How to Scale Commercial Real Estate Podcast with Sam Wilson On the New York City Podcast Network

Pitfalls And Opportunities In Self-Storage Investing

0 Votes | Vote Up This Episode!
Learn about the good and the bad of the self-storage space with our guest Mark McGuire Mark is a limited partner in 12 syndications ranging from multifamily to industrial hospitality and self-storage He talks about how storage units are becoming an increasingly popular asset why it s important to build relationships with brokers and what bad investments to avoid in the market Starting from the bottom of the ladder in his career Mark also shares the lessons he learned as he worked his way up to success 00 01 – 03 08 Taking Action and Following Up How Mark climbed the ladder to success Investing time with people smarter than us 03 09 – 21 03 What You Need to Know About Self-Storage Investing The self-storage industry is controlled by a select group of brokers This is the right way to approach and interact with them Comparing the first and the last self-storage deal he did Looking for locations The landscape then and now Mistakes multifamily investors make when transitioning to self-storage How Mark and his team position themselves and make moves in the current market The benefits of investing in self-storage What is a bad storage investment 21 04 – 22 24 Closing Segment Reach out to Mark Links Below Final Words Tweetable Quotes Find someone smarter than you go ask them what you should do next do that thing And then once you re done let them know that you did it and ask em now what the next step should be – Mark McGuire Self-storage is like the halfway house for recovering multifamily addicts – Mark McGuire The people who are willing to pay the most are young females and young females want properties that are well lit and that are aesthetically pleasing and have a lot of security cameras – Mark McGuire —————————————————————————– Connect with Mark at InvestingInMark com and follow him on Instagram Facebook and LinkedIn Connect with me I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns Facebook LinkedIn Like subscribe and leave us a review on Apple Podcasts Spotify Google Podcasts or whatever platform you listen on Thank you for tuning in Email me sam brickeninvestmentgroup com Want to read the full show notes of the episode Check it out below 00 00 00 Mark McGuire We ve been in an atypical market where we ve been up to the right for the last four years So you know despite how poorly you ve operated a deal or priced a deal like you could sell it just in spite of your knowledge base but there will come a day when you reach the high water mark and then pricing starts receding And then at that point in time brokers are going to be calling you asking what do you think this is 00 00 33 Sam Wilson Mark McGuire s biggest passion is wealth building and investing He s a limited partner in 12 syndications ranging from multifamily to industrial hospitality and self-storage He s invested in multiple private companies in the biotech finance and AI spaces Mark welcome to the show 00 00 49 Mark McGuire Thanks for having me Sam I m pumped man Excited 00 00 52 Sam Wilson Thanks for coming on today Certainly appreciate it Here s three questions I ask every guest who comes to the show in 90 seconds or less can you tell me where did you start Where are you now And how did you get there 00 01 00 Mark McGuire Yeah So started in as the maintenance guy the assistant to the maintenance guy So I started if there was a bottom rung on the ladder I think I started in the ground and currently now functioning as the chief investment officer at Hearthfire Capital And we focus in the syndication of the self-storage space and you know my journey getting there was from you know doing all of the work that nobody else wanted to do and kept finding people who were smarter than me and asking them for advice and then executing on the advice they gave me and going back to them and saying Hey I did that now what If I could give one piece of advice find someone smarter than you go and ask them what you should do next do that thing And then once you re done let them know that you did it and ask em now what the next step should be 00 01 48 Sam Wilson And that is the follow-up that I think 90 of people miss is that Hey I did it Lots of people are willing lots of people are willing to say Hey you know what do I do And then they listen and it makes em feel good to hear what they should do Then one they don t do it And then secondly they don t follow up and go back and say Hey I did it now what 00 02 06 Mark McGuire I mean Yeah Some of the smartest people that I know people that have mentored me you know I ve asked them after the fact like why did you choose to invest time with me Because you know time is a resource that people who it doesn t matter how wealthy you are you can t make more of it 00 02 21 Mark McGuire You can earn more money You can earn more time And the answer that I got from multiple people is you were a dealer You went and you did what I told you to do And then you followed up with action So take action 00 02 34 Sam Wilson Absolutely That s an inspiring story I think for all of us I love starting if there was a bottom rung of the ladder I started in the ground Did you did you go to college 00 02 43 Mark McGuire I did