self-storage investing

Ever considered investing in self-storage facilities?

Brian chats with Tom Dunkel, who specializes in real estate syndications of self-storage buildings. They discuss the high returns on self-storage, why it’s a largely inflation-proof investment, how to get started investing in it.

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live off rents podcast transcript

Brian: Hey, guys. Brian Davis here from Spark Rental. Super excited to be with you today and I am very excited to be joined by Tom Dunkel of the Storage Group. Tom, thank you so much for joining us.

Tom Dunkel: Hey Brian, it’s great to be with you today. Thanks for having me.

Brian: Yeah, so we were actually supposed to sit down last week, but we had some technical challenges, which is what happens when you broadcast these sorts of things live. So, Tom is an expert in self-storage, investing in syndications and alternative assets and alternative types of real estate investments. So, without further ado, Tom, let’s jump in and rewind to the beginning of your real estate story. Tell us how you got started in real estate investing and in alternative assets in particular.

Tom Dunkel: Sure, Brian. Yeah, thanks. Thanks again for having me. It’s kind of a dangerous question because, number one, I’m getting a little old and number two, I tend to be long-winded, but I’ll try to try to keep it punchy. So as a corporate finance and mergers and acquisitions guy in corporate America for about 10, 12 years until 2006, when I actually got fired from my job with a publicly traded company, which actually ended up being exactly what I needed to have happened to me to really get me out and start me on my entrepreneurial career, which I had wanted to be doing anyway. But sometimes it’s hard to make that leap. And when you get kind of kicked in the rear and you have to pick yourself up and dust yourself off, sometimes that’s what it takes. So that was 2006. I had always wanted to get into real estate. Of course, that was probably the worst time to start in real estate. However, even though I pretty much lost all the money that I had set aside to start my own company, I did learn a ton and I was able to reinvent myself and connect with the right people and partners and get the right experience and the right education after the crash.

Tom Dunkel: Because of course, I had a great career in corporate life and when I went into my entrepreneurial life, I was like, oh, well, this is going to be easy, right? You know, I’ve got an MBA from a great school. I’ve got this great experience with top professionals in their industries. And so, I figured it was going to be easy peasy. Well, I learned the hard way that it wasn’t so anyway. So, I started out like a lot of folks do, doing residential real estate, wholesaling rentals, fixing flips, that kind of thing. But when the market crashed and I needed to reinvent, I pretty much got out of all those businesses and I started buying pools of distressed residential mortgages, and that business was kind of the right place at the right time. I connected with a great partner, Joe Downs, and we’re still partnering today, 12 years later. And that business really kind of took off over the years. We raised a bunch of money from high-net-worth individuals, and that helped to fuel our growth. And to this point, we’ve in that business, we’ve done over $50 million of revenue and yeah.

Tom Dunkel: Which has allowed us over the years to start doing some other things. So, we started doing some hard money lending, which didn’t quite work out for us, but we learned from those experiences as well, and we got into a short-term vacation rental portfolio. So that’s still running. And that’s been great, especially in the COVID era. And our primary business right now is self-storage. So, we started buying self-storage facilities really early 2020. We closed on our first one and kind of mid-2020. And like we do with all of our businesses, whether it’s the rentals or the distressed mortgage we put our own money out there first so we can learn the business, make the mistakes, correct the mistakes, and figure out what works, what doesn’t, and get the right team together and make sure we’re executing at a high level. And so, once we kind of perfect those things, then we go out to our friends and family, etc., and that’s when we start doing our syndications. So that’s what we’re doing today, Brian, is we’re doing self-storage syndications, meaning that we’re pulling groups of investors together that are and we’re buying these self-storage facilities primarily in the eastern US.

Brian: Okay. All right. Well, there’s so much to break down there. And it’s funny that you mentioned some of the twists and turns along the way. You know, we before we went live here, we were talking about how in most people’s businesses, you know, there are all these unexpected twists and turns and that what you end up specializing in is not necessarily what you set out to. Thinking that your business is going to be. So, I can certainly relate with all of that. So, tell us a little bit about self-storage, investing, the fundamentals of that business, the typical returns that you see, some of the risks that you see because most residential real estate investors are not super familiar with self-storage as a real estate niche.

