Self-Storage: The Best Investment For An Inflationary Environment

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Joining us today to discuss the opportunities in self-storage during the current market conditions is Kris Benson He is the Chief Investment Officer of Reliant Real Estate Management a company that offers institutional quality self-storage investments to accredited investors He digs deep into why self-storage is still an incredible asset to invest in and offers strategies on how to squeeze NOI out of properties He also touches on what it takes to be a sophisticated operator in the space the work they are doing in boat and RV storage and the importance of return on equity 00 01 – 12 35 Self Storage Investing Insights Kris talks about his background as an investor To make money in real estate do it at a scale He introduces Reliant Real Estate Management and the work they do They are seeing significant compression in cap rates in the market There is still a lot of capital chasing deals in the self-storage space with institutional investors looking for a safe and profitable investment Investors who are not well capitalized and not-so sophisticated operators may be potentially setting themselves up for failure What makes a sophisticated operator Leveraging different technologies such as touchless leasing One of the most important things moving forward for increasing NOI dynamic pricing algorithm Comparing the data and software advancements for multifamily and self-storage 12 36 – 19 12 Business Growth and Return on Equity Kris breaks down the boat and RV storage facilities they own and what they re doing in development When there s equity in the deals is it time to liquidate or refinance 19 13 – 20 28 Closing Segment Reach out to Kris Links Below Final Words Tweetable Quotes There s a lot of people in the space who are not sophisticated operators and when things get tight again it probably comes down to bad debt or too aggressive on the debt side – Kris Benson This one is probably going to be most important moving forward is dynamic pricing algorithm where you re matching prices day to day based on occupancy – Kris Benson I m a huge believer that in real estate anything you buy today in 20 years is going to be a good deal – Kris Benson —————————————————————————– Connect with Kris through the Reliant Real Estate Management website and KrisBenson com 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 Kris Benson What I would say you should measure us on is well what happened to NOI during that period Did we grow that And that s what you can hold us accountable to but cap rates and valuations who knows that s all made up right So we can t control that But what we can control is if we can squeeze NOI out of something we re doing our job and then the market s going to do what it s going to do 00 00 32 Sam Wilson Kris Benson is the CIO at Reliant Real Estate Management They are a top 30 vertically integrated self-storage operator Kris and his Reliant team have transacted on over 1 billion in self-storage in the past five years Kris welcome to the show 00 00 47 Kris Benson Hey Sam Pleasure Appreciate you taking the time 00 00 49 Sam Wilson Hey man Thank you for coming on Certainly appreciate it There are three questions I ask every guest who comes on 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 00 59 Kris Benson Those three questions take longer than 90 seconds to answer Is that okay 00 01 03 Sam Wilson Do your best 00 01 05 Kris Benson Where I started probably very similarly to a lot of people who get involved in real estate I owned some duplexes in the town that I lived in and very quickly realized that that was going to be very challenging to scale And essentially I hated everything about it It was not really the work it was more the people like it was just soul-sucking It it always there was always problems No one was ever happy So ultimately I heard in a podcast or read I wish I could credit who said it to me but basically it was big deals and small deals are the same amount of work You just make less money and small deals And so we started to scale into some larger multifamily we ve ended up building a 64 unit apartment complex And for me Sam that s where kind of the light bulbs went off where I was like ah this is how you make money in real estate And and it was figuring out how to do it at scale 00 01 54 Kris Benson And I m going to fast forward a lot of the story but how we got to where we are now is about six years ago I was convinced cap rates and multifamily couldn t possibly get any more compressed than where they were at that moment Whoops I was off by quite a few years so I started looking for other asset classes to invest in And that brought me to two really interesting niche classes mobile home parks and storage and kind of fell in love with the metrics behind storage So was an investor of Reliant which is where I am now first And then the founder of Reliant Todd Allen and I kind of formed a partnership and we ve been scaling ever since So it s it s been a fun ride 00 02 33 Sam Wilson Yeah that s interesting Your crystal ball was definitely broken when it comes to where multifamily has gone I was talking to a friend of mine the other day They said in 2016 they were underwriting a deal and they couldn t bring themselves to pay 14 million for it And then just traded hands what did he say 45 million here just a couple of months ago And he s just like I don t even understand this This is crazy So but you know aside from that I don t want to go down that rabbit hole necessarily and talk about why it s where it is but you found a niche in self-storage Tell me a little bit about what you guys are seeing as far as opportunity goes right now in the self-storage space 00 03 08 Kris Benson Yeah for sure I mean what I would say Sam is Reliant is a value add shop So generally we re buying existing assets and adding something to them to force appreciation So we re just our goal is always to grow NOI and usually our plan is expansion So we re adding square footage and then getting those units leased up And generally that s where we re getting our NOI growth We do some other things you know especially if we re taking over kind of a mom and pop owned facility there s usually some low