three semesters non consecutively and never graduated 00 02 47 Sam Wilson I love it I love it That s one I m my now it makes the story even better Tell me what you guys are doing today 00 02 53 Mark McGuire Yeah so Hearthfire Capital we currently own 12 facilities about 420 000 net square feet buy operate manage improve self-storage facilities That s what we do 00 03 08 Sam Wilson That space has seen I mean as all I think real estate asset classes have have just seen an incredible interest from the institutional side of things How is that changing what you guys do your strategy your return profiles I guess I asked that question and then like we ll start there got too many questions for you but we ll start with that one 00 03 30 Mark McGuire Hey fire away It s interesting I was actually just on a call before I hopped on here today with a broker in the space Just asking them what they re seeing Cause we ve been self-storage has really been controlled heavily by a small group of brokers So it s interesting in self-storage that s different from other asset classes is that it s not like there s a bunch of people especially everyone comes from multifamily Everyone knows multifamily It s the easiest one to get into requires the least amount of capital There s the most amount of possibility but there s not a lot of like good trophy properties And they re the brokerage of those properties is A a lot of them don t ever get on the market that they maybe get limited bid at best 00 04 10 Mark McGuire But two there s a lot larger pool of brokers competing for the inventory versus in self-storage it s controlled by like eight or nine groups that really do the vast majority of the industry across the country So when you get in with a couple of them you prove that you can perform you sign deals up on the front end 00 04 29 Mark McGuire You don t retrade them You take them down on the back end obviously assuming that you know you didn t get lied to or debt didn t go up 200 basis points over the time in which you had it in your contract That s how you get in with these people and self-storage is really controlled by a select view group 00 04 46 Sam Wilson Got it So how did you crack that egg If you re coming in is the new guys on the on the block like what would you say to somebody if they wanted to get in front of these people and actually become a credible buyer 00 04 58 Mark McGuire Yeah So you know what I would tell anybody who s looking to make that move you know reach out to them sit down with them tell em what you re looking for And then when new offerings come in that are what you re looking for offer on them within like you know 24 to 48 hours And and if they don t work for you tell them why that property wouldn t work and give them actual reasons not just like I don t feel like buying this today 00 05 27 Sam Wilson That is and I hear that over and over and over I think I ve heard that 10 times in the last three weeks from guests on the show and it s something I just think that just needs to be reiterated again I mean I I can t thank you enough for saying that which is tell em tell em why it doesn t work 00 05 42 Sam Wilson Communicate with your brokers And I think that s I need to go back and just kind of splice all these and put like a broker advice podcast together from about the last 30 guests and say Hey this is this is how you interact with brokers cause it is it is an interesting art and figuring out how to get in front of and stay in front of them and what it means to be a valuable buyer to them 00 06 01 Mark McGuire And so many people misunderstand that they they have the relationship with brokers confused People think that brokers are supposed to bring them deals and you know brokers are out looking for deals but the expectation of you telling somebody that you want something one time A is bad that that s a horrible assumption that they re going to actually remember that they talk to you let alone remember the specific criteria that you gave them 00 06 28 Mark McGuire And you want to find a way to bring value to them cause sometimes brokers missed a mark on their pricing And sometimes you know they look at it and we ve been in an atypical market where we ve been up to the right for the last four years So you know despite how poorly you ve operated a deal or priced a deal like you could sell it just in spite of your your knowledge base but there will come a day when you reach the high water mark and then pricing starts receding 00 06 51 Mark McGuire And then at that point in time brokers are going to be calling you asking what do you think this is worth And that s where the true relationship it s a true two-way street at that point where they re coming to you asking Hey what would you pay for this and help me understand why because if they re not getting the pricing that they told a seller they want to be able to go back to that seller and articulate why what s changed in the market that s prohibiting them from executing on what they said Cause it s an all about reputation and integrity and if you don t have those two things you re out of the business 00 07 19 Sam Wilson Exactly And you know to the point yes you are a buyer Yes you are a quote client of the broker but like you said it becomes a two-way the symbiotic relationship in the sense that you need them they need