Self storage has historically gotten a bad rep for being on the low end of real estate holdings, and while there are still more mom and pop highway storage facilities than ever, professional real estate investors recognize how partnering with operators in ground up self storage development present a bounty of opportunity for interested real estate investors. In this discussion, we cover the finer details and important questions to consider when rating this asset class against others
onsite with my good friend Arthur Hood.
What's happening, Arthur?
Not a lot. Good morning.
I appreciate you going to the extreme trouble that you've gone to to create this opportunity for you and I to speak to one another.
That was easy.
It was easy.
I already have the office, so
you know, we got the space.
We've got the opportunity. And we definitely have
the topic today. But Arthur, before we
get into the topic, I want to frame the
conversation for you around this avatar
that we've created named Stuart. Stuart
is a character that we dreamt up to
represent the investors that are most
likely watching this program today. And
most of them listening have built some
wealth in the stock market, but they've
got capital gains. They definitely have
tax exposure. and they're starting to
ask a very basic, simple, but incredibly
important question. Where does my money
go next? So, today we're going to
explore an asset class that you are just
an absolute expert at, and it's quietly
outperformed like almost every other
real estate sector for decades. It's
self- storage. So, Arthur, man, like
you've structured more money in these
kinds of transactions than I can even
keep track of. Do you have you keep a
running total of
I I started to look at it one day. I
think just over between lifetime of
transactions probably just over a
billion dollars.
There you go. There you have it. So we
we'll just clarify that was a B billion
over a billion dollars.
Not a million.
So that's industries but yes.
So let me let me just ask you like so we
said right like this this group of
people they're sitting on a stack of
RSUs right they've got the opportunity
really to create some leverage from the
income that they've created that's
largely sitting dormant so
we've in the capital shift what we talk
about a lot is this idea of needing to
change the way you think so that you can
change the way that you invest. So from
your perspective when people are
starting to explore real estate as an
investment vehicle like what's the first
big mental shift that they need to make?
Uh the the the first big mental shift
anyone needs to make especially
switching to a real estate investment is
that it's not a true liquid investment.
There is a somewhat of a cost to get in,
cost to get out as far as selling trans
or selling a property, buying a
property, but long-term you're going to
get depreciation, the ability to use
leverage, which you really can't use in
the stock market unless we get into
leverage and a bunch of high risk
involved in that, right? So you can do those items is the
biggest shift is if you've got a million
dollars in stocks, if you want a million
dollars in cash, you can have a million
dollars in cash the next day wired to
your bank account by day two. You can't
really do that with real estate.
However, you can still get liquidity,
but you have to borrow against your real
estate. But then that's a that's a
tax-free transaction.
And that, ladies and gentlemen, is what
many of you are after. So, if that
catches your attention, you're going to
want to pay close attention to the rest
of what we're going to talk about today.
So, a lot of times, uh, Arthur Stewart
as a character, he's got a mental
construct that he needs to break down
before he or she can really make this
change that you're describing. So, what
do you think is the one big belief that
investors are stuck with that keeps them
rooted in the stock market and really
not considering what we're talking
about? I think the one of the things
that keeps people rooted in the stock
market is just the ease. It's click of a
button. They don't have to think or do
anything. Real estate seems complicated
from the outside if you've never done it
before. However, for me, I'm a lot more
comfortable with real estate. It's a
hard asset. I can touch it. I can feel
it. Um, regardless of what happens to
the US dollar, it will be paid for in
some form or some currency. So, if the
dollar was to ever just crash and burn,
real estate will trade in some form of a
currency, gold, it doesn't matter, but
it'll it'll maintain its value.
Amen. And if you haven't given
consideration to that thought, there's a
foundational aspect for you to really
spend some time thinking about uh
putting into your favorite AI engine to
really spend some time in self-discovery
around what this process might look for
you, but look like for you, but there's
definitely something to be had when it
comes to this. All right. So, myth is
busted, but let's talk about the actual
asset class of self- storage itself
because
I've I've watched some of your other
content, you have some really
interesting perspectives on self storage
as an asset class. So, when the listener
when the watcher first hears self
storage, for me, I can remember when we
first were considering this asset class
when you were talking about it and we
kind of wrote it off. It's like why
would that be an interesting or valuable
asset class? So for your perspective
like why does that reaction cause people
to miss that opportunity?