Tom Dunkel: Sure. Yeah, great question. So, yes, self-storage is always sort of been a little bit of a redheaded stepchild in the commercial real estate space, but kind of under the radar. It’s also been one of the best performing or arguably the best performing commercial asset class out there for the past really 30-plus years. What we love about self-storage is like all real estate, right? It’s connected to hard asset. So, unlike the Internet days of the dot com bubble burst, you actually have a hard asset that you’re investing in. By the way, I feel like we’re sort of revisiting that whole time period with crypto right now. But anyway, we’ll save that. Save that for.

Brian: NFT’s Yeah.

Tom Dunkel: Yeah. Because I’m not sure what people are investing in there other than these ideas like and it reminds me as I said, I was in investment banking in the Internet bubble era, and it was I never understood what those guys were talking about. But anyway, self-storage, I can get my head around, right? Because it’s metal boxes with concrete floors and roll-up doors. It’s not a super complex industry. It’s another thing that we like about it is people like to invest in things that they know and understand. And so, when it’s hard asset and it’s an easy, pretty easy business model that’s cash flowing, and we can get great terms on our debt and we’re typically getting 75% loan to value loans. And of course, rates have been going up recently, but our rental rates have been going up faster.

Brian: Sure, inflation helps on that front.

Tom Dunkel: Yeah, it absolutely does. And people should be concerned about inflation. I mean, it’s obviously eating away at buying power and a lot of different areas of our lives. But one of the things I do like is our rental rates across our portfolio were up 22% last year, so we’re way ahead of inflation in that regard. The only question for the future is how much are interest rates going to go up and how much or how much pressure is that going to put on property values coming down? So that remains to be seen. I’m certainly not a fortune teller. I don’t think anybody is. But I like where we are. We have a great operations team, so that’s really what we’re focusing on right now. The, for example, delinquency rate in most self-storage facilities around the country is about 10%. Across our portfolio, we’re at about 3%. And that reason is, is because we really focus in on our management key performance indicators. And that’s a big one. And so, we just make sure that we keep that low and make sure we keep the rental rates high and that keeps the cash flowing for our investors.

Brian: Yeah. So, you mentioned not having a crystal ball as far as what’s going to happen to property values. But with income investments like self-storage facilities, property values dipping a little bit doesn’t necessarily have to impact you as long as the cash flow continues to perform. So, can you tell us about your typical returns on these facilities that you’ve seen so far? And I understand you’ve only been in this space for a few years, but what do you typically look for and what do you want to see as far as returns among self-storage facilities?

Tom Dunkel: Yes, and you did ask me that earlier. I just like I said, I kind of start going off and I lost track of.

Brian: It’s a casual conversation around here.

Tom Dunkel: I know. Exactly. But thank you for bringing that back up because of course, returns is the name of the game. Right. And that’s what investors are looking for. That’s what I look for when I’m looking at other investments as well. And so, we’re when we’re underwriting our deals, where we have, we as the sponsors have a split of the deal and our and our investors have a split of the deal on a passive basis. And so, when we when we’re doing our underwriting and our projections, we’re trying to gear that so that our investors are making a high teens IRR internal rate of return. And because people do like cash flow generally, we also pay a preferred return typically in the 6 to 8 10% range and those payments are made quarterly. And because sometimes people like to, they just want to see that that that income coming in. And so, to this point, we’ve been exceeding those projections for our investors, which we’d love to continue doing that. But like we talked about a second ago, you know, crystal balls are difficult, but we’re very conservative. With our underwriting. And that’s really for my training, corporate and my corporate life, doing the mergers and acquisitions and doing the corporate finance for these big public companies. That was what I did. I built the models that projected out the financial performance. And so, I’ve just learned a long, long, long, long time ago that you really want to under-promise and overdeliver. So that’s really part of the core values and culture of our company, is we under-promise, and that gives us the ability to overdeliver. And sometimes when you first doing it, it’s hard to under-promise because you want everyone to think how great you are, and you want to give them this great goal.

Brian: To raise the money.

