Case Study 90,000 Sq. Ft. Industrial – Office in Atlanta, GA MSA
All week long we’ve been dealing with Operating Agreement Details, waterfall profit distribution discussions, and sending financial docs over to the Life Insurance Company doing our loan. This will slow down once we close DD and simply await the closing. Here are the Details:
90,000 sq. ft. (actually a bit larger)
8.7% cap rate on current income
National & Regional Tenants with 3+ yrs on Lease
10% Vacancy – to add to marginal value
$17,000,000 purchase price
$8,100,000 Capital Raise projecting 8% distributions beginning Day 31 (fully subscribed)
Why are We Buying this Deal?
This deal is projecting an 8-9% yield to Limited Partners paid monthly, beginning on day 31. If you’ve ever invested in syndications, you know this is special. It is very rare that distributions begin immediately. Normally they begin in the 1-3 year range-after a value add plan has been executed. This deal is special.
This deal is located in the Atlanta MSA, in one of the Northern suburbs. An 8.7% cap rate is a solid deal in a market like this. But, if this deal is so good:
Why the Seller is Selling?
This deal is 3 buildings, each about 30,000 sq. ft. One of these buildings is office space. The tenant was just acquired by a national company and resigned a 3 year lease. The risk is that the tenant leaves at the end of Year 3 when the National decides the location is redundant. 30,000 sq. ft. of Office Vacancy is the risk in this deal.
The Value Add – Redevelop the Office
If the office tenant leaves, we will redevelop the office building into 3 spaces of Industrial Small Bay-a red hot asset class right now. This deal only works because above the drop ceilings in the office building there is plenty of height to reconfigure the use. However, this is not cheap. A redevelopment of this size may run $500,000 or more. We’ve raised this capital up front-so Limited Partners will not receive a capital call in Year 3 if the tenant vacates.
Delusional Optimism – The Home Run Potential
If the office tenant leaves, the distributions will slow down as the space is vacant & during the time of the redevelopment project. It might be a tough year or so while that occurs.
However, if the office tenant stays, and we either give NO TI money, or even a few hundred thousand dollars, this deal becomes a home run. We have already budgeted for dealing with either of these scenarios going into the deal.
I wrote this article on how Delusional Optimism plays into my decision on whether or not to do a deal.
The Office Building
How to Invest Alongside Diamond Equity
Here at Diamond Equity, we have two main types of investments:
Syndication Deals: 5-10 year hold periods. 18%-25% IRR
Most of these deals mentioned above are funded through a few phone calls & texts without ever being sent out to this email list (like today’s featured Atlanta Industrial – Office deal – $8.1M fully subscribed).
If you want to be added to my personal short list to place capital in our deals, reply to this email with the estimated amount to deploy, your cell number, & two times & dates that work this coming week for a quick phone call.
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I asked a successful real estate developer this question over a lunch early in my career. He sat back & thought a moment before answering with one word: “Vision.”
What is a Developer’s Vision?
I’d define a Developer’s Vision is seeing something that can be done with a property that no one else believes is possible within the confines of maintaining a profit. Often, there is additional investment to create a superior project to anything found in comparable sales-with the faith that your project will command a premium.
Developer’s Vision in House Flipping
House flippers with Developer’s Vision often buy houses from us in rough condition and are much more creative in their construction phase than I would imagine myself. Small one story house receives a 2nd story addition. The façade is transformed by adding a larger porch or reconfigured entry way. Both require additional investment compared to a standard renovation project where no major alterations are made.
Note that Developer’s Vision is different than simply fixing up a house and selling it. If you look at comparable sales and match the renovation to what the market has already accepted, this is not really a visionary activity. It may be the safest route to a profit, but no new, grand “Vision” was executed.
Executing a Developer’s Vision is risky because there are no comps proving the value. You build a 2nd story addition and create a 4,200 sq. ft. house in a highly rated school district where no other sold homes exist with more than the 2,100 sq. ft. home you modified within a half mile radius to “prove” the market’s willingness to accept such a home. Risky.
However, this same inability to “prove” value offers the opportunity to price much higher than you could if there were already another property just like it. This is where Developer’s Vision pays off big-assuming you’re right and the market agreed. This is how new price records can be achieved.
Here’s an example where a small additional investment, adding a small porch and “address shutter” feature transformed the curb appeal:
The interior of this home was also impeccably designed, and I’d say with optimal Developer’s Vision. (Developer credit RESolutions Team, LLC)Photos
Managing the Risk -vs- Reward
In conclusion, for anyone reading who has limited experience in flipping houses, I’d suggest ALWAYS matching the renovation quality found in nearby comparable sales. You might implement Developer’s Vision at a small scale, as in the front porch example above to test your design skill. Before executing a larger Developer’s Vision, such as a large addition or any project exceeding $10,000, I’d plan to have at least 20 successful projects under my belt.
Danny Newberry, founder of Vail Commercial, joins Daniel Breslin to discuss Newberry’s evolution in real estate investing. He shares the key lessons he learned in his journey from residential properties to commercial real estate, including the benefits of triple net leases and the importance of strategic management. Danny also covers market insights, cash flow considerations, and strategies for finding value in commercial investments. Tune in to this conversation full of valuable information about making the transition to commercial real estate or looking to enhance their investment strategy.
This Episode is Also Sponsored by the Lending Home. Lending Home Offers Reliable & Low Cost Fix & Flip Loans with Interest Rates as Low as 9.25%. Buy & Hold Loans Offered Even Lower. Get a FREE IPad when you Close Your First Deal by Registering Now athttp://REILineOfCredit.com
Dan Newberry & I Discuss Investing in Commercial Real Estate:
Transitioning to Commercial Real Estate (00:01:39)
Danny discusses his journey from residential to commercial real estate, highlighting the gravitational pull many investors feel toward larger deals.
