Paul Moore (03:44):

It’s an asset class that it was largely overlooked for years, but has obviously become quite popular in the last several years. And a lot of folks who had never thought of self storage before are eager to invest. So when I wrote the book on it, honestly, it was delayed from COVID and everything. It couldn’t have been better time because the Wall Street Journal, New York Times, and a lot of other folks have said, this is the best performing commercial real estate asset class since COVID.

Robert Leonard (04:16):

How long have you been in the business for?

Paul Moore (04:18):

So just a super quick history. I sold my company to a public firm in ’97. I know I don’t look that old. Thank you. But seriously now, hey, I look older than that, right? But anyway, I sold my company and I started flipping houses and I did some rent to own. Then I built some houses, did a small subdivision, started flipping lots Smith Mountain Lake in Virginia. And I always wondered how to get into commercial. I wasn’t sure.

Paul Moore (04:45):

And I invested an oil and gas deal in 2010 in the Bakken in North Dakota. And then we realized there was this massive housing shortage. And so we built a couple multifamily facilities that we ran as extended stay hotels for oil workers. We made a ton of money doing that. And I ended up staying in multifamily. I ended up writing a book called The Perfect Investment about multifamily investing.

Paul Moore (05:11):

But I concluded over the last five or six years the perfect investment’s not perfect if you can’t find deals that pencil out. And it just wasn’t working for me. And so we decided to expand into self storage and mobile home parks in 2018. The problem was my company didn’t have any experience in that.

Paul Moore (05:29):

We didn’t have a team. We didn’t have a track record, but we had a lot of hungry investors who were wanting to invest. So we took a third party approach. We decided to become our investors’ due diligence partnering. We decided to go out and look for the best operators we could find, the best deals we could locate. And we eventually put those together in a fund. And now we’re on our fifth fund. Investors invest with us and they get diversification across self storage, mobile home parks, apartments, light industrial, and the goal is to give them diversification across these asset types, geographies, operators, strategies, and of course the deals themselves.

Paul Moore (06:07):

And so that’s what we do. I am not a self storage operator, but I was so passionate about the business and the lack of good stuff, material out there. I started writing about it.

Robert Leonard (06:19):

When you sold your business in the ’90s, was it a real estate firm that you sold to another public, like REIT, or was it a different type of business?

Paul Moore (06:26):

No, it was actually a staffing firm based in Detroit.

Robert Leonard (06:29):

How did you get into that business?

Paul Moore (06:32):

I had an MBA and an engineering degree and I went to Ford Motor Company for about out five years. And a friend of mine at Ford and I were honestly a little bored with corporate America. We were itchy to do something entrepreneurial and we saw this opportunity in what is called the PEO business, professional employer organization. And so that’s a business that provides outsourced HR, payroll, and administration for lots of small companies. And so we did that. And after about five years, it turned out that Wall Street was just really interested in this business. And so a lot of firms went public in the late ’90s and one of them acquired us.

Robert Leonard (07:14):

Very interesting. So getting back to self storage, you mentioned it’s a pretty popular one today. Why is that? Why did it become so hot over the last year, two years, three years or so?

Paul Moore (07:25):

Yeah, it’s been hot for a while, but what’s caused a recent spike is, I mean, like everybody, two years ago, next month, February, March of 2020, we were all wondering if the world was going to end, or if we were all going to die, or what was going to happen. But self storage got the first bump actually when college students started putting their stuff in storage, wondering, am I coming back in two weeks when this curve gets flattened? Or is it the end of the semester? Or is it next year? I don’t know. So they put their stuff in self storage. That helped a bit.

Paul Moore (07:57):

And then unfortunately, the situation unfolded and there’s these four D’s, self storage is recession resistant. One of the reasons is it does great in boom times because people are buying extra stuff, but in bad times, people are actually doing these four D’s, and the D’s are downsizing, dislocation, death, and divorce.

Paul Moore (08:21):

And unfortunately, there’s been a good bit of that happening in general in COVID. I mean, think about dislocation alone. Lots of people are moving out of New York City, and Chicago and, San Francisco, and LA, and they’re moving to other places. They realize they can work from home. So when they relocate, they’re using self storage along the way typically. Those office spaces are downsizing.

Paul Moore (08:44):

My friend manages a ton of office space around D.C. and he said, people are breaking their leases left and right. Well, that office furniture and equipment is often going into self storage. Bars and restaurants have been closing down and that stuff’s going into self storage. And so self storage has just boomed, like I said, since COVID. But there’s a lot of reasons it’s boomed in general. Like I said, it’s recession resistant. That doesn’t mean it’s recession proof, of course.

Paul Moore (09:13):

The rents are in elastic. We love that. I mean, think about it. If I’m renting a thousand dollar a month apartment and my landlord raises the rent by 6%, yeah, I might think twice before I sign up for that 60 bucks a month, 720 a year. But if I’m renting a self storage unit and the landlord raises the rent by 6%, well, if I’m paying a hundred bucks a month and now it’s going up by six bucks, I’m probably not going to spend a weekend, get a U-Haul, get my friends together to move my treasures down the street just to save six bucks a month.

