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Pros and Cons of Self-Storage Investing

Apr 23, 2022

We’ve learned about the rewards of investing in self-storage, but what about the risks?

In this episode, Kris Bennett breaks down the opportunities and obstacles in the self-storage space. He is a Self-Storage Managing Partner at Passiveinvesting.com with 14 years of experience in the real estate industry. From raising capital to finding deals, listen in if you want must-have knowledge and actionable advice before dipping your toes into self-storage.

 

[00:01 - 02:42] Pivoting to Self-Storage

  • Kris almost gave up on real estate
    • Here’s how he found his way back
  • The reason they shifted their focus to self-storage

 

[02:43 - 07:44] Raising Capital from the General Public

  • Funding through CrowdStreet
    • Find out how they partnered with the platform
  • The advantages and disadvantages of financing this way

 

[07:45 - 13:44] The Cons of Self-Storage

  • Kris talks about the misconceptions about self-storage
  • The challenges in doing smaller deals
  • Setting expectations with investors and attracting capital

 

[13:45 - 15:42] Closing Segment

  • Here’s what Kris and his team are curious about right now in the real estate space
  • Kris recommends these books
  • Reach out to Kris! 
    • Links Below
  • Final Words



Tweetable Quotes

“If investors are educated on their own… If they educate themselves on all of those options, the investable universe of what I can't invest in and what real estate looks like, what's the risk-return trade-off, then they will understand okay, storage is a great bet.” - Kris Bennett

 

“Set big goals because those are the things worth going after.” - Kris Bennett



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Connect with Kris at kris@passiveinvesting.com and follow him on LinkedIn if you want to learn more about self-storage. 



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Email me → sam@brickeninvestmentgroup.com

 

Want to read the full show notes of the episode? Check it out below:

 

Kris Bennett  00:00

You have to set up investor expectations. If you're raising capital from investors, we've run into this issue in the past, I've run into this issue in the past where you set expectations, you send them an OM of what you're going to do for your syndication docs or whatever, hey, we're going to go out and find 10 deals and we're going to give you this return or whatever, then the market shifts and now returns are lower than now you're stuck, right? So you have to set investor expectations. Guys, you're jumping into this business. Storage is wonderful, but 10% return cash on cash, your one is probably not going to happen unless you find a needle in a haystack. A massive haystack. Right? So it's probably not going to happen.

 

Intro  00:33

Welcome to the How to Scale Commercial Real Estate Show. Whether you are an active or passive investor, we'll teach you how to scale your real estate investing business into something big.  

 

Sam Wilson  00:45

Kris Bennett buys self-storage facilities in growing markets and business-friendly states. He resides in Charlotte, North Carolina. Kris, welcome to the show.

 

Kris Bennett  00:54

Thanks, man. Appreciate you having me on.

 

Sam Wilson  00:56

Hey, man, pleasure's mine. Same three questions I ask every guest who comes on the show: In 90 seconds or less, where do you start? Where are you now? And how did you get there?

 

Kris Bennett  01:02

That is a great question, Sam. So I started in real estate in 2007. Right before the Great Recession, if anybody remembers that time, it was pretty rough. We thought we're all going to be rich. I was in my real estate licensing class and going to become a residential broker. And obviously, the world changed, over the next two years actually soured me on real estate. I was doing foreclosure work. So when people think about like banks and all that foreclosing on folks, well, how do they do that? Well, they contact agents and have them go evict people. And so that's what I was doing. And it was not fun whatsoever. I was single at the time, no family, had I had a family, had kids, I would have just cried my heart out every day. So that was really tough. Decided to go to school and get away from real estate as far as I could. Coincidentally, the only way the only job I could find my first summer in college was at a real estate investment firm, a private equity firm in Chapel Hill. And I had no idea what he was doing. But he hired me on to do some underwriting and whatnot. It opened my eyes to the fact that you can buy massive commercial real estate, he was doing apartments but the idea is you can raise capital to buy these large buildings and make money doing it and my eyes like bugged out, right? So one, I hadn't seen that many zeros before my life, and then another was that oh my gosh, this is how you do it. So the light bulb went on. To make a long story short, I graduated, worked at a family office in Raleigh, North Carolina doing multifamily acquisitions. We pivoted to storage arrays the storage fund on CrowdStreet, That fund is doing really well. They're I think on fund two or three at this point. So connected with passiveinvesting.com. About a year ago, I know one of the principals for a number of years before he got just got into real estate investing, and kept that relationship going. And that's where we are now, leading the storage arm of passiveinvesting.com. And did you ask where are we going with that as well? Or was that the answer to everything there?