I think a lot of it's because when
people think of self storage they think
of the old rollup door
makeshift building on the side of the
highway in a small town, you know, 20
miles from where they live. They don't
really see the new generation 5 climate
controlled facilities that look like a a
medical warehouse. They're beautiful.
They're done very well. Concrete floors,
stainless steel in the walls,
everything's climate controlled. And
they also don't realize, you know, if
you live in an older home, um, you
probably have a fair amount of closet
space and some attic space, but if you
live in a newer home or an apartment,
the builders were never really
incentivized to provide a lot of space
they weren't going to get a premium for.
So, there really isn't that much storage
in a lot of new in new places. and and
people on, you know, in their 30s and
40s and younger and older all have
hobbies, whether it's hiking, kaying,
skiing, working out, whatever, bike
riding. So, everybody has things that
they don't have room to store at home
anymore, especially if they live in an
apartment or a smaller starter home.
They've got to have somewhere to store
their stuff.
Absolutely. And what we've noticed is
home ownership from firsttime home
buyers, it's taking them longer and
longer and longer to actually be able to
buy their first home. So, they've got
some more disposable income in many
instances because they haven't
necessarily found themselves pressured
into saving for a down payment just
purely out of belief that they're not
going to be able to be a homeowner.
Secondarily, we're starting to see a lot
of build directly to rent product that's
hitting the marketplace, which is just
going to be a continuation of what
you're talking about as far as the
builders not really being incentivized
to create storage space for the people
who are moving into that product.
Absolutely. A lot of your uh build to
rent product doesn't have much storage
in it, but you've also got a lot of
younger people who are wanting to remain
transit. They're not buying a property.
Maybe I agree, maybe I don't. uh with
that I think they should but they're
renting for a lot longer period staying
in a smaller place and they all have
things that have to be stored and also
I've seen accumulation of they were in a
little bit larger place and they're
going to store the sofa and the TV and
this that and the other and the bike and
the workout machine and they end up
storing it for five years
for five years. So let's dive into this
a little bit more. So, if Stuart's
sitting there right now on, let's just
call it a half million dollars,
why would storage be more interesting to
them maybe than a traditional long-term
rental, multifamily, or even a
short-term rental uh approach?
Well, I think depending on your goal,
I'm involved in all of the the spaces.
Um, I have a significant portfolio of
single family rentals. I'm I'm involved
in some multifamilies. I'm involved in
uh one industrial complex. I'm involved
in some uh retail. But what I what I
like about storage, and we put a spec a
decent amount of of that money in
storage, is what we're doing is ground
up storage. So, we're buying property
that is pre-entitlement. We're putting
it under contract, entitling the
property, and then by the time we
purchase the property, there's been a
value lift between unentitled and
entitled property. So, you know, we're
just making up numbers here, but let's
say the unentitled raw value of the
property was a million, but by the time
we have it entitled, it's worth 2.5
million. Then we're going to build
something on that for maybe an
additional 15 million or 20 million. So,
maybe we're all in the deal for 20
million. Well, it's going to be worth,
you know, it's stabilized. It's going to
be worth 35 or 40 million, maybe more.
Uh, especially as you start to push up
rent. So your value lift of going into a
new construction
deal is significant because you're going
to get the lift of value and not just
the appreciation but the completed
product appreciation. Also I think that
the thing I like about storage is you
have a diversity of tenants because
you're going to have in a lot of these
projects you're going to have 700,000
1200 units. So if once you get it leased
up, which takes a couple years, but once
it's leased up, if you lose a few
tenants, who cares?
It's it's spread across
a long a long piece. Also, you're not
having to to uh go through a complicated
eviction process depending on the state.
You lock them out, send a demand, they
don't pay, you can auction off the
stuff, which hopefully will return most
of the unpaid rent. Generally does. Most
of it will be returned. then you can
sweep the damn thing out and rerent it.