hanging fruit there as far as you know rental rate increases and having things like U-Haul truck rental and tenant insurance and those kinds of things as well where we can add some ancillary income But I would say look the market in self-storage in the last three years has been pretty incredible We ve seen a significant compression in cap rates So values have gone through the roof And what s interesting Sam is we stand here today it s the middle of June interest rates are rising but we haven t seen cap rates come up Values are not changing yet 00 04 06 Kris Benson And I think you know a motivator behind that is there s still a lot of capital chasing deals from an institutional level There s a lot of money still trying to get into the asset class I had to call this morning with a group They just funded a group that is starting up and looking for some expansion capital and they had 13 term sheets And this group is coming to us saying Hey these guys are still looking for a place to place money do you want to talk about it So there s still a lot of capital chasing this asset class for the reasons that you know we fell in love with it There s there s a lot of recession resiliency there at least in the last two economic cycles And I think you know institutional capital is trying to find deployment in that space 00 04 46 Sam Wilson Yeah I mean certainly I don t know any asset class where capital just isn t chasing yield I mean it s looking for it wherever it can find it So you know it s no obviously no surprise that it s gone into self-storage but let me ask you this I understand the and we think we well covered it on this show the recession benefits of self-storage but yet I think in every every crisis it brings out unique opportunities to acquire Are there people who are misaligning their portfolios or taking on debt in the wrong way or just setting themselves up for failure in the self-storage asset class in particular if we go into a recession 00 05 25 Kris Benson We hope so Time will tell Sam right I I agree Usually the best buying opportunities are are going to be in when there s blood in the streets right We ll find out is there s been a huge glut of self-storage development in the last five years right so a lot of people when you make money in an asset class People are going to show up and say oh I can do that right So there s been a lot of merchant builders who are not self-storage operators they just are developers They can develop a storage facility and they hope Hey I m the backend I m going to sell this to one of the REITs or a publicly traded company It s going to turn out just fine And and they ve been right for a long time The interesting part s going to be look if I did a ground-up development three years ago I was probably underrating sub 4 debt on my construction loans right In my model I was saying all right it s going to build be a year plus to build it s going to take me a year or two to lease this thing up And then I got to go get perm financing The question s going to be what did they underwrite that permanent financing at interest rate wise right And if they needed it to be a four and a half to make their project work Well they re going to come into a market where it s five plus right And that s where we could see some pain right Is the sea of old deals where they re coming to market and saying all right I got to go get perm financing And the lender s looking at them saying yeah At five and a half or you can buy down your note you got to come up and you know come up with a big chunk of cash to buy down the proceeds So Sam I think you know for those operators that may not be well capitalized there may be some opportunities there where deals that either banks are taking or banks are starting shop cause they know Hey we re going to get this thing back So you know I think time will tell The other part of this is there s a lot of people in the space who you know are not sophisticated operators and when things get tight you know again it probably comes down to bad debt or too aggressive on the debt side But when you re not a sophisticated operator it s harder to make things work when you know the revenue side gets a little bit tighter 00 07 24 Sam Wilson What are some things when you say that word sophisticated what are some things that come to mind that you would say would make someone a sophisticated operator 00 07 31 Kris Benson Yeah that s a fair question 00 07 32 Kris Benson I mean there s a lot to that right And I think it depends on what you re thinking about but well let s start with just kind of the digital marketing side right And and how you re attracting customers I think in the world we live in Sam today even in the smaller markets the secondary and tertiary markets We generally like to operate in the smaller markets cause we have a competitive advantage there right Our digital ads Google AdWords SEO those types of things Generally mom and pop operators have a website but they re not really doing anything else right And when I say mom and pop it s not derogatory You know people who own less than five facilities kind of fall in that category right And it s it s not good or bad It just is the how they attract customers Do they have I d say a big thing in the last 24 months has been touchless leasing right So the ability for a customer to rent online get access to their unit get their lock and never go in the office sign their lease Everything is done online that s since COVID has been a huge push I would say probably 30 to 40 of our leases They never walk into our facilities That s another one 00 08 39 Kris Benson And then I I would say this one is probably going to be most important moving forward is kind of a dynamic pricing algorithm where you re matching prices day to day based on occupancy and trying to squeeze out revenue based on you know Hey we we may have five to seven types of units in a particular facility and each one is being priced based on that type of units occupancy right So if 10 by tens are full that price is going to go up If five by tens are you know empty that price is going to go down and that s shifting every day comparatively to what s happening in the rest of the market So just kind of a snapshot 00 09 17 Sam Wilson No I love that And that that brings