Paul Moore (09:47):

And that’s part of the point, people aren’t thinking about this much, it’s automatically hitting their credit card and they’re thinking, “Eh, it’s a month to month lease. When I get a long weekend, I’m going to move all that stuff out anyway.” Well, they often don’t do that. We’ve talked to people who have forgotten they had stuff in storage for literally up to seven years. And so it’s a small part of people’s income. There’s a huge switching cost.

Paul Moore (10:13):

I mean, to move all your stuff down the street or move into your garage or whatever, it’s a bigger cost than it’s worth at times like this. The industry’s quite large. I mean, there’s actually 53,000 self storage facilities in the U.S. That’s about the same as Subway, Starbucks, McDonald’s combined, but about 75% or so are independent operators. And two out of every three of those are mom-and-pops.

Paul Moore (10:38):

And so this provides a great opportunity for people to come in, for a professional operator to come in and really pay them what’s top dollar for what they have, but actually reconfigure the facility to make it into a first class facility. And with the power of a dollar, the power of commercial real estate value formula, it can really drive up the value and increase investor returns to a level that I haven’t seen in many other asset types for a long time.

Robert Leonard (11:12):

What are the 12 characteristics that you look for to identify a facility that is owned by a mom-and-pop? You just mentioned there’s over 70% owned by independent operators. So if somebody’s looking to buy from them, what are the 12 common characteristics to look for?

Paul Moore (11:28):

We love this. Self storage and mobile home parks have more mom-and-pop operators than any asset type I’ve seen, any large commercial asset type, at least. So these mom-and-pop operators, they typically don’t have the desire or the knowledge or the resources to improve their facility. Hey, they don’t need to, Robert, because they’ve already doubled the value of their facility just from cap rate compression over the last decade.

Paul Moore (11:54):

And so what that means to them is, “Hey, I can continue to be doing just what I’m doing, be mediocre. And I can still get a great value for my facility.” They know the value because they’re getting offers all the time. But some of these characteristics include the attitude, if you build old it, they will come. Remember that old movie with Kevin Costner. Well, it used to be if you just build a self storage facility in a decent location, it would fill up.

Paul Moore (12:21):

That was before internet marketing and all kinds of crafty techniques were developed by other storage operators. But these folks, they’re already filled up and they’re typically not tracking the current rates in the market. So that’s another aspect of this. They rarely increase rates, which means they typically stay full. The tenants are sticky. And so they don’t care about raising rates. And they basically are saying, “Hey, look, I’ve talked to some of these storage facility owners and they’re like, ‘Hey, I’m a hundred percent full. Why do I need to advertise?'” And poor advertising is another aspect of a mom-and-pop.

Paul Moore (12:57):

I talked to one the other day, literally he said, “Yeah, I’ve had four rate increases in 28 years.” I said, “What? Seriously? Oh, I mean, oh, okay, great. You want to sell?” Anyway. But they typically have no showroom. They don’t sell retail items. They don’t do U-Haul or Penske. They don’t provide rental trucks, which is a really nice value add to a self storage. They put their pricing right across the board. In other words, they don’t do like hotels and airlines. A great operator might move their prices differently on a Saturday versus a Tuesday afternoon. And if somebody’s relocating, they might get a different price than somebody who’s just doing this shopping out of convenience. They have poor maintenance, poor security.

Paul Moore (13:45):

I know the one I stored in had poor pest control and had water infiltration. There’s no marketing budget. Often, no website. And here’s a big one, they often have untapped land. What I mean by that is they’ll say, “Oh, yeah, we got six extra acres here we don’t use.” With the current situation, Robert that’s another reason self storage is so popular right now. There’s a huge demand for boat and RV storage. And man, self storage facilities that have extra land and not using are leaving a golden opportunity on the table. And so this is a great opportunity for someone to move in and capitalize on that.

Robert Leonard (14:25):

One of the assets that I’ve been getting into over the last year or so has been actually RV rentals. So I buy RVs and then rent them out. Similar to an Airbnb model, but with RVs. And people keep asking me like, “What is the future of that? What are you going to do with that?” And I’m like, “Well, as a real estate investor, maybe I’ll buy a lot, pave it, put a self storage facility on it, do some boat and RV storage, and then also run an RV business out of it.” So what you’re talking about leads perfect into like what I’m doing as well.

Paul Moore (14:51):

Oh, that’s great, Robert. That’s a fabulous strategy. I’m excited to hear you’re doing that.

Robert Leonard (14:57):

You mentioned cap rate compression has allowed these owners’ values to go up. For those who mostly operate in the residential space, don’t do much with commercial and are listening to the show, explain to us what cap rates are and then what a cap rate compression mean.