Tom Dunkel: Yeah. With these hockey stick returns and such. But again, over the years we’ve, we’ve done it over and over and over again in all of our businesses. We underperform under 100 points. We under-promise, we overdeliver. And, you know, and the beautiful thing about that, Brian, is our investors, they stick with us. Our repeat investor rate is through the roof. And our investors, they come they start out investing a little bit of money, and then they increase that over time and they bring their friends, and they bring their families. So, we know we’re doing something right because we’re able to generate those returns and get those kinds of referrals from our investors, which is great. We really appreciate that.

Brian: Yeah. And that is key to longevity in any business is the business the word of mouth. So, we’ve danced a little bit around this topic of where the market is headed, you know, potential for recession. So, I hear repeated time and time again that, oh, self-storage facilities, they’re one of the few recession proof investments we should all be pouring our money into self-storage facilities. So, tell us either why that’s true, why it’s completely false, or why it’s partially true, but. But not as clear cut as it makes it out, to be.

Tom Dunkel: Sure, of course. Well, there’s truth and maybe some caution to be thrown in there as well. But we have in our investor deck and our investor pitch deck, we have a slide that shows over the past 30 years, it shows the GDP. Right. So, the growth GDP growth, that of course, it’s like it’s a crazy looking graph because of course, we have boom cycles, we have bust cycles of booms and busts and everything in between. And then over the top of that, we have occupancy for self-storage facilities going back to the eighties and that line goes about like this. So, meaning that when the economy is booming, if it’s crashing, if it’s somewhere in between, people always have been needing a place to store their stuff outside of their house. And so that’s why occupancy rates in self-storage have generally been between 80 and 90% on average across the country for an entire time period. So, when people say it’s a Great Recession-proof kind of asset class, I do definitely have to agree for the most part. But where folks can get in trouble is and this is again, something I’ve learned because I’ve been through some booms and busts when things were crashing 08, 09 and 2010.

Tom Dunkel: A lot of folks were over levered. Right. And so, they had too much debt on their properties and the cash flow dwindled and they couldn’t make their payments and they lose the property, and the equity gets wiped out. Nobody wants that. And having lived through that and learned from that experience, we definitely take great measures in making sure that we can certainly cover our debt payments. But unfortunately, there’s there are folks out there today who are continuing to pay very high prices for facilities. And I’m concerned that those folks are going to end up in a bad place in another one two years as this recession starts to rear its ugly head. And I certainly don’t wish that on anybody. But we’re seeing it happen out there where folks are taking on a lot more debt than they should. So that’s certainly a risk in any kind of asset class where leverage is being used. But that’s definitely something that we take a very cautious look at because that’s not again, we want to under-promise and overdeliver. We can’t do that if we’re pushing, pushing, pushing on the leverage.

Brian: So now I understand that Belrose storage group only allows accredited investors in wealthier investors to participate. But know a lot of our audience members are not accredited investors. Do you have any tips for nonaccredited investors who want to put some of their money in self-storage? How might they go about doing that?

Tom Dunkel: Sure. Yeah. So, while we certainly do look primarily for accredited investors, we do have the opportunity to include nonaccredited investors on some of our capital raises. But in order to do that, we really need to have a pre-existing relationship with those folks. And the reason being we need to have a comfort level that this person is going to understand the investment and they are going to be okay if. If things go really badly and they lose their money, we need to know that it’s not going to be the end of the world for them. Right. And so, we need to have those that comfort level both ways before a non-accredited investor would be permitted into one of our opportunities. As far as how other folks approach it, I’m not really sure. But if certainly, a nonaccredited person might still be able to go and get a loan and find a self-storage facility on their own because there really are all shapes and sizes of self-storage facilities out there, just like other commercial asset classes. And a friend of mine that he bought like it was like a 50-unit facility for a few hundred thousand bucks, so. If you’re not accredited, maybe that’s where you start. And hopefully things you run the facility well and you grow your wealth and then you can become an accredited investor, which opens the door to a lot of other opportunities, but you’ve got to start somewhere. So, I would say I would encourage people to just if you’re not accredited, make it a goal to become accredited and just start putting those pieces in place and getting educated and getting the right team together so that you can reach that goal.