The Impact of “Rich Dad Poor Dad” (00:02:24)
He reflects on how reading Rich Dad Poor Dad at a young age sparked his interest in real estate investing.
First Investment Experience (00:14:30)
Danny shares his experience buying a sixplex during college and how it opened his eyes to the potential of real estate.
Challenges of Managing Multifamily Properties (00:21:22)
He talks about the overwhelming management intensity in multifamily properties and the cash flow challenges that often arise.
Advantages of Triple Net Leases (00:25:40)
Danny explains the benefits of triple net lease agreements, where tenants cover taxes, insurance, and maintenance, reducing the landlord’s responsibilities.
Evolution of Real Estate Investing (00:27:00)
He describes the progression from single-family homes to multifamily and finally to commercial real estate, highlighting the learning curve involved.
Market Insights and Timing (00:42:35)
Danny discusses how changes in the interest rate market influenced his investment strategy and decision-making processes.
Importance of a Strong Tenant Profile (00:39:50)
He emphasizes the significance of securing tenants with solid financials to ensure consistent cash flow.
Focus on Smaller Commercial Spaces (00:40:23)
He expresses his preference for small bay industrial and neighborhood shopping centers, noting their quick leasing times and lower management intensity compared to larger assets.
Long-Term Holding Philosophy (00:46:22)
Danny shares wisdom about the importance of holding quality assets long-term and understanding market dynamics to maximize investment returns.
Relevant Episodes: (200+ Content Packed Interviews in Total)
Investing In Commercial Real Estate With Danny Newberry
Danny Newberry, welcome to the show. How are you doing?
I’m fabulous, Dan. Thanks for having me.
Danny Newberry’s Journey To Commercial Real Estate
We’re going to get into investing in commercial real estate withVail Commercial Founder, Danny Newberry. He and I have been friends, business partners for the past several years. He’s got an interesting journey to the place where his business is now. We are going to dive into a lot of that. Why don’t we start? A lot of the people on in my network and the audience of the show, we have a lot of house flipping. We have a lot of real estate agents. We have commercial real estate investors.
I’m going out on a limb, there’s a lot of people reading who would love to make the transition as they see people closing commercial deals, hear about refinances. There’s just this gravitational pull, if you will, from larger deals to the starting place for a lot of investors in residential real estate. Would you mind going through the thought process and the moments in time as you shifted your gears into commercial real estate?
Absolutely. Yeah. I’ll take you back from the beginning. Essentially, when I was in high school, my grandmother actually gave me the book Rich Dad Poor Dad. I remember reading it and it just struck a chord. I was like, “This is awesome.” I’ve been looking for something. I had probably already started a half a dozen small time businesses for a high schooler, like candy machine vending business, kitten smuggling from Utah to California and a handful of other ones that were semi profitable. Ultimately, when I read that book, it just really hit me that I think I can create what I want with real estate.
At that time, I was really going down the multifamily path. The first building I ever bought was a vacant six-plex. It was my first year of college, and I put it under contract for $155,000. I ended up closing it with my best friend’s dad, who was a hard money lender. He gave me the $155,000 plus $30,000 to fix it up because it was completely vacant at the time. Over the summer, I had fixed it up, filled it up, and it appraised for over $300,000. I’m like, “Why would I go back to school for a degree? I don’t have to make less money than I made on my first real estate deal.” That was the eye-opener for me that I’m like, “This stuff is real. It works. I want to go into this full-time.”
I quit college and ended up going after a lot of different assets in Southern Utah. I decided to move to Las Vegas because I was like, “I need to go to one of these hard-hit markets, either Southern Florida Phoenix or Vegas.” I lived like two hours from Vegas, so I’m like, “This makes the most sense.” I ended up moving out there and bought a ton of these 4-plexes and 10-plexes and smaller apartment communities. What I quickly realized was the management intensity was overwhelming and my cashflow was not there. I was buying these things super cheap. I will say it probably didn’t help that I wouldn’t even consider them Class C or Class D locations.
They were more like war zone properties in Vegas and so your tenant mix is not always the greatest. At the end of the day, I was like, “I need to scale up.” I started going after some larger apartment complexes. I bought a 48-unit, I bought 138-unit apartment. That was where I started to realize having a team on-site that can basically manage the asset versus trying to have a third-party management company manage it from afar. It just made a night and day difference from that standpoint.
Something really interesting happened to me. I was working on all these apartments and it was a lot of work. It was not easy. It was not passive by any means, so don’t let anybody tell you that that’s the case. I had an investor of mine who owned a ton of shopping centers and industrial buildings and couple of office buildings. One day I asked him, “Why don’t you own any apartments yourself?” He goes, “I don’t want to work that hard.” I go, “What do you mean?” He goes, “I only buy triple net lease deals.” I go, “What’s that?” He goes, “Where the tenants pay and your taxes, your insurance, and all the common area maintenance. Anything that’s interior in their suite is their problem, and everything that’s exterior gets billed back to them.’ I was like, “That sounds amazing.” When a tenant beats up my unit at my multi-family property and leave it trashed, the only thing I can really do is evict them and go after them in the courts, which is usually cost me more money and time than it’s worth.
I was like, “This sounds really intriguing.” That’s when I really started to dive into the commercial sector where I then went off and bought an industrial building, a medical building and a shopping center. I just loved it. I remember you sign a lease, you add a couple of hundred thousand here, $500,000 there, $1 million here, literally with a signature. I was like, “This is incredible. Now it’s financeable. I can go to the banks, I can refinance before the tenant’s even in and operational. I could go refinance and if I needed to do tenant improvement and I can borrow that.” It was just a whole different mentality. I call it the evolution of real estate investing where you might start off with like single-families, then you scale up to apartments.