Paul Moore (15:12):

Yeah. I’m going to back up a little bit and just talk about the value formula for commercial real estate and specifically self storage. Think about it. When I had a flip house I was going to do, and I paid 115 for it in Roanoke, Virginia, and added, my son got involved and we really dolled it up. We just made it the most beautiful house. It was a huge house. And meant a lot of flooring, a lot of paint, a lot of lighting. And we ended up spending way more than we had planned.

Paul Moore (15:45):

And so I’m just going to round the numbers. Let’s say we had $300,000 in it. And let’s say that this was a $200,000 neighborhood. You can guess what would happen. That’s not exactly what happened, but if it was, residential real estate, as we know, is based on comps. And the value is based on the neighborhood.

Paul Moore (16:06):

Commercial real estate’s entirely different. It’s based on math. Now, your mom always told you, you should be good in math. Then here’s why. Because the value formula is value equals the income divided by the rate of return, which is similar to the PE ratio in stocks in a way. But the value of the asset is the net operating income, which is the net income, the gross income minus all the expenses, not including the mortgage payment, that gives us the NOI, the net operating income. And that’s the numerator.

Paul Moore (16:39):

The denominator is the cap rate, which is the rate of return. And this is the unleveraged rate of return. And the cap rate specifically is set by the market. It’s set by market sentiment. It’s not something we can set. And basically, it’s the rate of return on an asset like this in a location like this, at a time like this, in a condition like this.

Paul Moore (17:04):

And so that cap rate used to be around, let’s just say 10%, people would say, “Yeah, it’s a 10 cap.” Meaning that for a million dollars, you could you get a hundred thousand dollars annual cash flow, net cash flow. Now the cap rates have compressed to, let’s just say for the argument here, 5%. So that means since the denominator has shrunk by half, that means the value has doubled. So now it costs $2 million to get a hundred thousand dollar income stream.

Paul Moore (17:38):

So $2 million, divide a hundred thousand dollars into that, and you get 5% or the cap rate. So cap rate compression means commercial real estate is much more popular than it was before. And part of the reason is we’ve got 5,000 year historic low interest rates. Because interest rates aren’t part of that formula, but they do factor into the entire picture. So when someone’s getting a loan on that deal, if they can get 2.9% interest rates, which some of these mobile home parks, self storage facilities are getting, well, if the cap rate is 5%, they’ve still got cash flow to work with. But if interest rates were 8%, well, there’s no way that people would pay at a 5% cap rate, if you know what I mean.

Robert Leonard (18:28):

And the of cap rates are local,, kind of similar to how a comp would work. Like you said, comps are based on the neighborhood, the area. So a cap rate’s going to be local. A cap rate for California, Los Angeles is going to be different than the middle of the Midwest. Right?

Paul Moore (18:43):

Yeah, that’s right. Typically, in a real popular area like, let’s say Boston or LA where there’s some legacy real estate values that are sort of independent of the math. The cap rate might be more compressed. A small town, let’s say it has a hundred unit multifamily in a town of a hundred thousand. One shock to that economy can really mess it up. So investors tend to be a little more wary of something like that. They might say, “I really want to get an extra risk premium to invest in Lynchburg, Virginia versus LA.” So they might be willing to go in at 6% cap rate rather than 5%, for example.

Robert Leonard (19:27):

And we’re talking about cap rates compressing, but with the other very powerful piece of commercial real estate is you can also increase the numerator. So if you increase enumerator, and we’re talking about, maybe you have a hundred units and you add like $20 a month, that doesn’t sound like a lot per unit. You’re only adding $20 a month, but on a total, that’s a lot. And that adds a significant amount of value to your property just the way that commercial real estate is valued.

Paul Moore (19:51):

It’s absolutely right, there are so many… Robert, I laughed when I first heard the term value add self storage. I thought, wait a minute, I get value add residential and single family and apartments. There was light, and paints, fixtures, and the fake hardwood flooring and appliances, but self storage, what is it? It’s four pieces of sheet metal, some rivets, a floor and a door.

Paul Moore (20:17):

How can you add value? Well, my friend, I can tell you there’s so much value add in self stories that I never dreamed of. You just named one of them, adding units. Adding units is a little tougher than some because you need land, you need permits, you need capital, but there’s some others that are pretty easy. For example, filling vacant units, a lot of mom-and-pops I mentioned some are totally full. Some of them are half empty. And so filling vacant units is one.

Paul Moore (20:47):

Raising the rent. A lot of these rent… The mom-and-pops rent way below market. Raising the rent 10% can raise your returns by like 30%. Adding a paid billboard, adding a cell tower, adding an ATM, a propane filling station, adding U-Haul, I mentioned before. Let’s just take U-Haul and use our formula, and put this all together.

