Where to Make a Ton of Money in Real Estate Right Now

by | BiggerPockets.com

Have you joined the club yet?

If you’ve been excited about real estate investing but unable to find well-priced assets, then I invite you to join the club. You’re not alone.

This is typically the case if you’ve been looking for multifamily assets of any size. Or single family homes to flip. Or homes to build a single family portfolio.

It’s been tough out there, and it’s not just limited to you Californians—or New Yorkers, Jerseyites, Texans, Floridians, or Las Vegans. It’s no longer limited to large and popular cities or newer, stabilized assets.

It’s tough all over and there are many reasons for this. I’ve discussed a number of reasons that multifamily is overheated on this blog. Many of the same issues apply to single family homes and other popular asset classes.

After years of banging our heads against the wall, my company decided to do something about it. We decided to look outside multifamily to alternative asset classes. Assets that aren’t as cool or exciting. Assets that are, well, quite boring.

We began to explore self-storage and mobile home parks. And what we found was anything but boring.

When we studied alternative assets, we learned that the profile of the current owners—the sellers—was a critical factor in achieving substantial profitability.

I’m going to spend the rest of this post discussing self-storage and touching on mobile home parks—assets within my realm of experience. But what I’m saying may apply to other asset classes, too, like land, garages, parking lots, and more.

Related: Work Less & Earn More With Commercial Investments—Here’s How

Fragmented Ownership – A Key to Alternative Asset Success

They say you make money when you buy. But I’ve always believed that to be partially true, you actually make money when you buy, when you upgrade, when you operate well, and when you sell.

But here, more than in most other realms, you really do have the potential to make massive profits through buying well.

It is estimated that about 74 to 76 percent of self-storage facilities are owned by less-than-sophisticated operators. And about 66 percent of all facilities are owned by single-facility operators—also known as mom-and-pop owners.

There are almost 55,000 self-storage facilities in the United States. That is more than the combined total of McDonald’s, Subways, and Starbucks.

About 40,000 are run by independent operators. Perhaps 36,000 or so are single-facility operators. Many of these independents are mom and pops, and they run their facilities that way.

They don’t need to run them better. They’re making a profit and they’re happy.

Contrast this ownership breakdown with the situation in multifamily right now. The apartment world has been increasingly dominated by larger, well-capitalized players. It is hard to acquire an under-performing property from this group.

This is why our firm expanded outside of the multifamily syndication world. Now we really love self-storage.

According to the National Multifamily Housing Council, 93 percent of multifamily assets with 50 or more units are owned by operators with more than one asset—potentially sophisticated operators.

The largest player in the self-storage arena, Public Storage, owns only about 7 percent of the market.

A different study shows the market share of the top 10 self-storage firms at only 26 percent.

Check out the average returns from a variety of REIT sectors from 1994 through 2018. In particular, check out the returns in 2008.

Note that self-storage was the only asset class here to have a positive return in 2008. In fact, every other sector experienced double-digit losses ranging from -12 percent (health care) to -67 percent (industrial).

Buy from a mom and pop!

So, what are some of the characteristics of a typical mom and pop-run self-storage facility? Though these don’t apply to all, and I’ll almost certainly offend someone with this generalization, I’ll give you a quick overview of what I’ve observed.

Common Characteristics of Mom-and-Pop Operators

  1. If you build it, they will come. This worked in the early days of the business and some operators have kept up the tradition.
  2. No website (or a poor one). Similar to No. 1, the business was largely characterized by drive-by marketing for years, and this still works for many. (But can they really maximize revenue? They often don’t need to.)
  3. No showroom. The opportunity for ancillary income is not a priority. Tenants can buy their boxes, tape, scissors, and locks at their competitors.
  4. Rare price increases. Many small operators become friendly with their tenants and rarely raise rents. The result can be below-market pricing.
  5. Across the board pricing. Where a savvy operator might raise their price on the last few units of a popular size, this is often too much trouble for a small operator who would have to use white-out or mark up his well-worn price sheet.
  6. Rent what we got. Storage facilities are mostly sheet metal and rivets. They can usually be reconfigured to meet the current local demand. If the demand for 10′ x 10’s is high, and 10′ x 20’s are empty, walls and doors can be added to optimize occupancy and income. Most small operators wouldn’t do this.
  7. Poor maintenance. Some of the 70’s and 80’s facilities look like… well, 70’s and 80’s facilities. There is little reason to update or maintain them well, and their revenues reflect this.
  8. Poor security. The No. 1 crime at self-storage facilities is theft (obviously), and many smaller operators don’t go to the trouble of installing security cameras and gated fencing.
  9. No marketing budget. Many of these operators boast that their marketing budget is close to zero (except for that donation to get their name in the charity raffle brochure). Their revenues suffer, but they may not know it or care.
  10. Untapped land. Many operators have unused land or parking lots for RVs and boats that could be used for profitable expansion through a beautiful new climate-controlled building. You may be the one to make this profitable expansion.
  11. Pest control and water infiltration. Many facilities get a bad reputation. In 1999, when my antique furniture was roach-infested and water-stained, I wasn’t a happy self-storage customer.
  12. Rental truck income. Rental truck operations (U-Haul or Penske, for example) can often be a great source of ancillary income with little capital expense or effort. In addition to a healthy boost to the bottom line and asset value, this can also lift occupancy by 3 to 5 percent. Most small operators don’t go to the trouble.