It’s a really easy concept to go from single-family to multifamily. Going over to the true triple net stuff, it was a learning curve. It doesn’t happen overnight. It’s a different language. You just underwrite deals much differently. Everything from leasing to the way you stabilize these things is just different. At the end of the day, I just fell in love with it. I really feel like I found my niche within retail and industrial and that was the beginning of a long-term business plan and what we’ve been focused on over the last decade.
Yeah, that’s good stuff right there. The evolution of real estate investing. I just exited like 35 units between two buildings. The 1031 exchanges are still open. If they don’t close, I don’t care, I’ll pay the tax. I’m in this I odd place with that. There was this false sense of security, Danny, in owning those buildings, like, “I’m paying them down and someday they’re going to be better rents,” and the whole thing. If you do the math on the turnovers, like the fifteen-unit building, while I was under contract to sell the property, I think like five evictions started, so it’s like a third of the building. They might have worked it out and got them paying again. I did not even look. I was so at the end of my rope with that.
As I look back through the ownership of both those buildings, every year, every penny of the cashflow was vaporized by 3, 4 or 5 months of no rent. While I’m getting a tenant out of there, I’m paying to do the turnover. I’m paying a leasing commission again to get it full. Maybe I’m evicting the same tenant in like month nine or something of the new tenant.
I don’t really know if that was the case or they were the old tenants. I didn’t even bother to look that close. I say it’s a false sense of security. This is probably C or D-grade, like you said, the rough apartment areas to own. Maybe it was an asset class thing. Multifamily investors laughing at me right now. “What an idiot Dan Breslin is for investing in the wrong class.”
I think there’s a sense of freedom that comes from that. My money’s now, I don’t know, 70% as far as like my net worth. Industrial, self-storage. We’re doing self-storage development as we speak. The center that we own together, those are passive for me. The partners are doing all the leasing. The partners are overseeing the construction. There’s a quarterly management statement that comes out or partner report, I guess it would be.
It’s just weird to have that false sense of security that’s like fictitious. There is net worth there. There are large checks that came from the sale of those apartment buildings. There’s profit there, but the actual ownership of them was such a break even, if not negative, tens of thousands, maybe $100,000 depending on how much repair had to go in a given year. It’s just got to be really hard to sustain that versus the triple net lease into the industrial. That’s like some of the pain. I’m done with the pain of those apartment deals.
I’ve got to tell you, I got into real estate because obviously the book Rich Dad Poor Dad was like, “Assets put money in your pocket every month.” I never realized that with apartments. I had a couple of apartments that did okay, but for the most part, the portfolio was break even if not negative, constantly. It was a never-ending battle. It wasn’t until I got into triple net, the triple net business that I really started to see what coupon clipper cashflow, Steady Eddie.
You can project it out for many years in advance of what you’re going to get based on your rent roll because the tenants don’t sign twelve-month leases. They sign 3, 5, 7, 10, 20-year leases. People always talk about this. I always hear it out there, “That’s really risky. What if they go out of business and this or that.”
It’s like, “Yeah, that happens,” especially for people that are just starting. We gamble all the time with that knowing that we can turn that space around very quickly, and eventually we’re going to get somebody in there. When you find the right operator, they typically are in business for a long time. We’ll find a nail salon, for instance. They’ve been around for a decade and it’s like they’re humming along, they’re doing great, they’re financially successful they’ve got good clientele.
They’re not going anywhere. I don’t see that industry changing. We’re primarily focused on the industrial and small bay retail. We just know that we can backfill that stuff so quick and easily compared to trying to backfill a grocery store box or a 100,000 square foot logistical building like that. There is a lot more time and money involved to get those spaces leased versus 1,000, 2,000, 3,000 square foot box. With the apartments, I just never realized the cashflow. I always wanted passive income. A goal of mine was like, “I want to get to X amount of cashflow so I can live a certain lifestyle.” The apartments just didn’t do it for me. I always made my money when I sold every time on apartments.
Ditching Long-Term Leases
Here’s another part of the growing pain I could share of my own. When I first started buying houses and renting them out and apartments and renting them out, one of the fears I had was what if somebody doesn’t rent this house, which just sits vacant? I’ve driven by vacant houses, like for a decade, 15, 20 years. Houses sitting vacant. I assumed that was a risk I would have in residential real estate. That did not at all turn out to be the case for any of my units. 30, 35, 40, 45 days on the market for a rental was a long time, no matter if it was a single-family house or an apartment unit. Granted, we’re in bubble epic bubble times of real estate in all of history for the United States.
When you find the right operator, they will be in your real estate business for a long time.
It may not have actually been you turn around your unit and get it rented in 30 to 60 days. That may not have been reality a decade ago, 15, 20 years ago, I don’t know. It doesn’t really matter. I got comfortable with that speed and that timeline. We just did a triple net lease on a single tenant warehouse deal. On March, we just got our first rent payment. We were vacant for like four months. I think we may have been 6 to 7 months on the market.
We went on the market for 6 to 7 months, and we filled 30,000 square foot space with a decent enough lease. That felt slow to me, Danny. I am so used to speed in the residential game. It’s like houses are liquid. Apartment units are liquid. It’s the small bay industrial and small bay retail sector. What is the average days on market timeline when you’re going to turn that unit and backfill it quickly?
I’ll tell you, it’s a lot quicker with small bay industrial. If you’ve got 1,000 to 3,000 square foot bays with a small 500 square foot office, one bathroom and just warehouse space, we typically will have a waiting list, if we get it out there on the market, never more than 30 days for the most part. Those stuff leases up fast. We’ve had great success in that. We’ve had great success in getting the lease rates up.
Typically, like even on those on the true small bays stuff, we don’t even like to sign long-term leases anymore because the lease rates have been going up faster than the 3% that you would typically put on a normal lease. If you’re signing a 3year lease at $10 a foot, and then you add 3%, that’s only $0.30 a square foot a year.