Paul Moore (21:10):

So I have a friend who has a self storage facility in Rockledge, Florida. He gets $5,000 a month in commission from U-Haul. I know another one that we invested with Beeville Texas, I think gets a thousand dollars a month. So let’s say $3,000 a month you’re adding to the bottom line. And since you’ve already got an employee there anyway, it’s not adding any CapEx, capital expense. It’s not adding any labor. So let’s just say all 3000 a month from the U-Haul commissions flows to the bottom line, Robert.

Paul Moore (21:40):

So that’s 3000 a month, $36,000 a year added to the bottom line. Now to be, I would say, even if that’s valued at 4.5% or 5% cap rate, let’s just put a 6% value on it. Interest rates might go up. So $36,000 a year, adding to the net operating income. That’s what you said, adding to the numerator, divide that by a 6% cap rate, 0.06, that is a $600,000 increase in value. Now let’s put this in perspective. If you bought a $2 million self storage facility and you got leverage on… Let’s say you financed two thirds of that. You basically only have 667,000 cash in that and the rest would be debt.

Paul Moore (22:30):

If you just increase the value of that facility by 600,000, the bankers don’t share in that 600,000, the investors do. You just increased the value of your equity almost a hundred percent just by signing a contract with U-Haul and setting some trucks out front and operating those. This is really powerful stuff. And that’s why I love commercial real estate. That’s why I love the value formula.

Robert Leonard (22:56):

We’re talking about this in the context of self storage, but it works in apartments too. So if you own anything over five units, if you raise your rents $10 a month, that might not seem like a lot on a per unit basis. But if you look like you just explained, Paul, if you add that to your net operating income, you’ll see even on a residential property and apartment building, a small one even, that it’ll add to significant value to… This is how all commercial real estate works, not just self storage.

Paul Moore (23:20):

And I think that’s the reason that Forbes 400 wealthiest people in America almost all invest in commercial real estate to protect and grow their wealth.

Robert Leonard (23:30):

You mentioned that mom-and-pops used to be able to just buy self storage in a good location, and that would kind of be enough. They didn’t have to do advertising. What do you define as a good location for self storage? We kind of have an idea for residential real estate, but what about self storage? What makes a good location?

Paul Moore (23:45):

The first thing you want with a location for self storage would be a location that has a lower supply of self storage than the demand would dictate. And the way to look at that is with a Radius tool. So there’s a tool out there called Radius+. And if you’re looking at an old Sears or abandoned Kmart building or an old warehouse, like we invested in, in Haverhill, Massachusetts, North of Boston, we look at this Radius+ tool first, and we try to figure out how many square feet of self storage there are for every person in a radius. And so in a downtown location, there might be a one mile radius. In a typical suburban location, it might be about a three mile radius. So if that three mile radius has a hundred thousand people, we want to see, like the national average would be about seven or eight square feet of self storage for every man, woman and child in that radius.

Paul Moore (24:43):

So if it was 700,000 or 800,000 square feet of self storage there, or much more, we would think, “Eh, it’s probably a well supplied location.” But if we find a location like that, that has maybe two square feet of self storage per person, that is a potentially great location. So that’s the first thing we look for.

Paul Moore (25:03):

The second we’re looking for a highly traveled road. We’re looking for a vehicle count of in a bigger city might be 30,000, 40,000, 50,000 cars per day. In a smaller town, it might be 10,000 vehicles per day. We’re looking for a good traffic count.

Paul Moore (25:19):

Third, we’re looking for good visibility. Now you might say, well, the traffic count takes care of that. It’s not necessarily really true because there’s a facility near me, the one I mentioned, raised their rates four times in 28 years. I drove by there hundreds of times for the last six years. I don’t know if I ever saw the facility. Just the way it was sitting back behind other buildings. I don’t know if I really noticed it. So you want good visibility.

Paul Moore (25:47):

The fourth factor is you want decent incomes. So you want middle income or high income areas. You definitely don’t want to be in a slum. You don’t want to be in a dangerous location. Even if it’s near a good area, people won’t want to go there to store their stuff. Crime is the biggest issue with self storage. And like I said, a lot of these mom-and-pops don’t have security cameras and such, but people don’t want to go into a bad area, even if it’s only a block into this area and they’re in a nicer part of town, they’ll go somewhere else.

Robert Leonard (26:22):

How do you get your data for how many square feet of self storage there are in an area and also the vehicle count? Is that all public information or are there studies you do yourself?

Paul Moore (26:31):

Yeah. I just Google VPD, vehicles per day, at that address. And I can typically get that, dig a little bit more than that perhaps. The data on the square feet of self storage per person in a radius is really nicely contained by this tool called Radius+. And you can either get a subscription to that. Or if you just want to do a one off location, you can go in, type in the address, pay them a little bit of money and they’ll give you a full report, whatever radius you want. You can go anywhere from, I’ve seen 1 mile up to 3, 5, and even 10 miles in a really rural location.