There's not any, you know, there's no
tenant improvement. You're not having to
do a bunch of tenant improvement to get
somebody in like in a commercial space.
You're not having to do paint and carpet
like in a residential apartment. And
you're not having to pay leasing
commissions to get somebody else in.
Right.
So, all of those things make for a
faster turn with less cost of goods really.
Correct. in a lot of ways because the
eviction process alone for a long-term
rental again depending on where your
property is a year sometimes before you
can get a tenant out and you're saying
in certain states you could probably get
somebody out in 60 days but that's
becoming rare and and and in other
states you know sections of Washington
state and California you could be 6
months to a year or longer to get a
tenant out you've got some states that
have passed laws you can't evict during
certain temperature cold weather and all
these types of things. Not arguing
whether right, wrong, or indifferent,
but it's just a fact you have to deal
with if you own rentals in those
markets, especially the long-term
rentals in those markets. Um, where in
the storage, they don't pay, sweep the
[\h__\h] thing out,
open it up, auction it off, you're done.
I mean, the real process would be
lock them out, send the demand, auction
it, get your money from the auction,
hopefully it covers your past due, sweep
it out, and rerent it. You're not having
leasing commissions or anything else.
No paint, no carpet.
Easy peasy. Well, let's uh let's back up
because you touched on a topic that I
think uh stewards out there would be
really interested in hearing more about.
So, when you're talking about ground up,
you're talking about we're going to take
a raw piece of land and when it's done,
it's going to have this beautiful brand
new climate controlled self- storage
facility sitting on it. But in that
process, you've taught that there's
opportunity actually to create
appreciation and value in that property
along the way. That's called the
entitlements that you mentioned. You
want to just elaborate on that for the
listener a little bit?
Yeah. I mean, being in the real estate
development business, to me,
entitlements fairly simple, but for most
people who've never dealt with it. Um,
so I I I buy raw tracks of property or
generally I contract raw tracks of
property both for uh storage
development, but I also do subdivisions
and entitlement. I sold 300 and uh a
little over 300 acres, 600 lots uh a
little over a year ago to Dr. Horton.
But I'll assemble several properties or
one property that is just raw land. Then
I will get the zoning, which is
basically entitlement. I'll get the
zoning changed or get it approved for
whatever I want to put on it, whether
it's storage or whatever. Now, there's
regulations and what you can and can't
do, but I find a a better use for that
property and then we'll get it entitled.
So, in other words, we get the project
approved. Once we get the project
approved, that's a value lift in the raw
dirt. Now, you spend a little money to
do that, having it under contract,
legal, engineering, architecture, etc.
But then you have an fully approved
project entitled. Then we go all the way
through design phase. So not only have
we got it approved, now we have a design
design for that particular property that
is now approved. And by the time we're
ready to pull a building permit, you
know, like I said, you know, you could
have a significant value lift. A million
dollar piece of dirt could be worth two
or three million or three and a half
million. just all depends on what you've
done um and what the the the the end
economic looks like because it's raw
dirt. It's raw dirt once it's entitled
and proved under a full design that's
engineered. Now the the land value is is
a part of the completed project value.
You've built equity along the way and
there's actually other guideposts along
the way that also create additional
value in the property as well. You want
to just touch on those real quick? Well,
there's a lot of guidepost that can, you
know, different things that create value
on and you talking about self- storage,
you know, once it's built, you've got
the revenue for the self storage, you've
got the insurance revenue. We get a
split on the insurance for the
individual tenant that has uh insurance
on their their stuff. We we split that
revenue. So, there's that. We have some
of our projects end up with some
billboards on them. We have one in Las
Vegas that's going to wind up with a V
bill bill billboard um that's going to
add about two and a half million of
value because we have advertising
revenue off the billboard to the highway
that it's located next to it. So there's
there's lots of value ads on property.
You know we we've I've taken raw
property and you know carved off 200
lots and sold to a home builder and then
kept a commercial piece on the front
that became you know a little strip
center. Mhm.
There's all types of value ads that
create equity on property once you, you
know, come up with an idea, get that
idea approved.