Brian: Yeah, absolutely. And, you know, if you are interested in investing directly in a self-storage facility, but you don’t have experience, you can always partner with someone else who does have some experience. You can cut down the cash required for you to participate, get exposed to some expertise in the process.

Tom Dunkel: Absolutely.

Brian: So, with Belrose storage group, what is the minimum investment for people to participate in your syndications?

Tom Dunkel: So, our minimum investment stated in our documents is $25,000. But there’s a little asterisk there because myself and my partners, we have the ability to flex that number if we need to. I know some folks, maybe they’re invested in other things or. But they could come in at a lower amount if we had a chat about it beforehand. But yeah, we’re typically looking for 25,000 because our typical raise is in the about $1,000,000 range. So, we don’t it’d be tough for us administratively if we just took on a lot of smaller investors. But we’re also in the relationship business. Right. So, if someone came to us and said, hey, you know, I’m 25,000, doesn’t work for me right now, for whatever reason. Can I kind of test drive you guys at 10,000 or 15,000? You know, if we had a chat about that and you got comfortable with us and we get comfortable with you, of course, we would entertain that. Of course.

Brian: All right. Well, so I’ve put a link here in the comments to a belrose storage group where people can learn more about what you are up to and the investments you guys are making, signing up with you guys. Is there anything else that you want to leave the audience with before we wrap up this conversation about self-storage, investing and syndications?

Tom Dunkel: Sure. Absolutely. Actually, it’s broader than that, if I may, Brian, as I as I’ve kind of alluded to during our chat today, I have been around I’ve been around for a little bit. I’ve had some great experiences. I’ve also had some great learning experiences where I’ve gotten pretty good. So, what I’ve done is I’ve actually compiled some of my some of the lessons that I’ve learned and put them into an e-book which is available at our website. And you don’t have to give your email or your name or your phone number, any of that stuff. It’s available for anyone that wants to go grab it on our home page. And what it is, is it’s a resource for folks to do their due diligence. So, it’s called safe investing. Reduce your risk and achieve your investment goals. And so, what it is, is a framework for people who are interested in alternative investments, whether it’s. Real estate or lending or whatever else. It gives a list; it gives a framework. So, it gives a list of questions in an organized format. And safe, as you might have seen, is an acronym. Safe, S is a sponsor. So, who’s the sponsor? Who’s running the deal? What’s their background? What’s their track record? Are they criminals they wanted? So, you know, so it gives a list of questions to ask about the sponsor. And the ultimate question, Brian, is can I sleep well at night knowing that this person has my hard-earned money and then it goes on to a which is for asset.

Tom Dunkel: What is the asset I’m investing in? If they do a deal with us, they’re investing in membership interests in an LLC that owns a self-storage facility. And so, it gives a list of questions about what is the asset F is for financials and all the questions about what are the financial aspects of this deal, what are the projections? Are they believable? Has the sponsor delivered these kinds of projections in the past? And what kind of returns can I expect? And then E is exit. How do I get out of this thing? Because it’s not like you’re going you can go to and click click click and get your money out it’s in a syndication deal like ours you know your money is going to be tied up for two, three, four or five years. And so, you need to know that going in and you need to also know what are those circumstances that have to come about for me to get my money back? And do I have any control over that? And how does that happen? When does that happen? Those kinds of things. So, the whole point of all these questions is to just help people. With a framework to do their due diligence, because due diligence is very, very important. And what are the questions you should ask? And ultimately, it’s can I sleep well at night? Knowing the sponsor, knowing the asset, knowing the financials, knowing the exit strategy for this deal. So, I encourage everyone to come to the website and pick that up.

Brian: It’s a fantastic resource. Thank you so much for sharing that with us and that’s very generous to be giving away eBooks without requiring email addresses or names or any of the stuff that most people require for when they give up.

Tom Dunkel: Just trying to add value.

Brian: Well, Tom, thank you again for joining us today. This was a fantastic conversation, very eye-opening about self-storage facilities, alternative assets, and syndications as well. And we hope to have you back here soon.

Tom Dunkel: I’d love to be with you again, Brian. Thanks so much.

Brian: All right. Have a great week. See you guys’ next week. Bye now.

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