Last summer, my company considered acquiring a small self-storage facility in a fast-growing area near Raleigh, N.C. The aging owner’s dad had constructed it in the late 70s. It was painted a gnarly brown and tan. It was only using the back half of its land; the front half was begging for a climate-controlled building.

There was no website. (“Why bother? I’m full!”) No truck rental. All the units were one (odd) size. No gutters.

She was renting under-market. She had handwritten books. And she only accepted cash and checks—classic mom-and-pop facility.

Mobile home parks have similar characteristics. Though I haven’t been able to verify this, I read a statistic estimating that there are about 50,000 mobile home parks in the U.S. It’s estimated that about 99 percent are run by mom-and-pop, unsophisticated operators.

Many of the characteristics of a mom-and-pop mobile home park operator are similar to those listed above. I can imagine it is similar for garages, land, parking lots, etc., though I admittedly haven’t studied these asset classes.

Related: Why Self-Storage Investing Is Red Hot

Why You Should Buy From a Mom-and-Pop Operator

You may fancy yourself Chip and JoAnna Gaines, Jr. (If you’re actually them, please contact me. I have an investment opportunity for you.)

You may invest big bucks to remodel and fix up and renovate and beautify and stage your $300,000 home to the level of any million-dollar home in Texas.

But if your home is in a $300,000 neighborhood, you’ll never get the value you hoped for. You may even lose hundreds of thousands on it. (We’ve all seen examples of this.)

That’s because the residential real estate world is appraised by comparable properties, or “comps.” This is not so in commercial real estate.

In commercial real estate, the value is derived by a formula.

Value = Net Operating Income ÷ Cap Rate

The cap rate is an average investor’s expected rate of return on an asset like yours in your market at any given time. It used to be in the 7 to 10 percent range. Lately, cap rates have ranged between about 4 and 7 percent in many asset classes.

By increasing the numerator (the net operating income) in the value equation, we are able to proportionately increase the value of the asset.

By compressing the denominator (the cap rate) in the value equation, we are likewise able to proportionately increase the value of the asset.

Both of these possibilities are likely when buying a well-placed asset from a mom-and-pop operator—especially when the asset can be repositioned to sell to a REIT.

self-storage facility with garage door open and packed boxes stacked inside

Potential Upgrades in Self-Storage

The power of buying from a mom and pop lies in the numerous upgrade opportunities available to you as the new operator, as well as the asset and equity value this creates.

Examples include:

  • Utilize road frontage (signage, visibility, etc.)
  • Clean-up/refurbish (corner guards, fences, locks, gates)
  • Security and lighting
  • Modernize systems (collection, accounting)
  • Add truck rental
  • Free moving truck (for incoming tenants)
  • Free shelving
  • Tenant insurance
  • Administration and late fees
  • Ancillary retail sales (locks, boxes, tape, scissors)
  • Expand facilities (add climate-controlled facilities)
  • Boat & RV storage
  • Billboard, cell tower, ATM, etc.
  • Timely evictions
  • Improve marketing (signs, web, social media, PPC, geotargeting, remarketing, move-in specials, etc.)
  • Price by demand
  • Size by demand
  • Price by tenant motivation

Now let’s string together a handful of these improvements to see how it could impact value. These are only examples and results may vary widely. Assume your facility is 500 units, and you purchased it for $6 million. Assume rents on a typical unit are $100/month.