So, it seems to me as though, as in just
about every other asset class in real
estate, there is a a heavy emphasis on
location.
So, how much of this equation is
predicated on making a smart choice on
where you're putting it? And how do you
approach that particular part of the
equation? Uh, we have a really, really
good team. Uh, my partner in the storage
development business, Russ Kovven, has a
a track record and a history through
developing two other storage companies
that both sold and exited um, in picking
really good locations. We probably look
at a hundred locations, come across our
desk, we take a serious look at 10 and
wind up doing one or two out of that
that piece. Uh because it has to be in a
in a market that is underserved. We
won't go in an oversaturated market,
which there are some. There's a lot of
markets that are underserved. So, we go
into an underserved market. We make sure
there's enough rooftops and apartments
in the area and enough population count
to be worth it. And then we look at
market rents in that area. There are
areas where have plenty of population
but for whatever reason the market rents
aren't as high as somewhere else.
Um we tend to also focus in on areas.
Now we have built in Texas which is
fairly easy to get approved. But a lot
of our projects are in areas and
municipalities that are very difficult
to get storage approved. um it may take
us, you know, two, three years to get a
project approved, sometimes a little bit
longer. However, you're not going to
have competition next door
because nobody else is going to go
through that. They're going to go to the
easier places. So, we try to focus on
the places are a little harder to get
approved because you'll have less
competition.
>> Amen. I believe that's called for the
people who've read it the the blue ocean
strategy as opposed to the red ocean
where there's lots of competition. So,
could it potentially be the case that
two investors making an investment in a
self- storage project could end up
making different amounts of money?
Well, it it it percentage- wise should
be the same if they're in the same
project. Different projects are
obviously going to have different
economics.
Sure.
So, one project could be a 39% irr with
a 3x multiple on the equity. One project
could be a 20some percent IRRa with a 2x
on the on the on the equity and a
project could be a home run. Everything
hit perfect and you'd be a
3.5 or four times on the equity. It can
be all over the place, but there's
significantly decent performance. And
everything we do, we pay a 10% pre to
the investor. Now it acrus during
construction and it acrus during lease
up and stabilization but we do pay out a
10 prep that occurs that then pays out
before there's a waterfall distribution
to the GPL.
Yeah. So really what we're talking about
is velocity of capital return here which
I think is an interesting topic for an
investor in this space. You know, people
have a tendency to want their money
quickly. And when you're intuitively, if
you think about it, we're talking about
something that's going to take a period
of time for it to be able to go from the
uh identification of the piece of dirt
that you might want to build it on to
until it's all leased up and stabilized.
So, knowing that, is there any kind of
uh secrets or thoughts around that
process that you think would be valuable
here?
The process can take a little while. So
if you're in a you know from the time
you contract contract a piece of dirt to
have it fully entitled depending on the
area could be
3 months to a year and by the time you
have something designed approved
engineered with building permits could
be another six months. So you could you
could be from the time you've contracted
a property the time you start
construction could be one to two years.
Mhm.
Sometimes you can do it a lot faster in
certain areas, certain municipalities
you can't. But once that construction
starts, so let's take that off the
table. But once construction starts,
we're generally building in 12 to 16
months. We use Arco Murray, a a pretty
substantial contractor in the country
and they build quite quickly. May pay a
small premium for it, but the time
savings uh and the guaranteed
completion's worth it. um from the time
they start we're 12 to 16 months to
completion and so far closer to the 12
and then you're looking at
12 to 24 months in lease up. You're
probably fully leased at 24 but you're
ramping up the whole time. So you've got
a three-year period before you're
stabilized
um with a lot of cash flow and then of
course you're going to push those rents
up. You know, our general time to exit
from the time we put a shovel in the
ground to the time we're going to exit
is going to be about five years.
So, what would an exit look like?
It could be a sale, traditional sale. It
could be uh if everybody wanted to, we
had a portfolio together. It could be
roll it into a REIT,
which is, by the way, everybody would
then get shares in the public REIT,
which is a non-t taxable transaction.
