All Forum Posts by: Rob Cee

Well, @Serge S., one thing to consider is that in this property's history the only way it has traded has been via foreclosure.  That should tell you something.  :)

Nevertheless, you are right that it is a challenging size.  I have a 302 unit facility that I built brand-new around ten years ago.  It too was in a small town and it was cheap land that I thought would make me enough passive income to convince me to start buying self storages everywhere.  My balloon was quickly deflated, however.  My problem was that I built it...had I bought a facility using capitalized trailing income I would have been fine.  Unfortunately development comes with a lot of risks like rising construction costs, onerous unforeseen design requirements by the city, etc.  So without going into my woes as it related to the development, let's instead talk about how this relates to your deal.

The concern here is twofold.  Let's start with the big one.  The facility is 10% occupied.  I know how serious this disease is because when I built my facility it was 0% occupied to start.  The appraisal and market study forecasted that it would take 18 months to achieve stabilized lease-up, which was considered to be somewhere around 80% occupancy.  Instead, it took closer to seven years to get there.  Ouch.  Moral:  Don't trust paid studies.  Other moral:  Don't build self storage in small towns, the absorption just takes too long. 

Concern 2: A facility of this size can't afford payroll.  You might be able to pay a neighbor to go over and check on it for you once in a while, but how much can you really spend on that?  Not much, and not at all until you achieve a high enough occupancy. 

If you live down the street and want to check on it yourself, then no problem.  If you want to rent out units by advertising on Craigslist and meeting tenants out there, you might be able to make this work but your lease-up will be slow-going.  Another option is that you can get automated kiosks that tenants can use to make payments and even rent out units.  I don't have one of those so I'm not sure how they work but I'm sure you can research it and find out.  To underwrite, use a pretty high vacancy, long absorption period, and a fairly high uncollectable debt loss.

Don't get me wrong, I'm not a downer on self storage.  Now that my facility is 93% occupied and my delinquents are minimal it's a great business.  But the word "business" is important--it's not a passive real estate investment.  It's nothing like renting out houses.  It's a little bit like managing a 300 unit apartment building with just as many tenants to manage and phone calls to take and collection calls to make, just without all of the maintenance tickets.  But you do have to have advertising, a phone line, office equipment, files, management software, a website, etc.  For my facility, I have all of the above plus one full time employee and two part-time employees.  I'd hardly call that passive!

@Jedd Braunwarth

You are right that there is some degree of hands on required to succeed in self storage but that is true of any investment. For the first two years after buying my facility, I ran it myself by commuting 60 miles each way 4-5 days per week. This was somewhat do to my OCD/type A personality but the facility was quite neglected when I took it over so it really needed some attention. I also added 10,000 sq. feet during that time so that required my attendance as well. That being said, for the last year, I have had a manger who works just 16 hours per week in the office plus 1-2 hours for appts. Total cost is less than $1000 per month including WC and disability etc....Small price to pay given that total revenue is $15,000 per month and I now visit the property 1-2 per month spending less than 20 hours per month "managing" this investment. I do move people in remotely when my manager is not available. I use Logmein.com and email paperwork to them, take payment over the phone and have locks hidden onsite so they can buy those too! Super easy. CHeck out my blog at the link below for a summary of my experience (if you havent already). Im happy to answer any other questions that havent been addressed yet.

@Andrew S. ,

Sorry for the delayed response...not sure how I missed this. My Storage facility is actually in Syracuse, I am only there a couple times per month but Id be happy to show you around if your schedule allows when I am there.

Mike

Origination is great. My weird little nano-niche is pretty low volume and includes a bit if origination. 

Buying existing paperwork means accepting the work of someone else. There's money in fixing their mistakes or the circumstances that befall you note sellers. 

IMHO, too many people with too much cash trying to buy too few good deals, notes included. Many of the people who bought notes thru guru-nomics are discovering that much of that paper has little market value outside of their sphere. 

I suggest you find a live conference to attend that is not dominated by any one personality. 

And Bill Tan might appreciate your phone call or email. Or, get in a plane and go see him. 

You're smart. You get to choose who surrounds and influences you. 

@Jim Keller Suggest you start a new thread and post your query. 

@Rob Cee I'm still not clear what you seek. Are you attempting to get guidance and direction from seasoned paper people? Or are you trying to make a certain decision?

Long rants aside, I love paper, as I stated before. I understand the collateral and own a number of rentals, but they're not my true pleasure. 

If your tolerance for risk is low, buy 1st TD's at very low LTV. If you have a taste for higher, perhaps scratch and dent or NPN 2nds.

If you understand title well and can fix problems efficiently, you might venture into defective paper. If you're really feeling confident, go for BK or brownfield paper. 

I believe there are two factors to consider; 1) How to learn to work deals, and 2) How to generate leads. Solving #1 will bring you more of #2.

If you get good at the paper business and know how to fix problems, go to places where your peers go. Hang with them. Go to the same conferences. 

Join or start a mastermind group. I started one many years ago whose members' combined net worth are now well over $1B. Not bad for a bunch of Bottomfeeders. 