you yes they get paid but you also get paid by buying deals as well So it s and it becomes very valuable when that last step I think occurs Like you said where they suddenly go oh okay Hey you know Mark what do you think about this 00 07 43 Sam Wilson Tell me this is a project we re looking at What s it worth And and they ll they ll smell They ll smell it If you if you re not telling you know giving em accurate feedback low balling em with something that that doesn t make market sense That s a cool point you make there Tell me about your first deal you did and then compare it to the last deal you did And tell me how things have changed and maybe what you guys are doing differently from the first to the 12th 00 08 07 Mark McGuire So the first deal that we did with Hearthfire Capital or the first deal that I ever did relative to one that I just did with Hearthfire Capital 00 08 12 Sam Wilson Let s talk all self-storage 00 08 14 Mark McGuire Okay cool Very first self-storage deal we did we purchased for I think it was about 1 7 million We re actually on market right now at 3 5 million to take that full cycle as we speak here A lot smaller facility worth about a third of the value And actually it s worth less than a third of the value 00 08 37 Mark McGuire It s just less it s less decimal points That s all it is at a certain point though you know if you re playing for big for more decimal points you got to really know your craft because when there s bigger decimal points you can create more wealth The process is the same but the stakes are higher 00 08 56 Mark McGuire You want to kind of start a little smaller so that way if you do make a mistake it you don t get I m going to say totally crushed and knocked out of the game Go a little smaller in the beginning and that one had no expansion That one was just a pure revenue play a pure you know optimization doing some parking lot renovations and converting a particular area the facility to climate control 00 09 19 Mark McGuire And the one that we just did we bought a 31 000 square foot facility with a 34 000 square foot expansion that we ll be doing So we re building 34 000 square effectively taking this facility size to 65 000 square feet and upgrade in the class of that facility 00 09 34 Sam Wilson What was the purchase price on the 12th one 00 09 36 Mark McGuire Man now you re testing me The equity I think the purchase price of the the 12th one was like you know dirt and existing facility was like 4 7 million stabilized values going to be in the eight or 9 million range 00 09 55 Sam Wilson Okay 00 09 55 Mark McGuire And the first one was 1 7 million going to three three somewhere between three and three five We ll see how it shakes out 00 10 02 Sam Wilson Right right So so yeah I mean obviously you re getting into bigger projects It doesn t sound like you re playing for the 1 5 or 1 7 million dollar projects anymore You guys are looking at bigger assets Tell me on a square foot basis Like I know 31 000 square feet is that a small I don t I don t own no I don t own any I have a passive investor in self-storage I don t own any personally So tell me you know what s the size of a good facility for you guys Like where do where do the numbers make sense 00 10 28 Mark McGuire Yeah So from a sizing it really kind of depends because and and and I hate to say that but it s the truth If you re already established in a market and you can get economies to scale by pulling a property manager from a local facility nearby and then getting cost shares on the operations side of things you can go and take that facility and that facility makes sense If you re going to go and penetrate a new market and stand set up a flagship buying a 20 or 30 000 square foot facility is is going to be challenging unless there s a big like we re doing here a big expansion on the backside to really get that economy to scale So if we re we call them bolt on sites 00 11 06 Mark McGuire So if we re going to look at a bolt on-site we would do 20 to 30 000 square feet If we re looking at a flagship it s going to have to be 50 to 60 000 minimal 00 11 15 Sam Wilson 50 to 60 000 square feet is a okay so that that s kind of the entry-level where you say Hey we re starting in a new market It s gotta be at least 60 000 square feet How have things changed on the buy side competitively Like what what s that landscape look like now for you 00 11 31 Mark McGuire You know it s funny you say that literally that was the call I had this morning with a couple of brokers I ve been reaching out to some brokers I have relationships with cause we ve been swinging and missing on some deals And we re just getting outbid and it s and like these are deals that when we hear what these things are selling for I m like the IRR at the investor level was like 11 Nobody wants them invest in a private equity deal with an expansion component for 11 That assumes everything goes right If anything goes remotely wrong you re toast 00 11 59 Sam Wilson Right 11 became 4 Thanks at best 00 12 02 Mark McGuire Maybe at best Yeah So you know we re like you alluded to earlier there s a lot of capital pouring into this space and there and this is like I always say self-storage is like the halfway house for recovering multifamily addicts 00 12 16 Mark McGuire And it s everyone who s sick of chasing diminishing