Robert Leonard (27:10):

With the potential risk of crime and people breaking into storage units, do you just insure against that in addition to having a security system, how is that handled?

Paul Moore (27:21):

Yeah. Every tenant actually gets their own insurance. And this is another value add for self storage because they can sell tenant insurance on their stuff for, let’s say, 8 bucks a month. And the insurance company will profit share with the self storage facility, especially if you’re a professional owner with a lot of locations or a large facility. You can make 4 or 5 bucks a month. And so let’s just do the map on that. Let’s say you add insurance at $5 a month. Let’s say you could profit share at 5 bucks a month. Multiply that by 500 storage units. That’s 5 times 500 times 12 months. That’s $30,000 added to the bottom line.

Paul Moore (28:02):

While that could pay for an additional employee, or if it goes to the NOI, the net operating income, 30,000 divided by 0.06, 6%. This is our value formula. You just added half a million dollars to the value of your facility. That’s straight in your investor’s pockets if you sell a facility. If you bought a $2 million facility and you added half a million just by adding tenant insurance. That’s pretty significant.

Robert Leonard (28:30):

Is there a distinction between where these types of things you’re adding are part of the business and not part of the real estate, and then it’s valued differently and looked at differently by lenders?

Paul Moore (28:42):

That’s a great question. And it is looked at differently potentially by the property tax assessor. You can make an argument that we have a retail business and a real estate property here, and you can try to break them out and try to make that argument with the assessor, but there’s no differentiation at all between these issues when it comes to the lender.

Paul Moore (29:03):

And your question speaks to the bigger issue of how these operators, how these owners view their facilities. Some of these folks, when I sold my company in the ’90s for millions of dollars, I thought about buying a storage facility. I thought, “Oh, it’s just a cash cow. It’s just going to throw off cash and I’ll just get a check every month. That’s pretty cool.” I really wish I had invested, but I would’ve been a mom-and-pop operator if I thought that way.

Paul Moore (29:30):

Because if I think it’s just a piece of property that throws off income, I’m sorely mistaken, I’m leaving all these value ads on the table and leaving them for somebody else to come in and do and increase the profits for their investors.

Robert Leonard (29:46):

You mentioned before that you had come across somebody who might have their facility completely full. And you mentioned that they still need to advertise. What would advertising do for them in that capacity, if they were already then completely full? Would it just allow them to increase their rates?

Paul Moore (29:59):

Yeah, essentially, it would allow them to increase their rates. What they should be doing is every time somebody leaves for any reason, they should be considering the possibility of increasing their rates. I’ve heard it said often that the most profitable facilities typically have an 88% to 93% occupancy. Other people argue that it should be like 95 or 96. But if you’re at 100 and especially if you’re not advertising at 100, and especially if you’re doing other things wrong, chances are you’re leaving a lot of money on the table. So yeah, advertising allows me to bring in more people, get better tenants, higher paying tenants, and obviously make a lot more profit.

Robert Leonard (30:41):

I often like to talk about the downsides to an investing strategy here on the show, especially after we’ve spent a bit of time talking about all the good aspects of it. So what are the downsides to, or the risks of investing in self storage? How have you seen investors, or even maybe yourself get burned in the self storage sector?

Paul Moore (31:00):

I can take it in Nashville and drive you around, Robert, and show you that it is… You would look around and say, “This is not a place I want to invest in self storage.” There’s facilities everywhere, like there are in lots of towns.

Paul Moore (31:13):

And I can also take you south of Nashville, about 15 minutes to a wealthy suburb, a couple of them, Bellevue and Belmont, and show you that due to zoning, land prices and other issues, they haven’t got any facilities, last I checked at least. And so they have a huge shortfall in self storage facilities, and there’s a huge demand there for it. And so that would be a great place to build. Self storage is very, very hyper local. You don’t want to just look at the market, you want to look at the submarket and even the exact location within the submarket.

Paul Moore (31:50):

The biggest risk for self storage and therefore the biggest downside is when you’re leasing up a new facility. The possibility exists that a national competitor will build nearby. And if this happens and you’re only 10%, 20%, 30% leased up, chances are you’re going to have a long, hard road to get fully occupied and stabilized. The national company can come in. They can probably outmarket you, they probably have better studies than you. They might have a better staff than you, and they can certainly lose money a lot longer than most of us.

Paul Moore (32:27):

And so this is a real risk, especially in an oversupplied market like we’re seeing around the country right now. So this is the number one risk of self storage. I’ve heard it said that every well located, well marketed, well staffed facility eventually fills up. But eventually that time… If you’ve got a bridge loan, a construction loan that is basically a three-year bridge loan, that can be nail biting if two national competitors pop up nearby.

Paul Moore (33:00):

And that’s exactly what happened to us in one of our first self storage investments years ago. We were investing in Bradenton, Florida, and we were right by Lakewood Ranch, which was, I believe the first or second fastest growing master-planned community in America. We were right in the middle of it on a main road. That felt pretty good. There was actually two facilities. One facility was almost stabilized and the other one had just built out a lot of new units. And so it was definitely not stabilized. So the operator we invested with took over.