We’ve had it where we’ve gotten $1 or $2 every year in increases on a property. Yeah, on some of those, we like to do shorter term just so we can get it to market faster. Anyways, on the small bay retail stuff, it depends. I will tell you, if you’re holding out for nationals, that can take a long time. The holding out for a national, if it’s even national-worthy, every center’s different depending on your ingress, egress, your density, your rooftop density, your traffic counts, all these different things come into play. From start to finish with the national tenant, it can take three months. I’ve had it take almost a year from start to finish. When I did a Starbucks deal, that was about a year.
To clarify, Danny, that year was the moment the agent first looked at the site?
Yeah. They identified the site and said, “We’re interested.” It took a long time from start to finish.
To sign the lease?
It was just a piece of dirt. We had to do a whole build to suit. We actually had to negotiate what is it going to cost the landlord to actually build the structure for Starbucks and deliver keys to them where it’s basically move in ready? There was a lot that went into that into that process. If it was already a box that was ready to go and all they had to do was move in, it would’ve been a lot quicker. This was a true built to suit.
If you’re going with mom and pops, it can be quick. Even like on our deal that we’ve got together, we had a lot of mom and pops move in and we’ve had a couple of them not be successful and not make it, but because the units were rent-ready, they were turnkey, essentially, when we got it they were second gen spaces, they needed some work, so we had to go in there and clean them up and build them out.
Now that they’re built out, if that tenant doesn’t make it, there’s typically a lot of people that can come right in and literally just take it as is or very little build out at that point. That could be anywhere from 30 days to maybe 90 days. For the most part, when you’re dealing with these mom and pops, you can sign a lease pretty quick. A lot of times, they’re like regional tenants. Maybe they have 1, 2 or 3 locations around town. Those are just a lot easier to get done than a national tenant.
On the build out, that could be recycled. Are we talking like there’s a half bathroom, maybe two bathrooms in there, and like a counter from the tenant who failed? What type of actual build out is there? You’re not just like re-white boxing it all over again. Right,
Right. I’ll give you an example. We have this liquid. It’s called liquid. They’re not making it. We’ve got actually like two other tenants that there’s just not enough hood space in the market that’s open and available for these little restaurant tiers to come in. If you’ve got a hood and you’ve got basically a move in kitchen ready to go there is a hand, there’s a waiting list for those type of suites.
You put it out there and you’re going to immediately start getting action, and then you get to sift through and decide, “Who do I want to put in the center? What’s going to be the best fit? Who’s got the best financials? Who’s got a good forecast or has existing experience and other locations? You look at all those different factors and to determine who’s going to be the best fit. Yeah, like something like that. We don’t even have it out to market, but we already have a list of tenants that would take it like that if it were available.
I assume that TI was your responsibility originally to put the hood and the kitchen in? What’s that number?
It depends on the build out. Call it $20,000 to $50,000, probably in that range.
Lease rates are going up faster than the 3% that you would typically put on a normal lease.
Is it normal for the landlord to do that for those type of tenants?
Two Types Of Landlords
Yes and no. I’ll tell you the difference between us and other landlords. There are two types of landlords. One landlord, which we love buying from, is the type of landlord that doesn’t give their tenants any tenant improvement dollars, doesn’t fix up the property and essentially wants to lease everything as is to anybody coming in. Whoever’s coming in is going to put the full investment into the space.
Here’s where I see the value and why we don’t do this. They’re typically going to get, we’ll just call it market rate rent for an as is space would be $10 a foot. If we go in there and we do the tenant improvements and do the build out, we may get $20 a foot for that same space. When you look at it on a cap rate, we might be creating $6 to $10 for every dollar we put in the building or in the build out.
If we’re going to go put in $100,000 in tenant improvements, I’m hoping that that increased the value of that space by $500,000 or whatever it might be. It’s going to be significant compared to the investment in the space. If we’re handing it over turnkey like that, we’re going to demand a much higher rent, ultimately resulting in a higher value of our property.
You got the benefit of the backup plan. If they fail, that equipment is yours and that tenant is not scrapping all the equipment they put in there and turning over a box again that needs a bunch of work. How often have you exited? When I’m underwriting shopping centers myself, I can see the TI packed rents in there. No, we’re not getting $34 a square foot for this space. It’s just not happening. The market does not demand $34 a square foot. It might demand $15 or 417, but there’s a TI package in there. Sure enough, there is some kind of TI package in there. That makes me hesitant as a buyer to want to pay NOI type of income on some of that TI dollar for dollar. Have you been successful in selling that to the next buyer and getting full freight on the cap rate and the TI rent?
Yeah, so I’ll tell you, we don’t like to do that in general, where we’re way beyond what the market is because anybody’s going to come in and underwrite and say, “All the other shopping centers in the area, lease rates are between $10 and $20 a foot. If you’re at $34, you’re just so far off the mark. Anyone who’s going to come in is going to discount that.
We be at the higher end of market, whatever that is. We don’t want to be above that because then yeah, again, we’ll get dinged on it on our exit. We are conscious of that. There are certain occasions that you’re going to get a higher rent and you’re just like, “If I hold it, I have a higher cap rate, better cashflow,” and if I want to flip it, you just got to come to reality of what the market is and what someone’s truly going to offer you and you’re good with it then great.
How much of a discount will the bank ding you on the refinance for that $20, $24 a foot for the built out TI space? Are they also taking some off of that income?
Typically, they’ll be a little more conservative on it. It’s typically like a give and take. You can go back to the appraiser, you can go back to the bank and say, “We did all these finishes.” It is like a nice restaurant. You go into some restaurants and they have a couple of hundred dollars a square foot and tenant improvement you can see. You’re like, “This is really nice.” You go into the other guy and they’re $20 a square foot build out, and you can tell.