 

Sam Wilson  02:41

I don't know, man, that was great a summary.  It went to a lot of places, but I love it. No, that's good. That's really, really interesting. So back up a little bit when you said CrowdStreet and just kind of define how you guys interface on that front. What was that story there?

 

Kris Bennett  02:43

Okay, good.  Yeah, sure. So what the firm I was with is called 10 Federal, if people want to look it up, it's called 10 Federal, 1-0 federal.com. When I started, there was their director of acquisitions, which is a fancy title for bird dog. So in other words, go find deals from brokers or owners. And so that's what I was doing mostly in the Carolinas, this is about 2016. So multifamily properties in the Carolinas, I made a bunch of phone calls, talk to a bunch of brokers, underwrite a bunch of properties, I was doing all of that work, and just couldn't make the numbers work on stuff. So just kind of summarizing here, we had a couple of deals in a contract that fell out, etc. So we decided to pivot to self-storage. And the reason being is that the guys I was working for had a little bit of experience within storage, and they were building some small facilities for themselves using SBA financing. And we can talk about what that is, if you want to, but SBA financing. It's a small, meaning 15,000 square feet or less, so think maybe 150 to 200 units or less. That is small in self-storage. And since they had that experience, great. Okay, so we know how to do it right financing and whatnot, and kind of like what to look for when we need to raise capital. Okay, well, we're not that good at that. So let's go ahead and partner up with CrowdStreet. And this is again, 2016-2017. So 2017, really for the storage fund. And so we were able to do so, put together the offering memorandum and all the organizational docs behind it all and basically put it on CrowdStreet on their website and raise capital through that platform. And I'm sure their terms and conditions and whatnot have changed. But obviously you paid him some money, just pay this money to be able to do that-- almost knocked over my tea here. And it was successful. So the goal was to raise about 10 million bucks, I think we raised pretty darn close to that for our very first fund put out, you know, that was put out there for the public to see, and criticize, and invest with, and get on board with so that was a lot of fun. That was a successful raise and deployment of that capital.

 

Sam Wilson  04:42

How many deals did you guys do before you launched with CrowdSreet?

 

Kris Bennett  04:46

Oh, man, within the firm at 10 Federal at the time, between apartments and storage, man, I can't remember, maybe 10 to 15 something like that. Maybe I'm overcounting that, I can't remember exactly. And so that was all, like mostly with five real five or six close investors who obviously were repeat investors who would take down those deals with us. 

 

Sam Wilson  05:09

So was the approximate, I'm getting to something here. What were the approximate assets under management at that point? You know, when you guys went to CrowdStreet?

 

Kris Bennett  05:16

I think it was, so we had apartments, mostly, I want to say the total value was maybe two to 300 million. Okay. I can't remember, so the larger.... 

 

Sam Wilson  05:26

The reason I asked that is just because it's people think about that, as I think about, you know, the thrust of the show is how to scale. And I think about maybe at some point in the future, maybe I'd like to partner with a CrowdStreet, a realty mogul. No more of that. Yeah. Yeah. Where do you have to be in order to do that? And obviously, you have a significant track record, two or $300 million in assets under management, not a small amount of real estate to own. So just as people hear that, and go, Oh, hey, that'd be cool someday, that gives them kind of a marker as to where you need to be. 

 

Kris Bennett  05:53

Yeah, yeah, exactly. 

 

Sam Wilson  05:55

What were some of the things that you liked and didn't like about partnering with CrowdStreet? And again, I'm going somewhere with this.

 

Kris Bennett  06:01

Oh, sure. They were actually, really so if I... So that was 2017. So that's about five years ago. So they have new people in place, and all this stuff, and new processes and new vetting procedures and everything. So people have to realize that as well. So I'm talking a little bit half a decade ago about what we're doing. So at the time, I think the pricing was a little bit steep. And people have to realize that how they had it structured at that time, they had what they call investor rooms, and whatnot. And so basically, each investor that comes in through your portal, they will go to a website, essentially set up for them that gave him all the statistics and capabilities to invest and vet the deal and all that kind of stuff. And that would cost you money based upon the number of investors. There was an upfront fee to get started, you know, there's a number of things. So it is expensive. And now what I'd say be one of the downsides or cons to it.. The great, the upside was they were great to work with, very easy to work with. They kind of held your hand through the process, You send them, you know, financials and your underwriting and all these other things. So they're kind of looking over your shoulder to make sure that, hey, you're not fudging the numbers here or something like that. And that you're not making a mistake, obviously, within your projections, because they have to put it out there. But they help you kind of make it look professional, and good and presentation worthy to their investors. So again, it was a long time ago, their logo and colors have changed back then it was like red and something else. So it's been a while. But it's a bit pricey. But I think if you're trying to raise capital from the general public without registering your securities, it's a great way to do it, and kind of offload some of that work to someone else.