Paul Moore (33:38):

And then the first thing that happened is about 60 of the units suddenly vacated, but there was nobody there picking up their stuff. Huh? What happened? Well, it appears that the previous owner had patted the rent rolls to make a better economic number. Think about the value formulas based on the income divided by the cap rate.

Paul Moore (34:02):

Well, it appears, and I’m not saying it really did, that the owner had a lot of family members’ names on the rent rolls and were patting that. So that was a big shock right up front. And that’s an unusual risk, but it is a risk in self storage. You need to be real careful, and any real estate business doing due diligence.

Paul Moore (34:21):

Well, the second shock to due diligence was two national competitors were permitted and were building really close by. And they built very fast. When they came in, it made it hard for all three facilities to get to stabilization. Well, these national competitors had better staffs, better marketing. They could undercut prices, like I said, and it made it very difficult for the investment we made. And so we were expecting to get about a 4% reach cash flow the first year, six the second, seven or eight after that. We actually got a 1.8% cash flow total in the first three and a half years.

Paul Moore (35:03):

And worse than that, the operator was faced with refinancing this bridge loan and he wasn’t at stabilization. And there was a question about whether he would even be able to get refinanced. You’re talking about a 75% LTV debt. This would’ve been disastrous for the operator and the investors. Well, he was able to get refinanced. He put a better team in, he increased his marketing. He did all kinds of things. He threw a lot of effort at this facility. Eventually, the net operating income, the occupancy, everything got to stabilization in the like 92% range. And he just sold the facility at a cap rate somewhere in the 5% range. And all the investors got their principle back plus an 80% profit in about three and a half years.

Paul Moore (35:59):

So it turned out to be about mid 20% per year return. Pretty good deal overall for a real nail biting experience. You know what he did? He actually had a national company. He had offers from several national competitors. He had a big private equity group come in and take out all the investors at a better, much better offer than any of the other offers he got from the national competitors, which is kind of surprising. But this private equity group paid him much more and kept him on as the property manager. So he got to benefit twice.

Robert Leonard (36:36):

Interesting. So do you see national competitors as like one of your… Is it on your checklist and it’s an instant I don’t go there because there’s so many national competitors or is it just something that you want to be aware of and you just want to kind of make a mental note of?

Paul Moore (36:49):

Yeah, we definitely want to be aware of that and make a note of it to say the least. We invested in Greenville, South Carolina, and there were some national competitors nearby and it actually was a little overcrowded space and that’s been a little slower to get to profitability than some other areas. We also invested in Ishpeming, Michigan. I think the population there is about 2,000 or 3,000 people, but we have a 1,500 unit self storage facility that draws people from all over the rural areas to that area. And it’s full and it’s humming along.

Paul Moore (37:24):

We also invested in Beeville, Texas. We invested in a mom-and-pop facility. All the owners were the five kids. The parents had passed away sadly. The five kids were fighting and they were taking this facility into the ground. And so they wanted about $5 million for it.

Paul Moore (37:43):

My operating partner paid $2.4 million for it, cash, quick closing. He went in, he put in some great marketing. He kicked out the bad tenants. He raised the rates 20% or 30%. He fixed the occupancy, fixed some other stuff, added U-Haul. And remember, we only paid $2.4 million cash. Three months later, got a $4.6 million appraisal, financed it at 43% LTV. That’s $2 million financing. That means us as investors we only had half a million dollar left in this number 2.4 we had put in upfront. And when he sold it for 4.6 million 18 months later, it was a huge payday for the investors.

Robert Leonard (38:30):

How do you combat against the… I guess I’ll call it fraud that you saw with the owner having their family rent or supposedly rent from them. And, like you said, you see this in other asset classes too, but just what are you doing for due diligence to verify these rent rolls and make sure that the information you’re getting from the seller is accurate?

Paul Moore (38:49):

Our strategy, my company Wellings Capital, our strategy is to invest with operators who are experts. And so it’s sort of a Berkshire Hathaway strategy. We look for the very best teams with the very best products, the best companies, and we invest heavily with them. And what’s one of the questions we ask now, of course, we’re asking them, how do you do due diligence on this? And they each have their own strategies, but they need to uncover everything they can by looking through the books, they need to match revenues and expenses on the books. Of course, that wouldn’t have cost that one. And I think that as a result of that, after that happened, I think, Robert, if I was the one doing due diligence, I would add to my sales contract some kind of clause stating that you are certifying this rent roll.

Robert Leonard (39:42):

I wonder if there’s a way… A big red flag might be if they’re getting a lot of people paying in cash because obviously family could quote unquote pay in cash. But if everybody’s paying through an online system or through a credit card, I mean, they’re probably not charging their family members every month for something that they’re not actually using. So I don’t know, maybe that’s a good way to kind of combat that.