There is an argument to be had and to be made for that. That’s just really laying it out for the appraiser and for the bank and letting them know. It may not even be like your comps are on this street, but if you’re in a city and you can point to other restaurants that are within the city and say, “Here’s a comparable build out and their valuation and what it traded for.” Instead of looking at it from more of a localized aspect, you’re looking at it from more of a macro point of view.
Working On Short-Term Leases
You build a nicer house with nicer finishes, it should appraise for more. You spend $650 a foot building a house versus $185, clearly that’s a multimillion-dollar home versus the starter home. That’s logical. Danny, where do you fall on the buy and hold forever spectrum versus everything is sold as soon as it’s baked and ready?
Some investors that we would hear about are like, “The guy held everything forever. He is 90 years old, he’s got $100 million in real estate, and it’s all paid off. On the other end is nothing’s probably in portfolio more than 49 months and it’s all sold. A lot of times, to pay investors off and keep it going. Where on that spectrum do you lie in general? I know that deal by deal is clearly going to be impacting that.
I have two buckets. The fix it up, fill it up and flip it, and then the long-term hold, refinance, and hold it. It’s been different lately and the market’s constantly shifting. I will tell you, from my standpoint, if I don’t have any partners or I only have like 1 or 2 partners, I love the idea of holding long-term, and especially if I love the asset, love the area. In the beginning of my career, I’m guilty of selling way too soon because I wanted to, number one, pay off my investors, number two, get some cash in the bank as I was building up my nest egg. Now, we’re looking at stuff on a long-term hold aspect.
When we come to the point where it’s ready to either exit or refinance, we’re looking at the market conditions. Right now, it’s not the best time for long-term fixed financing putting 10-year debt and you’re going to be at 7% plus. It’s not as attractive, obviously, as it was years ago. It changes the projections of what you were looking to do. For me I am still holding quite a few things for the long-term. They’re not in big syndications or they’re smaller deals. Not all smaller deals, but smaller partnerships. For larger syndication, unless we can refinance and pull out a majority of the cash, we’re probably flipping out of it, for the most part.
Some of these I’d love to hold long-term and it might be one of those things where we’d go back and say, “We’re going to go in for a refi. Who wants to stay in and who wants to get out?” That could be a conversation had. I definitely agree with you that there is something to be said for never selling. I have partners like that and they’re some of the wealthiest people I know. Cashflow is amazing. They can live any lifestyle they want. I’m trying to do more of that and just really build up a really quality portfolio that never sell. We do a lot of deals though, so we’re constantly recycling money and then we’re holding certain things. That’s why I say I have two buckets. It’s nice because one generates cash and the other one generates cashflow.
When I get residential houses, you’re fixing and flipping, there’s a finish line and it’s 6 to 12 months from the day you go to settlement on the A to B purchase. Fast, transactional, in and out. If you’re going to build a portfolio of houses, 10, 12, 50, 100 or more, if you’re going to buy apartment buildings, if you’re going to buy any of these assets that we’re really talking about here with maybe the exception of to build a suit Starbucks, which is a little bit of a set it and forget it. Less of a business, more of a real estate investment. These are businesses, Danny. Every single one shopping center that is valued at $15 to $20 million is a business that has to be run. It has to be managed. Someone has to do the snow, somebody has to do the landscaping, someone has to renegotiate the landscaping contract.
Always know the real estate deal you are getting into. If you are not careful, you can get into something that looks amazing but could become your worst nightmare.
Someone has to drive by and make sure the landscaping contractor actually did the work. It’s a never-ending business. It’s almost like you could apply the Warren Buffet mindset to any of these assets as well. It’s like, which of these businesses has a moat in the form of the location, has a competitive advantage due to the traffic patterns that exist for that specific business. It’s an advantageous piece of real estate and maybe it’s an advantageous tenant mix that you put together. This thing is just working magically.
You would really regret selling that one later if it turned out to be this quality business in the way that Warren Buffett might talk about it. Whereas on the other end of that is there’s probably a whole lot of other subpar businesses that somebody wouldn’t want to own where they have to go out there and run the lawnmowers themselves in the landscaping thing all the time versus somebody who’s built up some team with 100 trucks and 100 teams who are doing the lawnmower.
The larger scaled up business would be one you’d want to hold forever and a smaller mom and pop one would be one that maybe it is worth buying that one for $1 million, putting in some marketing, putting together the business and, and fixing it a bit, and then selling it for $3 million and making the check and keeping it moving.
I think when I realized that my rental portfolio was a business, and the reason that I sold most of it already is I knew that I didn’t have the time and bandwidth to apply building a great business to manage my own real estate while I was in the middle of building, running and managing Diamond Equity and flipping a couple of hundred houses a year. I made a decision that my energy was going to be a better return on time for me and my partners in the main business. That was what is driving me to sell the rest of that portfolio off.
It’s like this concept for me of looking at every one of these balance sheets, the rent roll, the income, the expense. It’s a complex business, maybe not as complex as some other businesses that you might buy. We can analyze the risk in these commercial real estate assets, these commercial real estate businesses one by one, and you can see the comps a lot easier, and you can see the potential for the income a lot easier to mitigate the risk compared to other businesses. At the end of the day, you’re buying an operating business and maybe the seller didn’t realize that’s what they had, and you’re implementing these systems to build the value there. Holding onto the great businesses for the long haul, the great assets is a great place to be.
I have a friend who who’s owned a lot of property. Maybe half a decade ago or something, I asked him, I go, “How do you know when to sell versus hold?” He goes, “Danny, you never really know going into a deal. I can’t tell you why or what, but you can get into something that looks amazing and it becomes your worst nightmare. One problem turns into another, which turns into another, you solve one another one comes up. I can’t tell you why, but those ones, after about a year or two, you’ll figure it out if it’s a holder or if it’s flip out of it. It’s his philosophy.