you know a few things out that maybe I hadn t thought about And we re certainly seeing that on the dynamic pricing side on the RV resorts You know it s something where again you know mostly mom and pop owned and it s like well we know that you know it s you know 69 a night 79 a night whatever it is And that s been what they ve been saying for a decade cause it s easy to remember But it s also parable for business Like wait no I mean it s July 4th You should not be 79 You should be 179 a night Like whatever it is again I m making up numbers here but that that whole dynamic pricing capacity is something that you know it s overlooked I think in a lot of industries and we ve seen that of course come around in Airbnb We ve seen that the airlines the hotels have had it forever and it s like why don t we have this applied across you know all of our real estate asset classes So do you think that will take off You know and there s just a there s a random stray thought here so forgive me I mean we don t we haven t seen that in the multifamily space yet 00 10 12 Kris Benson The dynamic pricing 00 10 13 Sam Wilson Yeah Have you seen that anywhere 00 10 15 Kris Benson Yeah it exists for sure especially some of the larger operating platforms That s where I first got introduced to it is that pricing is changing in the market almost daily based on unit type The difference is Sam with with multifamily specifically right The big boys report So there s you know like the Yardi and the CoStar are getting that data so that everybody can have the benefit of having that data right And in storage there s a couple of groups trying Radius is one where they re trying to create this momentum where operators are reporting this information in so we can all benefit from But it s definitely not to the level of like a multifamily and and part of it s just because the market is much smaller than multifamily So software companies are looking Hey where do we invest dollars to build a platform Storage is a smaller addressable market than multifamily right So you know I think part of it is who s making investments into the space and storage has come a long way from where it was 10 years ago for sure in the sophistication and you know the technology that s supporting it but it s still not kind of the maturity level I would say of like a multifamily or an office right You know some of the core four when you think about the major real estate asset classes but yeah I would say that that pricing algorithm tool is is super helpful when you think about how to squeeze NOI right 00 11 39 Kris Benson And Sam in the world you and I live in that s how we should be judged by investors right You know I mean so if you have been a an operator of almost any asset class for the last five years You should have made money unless you re really you know really screwed it up you should have made money And that could have been just cap rate compression You could have done nothing And you still should have made money What I would say you should measure us on is well what happened to NOI during that period Did we grow that That s what you can hold us accountable to but cap rates and valuations who knows that s all made up right So we can t control that but what we can control is If we can squeeze NOI out of something we re doing our job and then the market s going to do what it s going to do 00 12 24 Sam Wilson Right Absolutely Absolutely Tell me about this You guys I mean you you own some regular just standard self-storage When I say that I m thinking like you said 5 by 10 10 by 10 whatever 10 by 20 units Do you guys have your hands in any other type of storage 00 12 39 Kris Benson Like wine storage or like that type of stuff Or boat and RV 00 12 43 Sam Wilson Yeah Any of those I hadn t thought about wine storage but yeah I mean I guess obviously you own boat and RV storage as well is that right 00 12 49 Kris Benson Yep We do We have some boat and RV-specific facilities where that s you know that s all they do And then we also have some storage facilities with traditional climate you know non climate controlled units like the garages that we have parking on Sometimes it s you know covered parking where you got the steel beams corrugated metal roofs and trickle chargers and you can park in there We kind of have a mix of both It really depends on the market that we re in You know where we found the most success obviously in the boat and RV parking is somewhere around a lake or recreational area Generally people want to park the boats and RVs there So yeah You know it it s very market specific if we re you know in downtown Atlanta and does a boat and RV parking place do well Probably not 00 13 32 Sam Wilson Probably not Or conversely an RV parking place in downtown Atlanta might do great just in the sense that where else are they going to park it Like you can t park it in your street you know in the in the neighborhood your HOAs forbid it So it s going to be where where else you going to put an RV if you own one Yeah that s interesting I know we talked about that a little bit off air as to like what happens to all of these assets you know if we have a recession in the gas prices You know gas prices keep going up we go into a recession What happens to boat and RV storage Where does that go I don t know 00 14 02 Kris Benson Yeah it s going to be interesting Last night I was cooking dinner actually and I had the David Muir Nightly News ABC or CBS I don t know what what channel it is but he was talking about Biden you know potentially proposing the idea of a gas tax holiday And I was like oh that s probably a good idea right now And then they re like that will save on average 18 cents a gallon I was like perfect That should make a huge impact in most people s lives They fill up 10 gallons I get a dollar 80 back Thanks federal government I guess I don t know how you kind of think about that and be like that s how we re going to fix this 00 14 34 Sam Wilson Right right Let s not think about the fact that three times more expensive to fill up this year than it was last year Let s think about saving 18 cents a gallon Yeah absolutely Man it ll be interesting to see how that shakes out It was a conversation we talked about again before we hit record on this where you were