returns and doing stupid stuff to try to acquire a facility that s way overpriced and overbid And you know there s not a lot of meat on that bone it s been picked over Now all those people are coming into self-storage and people are starting to put non-refundable deposits which is stupid 00 12 36 Mark McGuire And they re starting to do you know waving due diligence Stupid I mean it s just literally like let me just increase the risk factor as much as I possibly can and be as ignorant as possible so I can absolutely make sure to get burned 00 12 52 Sam Wilson Do you see I guess that and if and if that s the way you I guess that is the way you see it is that eventually they will get burned Where do you want to be when that happens and how are you positioning yourself for that 00 13 04 Mark McGuire Well I don t want to be competing for their deal I don t want to be competing for the deal the first time I want to be competing at it after they ve lost their shirt and the bank calls their note because they don t make their debt covenants 00 13 13 Mark McGuire That s where I want to be But we re right now like in order to acquire I mean it s an off-market game right now I mean and self-storage has for a long time been controlled by brokers and a lot of the inventory was traded by brokers And self-storage didn t have that popularity And I mean there were times man these things are trading for 10 to 12 caps And that same property that traded for 10 to 12 cap five to six years ago is now trading for six Like it s nuts 00 13 44 Sam Wilson Right Yeah It s absolutely insane What are the economic things or the environmental moves that maybe have to occur for you to think that it will return to a point where you can then pick up these properties at a discount when these people can t cover their note 00 13 59 Mark McGuire So self-storage what no one talks about in the whole recession resilient thing about self-storage during 2008 2009 as a part of CMBS defaults self-storage was at 0 03 That is three-hundredths of a percent Like that s a lot of decimal places in in front of the decimal smallest The next closest I forget whether I think it was industrial I think was the next closest And it was like not even close So self-storage has traditionally been low leveraged You re talking 65 to 70 loan to value And you have people that like it s not a lot of money I mean you re talking like a hundred dollars a month for a unit and the alternative is put it in your house 00 14 49 Mark McGuire Well if people don t have the space in their house they don t have the money or the income to go buy a bigger house Guess what A hundred dollars a month is cheap alternative So that all being said I completely forgot the question 00 14 59 Sam Wilson What has to happen economically for you Because you had said Hey you see people taking a huge risk people doing things you go gosh that doesn t make sense You guys are just you re making this as risky as possible paying the most you can And when you get burnt you can t cover the note Then I want to be there to pick it up 00 15 15 Mark McGuire So what has to happen is that people don t do their due diligence and a new facility gets built in the three or five-mile ring that totally crushes that other facility who had marginal returns to begin with 00 15 28 Mark McGuire And they and you know either they don t meet their debt service or they just barely meet their debt service and you know make it out you know by the skin of their teeth But the deal returns are you know super compressed 00 15 40 Sam Wilson Right 00 15 40 Mark McGuire So it honestly it just takes patience and time 00 15 44 Sam Wilson Yeah absolutely Tell me about you know again but you just kind of stay on the economic times conversation You ve invested as in as a maybe even an active investor in industrial and some other asset classes How do you feel like you guys are going to weather any any economic uncertainty and really why have you favored this asset class over another 00 16 05 Mark McGuire So self-storage just provides a really unique aspect to it where it kind of blends hospitality in terms of the dynamic pricing of the rates 00 16 16 Mark McGuire But it it manages that and then has a better sticky factor that s more along the lines of multifamily But it s got agility to it So what I mean by that is people don t want to go and move their stuff With self-storage if you think about multifamily right And your rent is 2000 bucks a month and someone says Hey I m going to give you a 10 rent increase every six to eight months 00 16 40 Mark McGuire If you go from 2000 to 2200 to then you know 420 dollars within 12 months you re going to be like I m out of this place Forget it Self-storage has 30-day leases And you know if someone s unit rent is a hundred dollars a month and you raise it 10 that s meaningful in terms of your revenue collected in your NOI 00 17 02 Mark McGuire It s not meaningful to the person who s renting the unit who has to then rent the U-Haul truck pick up all their stuff and then go put it down somewhere else At which point they may be able to find a place that s the same and probably not cheaper probably more expensive And then they got to take the time to move at all Nobody wants to do that For 10 a month you re not moving that You re not moving your stuff 00 17 24 Sam Wilson Right