It’s just really you might buy something and it’s just Steady Eddie. You spend very little time managing it. There’s no headache involved. It cashflows really well. He goes, “Those deals you just got to hold on for the long-term. You’ll know a year or two in.” That’s an interesting thought. You think you’re going to go into something and hold it forever, but I’ve had those properties and they just one headache after another. That’s been something I’ve implemented somewhat into the buy and hold versus buy and flip model.
Least Amount Of Money Put In A Deal
I love that rule. What’s the least amount of money you’ve ever put down on a deal excluding, “We raised $5 million for this, or whatever, so I didn’t put anything in there.” From a creativity standpoint, Danny, what’s the least amount of money you’ve had to put into a deal commercial?
I’ve gotten to a deal with nothing. Are you saying like I was able to borrow all the money with existing relationships that I have, and no partners? I’ve done deals like that. I’ve done seller financing deals. I’ve done deals where I literally got preferred equity and I got cash back at closing. I actually got a big check. I just closed a $15 million deal and my down payment was $866,000. Our year one cashflow is $260,000 with 2.5% rent bumps every year. I’ll have all my cash out in year three. I have an eighteen-year sale lease back on that deal. That’s going to be a nice long-term Steady Eddie. It’s going to be a good one.
Is there a personal guarantee on that loan?
No. Non-recourse.
You have the 866 at risk until that money’s back out of the deal and then after that, it’s smooth sailing.
I have risk for three years, but we got a CMBS loan on that one and then we had preferred equity from the sellers. There was a ton of background checks with this tenant. They’ve been around since the ‘80s. They were about $160 million in revenue in 2024. CMBS literally went through all of their ledgers, all their clients, called them all up, verified everything, and at the end of it, they said, “They’re as solid as a Starbucks.” I was like, “That’s great.”
Is this the Reading deal?
It is.
Sometimes, the only way a real estate deal would make sense is to reengineer it and make the numbers work.
Congratulations.
Thanks. Not that Reading’s great, but the tenant and the cashflow are fantastic.
There’s something to be said there because I am from Delaware County and Reading is like Berks County, so it’s probably about a 45-minute drive from where I went to high school to Reading, PA. Any of our readers in the Philadelphia regional, like, “There’s nothing at all worth $15 million at all in the whole city of Reading.”
I apologize to my Reading audience, if anyone’s there. The market’s actually gotten pretty freaking hot. I’m shocked at what properties are selling for in Reading. It is one of those beneficiaries of the market. What seems to be now that the housing shortage has pushed the demand into markets that didn’t have a lot, Reading happens to be benefiting from that. I think long-term you could see some change over there that’s helpful.
What I learned is it is so easy to judge a book by its cover in the commercial real estate business. A lot of money is made in areas, Danny, where the locals are like, “You never buy anything there at all.” I’m sure there’s a lot of people who take the call on that a deal and they’re like, “No, we’re not going to touch anything like that. Never going to happen in Redding.” On this specific deal. They would’ve never dig in a little deeper.
I was just throwing this out there. Think about all these qsrs that we see. These old Starbucks buildings, these old Carl’s Jrs.. Those buildings are crap. Especially if they’re over 20, 30, 40 years old and they’re still sitting out there, but if they have the right signature behind it, it’s worth millions of dollars. If it were vacant, it’d be worth a couple hundred thousand dollars. It’s all about who’s back in that lease and how long it is.
Maybe that’s the answer to the question that I was thinking. It’s like what made you want to dig a little deeper on that one as it as it crossed your plate in the first place?
Where that came about was when the interest rate market changed and shifted from the low-3s, mid-3s, and it went skyrocketed up to the 7s, basically, everything went stagnant in the commercial world and probably the residential world too for a while there. There wasn’t a lot of transactional volume going on. I was wondering to myself like, “If I can’t go borrow money at 3% anymore and I have to borrow it at 7% and I have to go buy that same deal at a 7% cap, there’s no spread, you’re not getting a spread between your debt and your cap going in, how do you make deals pencil or work?” We went a whole year without buying a single asset, which was the longest time I’ve gone since I started in 2009 of not buying a deal.
It was a dry spell. That’s when I came up with the concept. I said, “What if I could pay their price, get their cap, I’m the only buyer at the table, but I’m going to have them stay in for my equity? The way that I’m going to structure it is in a way that secures my position in the asset so that way, I’m not at risk if it doesn’t work out.” Basically, on that deal, it was a sale lease back and we use their equity to be our equity, giving them a return on that equity that was lower than the 7% caps. It was like 4% and it’s basically tied up for 18 years. If they ever stop paying rent, it gets wiped out within one year, it’s 5x damages.
Now my basis in the asset is no longer $15 million. It is $5 or $6 million. It changes drastically if they ever bailed or whatever. On top of that, I got non-recourse step for the first position loan. That was the only way that that deal would make sense for anybody. It was re-engineering it to make the numbers work. I said, “If we could do that on other deals, there’s lots of deals out there that are stagnant, sitting out there not moving, not trading, because there’s just no gap. The only person that can make it make sense is an all cash buyer.”
Who wants to do that on the stabilized sale leaseback deal at like above market cap rate basically, right?
Yeah, exactly.
Focusing On Small Bay Industrial Multi-Tenant Asset
What are your favorite asset types these days? 2025, in market now, what kind of calls are you looking to get right now as we speak?
Right now, I’m highly focused on small bay industrial multi-tenant assets. Call it somewhere between 10,000 to 100,000 square foot multi-tenant industrial facility where the unit sizes are somewhere ranging between like 1,500 square feet up to like 5,000 square feet. There can be some bigger ones, whatnot.
A lot of times, you can cut those back down though into smaller units, but I love the 1,000 to 5,000 square foot bays. That’s ideal, and then small bay neighborhood shopping center. 1,000 to 5,000 square foot suites in a neighborhood shopping center where you’ve got your Subways and you’ve got your taco shop and your barber. Those are what we’re looking for. Typically, everything we’re buying, there’s got to be some meat on the bone.
