All Forum Posts by: Scott Krone

1.  Learn about the different classes of self storage

2.  Learn about the current landscape of self storage during the pandemic

3.  How self storage performs better in a downturn

4.  Managing risk within the space

@Zariyan Stark  I would suggest running that concept of lease back by your real estate attorney.  Illinois passed laws that prohibited that with respect to short sales to banks.

@TJ Flynn  Well done on your success.  

With success comes tax consequences. One of the advantageous real estate affords its investors is tax shelters. There are many ways to create those shelters: Cost Segregation, depreciation, expenses from loan payments, Opportunity Zones, IRA's to name a few. To answer your question: Why isn't there more articles on Bigger Pockets about situations similar to yours is this: It is a complex question that one shoe does not fit every foot. There are many factors to consider:

So, what is best for you? I would suggest reviewing your question with your accountant and financial adviser to create a long term plan and goal for all your investments.   I would trust they have many questions for you in order to prepare a plan.  I would certainly ask them the questions you raised in this post.

@Jonathan G.  The Federal government and most states have deemed self storage as Essential, and can be open for business.  Based upon the SSA virtual conferences I have attended and conversations with other operators, most have been able to keep their doors open to serve the community.  With the rapid displacement of college students and need for warehouse space, it appears the overall market has not been impacted.  Data is still limited on rent collection, late payments, and defaults.  Our facilities have remained open.  That being like most businesses, we have altered the operations to protect the managers as well as our clients.   

However, the industry as a whole compared to other sectors of the commercial real estate market has not been hit in nearly the same manner.  The data we have seen shows obviously Malls, Hotels, Casinos, Strip Malls as being hit the hardest.  Data Centers and Cell Towers are the only two sectors of the commercial real estate market that are fairing better than Self Storage with respect to market valuations during this challenging time. 

@Andrew McCotter - Welcome from a fellow CHI.  To answer your question, the best time is when the building is leased up and stabilized.  Typically, banks and especially smaller ones will want to see it seasoned.  That can be 12 to 24 months, each lender has their own requirements.

@Nick Sullivan - I agree with @Jarod Hall by first look at the underlying zoning to determine density (number of units), set backs, FAR, height, etc. The lot/lots are irregular which may also require some zoning interpretation as well as the fact you are trying to join two lots. A PUD may be required. It seems the local zoning department employee was very helpful for you. I would suggest furthering the conversation with that person for their guidance with respect to the questions I brought up. Our philosophy is Trust but Verify. Get the information from them, and then verify it with an architect or local planner.

The reason we suggest that approach is it become, "Worst Case Scenario".  If you can interpret the code that permits more, then that becomes your "Best Case Scenario".

@James ONeal - First, thank you for your service.  Second, I agree with your first two points.  However, storage units like all real estate is an investment AND a business.  Does it require hands on involvement - depends on the situation.  I have friends who operate their facilities with very little on site staff.  That being said, they have developed systems to insure smooth operations.  Are facilities are much larger, and new so they require staffing.  That being said, it does not require me to be on site on a daily basis.

There is a significant difference between buying an existing facility, and constructing a new one.  Significant differences are obtaining entitlements (zoning if required), financing, and reserves for the lease up period.  As with most real estate, there is greater profit potential with development.  However, with greater profit comes greater risk. 

So, there are strategies to minimize those risks as much as possible during the construction and lease up period.  Most facilities take 2 - 3 years for stabilization, just the same as new apartments.  Most first time operators do not build new, they purchase existing facilities unless they have previous real estate development experience and understand the risks.

With regard to vacant land that you control. I would first suggest you review the zoning and comprehensive plan for the municipality to determine what is allowable and what they desire. Whatever the zoning, you can either look to sell it with the entitlements (zoning) or rezone it. If you rezone it, you can sell it "Pre-Developed". Another alternative is to JV on the deal where you contribute the property for a given "value" into the deal. This could allow you to gain some development experience and see the whole process while being on active duty.

@Zach Quick - Agree it is a business.  It is a unique real estate asset class due to the retail business component.  That being said, it is by far the lowest volume retail business due to the repetitive automatic sales cycle.

@Account Closed - I believe it is also important to consider like type asset classes.  I have many business friends who own First Gen facilities that are fully automated, and act much like a SF rental.  I do not know one operator who has someone living on site.  Like larger MF rental developments that require a staff, the Third Gen facilities with 600 to 1000 units typically do require 1 to 2 people to manage, and sell additional products:  insurance, boxes, packing material, truck rental, etc.  

So, I think it is important to understand ones goals before they enter into the market to best align their aspirations as well as business management expectations. 

@Account Closed  I have owned both MF and self storage.  I have found self storage to be far less "labor intensive" than MF.  Can you expound on why you feel they are more labor intensive.

@Joshua McClam .  @Paul Moore is coming out with a Bigger Pockets published book about self storage.  He was kind enough to dedicate a portion of book towards how we implement our model.  There are many ways to get involved in self storage.  Buying an existing smaller "mom and pop" facility (aka Class C or First Generation).  These are the traditional more rural facilities that are non climate controlled, garage style in a row facilities.

Class B or Second Generation is similar to Class C but climate controlled.  Third Generation or Class A are fully climate controlled in urban areas either new construction or renovated.  We acquire under utilized buildings in urban downtown areas and convert them into self storage.  The last two we acquired have both been in OZ's and came with existing entitlements.  The one we are currently working on the contract to acquire is also in an OZ and has the required zoning.  It is currently not a self storage facility.  We will renovate the building, and bring it up to Class A standards.

As @Andrea Weule stated there are many ways to get involved.  If you seek to acquire one by your self, than a smaller "mom and pop" facility is where most new self storage owners begin in order to learn the business.  Investing with companies that specialize in it is another way.  Like MF investments, they can range in price from a few hundred thousand to +$20.0mm.  Most of the larger facilities are managed, if not owned, by the larger self storage REITS.

Our web site offers information about self storage as well as podcasts I have been asked to speak about self storage, etc, if you would like to hear our story, and how we got into self storage.

www.codamg.com