All Forum Posts by: Scott Krone

@Trevor Gray.  May I suggest you also consider how you intend to finance the entire purchase rather than just the down payment which I trust you mean earnest money deposit.  That will help you answer @Heath Ryans options.  

@Alejandro Trevino  Welcome to real estate.  Self storage is an unique asset class as it is both real estate and a retail business.  There are many good resources out there.  @Paul Moore is writing a book for Bigger Pockets on self storage.  The key to analyzing the real estate is understanding the business market.  The second key is to identify which asset class of self storage you are looking to invest - Class C, Class B, and Class A.  These classes are not based on quality of neighborhood (ie MF and apartments) it is based upon describing the type of self storage and market (age, features, market - rural vs urban, etc).

@Austin Works  Both strategies work.  To answer your questions:

1.  Does it ever make sense to build new.  Yes.  Does it make sense in every location.  No.  The market will determine if it makes sense to build a new facility.  In each of the locations we have built, we moved forward with it because there was unmet demand in the market combined with attractive rental rates to justify the building.  We have elected to convert underperforming commercial spaces into self storage to make this even more financially attractive.  The reason, we are buying the building far below replacement cost.  With our conversion cost, it is far less costly than a brand new facility (but has all the amenities of a new facility).

2.  Or is buying an existing generally the better way to go.  If the market is saturated, then probably - assuming you also don't over pay for the existing facility.  In either situation, understanding the market at that specific location is the key to understanding self storage.  In either scenario, the goal should always be to generate cash flow!

3.  Why is a build longer path to cash flow.  In a build or conversion, as you noted, you have the construction time.  In addition, there is the lease up period.  Typically, lease up is 3% per month - similar to new apartments.  After one year, you typically cover your operating expenses, and by year two the goal is to cover your interest payments.  After that it should cash flow.

@Timothy Pauldon - I agree with @Jonathan Klemm, I know Renovo works with many first time investors and is located in Chicago.  They usually attend meet ups (when that was occurring) to connect and promote their programs.

@Trevor Gray  Having the financial side lined up is a great start.  Nevertheless, typically the first step is determining if there is demand in that market for self storage.  Feasibility studies, demographic studies are the beginning point to understanding the demand, market product type, and pricing to assess if your desired project is feasible.  

Allow me to elaborate.  We were introduced to a property owner that had recently purchased a strip mall.  The goal is to convert a portion of the mall into self storage.  The property does not have the proper zoning, nor has the owner done a feasibility study or demographic report.  Instead, they spoke with a locker supplier who provided them a layout for both Class A interior units as well as new Class B units on the site.  Great for the locker supplier, not so great for the owner.  

There is not enough demand to accommodate all those lockers, and the configuration was way too large based upon the demographics of the community.  It will take the owner a very long time to lease up the units, and they would be "wasting" a lot of money doing unnecessary work.

So before your rush into your first construction deal with self storage, we highly recommend doing research.  

To answer your question, a simple LLC agreement can be structured to accomplish your goals. To assess what percentages each party should receive, we base our LLC percentage on level of risk and associated rate of returns for that risk. Who signs mortgage, guarantee, work to be perform, etc.
 

@Joshua Rainwater - the topic of mentoring caught my attention be it MF, SF, RE or whatever.  I have had two mentors:  1.  I worked for and 1.  I paid for.  I have also taught college architecture.  

When I taught, we began the year by asking the students what they wanted to accomplish in the class.  This was 2nd year studio - a very demanding class of 12 hours of class each week.  The most common response was "an A".  Not a concept or skill to learn, but merely a grade.  Our response was this, "We don't give 'A's' is this class - they are earned.  There are no gifts.  We tell you the standards, if you meet those standards, you will earn an 'A'."

Despite paying a significant amount of money on tuition/room & board, etc, the 80/20 rule still applied.  80% of the work was produced by 20% of the people - even for those who claimed to want an 'A'.  @Brian Geiger is correct - succeeding does require work, usually hard work.

That being said, my first mentor taught me because I worked for him.  He showed me the ropes of development, architecture and construction.  My second mentor, mentored me on business.  He exposed me to new ideas, concepts, strategies that helped expand my business from a community business into a regional business in multiple states.  Two entirely different styles, and two entirely different results.  Could I have accomplished what we have if I had not had those mentors - maybe, but not likely.

Should you seek a mentor, define for yourself your objectives you are seeking to accomplish.  This will help you 1.  ensure you and they have objectives, and 2.  accountability - are you developing.  Hope that helps.

Wall Street Journal wrote yesterday that Blackstone is set to buy a portfolio of self storage facilities for $1.4 BILLION from Simply Self Storage.  

https://www.wsj.com/articles/b...

Self storage tends to perform very well in recessionary markets. So much so, I describe it a Recessionary Resistant. During the last recession, Extra Space moved to the top of the self storage REIT's with their own $1.0B acquisition at a CAP under 5%. Blackstone also made a major acquisitions in various state markets by buying distressed notes and properties via CMB portfolios.

Watching and understanding the market is very important for real estate investors.  Big players are starting to making significant moves.  

Thoughts, comments, or analysis if this latest acquisition is a forecast for the economy and real estate market.  If so, what is your strategy and how does it change?

@Tyler Casey  Congrats - welcome to the world of self storage.  It is growing in interest, so much so, that Blackstone is jumping in as well.  https://www.wsj.com/articles/b...  with a $1.4B dollar acquisition.

I received a BA in History in college, and then obtained a MArch from Illinois Institute of Technology.  I also taught second year at IIT in the College of Architecture for many years.  The curriculum was known as the brick studio.  The students were taught every aspect of construction during the second year (understanding a foundation, how to build windows, doors, etc).  The purpose of the class was to teach design through construction details.  It was developed by Mies van der Rohe and Alfred Caldwell, and has become a lost art.  

While in school, my professor owned a real estate development firm that also did architectural and construction.  I was able to learn all three aspects of the industry while working for him for 6 years.  I started my own firm back in 1998, and continued working in all three areas.

What are the advantages of being an architect?  Vision.  My back ground in development grants me the ability to see the project from a financial perspective - working on use, capital stack, entitlements, etc.  My architectural back ground provides the vision of knowing what must be done to the property to accomplish the development side - zoning, building code, design, etc.  Construction background enables us to know how to build it and what it should cost.

Working in the field for close to 30 years, we have interacted with many developers or contractors who do not understand the design.  Similarly, there are many architects who have no perspective of cost or construct ability (literally how to build what they are designing).  I am grateful I was fortunate that my education and early work afforded me the exposure to all three areas of real estate.  It certainly has benefited me as an investor. 

@Spencer Ellingson - Welcome to the world of self storage. I would first recommend getting to know the various asset classes in self storage A, B, and C. They are different than the world of MF. Class C is typical First Generation product, more rural and not climate controlled. Class B is similar to Class C, but newer, more suburban, and may be climate controlled. Class A is typically urban, larger, and fully climate controlled.

Each class has different financial strategies for a passive investor. It is both a real estate business as well as a retail business. It is a unique product in that sense. The benefit is an owner does not get the calls in the middle of the night that a toilet or kitchen sink is over flowing!

On our website there is a free Feasibility Report you can download. It is a for a specific site we did, however, it has great data and information on the self storage industry which will assist you in gaining knowledge. We are also involved in various self storage groups, we can introduce you once you have identified which asset class you are targeting.