  1. Raise rents by 20% to market level. 500 units x 90% occupancy x $20 x 12 months = $108,000.
  2. Add truck rental. $2,500 per month x 12 months = $30,000.
  3. Add boat & RV storage. 20 spots x $200 x 12 months = $48,000.
  4. Cell tower contract. $800 x 12 months = $9,600.
  5. Sell tenant insurance (w/revenue share). 60% penetration = 300 units $5 x 12 months = $18,000.

But the commercial real estate value formula reminds us that the bigger significance is the additional value you’ve just created.

Commercial real estate investors enjoy the value in the cash flow. But they even more enjoy the value of the cash flow.

Value Increase = Net Operating Income ÷ Cap Rate

Value Increase = $213,600 ÷ .06 = $3,560,000

That’s pretty amazing. Theoretical appreciation of over 59 percent ($3.56 million ÷ $6 million). This assumes the cost of operations didn’t increase from these improvements and assumes a constant cap rate of 6 percent.

But it’s better than it looks. If you used debt in the equation, the value increase flows straight to the equity investors. Assuming a modest 60% percent loan-to-value ratio on the initial $6 million purchase means debt of $3.6 million and equity of $2.4 million.

This means that the $3.56 million value increase translates to a theoretical equity increase of 148 percent.  To be clear, that’s $3.56 million divided by $2.4 million.

And this doesn’t even include the potential appreciation from cap rate compression. Selling an upgraded mom and pop to a REIT can result in a cap rate reduction from say 7 percent to say 5.5 percent. This would compound the asset appreciation by over 20 percent and the equity appreciation by over 50 percent.

And lest you think I’m dreaming, I can tell you that there are a number of operators I personally know who are achieving returns like this. One of the operators we invest with has been providing investors with over 40 percent IRR over the past 21 projects. And they are not alone.

Do you see why I love commercial real estate? And why I love fragmented alternative asset classes?

Check them out for yourself. I think you’ll agree that this is a rare opportunity. But it won’t last forever.

hard-money-lenders

Have you experienced pain in looking for assets among mature asset classes (like apartments or single family homes)? Have you experienced the power of investing in fragmented alternative asset classes?

Leave a comment below!

 

About Author

Paul Moore

After graduating with an engineering degree and then an MBA from Ohio State, Paul started on the management development track at Ford Motor Company in Detroit. After five years, he departed to start a staffing company with a partner. They sold it to a publicly traded firm for $2.9 million five years later. Along the way, Paul was Finalist for Ernst & Young's Michigan Entrepreneur of the Year two years straight. Paul later entered the real estate sector, where he completed 85 real estate investments and exits, appeared on an HGTV Special, rehabbed and managed dozens of rental properties, developed a waterfront subdivision, and started two successful online real estate marketing firms. Three successful developments, including assisting with development of a Hyatt hotel and a multifamily housing project, led him into the multifamily investment arena. Paul co-hosts a wealth-building podcast called How to Lose Money and is a frequent contributor to BiggerPockets, producing live video and blog content on a weekly basis. Paul is the author of The Perfect Investment—Create Enduring Wealth from the Historic Shift to Multifamily Housing (2016) and is the Managing Director of two commercial real estate funds at Wellings Capital.

29 Comments

    • Paul Moore

      Hi Aysha. One of the best ways to invest passively. But if you want to invest actively, I would either find a great self-storage broker, or start a massive campaign to contact owners. One operator we invest with has a team of 4 people calling owners everyday. And you can also walk in facilities as well. Call on many in person.

      • Mike Sturgill

        Fantastic article! Paul, you mention investing passively, what’s the best way to learn more about this opportunity? I’ve been intrigued by storage unit investing for years, but due to other obligations I have never pulled the trigger.

        • Paul Moore

          Hi Mike, there are many great private investment companies that offer passive self-storage investing. My company also does it. Feel free to private message me via BP for more info.

        • Paul Moore

          Hi Petru, there are self-storage REITs that you can invest in, such as Public Storage. That has performed well over the past decade. However it is not direct ownership like many private investments. Feel free to message me on BP for more info.

    • Paul Moore

      Hi Petru,

      There is a significant benefit to investing with private companies: You are considered a direct, pass-through owner of the real estate. Therefore you get the pass-through deductions from depreciation, Section 179, the benefits of cost segregation, etc. The tax savings are a significant part of your return. Many investors pay zero tax though they make significant profits.

      Additionally, if you choose the right private company you can get to know the owners/principals and build up a trust (or lack of) with them. You will have transparency and see how changes they make on the ground relate to your distributions and appreciation… and you will see a direct connection to your check in the mail.

      Additionally, private firms are more stable and predictable. They are usually not impacted by the mood on Wall Street, a war in the Middle East, or a CEO scandal.