There’s got to be some value add, whether it’s vacancy, whether it’s below market rate rents that we know we can turn. A lot of times, the properties need work. They need to be really refreshing and cleaned up and properly managed. Yeah, we’re doing a lot of that stuff in the Rocky Mountain and Southwest. I call it the southwest Rocky Mountain region. Arizona, Vegas, Utah, Colorado, New Mexico, Texas, those are our primary areas of focus, although we do stuff around the country. We got stuff here and there.
How do you manage something, let’s say in Memphis, Tennessee, living in Scottsdale or Utah or somewhere that’s like a 6 or 7-hour plane ride?
Hold quality real estate assets for the long term especially if you got in on a really great basis. Just let time do its thing.
I couldn’t do it if it was a small apartment building, that’s for sure. With retail or industrial, typically, we’ll get some boots on the ground. A lot of times, it’ll be one of our tenants that gets a discounted rent or if there’s somebody local that we trust and we know. Maybe it’s even a management company that we’re not paying them the management fees because we run all the accounting through our teams and we run all the calls and field everything through our office so we know what’s going on. We have a handle on every property.
We like to have someone that is boots on the ground walking the property, whether it’s weekly or a couple of times a week. They’re reporting to us of what’s going on. If you talk to your tenants, they’re going to tell you what’s going on. If there’s anything weird going on or deferred maintenance, you’re going to hear about it. Yeah, having boots on the ground, I’d say, is the number one thing. You always want to find someone who can really be your eyes and ears on the ground and then you can manage from anywhere, really, as long as you know what’s going on. There’s no reason you have to actually physically be there as long as you have somebody that is.
Do you guys implement any technology like camera systems out in the parking lot or anything like that as a standard procedure?
Yeah. Camera systems are great, especially if you’re going to hold long-term. It’s worth the investment. A lot of times, we’ll either try and get one of our tenants to be our eyes and ears, and usually, when you do your tenant interviews, someone loves to be that person. You can tell pretty quickly they’re going to tell you everything about the center, everything about the property for the last twenty years, and you’re going to learn more than you ever would’ve looking at anything on paper. You ask that person, “How would you like to be our eyes and ears.” They feel like they’re really part of the community, part of the center. It’s great doing that.
Danny’s Book Recommendations
I’ve got a couple wrap up questions here that we ask all the guests. We mentioned Rich Dad Poor Dad. Excluding that book, are there any recommendations, or maybe it’s even a podcast or some other source of information that you think readers might gain a lot of value from, Danny?
For real estate, there’s a lot of good ones out there, but Real Estate Titans was a great book. It just talks about the titans out there that owned massive portfolios. Some of these REIT managers, fund managers, guys like Sam Zell. It’s super interesting to listen to it from a guy or from a lot of different titans out there that had multi-billion-dollar portfolios.
Danny’s Crown Jewel Of Wisdom
The crown jewel of wisdom. Danny, if you could go back to 2009, knowing everything you know now, what would be the crown jewel of wisdom you would share with yourself then?
Two things. When there’s a crash, when prices are dirt cheap, understanding lots of different types of real estate and markets as well is really beneficial because then you can just swoop up everything and swoop up as much as you can and hold for the long-term. I look back at some of these deals and I’m just cringing at why I sold too soon. Not just even holding for cashflow because the cashflow a decade later, just looking at it, would be absolutely game changing. I’m like, “Why did I sell?”
At the time, I’m making a couple of hundred thousand or $1 million or whatever, and like, yeah, it felt great in the moment but to look and see how those assets are now performing, you cringe a little bit thinking about it. I would say going back to the philosophy of holding the really quality assets for the long-term, especially if you got in at a really great basis, just let time do its thing. With inflation in your rents, it is just going to be incredible cashflow. If I would go back, I would’ve gotten a true triple net leases sooner and I would’ve built a little bit of a team sooner and I would’ve held a lot more.
Where can readers get more Danny Newberry?
They can reach out to me. Our website’s VailCommercialGroup.com. We do a lot of joint ventures. We do a lot of partnerships where somebody who may need help with financing or signing on debt or bringing capital to a deal management, whatever it might be in a project. We’re always interested in getting involved in stuff that meets our criteria, especially if it’s in the Southwest or Rocky Mountain region. We do a lot of those type of partnerships and you can reach out to me at [email protected] and we can schedule time to talk.
The final question I ask all of my guests, what is the kindest thing anyone has ever done for you, Danny?
That’s a tough one. I really got to think about that. I’ve had a lot of things in my life. I’m very blessed to say that I have great people in my life. The kindest thing is my mother bringing me into this world. Can’t beat that one. Mom, thank you.
It’s a great place to start and a great place for us to finish. Danny, thank you for coming on the show. I got a couple of pages of notes here. I had a had a good time. I really appreciate you joining us here.
Yeah. It’s been awesome. Thanks again for having me on. I really appreciate it.
Danny Newberry is the founder of Vail Commercial, focusing on commercial real estate investment and management, particularly in small bay industrial and retail spaces. He is known for his strategic approach to identifying value-add opportunities and is a respected thought leader in the real estate community.
One of my first memories in life was my greatest loss. This happened somewhere around 2 or 3 years old. My favorite book at that age was The Little Engine that Could. I must have brought that book everywhere with me-so it came to pre-school on that fateful day.
Mom picked me up but placed the book on roof of the car-then drove off. The book disappeared and I was distraught. We looked around everywhere back then, but couldn’t find a replacement copy. I don’t remember the details of the event or the time period, but I still feel the sense of great loss. That feeling of loss exceeds any of the monetary losses I’ve experienced (some of which exceed 6 figures).
Alas! A Lifelong Win!