Paul Moore (40:01):

I mean, that would be something to look at for sure. It’s a little off topic, but it reminds me of one. My friend was buying a self storage facility near Chicago, and this is another aspect of a mom-and-pop seller. The seller actually… Remember, we want people to think about us all the time as a self storage facility, before they rent, and up to the day they rent and put their stuff in. We want them to forget about us.

Paul Moore (40:30):

Well, this self storage facility, the way they had their people pay was to bring cash in an envelope. And you would think I’m going to say drop it at the office. No. They were supposed to slide it under the door or open their unit and put it under the door right on the right side. So the facility manager would have to go around, open each unit and grab their cash or their check every month. And it’s just unimaginable. And this is just like your quintessential mom-and-pop. We love it.

Robert Leonard (41:03):

I was going to say, that sounds about as mom-and-pop as it possibly gets.

Paul Moore (41:07):

Yeah. I don’t even know if it’s legal to open their units, but that’s beside the point.

Robert Leonard (41:12):

You’ve mentioned staff quite a few times in some of your explanations. And I want to dive into that for a second because I had another gentleman on the show named Nick Huber, who is pretty big in the self storage space. I’m not sure if you’re familiar with him. But what he does is sounds like it’s a little bit different than you. It sounds like you’re buying with relatively big populations. He’s buying in these, at least from my understanding, is buying in these areas with very, very small populations. But what he does is he has no staff at his cell storage facilities. He basically entirely automates it. So the gates are all automated security, everything’s automated, they fill out everything online.

Robert Leonard (41:46):

And so that’s his competitive advantage because now you’re dropping $30,000, $40,000, $50,000 from expenses and that’s going right to the bottom line and not operating income, significantly increases the value of his property. How do you think about staff when it comes to your self storage facilities and have you considered this kind of more automated model?

Paul Moore (42:05):

Yeah. So I talk about this in the book and I didn’t give it enough time in the book, honestly. That’s one of the shortfalls of my book. I think that I didn’t talk about that as much as I should have. This is the best time in history up to now at least to have an automated facility. It used to be just a few years ago when people were trying to do automated facilities, they would buy this $35,000 kiosk that would be sitting out front and people would have to go to that kiosk. I’m sure it worked fine, but of course, stuff like that gets outdated really quickly. Well, with iPhones and Android now, you can actually just punch all that in right on your phone. It’s just a matter of software. It’s sort of like Tesla overtook the gauges in cars.

Paul Moore (42:53):

But it’s a great time to automate. Now that said, you’re losing a lot of value add opportunities. Let’s go over a few. Number one, you can’t do U-Haul from there. U-Haul could be enough commission to pay for an employee, but there’s other stuff you can’t do as well. You can’t upsell them. At least you can’t do it as easily as you could with a live person. These live people sometimes they’ll say, “Hey, for just 5 bucks extra a month, you could get this end unit or you could be right by the elevator or whatever.”

Paul Moore (43:28):

Another issue is you don’t have the showroom. So you don’t have the retail items. You can’t easily sell locks, tape, and scissors to these customers. You can’t rent dollys. There’s a lot of stuff you can’t do if you don’t have a live person there. So that’s what I would say. I would say there is definitely a place for his strategy. And like I said, I wish I would’ve covered that more.

Robert Leonard (43:56):

You mentioned before that self storage is relatively recession resistant. I want to talk about that for a second. How has self storage performed in previous recessions and how do you think it’ll do in upcoming potential recessions?

Paul Moore (44:09):

Howard Mark says trees don’t grow to the sky and we’re definitely going to have a downturn at some point. In 2008, mobile home parks did better than self storage and every other asset class. In fact, there wasn’t a dip at all. But self storage came up right behind them and they shot up right out of the 2008 recession. Again, you had the downsizing, people are downsizing from a 4,000 to a 2000 square foot home or a 2000 square foot home to an apartment and they need a place to store their stuff. And you’ve got dislocation, people losing their jobs. And then, like I said, in good times, people are buying more stuff or holding onto their stuff longer and they need a place to store it. And it really does seem like the argument is that the recession resistance of this combined with the sticky tenants.

Paul Moore (45:02):

And again, that doesn’t mean guys wearing Velcro suits. Though I’m not here to judge them. Seriously, sticky tenants are people who to stay because of the hassle factor and because of the relatively low price of storage. So when you combine those issues, you really have an asset class that is relatively recession resistant. Now I didn’t say recession proof, but recession resistant. COVID as mentioned a little bit earlier in the show has actually allowed self storage to do even better than most other, if not all other commercial real estate asset types. And of course we don’t know what we don’t know about the next recession, but it seems like self storage is well positioned to continue to do well, unless you’re one of those facilities that’s newly built, just leasing up, when a big downturn or disaster hits and you’re in a location next to some national competitors.