Yeah You re going to spend eight hours and 500 bucks moving all of it And it s like well I ll just pay the 10 bucks a month to be done 00 17 31 Mark McGuire So then if you go and get another 10 rent bump in eight months people were like eh I don t really feel like moving it for another you know 11 That s what happens And this is how it s just like you re just tweaking the dial and turning the heat up And that frog doesn t realize that that water s getting hot But man before you know it it s boiling that frog is cooked 00 17 50 Sam Wilson Right Right Tell me about this What are some storage units right now that you just look at and you go man I wouldn t buy that if it were free What s some garbage out there on the market that makes a bad storage investment 00 18 03 Mark McGuire Man so you know what s interesting is aesthetics are such a an important part about self-storage Self-storage was used to be marketed to the cheap and three or four years ago people realized they started doing more analytics data 00 18 19 Mark McGuire I m sure it was always being done but it became more widely understood that the people who are willing to pay the most are young females and young females want properties that are well lit and that are aesthetically pleasing and that have a lot of they have security cameras and solid gates and fencing 00 18 40 Mark McGuire They want to feel safe at the facility cause if they feel safe while they re there then their belongings are safe and therefore it s a good place to rent And if they have to pay more for that So be it That s sanity that s well spent So a couple of things I wouldn t buy A a facility I could buy you could you could build an A class facility in in an oversaturated market that can t support the rent and I don t want that facility So a facility that s located in an oversaturated market and how do you know if it s oversaturated You know there s base rules around square foot per capita and it s historically been eight to 10 square feet 00 19 15 Mark McGuire I think that s totally busted It really depends on the three and the five-mile rings You gotta really understand your supply-demand analysis and how to execute that Once you execute that or you understand that like the 8 to 10 square foot per capita is a great 1 rule of thumb if you will for storage but it could be six square foot per capita but there may not be enough population there to support the demand Or you got stuff that s built to the wrong sizes So if you go in and when you re doing your supply demand analysis you re noticing that this facility is way under-rented but it s all five by fives and five by tens And the the the market wants ten by twenties 00 19 54 Mark McGuire That s a facility that I don t want like cause you could be 50 vacant You re like oh man there s so much occupancy I could use here But if it s not what the market commands unless you can convert it I don t want it And then I mean ultimately it comes down to I want a facility that looks that looks nice or I have the ability to make nice And if I can t the turd is a turd all the way through and there s no amount of polish that s going to make it sparkle I m out 00 20 20 Sam Wilson Right That makes a lot of sense No that s really cool I was just curious you know again with the with the buying frenzy it seems like that we are in on so many fronts you know what it looks like or 00 20 30 Mark McGuire It s asset class agnostic man the buying frenzy doesn t care what asset class it is There s just a ton of liquidity and there s sovereign money coming in now Where these people I mean sovereign wealth funds where they re losing principle balance by not being spent So these people were like Hey if I get 5 on my money I don t really care 00 20 47 Sam Wilson Right Yeah That s that s really really interesting but still even in that even in that buying frenzy market I m always curious what those who are active buyers aren t aren t buying and why And you did a great job of kind of explaining deals that just simply don t make sense even right now So thanks for doing that Mark thanks for taking the time to come on the show today It was great to have you on learn about your business what you guys are seeing in the market how you guys are interacting with brokers what you guys are doing to get deals sent to you Again I love the you know just the the the information you gave us about how to interact with brokers how to stay in front of em and then of course your info there on mentors and how to be of value to them and let them know that you are actually doing what they re saying and then get them to continue to pour into you by you know giving them feedback and following exactly what it is they say to do 00 21 31 Sam Wilson So I think that was all awesome information If our listeners want to get in touch with you or learn more about you what is the best way to do that 00 21 38 Mark McGuire Yeah best way is investingwithmark com That ll put you right through our our website and capture or contact form and or if you re in on socials Instagram slash investingwithmark Facebook same thing LinkedIn same thing 00 21 51 Sam Wilson Awesome Yeah we ll make sure we put those also in the show notes Mark thanks again for coming on today I certainly appreciate it 00 21 57 Mark McGuire Awesome Thanks Sam Click here to visit this podcast episode