And now you have what people are used to
in a public company. Now you have stock
in a REIT that you can margin or borrow
against. So if you had a million dollars
in stock and a reach, you can borrow up
to half of that, greater depending on
your not that I would suggest doing
that, but you have a liquid asset that
you can borrow against or sell off in
small amounts. But generally we would
liquidate to family offices, uh, private
equity or to public storage, extra
space, cube smart, one of the big public
REITs, or do a REIT transaction where we
take stock instead of cash. There's
multiple exits depending on what we're
looking at at the time.
All right. So, let's try to break it
down into something that somebody could
use like as a timeline. So, from a
velocity of capital return, I make my
$100,000 investment with you. What can I
expect that waterfall to look like from
a timeline perspective?
Uh, you'll start getting some checks in
about depending on where you come in in
the state. Now, if you're in pre- land
closing, which is a little bit different
deal, but let's take that off the table.
Let's just say you're in from the time
we've closed on the property through
completion. Sometime around month 24,
you'll start seeing um your prep paid
out and then you'll start getting
distributions growing from there. So,
you're going to have a two-year period.
It's development deal,
right?
That's why you're getting the return
you're getting is
you're sitting for a little while. Well,
and not only are you sitting for a
little while, but there's a a potential
huge return at the end that is enticing
and it's important
and there's also a point where depending
on the deal um and depending on interest
rates. So, there's a lot of ifs in this.
You know, this was 3 years ago. I would
say, "Well, as soon as it's completed,
we'll refinance it with 4% money and
return 50 to 100% of everybody's equity,
and we just run it on debt." With
interest rates where they are right now,
that's not going to happen. But there is
going to be an opportunity at some point
before sale to refinance and return a
significant portion of the equity. Now,
you still have your ownership, but
you've got a portion of your cash back
plus your prep,
right? Which
now that's interest rate dependent. Of
course, but as is the case with most
investment relationships, if you're
loving the asset class, there's a good
likelihood that the person that you're
investing with is probably got a new
opportunity for you to just continue
that um capital growth based on what
transpired in the first transaction and
whatever the prospectus in the second
transaction might look like.
Correct.
Yeah. Which is incredibly awesome. All
right. So, how does it go wrong, Arthur?
Like everybody's like, "This sounds
great, but like what happens when it
falls apart?"
Well, you know, the real estate index
shows that self- storage has the lowest
default rate, commercial mortgage
default rate of anything. Very few self-
storageages go wrong unless they're
built in in an overs supplied market.
And even then, they're probably going to
just break even. You know, the idea of
total loss of capital in a in on any
real estate transaction done well is
relatively low if you do your due
diligence on the front side. You just
want to make sure the equity value stays
at least consistent with the total
capital stack. That's debt and equity.
And to me, you won't say it, but we all
know it. The operator is important. And
I I want to talk about this with you
because
you you can see through operators who
aren't who people should be investing
in. So,
how can I, Steuart, anyone as an
investor, like what are some of the
signals that we're looking for that
would signal go versus no go? Look for
operators that have had their nose
blooded at least once, that have been
through an ups and a down. You know, one
of the things that we've seen in the
real estate market really in the last 8
to 10 years, the last 18 months is
different, but prior to that, you didn't
have to be that damn smart. you could
fog a mirror and whether you were
rehabbing houses, flipping properties,
whatever you were doing, you didn't
really have to be right because property
was appreciating so fast it would cover
your mistakes. You know, there was a
period 2020, 20, 21, 202 in that range
where you could buy something, you could
be over your budget on the rehab, but
the appreciation was fast enough that it
covered it.
Sure. And you had such good spreads that
you could have 12, 14, 18% hard money
loans and then what you couldn't put in
a hard money loan, you could put on your
23% credit card and it all washed out.
Right now, you can't do that. You can
still use hard money for the
acquisition, but you're going to have to
have equity, um, significant equity.
Also, you had five people bidding to buy
a house as soon as you were done with
the rehab. You don't have that now. uh
you may sit with something on the market
for 3 months, 6 months, who knows? Uh it
will sell. There doesn't seem to be a
lot of price drops. There's some, but
they're not significant.