Now, if you'd like to call this a "strategy" buy a discounted note that is performing, underwrite it and see if it can be refinanced, you can accomplish much of this during due diligence before you buy it.

@Rob Cee

I guess the answer here is stop trying to find differences instead of similarities. If you banked, you banked for an investor. What is it you think they were looking for?

Putting money out in the first place is a precursor to even enter the distressed side of the market. You have to lend the money out in order for it to go into distress. When lending money the probability of default vs repayment is certainly at the forefront of making the loan. Like I said, it is sort of the point of the exercise.

I do agree brokering would provide less exposure to this type of vantage point to the market but I didn't bring up brokering you did. What a mortgagee is entitled to doesn't change from beginning to end in any loan. "Once a mortgagee, always a mortgagee."

As a banker you would have had concerns over buybacks or scratch and dent loans. Welcome to waive 1 of distress. The S&D defect causes a discount. The discount is present because the defect creates a concern over collect-ability and recovery of the loan. If you banked with the agencies - who bought your buy backs? An investor who buys defective loans.

Additionally, what do call Fannie/Freddie/Ginnie? Those are all mortgage investors. They are simply investors who buy loans (none of them "make" loans). They gave us a standard to use by which we can describe or identify the defects to begin with. They risk adjust loan rates by adding to the rate and spread which they will receive based on the underwriting which is a review and assessment of the probability and recoverable of the principal being lent out.

That is precisely the same reason a NPN get's discounted - collect-ability and recovery. Nothing new is added to the loan nor should be expected from the loan - it is always only ever principal and interest. The method or path of recovery are the remedies provided for in the documents and by law. They are present in underwriting as that is what you underwrite your risk to, as well as through origination and onto active account prior to full repayment.

Perhaps the real rub there now the capital at risk or the entity for whom the underwriting matters is you and not a third party but that doesn't change the reality of it being still the same. The mortgagee (you) are only ever entitled to the principal outstanding and the interest earned. Point to all that is, when you go looking for a loan investor do not confuse yourself with trying to find a concept born by these casual conversations and guru marketing. There are lots of loan investors and always have been. They all care about delinquency and default. Any investor who has ever made a loan has experience with default and distressed loans.

I understand why the similarities are blurred and the differences are highlighted and it is mainly do to trying to relate being a mortgage investor to being a real property investor. Shoot, all you have to do is look around BP boards and see how real property terms leech into mortgage investment topics. A mortgage investor who is a "buy and hold" guy? You mean the bank who makes long term loans? A mortgage investor who is a "fix and flip" guy? You mean the hard money lender who makes short term loans? I am hoping you are starting to see the point. Those terms leech in and distort what things really are. Add in a bunch of newbies who use those same terms and we have an epidemic of misunderstandings on many fronts.

As to the rebuttal on the idea of "strategies", your response perfectly encapsulates the influence of guru marketing and bar stool conversation trends. You mention specifically, "Some focus on NP 2nds with the plan to get them re-performing and sell them..."

The strategy, or better said...the overall aim, is to get paid [back] when investing in loans. What is strategic about purchasing a pool of loans where some may and some may not reinstate? That is no more of a strategy than rolling dice. The borrower is who actually determines performance, not the investor. The narrative here actually promotes a misguided idea of what really happens. The borrower can either pay or they can not. Mind you, the word "paid" there is not limited to periodic payment. A borrower pays you in a refinance. They also pay you when they sell their property. What good is a "strategy" which ignores routine and customary paths to get paid? Answer = no much.

In addition, that line of "strategy" conversation begets the question..."what did you do with all the other loans which your 'strategy' doesn't apply?"

As an aside, and you didn't mention it but it is certainly out there in form is the idea that "modification" is an "exit" strategy.  If you modify the loan as a mortgagee you will still be a mortgagee - ergo - you exit nothing.  Judging by your paragraph, you have heard that one too, many times.  Do you see the absurdity in the use of those words like?  They do not even go together.

That is the slippery slope that many fall victim to. The statements themselves are half baked ideas.  The statement takes on an improperly implied definition.  The reality of it is, no seasoned investor talks that way. You will never hear me or Bill or anyone else with real experience limit the real "strategy" of getting paid back to one or two particular paths or tool concepts. We will use every and all tools at our disposal.

Deed in Lieu is not a strategy it is a tool to be used in the strategy of getting paid back.  A DIL in fact doesn't even mean "to get paid back".  A DIL, a modification, forbearance, shorts and foreclosure are all tools we use not stand along strategies.  These tools get talked about and passed around as if they are stand along strategies and they are not.  That promotes misunderstanding for those who are trying to understand them better.  So, the first step in correcting that all is starting to understand what these are and what they are not, contrary to the bar stool conversation.

What we can do is look to this description of desired assets and dispositions as niches in a market. It is a niche to buy second liens as much as it is a niche to make hard money loans. It is a niche to work with NPN first liens as it is to make seller financed loans. To label these dispositions as strategies ultimately deflects the real strategy which is to recover the principal and interest from the loan by the most effective means required. As I said before, the "strategy" is to simply get paid back.