 

Sam Wilson  07:28

Right. And I don't think any of those things that you've just said have changed too terribly much, just on the cost of capital side of things. 

 

Kris Bennett  07:36

Yeah.

 

Sam Wilson  07:36

It's more expensive capital to get a hold of, but again, like you said, you get to offload some of that administrative burden and bring...

 

Kris Bennett  07:43

 Absolutely, yeah.

 

Sam Wilson  07:45

So that's fantastic. I love that. You know, we bring, we've had several people come on the show, obviously, you know, 500 something episodes, and talk about self-storage. And we always hear about the pros of self-storage. What do you think are some of the cons of being in self-storage?

 

Kris Bennett  07:59

Oh, right now, the biggest one is the amount of competition to purchase deals, and the high prices and low cap rates as a result. So people, they look at the high level, the way they like the pros, like you said, and we could talk about that, or whatever. But you know, all and storage is great. Let's get into it. And you have coaches and people out there that people can, you know, pay to help them find deals, and you can follow different podcasts, et cetera, to help you figure out how to find a deal and close on a deal, which is all great. That's all the mechanics of it. But you don't realize that, bro, these are expensive assets. This is not like picking up bird nests off the ground or something like that. Right? This is very difficult to do. And I don't think people realize that is one of the cons. There's so much capital piling into self-storage. Right now, the misconception is that oh, as interest rates go up, prices will come down. Mathematically yes, that should be the case. But because there's so much demand and so much capital out there that's flowing into self-storage, prices are staying high, they're not coming down just yet. We might see it come down later this year, depends on really where interest rates go. But right now that's not the case. Another con is the fragmented ownership and the mom and pop type ownership is great. But mom and pops, if you're looking for smaller deals, which I've done that in the past, if you're looking for smaller deals, when I say small, I'm saying maybe 20,000 square feet plus or minus somewhere in there, then they don't have good record keeping. They're sometimes difficult to deal with. When they send you, I've done deals with a guy literally sent a photo of a unit mix that he drew by hand because he didn't have records to send me the unit mix. Right? So you have to be ready to deal with that kind of stuff. And when you go to if you're using the bank for financing, the bank is going to want to see some sort of financial history there. Sometimes mom and pops keep all their businesses commingled into one P&L, and you got to figure out what the heck is that he's got a car business, a storage business, and he's got some single-family rentals. And it all comes into here and he's telling me it's this but I can't think... So you're gonna be scratching your head with those kinds of deals. If you go to institutional, larger deals. You don't have that problem but smaller deals, you could run into that problem. The other side of it is because the pro is it's an inflation hedge. I'm sure some people have heard that now rates are going up. So you can raise your rental rates/ Well, you can, but let's say you raise your rental rates on all your tenants 10 bucks every month. Someone's gonna get mad and move out, you're gonna make... You can't just raise rates, like every month, that's not, it doesn't work that way. Maybe once every six months? Yeah. Once every month? No, that doesn't work that way. Conversely, or the opposite of that is when rates come down, you're susceptible to that as well. So if the market is lowering rates for 10 by 10s, you know, within a three-mile radius of your facility, you are either you're going to be the highest because you're the best, you know, Class A really nice facility, you can kind of lead the market. But if you're not that, then you're probably in a race to the bottom right. So that's something that you have to think about. If you're battling REITs and whatnot, it can become a race to the bottom, where they're now renting a 10 by 10, for 50 bucks. And if you do the same thing, you're gonna go broke, you know, so there's things to think about the reverse of the pros are sometimes can also be cons.

 

Sam Wilson  10:56

Right. And I like that thanks for taking the time to break down some of the barriers or the obstacles in the industry. But I think also inside of those obstacles, that's what creates opportunity. Yeah. You mean, you guys have found a way to kind of work around all of those moving pieces and say, Okay, we still see opportunity, here are some things to be certainly aware of.