But you need to have somebody that's
seen all markets because, you know, like
I said, for 10 years, regardless of
sector of real estate,
if you were an idiot, you were going to
make some money.
If we could boil it down to one question
that the potential investor could ask
that operator, what would be that one
question you'd want them to ask?
I think it's it's actually probably two
questions. One of them, that's fair.
Bonus question.
Have you ever had
what's your worst deal?
Uhhuh.
And how did you rectify that deal? So,
part two of that question.
Gotcha. Gotcha.
And and that answer could be dumped it.
We all took a little bit of a loss, but
we rolled into something else and
rebuilt our money. or we refied it. We
held on to it for 15 years until it
turned around. Depending on the deal,
either could be the right answer.
What's a wrong answer?
That they've never had a bad deal.
Yeah. Exactly. No. Nothing's ever gone
wrong.
And and that could be very true for
somebody that's only been in it a short
time. Yeah.
That's not going to be true for somebody
that's been in it 10, 15, 20 years. You
will have something happen.
Yeah. So really what we're speaking to
is that will speak to the tenure of the
operator.
Yeah. The operator needs to be around a
while. And it doesn't mean you can't do
a deal with somebody new, but then you
need to have already done a few deals
and understand them yourself.
eah. Yeah. All right. Well, so Stuart's
excited. I can feel it right through the
camera. Stuart's super excited. Thinking
about evaluating a deal here. What would
be like the two or three most important
things in that evaluation? And then what
are a couple things that people would
probably think were important but really
weren't all that important?
One thing that people think is very
important is initial lease up rate. Um
it's really not that important. Not in
storage because you may have something
that five year out performance two two
and a half even $3 a square foot uh
depending on the market. So you may have
something that in 5 years will be 250 a
square foot on the rental. It may rent
at 70 to 90 cents initially, the first
10% to get people in. Then it may rent
at 95 cents to a$110
until it gets to 50%. Then it may go to
a dollar and a half from 50 to 75. And
then from 75% occupancy, you ratchet it
up again. But then once it's fully, you
know, full 90% or better, your rents are
all over the place. Well, then you're
going to start pushing everybody's rents
up. People generally do not move their
stuff out. So every 90 days or 6 months,
you're going to push their rents up so
that you hit that performant number that
you planned on three or four years out.
It just takes a while to get there. A
lot of people will focus on the initial
rents.
Yeah. It's It feels like surge pricing a
little bit, right?
It's a little bit like surge pricing,
but it's also fill it up, people won't
move their stuff,
right? For sure. Cuz it's sticky.
Yeah. Once you've you and and also
people don't feel it.
They don't really feel it. It's on a
credit card. It's on an AC draft.
It's probably more of a hassle to to go
get your stuff, move it to another.
Nobody's going to do it.
Right. Right. So, uh, what would be some
of the things that really do matter?
being a nice new facility in the area
because people do move to a nice new
facility,
being climate controlled, having
cameras, having a lighting system that
turns on and off, uh, makes especially
the women feel safe going down a, you
know, second floor hallway. Uh, the way
we do it, the lights come on and go off
as you walk down the the hallway. Uh,
keeping the facility clean. Uh, making
sure it's got controlled access.
um just making a nice facility. It makes
a big difference. And also being in a
market, but you're not oversaturated.
Now, you may say, well, there's two
other stoages in the area that are that
are full. Does it really need a third
one? Well, if the third one is going to
be brand new, generation 5, beautiful
facility, and the other two are rollup
door, no climate control, built in 1980.
Yeah, you can build one there
for sure. And the facilities that your
firm is constructing also often have
things like high door bays for things
like RVs.
Yes, we have high door bays. We've
constructed facilities in hot climates
where
we can air condition key parenthesis,
but you can back your truck in and close
the rollup door and unload and air
condition space. Now, granted, it's not
going to be 68°, but because of the
rollup doors and all of that, but it in
Vegas, it won't be 121 either.
Right. Exactly. Which, believe it or
not, sometimes small things like that
can be the actual difference in what the
buyer decides that they want to pick.
