three things you two income you need expenses and need to debt service so we have the income we have the expenses all right and we have a debt service so basically the cast over if you recall is your ny- your debt service all right so forty seven thousand - twenty three thousand four thirty two is going to equal your cash so I have a cat twelve of 23,000 568 all right so this this self storage facility 217 is 32,000 square feet or three and a half acres produces twenty three thousand five hundred sixty dollars per year cash flow in your pocket all right so from a cash flow standpoint this deal passes but how about from a cash in cash or a return on investment standpoint all right so an equation I want to introduce to you but if you're watching my previous videos you know I really focus on cash and cash return basically your your cash and cash return I'm going to shorten for a cash and cash okay cash and cash is equal to your your cash flow annually divided by your down payment okay so if my cash well here is twenty three thousand five sixty eight divided by my down payment of one hundred twenty one thousand two fifty alright if you do the math there that will give you your cash and cash return or your return on investment again I have it calculated on here and comes out to be nineteen percent okay so on this deal passes it answers the question is this a good deal or not so from from the information we have now it's a go until we jump into due diligence and take a closer look at a property so this property produces cash flow of $23,000 $23,000 any of the large bank and putting your hundred and twenty one thousand dollars in the bank what would you earn over the year probably one percent maybe I'm in one person probably 0.5 or 0.2 0.1 percent and commercial estate in this in this cell source facility which is real remember I got this one off of looping it it produces a return of 19 percent now to chef okay alright so that is this video here so if you want more resources like this please go onto our website commercial property advisors comm or you can simply subscribe to this YouTube video okay this is I'm Peter Harris and I'm your coach and mentor this concludes self storage investing for beginners I'll see you later

Channel: Commercial Property Advisors

Views: 200,569

Rating: 4.9177594 out of 5

Keywords: Self Storage, Self Storage Investing, Self Storage Investment, Commercial Property Advisors, Peter Harris, Self Storage Investing for Beginners

Id: mKe_sQUdKn0

Length: 39min 29sec (2369 seconds)

Published: Thu Oct 09 2014