 

Kris Bennett  11:15

You have to set up investor expectations. If you're raising capital from investors, we've run into this issue in the past, I've run into this issue in the past where you set expectations, you send them an OM of what you're going to do for your syndication docs or whatever, hey, we're going to go out and find 10 deals and we're going to give you this return or whatever, then the market shifts and now returns are lower than now you're stuck, right? So you have to set investor expectations. Guys, you're jumping into this business. Storage is wonderful, but 10% return cash on cash, your one is probably not going to happen unless you find a needle in a haystack. A massive haystack. Right? So it's probably not going to happen. So you have to set those expectations and where we're at in the market right now. This is a tough business to be in. But there are opportunities, and there's reasons why so much capital is jumping into self-storage, There's got to be a little discipline in what you're going after.

 

Sam Wilson  12:02

When you set those expectations for investors, I don't care how you set it, if you say hey, look, you know, like you said, it's a tough business, you know, you're not gonna get a 10% cash on cash return. How do you attract capital?

 

Kris Bennett  12:12

Well, where else are you gonna go? So investors need to look at the universe of investments, right? If they like the stock market, they like bonds, they like whatever, and I'm not negative on any of that stuff. A lot of real estate investors, Oh, don't put your mind stop. No, no, I think people can make a lot of money in the stock market. So if you'd like stocks you'd like, whatever, that's fine. If you're looking at real estate, okay, what's the investable universe of real estate, you have multifamily, retail, office, industrial, etc. Okay, well, we're all the returns there for the risk that I'm taking on? Risk and return. Not just both, if it's high return, there's got to be high risk somewhere, even if it's not immediately disclosed or fully understood. Okay. So if you will go back and look at REIT returns over the last 20 years, you can find that data on REIT.com. And download it, anybody can do that. And you can see returns for publicly-traded REITs all the different sectors, data centers, multifamily, etc. And you can compare year over year and kind of do an analysis, self-storage has one of the best returns of all property types. So what does that mean? Higher returns at some point will push more investors into that asset class driving down returns because there is less risk. That's why bonds return so little because there's very little risk associated with bonds, whereas cryptocurrency has a very high potential return, but very high risk and a lot of volatility and swings in the market. So if investors are educated on their own, I'm not saying they're not dumb or whatever, but I'm saying if they educate themselves on all of those options, the investable universe of what I can't invest in, and what real estate looks like, what's the risk-return tradeoff, then they will understand okay, storage is a great bet.

 

Sam Wilson  13:45

Love it. Absolutely love it. Kris, what is something you are curious about right now?

 

Kris Bennett  13:50

How to find more deals really right now. So while I'm working on that, we're doing a couple of things a source off-market deals, working with a couple of brokers to do that for us. And then I picked up a book I'm reading through so I can't recommend it yet. But it's actually been very good so far on helping me understand, you know, what I should do as far as just staying in front of people networking and those sorts of things. So that's what I'm trying to work on at this moment.

 

Sam Wilson  14:12

Got it, and that was my next question for you. What do you read now? So if you have another book that you want to recommend that you might have been reading or just finished reading.

 

Kris Bennett  14:20

Yeah, I finished Stephen Schwarzman's book, I have it over there, "What It Takes." I listened to audiobooks and so that was a really good one. I actually liked his story and the tips he gives at the very end. I think one of them always stands out to me is to, I'm just summarizing here, but to basically dream big dreams, set big goals, those are the things you should go after. And I really liked Gary Keller as well. "The One Thing" and "The Millionaire Real Estate [Agent]," those are great books. He focuses more on single-family there or just units of multifamily and that kind of thing, but the concept is still the same. And I really like Gary Keller's stuff. So those two things go together, set big goals, because those are the things worth going after, so.

 

Sam Wilson  14:58

Love it. Kris, if our listeners want to get in touch with you or learn more about you, what is the best way to do that?

 

Kris Bennett  15:02

They can find me on LinkedIn. Just search Kris. Kris with a K. K-R-I-S Bennett. Kris Bennett on LinkedIn. They could also send me an email. I may not respond right away. K-R-I-S @ passiveinvesting.com

 

Sam Wilson  15:13

Thank you, Kris for your time. Have a great rest your day. 

 

Kris Bennett  15:15

Awesome. Thanks, Sam. Appreciate it. 

 

Sam Wilson  15:16

Hey, thanks for listening to the How to Scale Commercial Real Estate Podcast. If you can do me a favor and subscribe and leave us a review on Apple Podcasts, Spotify, Google Podcasts, whatever platform it is you use to listen, if you can do that for us, that would be a fantastic help to the show. It helps us both attract new listeners as well as rank higher on those directories so appreciate you listening. Thanks so much and hope to catch you on the next episode.