      Feel free to connect with me if you want to discuss this further. I apologize for the delay… I was on my anniversary trip (#32!) the day you wrote and was raising capital for a deal since then.

  1. Gigi Louise

    Very intriguing article Paul, I had heard about self storage as an investment and how great they can be. You broke down the article very well. I admit I got stuck for a minute when you had “cell tower lease” in there. I thought, huh? why would you have a cell tower lease with your self storage business, so after reading the full article, I researched it and found a great article on the pro’s and cons of a cell tower lease and agree with both. It’s a tough consideration especially on the negative effects people feel about cell towers today. But overall this article has motivated me to look into self storage facilities. Thanks for the post.

  2. Brendan LoCicero

    Storage facilities in at least a some markets are overbuilt. I live in the Boise area and I just read in the local paper (Idaho Statesman) a few days ago that the city of Nampa (Next big city over not counting Meridian) has placed a moratorium on storage facility construction. Apparently the flooded market is driving fees down even as our property values and residential rent skyrockets. People are streaming into the area and construction can’t keep up. I’m not saying you’re wrong but I would certainly do my homework before investing in that market.
    Mobile home parks are a different story. Two of my uncles own a few bigger parks. They do pretty well. All I own are SFH’s and in this market, I don’t believe I would be able to get in if I had to do it now. If I ever get out of SFH’s mobile home parks will be my next stop. Cap rates in the double digits are still possible but again, they haven’t gone unnoticed by smart investors either.

    • Daniel Murphy

      There was a big surge in storage facilities up to 2008, but then the business model stopped. In my area, there has been minimal new storage facilities been built and have not kept up with the residential development that has taken off in the last few years.

    • Paul Moore

      Brendan,

      You are right on storage being overbuilt in certain markets. That’s why it is critical to go with a smart, ethical, professional operator when investing passively. Funny, Boise is one of the markets that is famously overbuilt right now. I don’t know what happened there, but my friend, AJ Osborne, is there and said it is crazy. There will certainly be opportunities to buy some back from the bank there at some point.

      You can hear AJ’s story on the BP Podcast last July 4th or so. He generated millions of value in self-storage… while in a coma.

      We love mobile home parks as well, and you’re right again, that arena will likely never be overbuilt.

  3. Daniel Murphy

    This is great info Paul. I did some research several months ago, because I noticed a gap in my market. I started to feel overwhelmed with the thought of having to do a new commercial build, but I didn’t know that the market was so saturated with Mom and Pops. I’ll have to start keeping my eye open.

  4. Dave Rav

    Thanks for the post. I have been trying to get into self storage for years! I’m just not there yet. However, I’ve been studying it off and on for awhile. Anyways, I will be challenging some of your assertions.

    Mobile home parks – got one of those! And I am a cross between your “Mom and Pop” and sophisticated owner – call me “semi-sophisticated”. Unlike the corporations who own Parks, I am firm yet fair and reasonable. I don’t screw people or overcharge, yet I make a healthy profit. I’m not greedy though, as I’ve seen with some of the corporations/REITs who have bought up a bunch of parks in my area. They go on to raise lot rents by 25-50% within the first year or two. I’m sorry, but you can’t do that to people! Even if rents are low. You have to work with folks. Lets keep in mind, about 95% of homeowners will NOT move their home (or can’t afford to). I think the owners know this, and take advantage of folks. Imagine if your utilities, groceries, or other monthly recurring cost spiked almost 50% in 18 months’ time! I digress..

    anyways, I want to challenge some of your numbers. You mention 76% of SS facilities are Mom and Pop owned. Does this include indep franchisees, or strictly off-name sole proprietors? Reason I ask is far and away, everywhere I go (SC, NC, FL, PA, VA) the vast majority of SS facilities seen are the big name companies. I DEFINITELY can’t say that roughly 75% of the facilities I see are off-name companies. I see your reference for your numbers is the Almanac, so someone has done research on this. But I dont see reflection of these numbers out there in the community (unless the numbers are biased, or they are including the franchisees)

    As for MHPs, you claim 99% are *still mom and Pop owned? I know you said you “read this somewhere” but I again must challenge. Big time. If someone would please SHOW me where these MHPs are — I’ll buy one!! (Or maybe 5 of them!)