Robert Leonard (46:05):

In your book, you mentioned a few different paths that people can take to get into self storage, actually to become a self storage master. And the first one of those paths is what you call the long and winding road. What does this broach look like?

Paul Moore (46:19):

So that would be an approach where you just go out and buy a self storage facility. Hopefully, it’s a mom-and-pop you renovate it. You add gravel parking for boats and RV. You do everything you can to make it perform as well as you can. And then you sell it and then do it again. You buy a bigger one and you renovate it, rent it up, sell it, and then you buy another one.

Paul Moore (46:46):

Now of course you can do that with refinance, the BRRR method that BiggerPockets made popular. But honestly the way I’m talking about is actually selling between these facilities. And that’s what we would typically see in that strategy.

Robert Leonard (47:02):

Why do you choose to sell instead of just refinance and take your cash out?

Paul Moore (47:07):

When you refinance, of course you still have some equity in the deal. And especially in these early deals, until you get an investor, the most efficient way to get the most cash to go buy a larger facility technically is to sell or to get some investors to take that equity out. So you have more equity to go to the next deal.

Robert Leonard (47:29):

One of the other paths you have is called the baptism by fire path. And you say, it’s the fastest path up the steepest mountain. Walk us through this path and how it works.

Paul Moore (47:39):

That would be the path I spend the least time on the book, I think because so few people take it, but I mean, if you made a lot of money in Bitcoin or if you retired from the NFL or won the lottery or got a big inheritance or sold your tech company, well, I covered everything. Didn’t I? You’ve got a lot of money at your disposal. You can actually just go in and buy a big self storage facility right off the bat. And this is the toughest. Well, it’s not the toughest way, but it is the riskiest way in the sense that you are putting out maybe $5 million of your own money, maybe less, right off the bat before you know anything.

Paul Moore (48:16):

So to do that, you’re going to want to get a great asset management team around you. You want to get great advice and you’re going to want to make sure you have a great property manager. And you’re doing all that without much knowledge. So you have to typically throw a lot of cash at that. And that’s why there’s a lot of risk with that path.

Robert Leonard (48:36):

I know Ndamukong Suh from the NFL is big into finance and crypto and this whole kind of round, and even real estate that we’ve been talking about. So I like to think he’s listening to the show. So if he’s listening to the show, that might be an approach that he takes.

Paul Moore (48:51):

There you go.

Robert Leonard (48:52):

Paul, to wrap up the show, tell us what has been the most influential book in your life. And then tell us where can people go to connect with you?

Paul Moore (49:01):

All right. So I love a lot of books, but one of them for sure is The ONE Thing by Gary Keller and Jay Papasan. No other book has described the pitfall of being an entrepreneur or an entrepreneurial investor in my case like that one. When I was an entrepreneur, I chased shiny objects. I actually told people I should put serial entrepreneur on my business card. Well, that would’ve been a terrible mistake, just like chasing shiny objects was for me. I did it over and over and a lot of those years I didn’t mention in my story, I made a lot of mistakes. I mean, after all, I had a podcast for four years called how to lose money. And we talked about mistakes people made along their way to the top.

Paul Moore (49:47):

And so I interviewed 238 successful people. And a lot of them did the same thing. Entrepreneurial investing is when you invest like an entrepreneur. You chase a shiny object, you speculate and your principal’s not at all safe and you got a chance to make money. Well, I speculate it just like I was an entrepreneur chasing shiny objects. And the one thing that book brought all that focus and allowed me to see the many errors of my ways.

Robert Leonard (50:18):

That sounds like a great title for your podcast. I think that’s very catchy and probably drew a lot of attention from people. And it’s funny you mentioned the one thing because I’ve read it before. I’ve read it a few years ago, but I’ve been really struggling with the shiny object syndrome as an entrepreneur over the last year, year and a half. And so I’m actually in the middle of reading it right now. I’m about halfway through and I’m really enjoying it. I really needed it.

Robert Leonard (50:39):

So Paul, thanks so much for coming on the show. Where can everybody pick up your book, connect with you, learn more about what you got it going on?

Paul Moore (50:48):

Yeah, the book’s called Storing Up Profits. It’s available at biggerpockets.com/storage or on Amazon. And if they want to connect with me, they can do it at my website. It’s wellingscapital.com. That’s W-E-L-L-I-N-G-S, wellingscapital.com. And if you add slash resources, we’ll give you a bunch of free stuff, including a special report on sell storage and another course on how to get into commercial real estate if you’re interested in doing that.

Robert Leonard (51:20):

Awesome. I will put a link to all those different resources of Paul’s in the show notes for anybody that’s interested in checking them out. Paul, thanks so much for joining me.

Paul Moore (51:27):

Hey, it’s great to be here, Robert. Thank you.

Robert Leonard (51:30):

All right, guys. That’s all I had for this week’s episode of Real Estate Investing. I’ll see you again next week.

Outro (51:36):

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