All Forum Posts by: Scott Krone

When we determine what percentage we retain, we first determine the desired rate of return our investors are seeking. Typically, we see investors requiring a 20% rate of return, so we adjust our percentage accordingly.

@Andrew Reich - I really appreciate @johann jells charts.  Real estate is like any other investment.  There are bull and bear markets.  There were smaller bear and bull markets leading up to the major crash in 2008-09.  2001-2002 was another example of it.  It is important to study demographics to determine growth areas.  Post crash, Texas and NC were growing very fast while other parts of the country were in decline.  Large institutional money ie  Blackstone and others also tended to follow those same trends making it harder for smaller investors.  

Having been in real estate 20+ years and experiencing both trends, we made the move to self storage.  Self storage actually thrives in both crashes and up markets.  In a crash, people downsize and put stuff into self storage.  In an up market, people tend to buy more stuff.  Are they fool proof - no, nothing is.  The performance is dictated by the demographics and saturation of the product in the market place in respect to the population.  It is far easier for us to study and understand that then market crashes.

So the moral of the story is to due your due diligence in the product type so you understand your market.

@Tom Hertel @Andrey Y. I don't believe we have had a 401k. As long as the IRA is self directed I would not know if it is a Roth or Traditional. Most of our investors use Equity Trust. I am sure they can better describe their programs.

We prefer self directed IRA's over 401k if you have the option. Over 50% of our investors use their self directed IRA accounts.

Typically no.   Most lenders would not do it, nor would I suggest doing it.  Why risk all three if something goes wrong in one.  Best way is to restructure the loans in the first two.

I appreciate the thread, and the comments from @Chris Clothier, @Jeff Schechter, and @Andrew Johnson.  Disclosure appears to be a main concern in the thread.  Full disclosure, I am not involved with TK.  However, I do know many investors who provide TK as well as many whom have purchase TK investments.  That being said, I do study the TK model as it is an investment strategy that is readily compared to our model (self storage).

I appreciated the comments above, because there are people who are doing it well and perhaps others not so well.  From an outsider perspective, the common thread that TK provides its investors is, as Chris Clothier states, - passive income.  It is the quickest way to generate passive income compared to MF or self storage.  Whether or not "instant equity" is generated, there is typically no or very little discussion on appreciation (both income as well as property value) as well as depreciation.  It is very hard to generate significant appreciation beyond inflation with a TK investment.  In addition, one typically has either 0% vacancy or 100%.   Obviously, more units alters this within a portfolio.  Neither of these factors do not make it either good or bad, rather a basis for determining your investment strategy.

Can "instant equity" be generate - I would certainly hope so. When we evaluate a real estate income opportunity we consider: 1. demographics 2. the property location in the market 3. price point of acquisition, 4. hard costs to improve 5. gross potential income 6. discounted income 7. expenses, 8. NOI 9. cap rate and 10. exit strategy.

We have had investors in everyone of our projects over the last 20 years - 90% of them we would consider "turn key investors" who are seeking an investment without any involvement.  Prior to us even going under contract on a property, we MUST consider and approve all 10 criteria above.  We have all 10 so we can insure we can generate:  

1. equity upon completion 

2. cash flow, and 

3. appreciation

Through out the investment our investors receive tax benefits of depreciation and losses during the construction.  That is the benefit of how the IRS has set up the tax codes.  I think where most TK investors get in trouble is they only consider 2 or 3 of the 10 criteria we discussed - specifically #3 and #8.  I believe if you are going to thrive in real estate, and specifically TK, then one should really need to consider all 10 criteria.

Every property we have bought over 20 years has been in an LLC. That should not be the problem to getting a loan.

@Debbie Rumsey Then it becomes a quite simply equation. How much cash do you need from your existing asset, and is that an acceptable amount of debt with respect to your risk tolerance. The good news is - you control all those factors. I am sure you will be able to obtain attractive terms even it is a LOC.

@Debbie Rumsey  It appears to me you are asking two separate questions.  1.   How much cash flow do we need to live off of.  2.  What is the best strategy for obtaining question #1.  May I suggest in order to answer the first question, compare your desired living expenses to your existing cash flow.  If they meet your goals, then great, if not then how much more is required.  So, assuming more is required, I would then consider how an additional property would help you meet your goal.  Debt is good for many reasons:  1. greater leverage to increase rate of returns, and 2. tax deductions.  I think the key for you is to determine the level of debt you are comfortable with.  

For instance if you had 30% debt on each building, yet could increase your cash flow before taxes by 20% by adding a second property, I would think that would be worth considering.  Over leverage on properties was one of the main causes for the crash.  

The strategy we use when we convert warehouses into self storage (MF with no toilets) is we put a conservative amount of debt on them upon completion - typically between 60%-65% of value.  If the market conditions change, we have the ability to absorb the market conditions without risking the asset.  The added benefit of our strategy is our costs are typically 65% of the end value.  So, we can pull out our investors cash without over leveraging the asset.  This allows us to dramatically increase their rate of return, reduce their risk, and provide them a tax shelter.

Self storage is a very demographic driven industry - specifically related to revenues.  The first step is to really determine the level of demand and pricing associated with it.  I can not speak to the costs associated (hard/construction and soft/operational - utilities) associated with cold storage.  We do have a bootcamp webinar outlining the process if that interests you.  PM me your email if it does.