    This may have been the case, maybe 20 years ago, where 99% of MHPs were M&P. And it may still be the case in rare, rural areas in various states. But overall, I cannot agree 99% are not owned by sophisticated owners, corporations, or REITs. Big biz has caught on. I would say that number is maybe 50% at best (though I wish I was wrong!!). Especially when it comes to medium-large size parks, those of 25 pads or more – they are probably only 10 to 20% Mom and Pops. Again, I keep a close pulse on the market here in SC, as I’m active in this space and industry sector, and corporate ownership abounds.

    • Vaughn K.

      I would imagine the M&P ownership rates for both of these vary tremendously depending on location. Maybe there is high big player ownership in major cities, and even in affluent suburbs… But once you start adding up the bajillion small towns of several thousand people, where almost every mobile home park and storage facility is owned by some random guy… That probably skews the overall figures.

      Big players just don’t tend to get involved in some town of 5,000 people, even if the little mobile home park there would provide solid income.

      You’d be hard pressed to find a single mom and pop office supply store that even exists in a city of 50-100K… But you’d NEVER find a single Office Depot in a town of 5,000… Yet almost every town of 5,000 will have a store of some sort that sells office supplies, locally owned of course. I used to live in such a town. There were literally ZERO chain stores of any sort there, other than the gas stations affiliated with whatever oil company and an Ace Hardware that was locally owned… Yet we had all manner of fast food places to choose from, an office store, multiple grocery stores, etc.

      It may just be this effect that drives the national figures to levels that don’t seem right to you. Or maybe it is franchisees being counted, I don’t know. But it wouldn’t HAVE to be that.

      • Dave Rav

        @Vaughn K thanks for the post. Very good point. I hadn’t thought of that. Small towns are often not penetrated by big business, at least not to the degree large cities are.

        However, it may be helpful to consider why. One reason may be the business opportunity may not be as lucrative. Multifamily real estate is greatly influenced by economic factors such as population growth, jobs, and desirability of the region. I have looked at a few MHPs 1 hour from my metro and I have turned them all down. This was due to less than 65% occupancy (with prospectus showing little possibility for future gains >10% due to these local economic factors). This is especially challenging in areas of decline. Of course not all small towns are in decline. But I would still be a bit cautious in small towns, if employment opportunities are limited or heavily weighted toward 1-2 large employers (what if they close or move away?)

        I was hoping to get a response from @Paul Moore. Paul, please feel free to weigh in.

        • Paul Moore

          Thank you, Vaughn and Dave.

          First of all, thanks for challenging my assumptions, Dave. We should be able to be pretty confident about the self-storage numbers since those figures are tracked pretty closely by the self-storage associations. Here is a stat from the SSA that I am using in my new self-storage book:

          • The top six companies (five are REITs) own and operate about 12% of all self-storage facilities
          • There are 150 companies that operate 10 or more facilities; 4,000 firms that operate two to nine facilities; and 26,000 firms that own operate just one facility

          This is admittedly a lower % of mom-and-pop owned SS than I had previously believed. I have been quoting a state that I saw that 66% of SS facilities are owned by one-asset owners. It appears that number has dropped to about 49% if this is accurate.

          On MHPs… I am certain I saw a stat that well over 99% are owned by mom-and-pops. But I cannot find that stat. And of course, it doesn’t mean it is correct. When I finish my self-storage book this summer, I plan to dive deeply into the mobile home park world and I hope to figure this out.

          As far as small towns… I think that certainly plays a huge factor. If you think about where mobile home parks are, they are more often than not in small towns. Far away from major metros. Not all of course. I invested in a MH in one very near WDC (Dumfries) in 2001. I agree that larger firms will likely never invest in a tiny town. And I wouldn’t either. This plays a bigger role in multifamily (IMHO) than in MHPs, and SS is in the middle somewhere I think.

          Thanks again, guys!

  5. Dave Rav

    @Vaughn K thanks for the post. Very good point. I hadn’t thought of that. Small towns are often not penetrated by big business, at least not to the degree large cities are.

    However, it may be helpful to consider why. One reason may be the business opportunity may not be as lucrative. Multifamily real estate is greatly influenced by economic factors such as population growth, jobs, and desirability of the region. I have looked at a few MHPs 1 hour from my metro and I have turned them all down. This was due to less than 65% occupancy (with prospectus showing little possibility for future gains >10% due to these local economic factors). This is especially challenging in areas of decline. Of course not all small towns are in decline. But I would still be a bit cautious in small towns, if employment opportunities are limited or heavily weighted toward 1-2 large employers (what if they close or move away?)

    I was hoping to get a response from @Paul Moore. Paul, please feel free to weigh in.

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