Absolutely.
Which modern conveniences are just the
same as they are in new construction for
single family homes.
Internet ability. So, you you have the
ability actually to connect to the Wi-Fi
when you get in the building. You have
the ability to not have to have someone
there at the facility to let you in.
Like we've all driven by the mom and pop
storage facility that has no security,
that has no advertising, that has
absolutely nothing.
We've got cameras in and the one we just
completed in Owens in Vegas to Russ's
credit. Uh you know, Russ had built uh
North American self storage and then he
founded uh your space America and I came
in as as the finance partner and I'm the
second largest shareholder. Um, one of
the things we did and is we made
everything clean, everything's polished,
but then there are lighting and camera
at every corner. There is nothing
missed.
And just to give people a sense of from
the profitability of this particular
asset class, how many people actually
work for the storage facility on a day
in and dayout basis
initially during lease up? So we we
don't uh brand them with our name. We do
uh branding deals or licensing
agreements. We give up a few percent of
the gross revenue which is minimal and
uh we do a deals primarily with public
storage little bit with um cube smart
and extra space uh but primarily right
now we're with public storage because it
gives us their national reservation
network. If you're moving from Debuke,
Iowa from a public storage to Southern
California, you may go public storage to
public storage. You, you know, one of
the top Google searches on the the web.
We do our own search optimization for
each location, but you got the national
network.
And during lease up, you may have four
or five people working there. Once it's
stabilized, you may have one
one,
which is one of the reasons why it it is
a reason that sometimes storage is hard
to get approved in certain
municipalities because they're looking
for job creation. Sure. And storage does
not create jobs.
Understood.
Uh very minimal on the job. However,
we make our facilities look good. We
just got approved in Henderson, uh,
Nevada, right next to a gas station in a
subdivision, but the storage building is
going to look like a nice office
building or apartment complex. It's not
going to look like a storage building.
Absolutely. Absolutely.
It's such a fascinating topic, Arthur.
Seriously, I could spend another half an
hour of time here working through the
nuance of this particular asset class,
but let's just net it out. I'm going to
ask you two questions. one, as a
fiduciary, as somebody who's responsible
for other people's money, we have a
tremendous responsibility to those
people. So, we don't take that lightly.
If uh an operator on this show ever
behaves as though they take it lightly,
that'll be incredibly obvious because
most of the operators that we talk to,
it's the single most important thing to
them. So, if Stuart had a half million
that he wanted to wire you tomorrow, how
would you deploy it?
It would well have to know a little bit
more about Stuart. Sure. Um, but I would
probably put if he's younger, under 50,
I'd probably go
300,000 in a storage development for the
capital appreciation. And then I'd
probably put a couple hundred,000 in
other things, whether it's notes,
whether it's um short-term rental,
whether it's a long-term rental. Um, if
he's younger than 50, I might go a
higher percentage into the development
asset class. There is a little more risk
in development, although very minimal in
storage, there is a little more risk in
in development, but the the capital
appreciation is better in the
development. So, the younger the more I
would put into that. Um, you know, if
they're already retired in their 60s,
well, maybe I put a little less, you
know, 150 or so. Uh, but it really
becomes a balance of where Stuart is. If
Stuart is 45 years old, earning a good
six figure salary, couple hundred
thousand a year, everything else in life
is stable, then I might go a little
higher into the storage, maybe 350 and
then just do one rental or something
along those lines.
Yeah. Yeah. Which makes perfect sense.
Let's cover the elephant so people know
about the short-term rental loophole and
how that can be offset against W2 taxes
and everybody's running around trying to
buy an Airbnb and whether or not that's
ultimately going to work out for them
remains to be seen. But they have been
exposed to the possibility of the tax
burden relief that the legislation
written created. How does self storage
compare to that in that particular uh
crucible?
Self storage does very well in that
because so much of the building is on
shorter depreciation. Um my friend Jeff
Hayyatt is great at doing cost
segregation studies. shout out
>> accelerated 179s on on rehab cost, but
you can do the uh cost segregation
immediately. Um on Owens in Las Vegas,
which we just finished, it's going to be
a little greater than 50%.