talking about return on equity I thought that was an interesting point where you were talking to a seller and the sellers you know you basically were able to present to them this idea that Hey you can hold this asset for a decade But what s your equity doing for you Can you break that down for us Cause I really like that thought process 00 15 05 Kris Benson Yeah for sure I mean look I m a huge believer Sam that real estate anything you buy today in 20 years is going to be a good deal right So I m 42 Anything anything that I had purchased when I was 22 today it s worth more money 00 15 19 Sam Wilson Sure 00 15 19 Kris Benson Unquestionably right So you know when I think about with that s kind of on my original invested equity I may have an incredible return on that when and if I have a liquidation event right So let s say I hold it for 20 years but if three years in the equity in the deal has doubled or tripled or quadrupled or whatever the specific situation you and I were talking about is a gentleman who built a boat and RV parking facility And he had 10xed essentially his equity by building the facility and filling it up in two years And so what I think about from the investing side in that is okay so you have X amount of equity What s your return on the equity that you currently have Not what he wrote the check for right he wrote the check for 250 grand when he built it Now he s got 2 5 million in it and when you look at your cash flows not on 250 grand it s your cash flows divided by 2 5 million His return on equity is terrible and not terrible but there are other opportunities for you out there And so I think that s how we look at a lot of our deals with our investors is when we get to that point where there s equity in the deals is it time to liquidate or refinance and pull that equity out because our investor s money has built that equity too We Reliant with our equity in the don t want it sitting there not earning And you as an investor with Reliant if you ve doubled your equity you don t want that sitting in there getting a 2 3 especially in this inflationary environment right So I think it s always just a balance of you got to look at all right what can I do with this money if I pull it out and if I m going and buying boats and RVs Probably not a great investment but if I could pull that money out and go reinvest and churn it again you know that s where we start to get that compounding effect on the investment side of things 00 17 11 Sam Wilson Yeah And I think that s that doesn t bode well with the Dave Ramsey school of thought but I think there are differences there obviously between what he talks Like you said you know Hey if you re going to pull out this equity and go buy a boat just for kicks and giggles then you re just buying another highly depreciating asset and paying probably too much for it And that s a bad move And and I think that s always a personal decision too Like you know sometimes there s a return on equity and then there s a return on peace of mind That s like okay well which one which one is it Maybe this guy s super happy He s like I don t care man I own a facility free and clear and I get paid for it every year and I don t have to think about it So ROPM return on peace of mind You don t know but I do like that idea 00 17 48 Kris Benson You trademark that Sam RO 00 17 50 Sam Wilson PM return on peace of mind And so I think that s always interesting is we survey our own portfolios and go okay what s it look like to extract maximum value and maximum return out of this and do it in a way that is meaningful and also you know protects us from downside risk Are you guys doing any development right now 00 18 07 Kris Benson Yeah You re saying from a ground-up standpoint 00 18 09 Sam Wilson Yep 00 18 10 Kris Benson Yeah we re not what I would consider a developer meaning Hey we can do 10 projects a year We just don t have the team to support it We are in the midst of well two active developments Third that s kind of going through an approval process right now and hopefully we ll have shovels in the ground before the end of the summer So a little bit Generally we re usually about one a year but what I would say is there s going to be value in development right now And there has been but we feel like there s kind of an interesting space right now just from a return on stabilized yield Like what you re going to get once this thing is built and the prices per square foot that are being paid for basically empty buildings and the replacement cost against it you know there s a Delta there and an opportunity for sure 00 18 53 Sam Wilson Right right Yeah It s really interesting And that s what we re seeing a lot even especially in the multifamily space I hear a lot have a lot of people come on the show and say they ll say Hey you know it s cheaper for us to build than it is to buy existing and then and then do a value add like we can just turn around and just push shovel on the ground and start ground up and have a better product for less money Like well that s really interesting 00 19 11 Kris Benson For sure 00 19 12 Sam Wilson Fantastic Kris I ve really enjoyed this Thanks for taking the time today to break down the self-storage market for us what you guys are buying how you ve bought it I love the clarification there around what a sophisticated operation or operator could look like you know and and kind of giving some quick ideas on you know when you see a mom and pop operator the things that it could be very very easily improved Yeah Certainly appreciate that Thanks for taking the time to share your story and just give us insight on what opportunities you see out there in the market If our listeners want to get in touch with you or learn more about you what is the best way to do that 00 19 42 Kris Benson Yeah I think probably our website s best reliant-mgmt com which is the abbreviation of management or if you just Google Reliant Real Estate Management you re going to find us you can find our current investment opportunities contact us get in touch with our team and learn a little bit more about the team and track record here 00 19 59 Sam Wilson Awesome Kris thank you again certainly appreciate your time 00 20 02 Kris Benson My pleasure Thanks Sam Click here to visit this podcast episode