Nice.
So on a $100,000 investment, you'll wind
up with about 50%
year one or year of completion. So when
you get the CO and you're in service, uh
once your building is technically in
service, you can do the cost segregation
study and we're looking at about 50
cents on the dollar. There's some things
we may do in some future projects
that'll get that greater u and it would
be greater in a um a rehab project or an
adaptive reuse where you go into a
building and basically everything can be
cost seged in an adaptive reuse, right?
Uh we're working on a couple of adaptive
reuses. you take an old Walmart, Kmart,
and turn it into self storage. But,
um, in this particular case, you're
looking about 50%.
So, let's break this one down even
further. So, I'm going to buy a
short-term rental.
I got to pick the market myself. I got
to go find the product myself. I have to
figure out how to create a value ad for
the guest by myself. I have to manage
that or hire someone and share in the
proceeds of the of what we're created
even if we're successful versus what in
self- storage essentially. Well, in self
storage, you're going to go in with the
operator. You're not really going to
have to do anything. It's going to be
quite a passive investment as an LP. so
that you really don't have to do
anything other than put in money, you
know, participate in some investor
meetings and calls, uh, watch the asset
grow and you'll get your your tax
deduction. So, for those of you out
there that are responsible for
enterprise level clients who don't have
time to even spend with your children,
this is not going to be another burden
for you. Yeah.
No, not at all.
Exactly. And there are lots of uh gurus
out there who are trying to convince
everybody that short-term rentals are
the way to go. And I'm not against it.
We're short-term rental people
ourselves. We have, you know, obviously
a big part of what we're doing in our
own portfolio is predicated on that tax
loophole. But it's not the only asset
class that people can realize this
benefit. So, thank you for being able to
share that with folks.
Absolutely. and I'm investing in a
short-term rental with you and I have
some short-term rentals along the coast.
So, I'm familiar with it. I have no
problem with them. I of course most of
the short-term rentals I have are places
I want to go anyway and I rent them when
I'm not there. So, I'm not in the
business just to make money, but I take
advantage of it. Um, but I'm in, you
know, I'm in multiple things. I'm in in
manufacturing. I'm in u company. I'm in
the mining business. I'm in various
industries across everything. I'm in a
medical uh tele medicine company. I
invest in a lot of different things.
Some more active and some more passive.
Um but I prefer investing in people
in products and in manufacturing and in
things I can control than the stock
market. I for percentage of net worth I
have very little in the stock market. I
have some and that might be a large
number for some people but for
percentage of net worth it's it's a tiny
number but I've always done better with
my own things and things I control and
are a part of. I'm just not the most
passive investor and it has a way of
working out that way. So even for folks
who start passive they get excited. My
wife Melissa is a classic example of
this. Once she sort of saw the path, she
grabbed it with both hands and realized
like, "Wow, this is more fun than
scrolling Instagram mindlessly. We can
actually do something to improve our
financial future with just a little bit
more education and exposure to things."
So, from a capital shift perspective,
Arthur, we we know Stuart, we've talked
to Stuart, we've talked about Stuart.
You have any final thoughts for our
watchers and listeners when it comes to
this evolution that they might be going
through? I think that they have to
understand that if they're working in a
tech job,
and I'm no tech expert, but things
rapidly change. And though there may be
always something that's going to pay you
a lot of money, maybe there's not. And
instead of just gambling on the stock
market, maybe you ought to gamble on
yourself a little bit and start
investing in development deals, self
storage, owning your own properties,
rentals, businesses, whatever. You got
to start doing things to to bring in
money passively and bring in other
active income. Don't count on one source
of income.
Amen. It's a different kind of
diversification, but it's actually more
impactful. Arthur, that's it. That's
all. That's everything, man. I really
appreciate you taking the time and
sharing all your knowledge with the
folks out there. Thanks again. And I'm
guessing we might see you again on this
program, sir.
Probably. So, thanks a lot. There you have it. Like,
share, subscribe. Let's get the Capital
Shift podcast up at the top of Apple and
Spotify
Episode 5