“I think I can-I think I can-I think I can-I think I can-I think I can-I think I can-I think I can-I think I can-I think I can.” This is all I remembered from The Little Engine that Could. What a fantastically strong belief system to install in the mind of a 3 year old! Most of my life, this mantra has applied: “I think I can!”
Faced with any challenge, “I think I can!” Considering executing that first fix & flip, “I think I can!” Build a $15M development, “I think I can!” Hoping to win that next deal, “I think I can!” Once any challenge has been met, this becomes, “I know I can, because I’ve done it before.”
(Aside, as I researched an wrote this, I am now realizing my mom might has simply gotten rid of the book to avoid my likely endless requests for her to read it to me… As an adult, I’d completely understand this now if that was the case. You can see why if you read it yourself.)
I Think I Can – MAKE A DEAL!!
Here’s an example of how this created the life I live now. I am a Deal Maker. Any deal begins with: “I think I can win this deal,” and therefore I make an offer. If you don’t believe you have a shot at winning the deal, you’ll never make the offer.
Further down the track on Deal Making is your follow up. Again, “I think I can win this deal,” and therefore, I follow up. If you don’t believe you have a shot at winning the deal, you’ll never follow up. In Diamond Equity’s experience, about 45% of deals occur 30 – 1,819 days after the offer is made. That is a long, strategic follow up cycle requiring a strong belief system to stay the course.
Next time you consider a deal, remember, “I think I CAN win this deal” and MAKE THE OFFER! And when the offer isn’t immediately accepted (which is 99% of the deals that get done..), remember to follow up diligently and earn that deal!
Seasoned real estate investor and entrepreneur Fernando Angelucci is here to break down his strategies for finding success in self storage development. Joining Daniel Breslin, he presents their three-point approach, like three legs in a stool. Fernando explains how he considers location, technology, and the current market dynamics in choosing a self storage to invest in. He also shares his experience in dealing with zoning risks and how to handle new real estate development versus retrofitted properties.
This Episode is Also Sponsored by the Lending Home. Lending Home Offers Reliable & Low Cost Fix & Flip Loans with Interest Rates as Low as 9.25%. Buy & Hold Loans Offered Even Lower. Get a FREE IPad when you Close Your First Deal by Registering Now athttp://REILineOfCredit.com
Fernando Angelucci & I Discuss Self Storage Development:
Current Market Trends (00:03:21 – 00:04:22)
Innovative Business Model (00:11:55 – 00:12:37)
Investment in Technology (00:19:50 – 00:20:30)
Long-Term Vision for Investment (00:36:20 – 00:37:30)
Engaging with Municipalities (00:46:30 – 00:47:48)
I’m doing well. I’m in Florida. For whatever reason, I love location stamping my episodes. I ask most guests where in the world are you recording from?
Yeah, I’m currently recording from Curitiba, Paraná in the South of Brazil.
Navigating The Self Storage Space
One of the more interesting locations we’ve heard for sure on the show. For readers who don’t know probably some of your story, if you could start there, would be how Brazil and South America ties in with Chicagoland, which is how I know you is, because you’re aware of this local guy who’s not quite as local as may have originally thought.
I’m the son of two immigrants from Brazil. This city is actually where my dad was born. I have family here. I’m taking care of one of my family members right now. The story moving forward is my dad went to the United States. He was an engineer. My mother also went to United States at a different time. They actually met in church in Chicago and then I was born and raised there.
I went to school there. I ended up going to University of Illinois, graduating, also becoming an engineer. Prior to that I read Rich Dad Poor Dad when I was sixteen years old. It changed the whole way I thought about making money, especially the way that my parents taught me how to make money. Their old school American Dream was go to school, get good grades, go get a job at a Fortune 500 company and then retire the pension within 40 years.
Obviously, that book tells you to do the exact opposite of that. I lasted about thirteen months in the engineering world. I immediately started flipping houses, wholesaling contracts, buying rental properties, buying apartment buildings. Around 2016, I started to see this trend where the government started getting involved in habitation-based real estate in private investors businesses. A perfect example of that’s during COVID when they basically told tenants that they didn’t have to pay their rent and you couldn’t do anything about it. You couldn’t evict them. The investors, they still had to pay their mortgages and property taxes or else they would lose their properties.
Just to interrupt you a second there, that trend is probably more prevalent as rent control across the country. It’s been popping up for a long time. It is law in a lot of markets. It is hanging looming threat in a lot of markets. In some markets, maybe it’s not at all on the radar, but with the housing shortage and with the prices of homes and inflation, I think that threat has certainly crossed every residential real estate investor who holds rental property that way. It’s probably crossed their mind and maybe one of them things that could come up at any minute anywhere in the country.
We always thought it was primarily just going to be in LA and New York City, but then you start seeing it creep into the like the Midwest where your really good rental properties are. The really good returns. Look at Minneapolis now. I think that it’s one of the most hardcore tenant friendly cities in the country now, even above New York and Los Angeles because of the rent control, the restrictions on being able to raise rents until you do some substantial amount of rehab.
I know a lot of investors that they ended up having to sell all their rental properties in that market because it just didn’t make any more sense to hold them there. That was a tough trend to see. When we started seeing this trend closing in on Chicago and the Midwest, we decided, “What’s a good asset to get?” We started looking at things that are instill in real estate but does not allow someone to live inside of your investment. It allows much more control and a much lower amount of risk or risk mitigation for ourselves and our investors.
We came upon three things. It was data centers, mobile home parks, and self-storage. Right off the bat, data centers were out because to build a reasonable sized data center, you need something like $150 million in equity and then small data centers like a $500 million data center. That was out. I knew a lot of investors that were already in the mobile home park space. I called them and said, “What do you think about this?”
They said, “Fernando, listen. On paper, yes, they claim that mobile home parks, you just own the land. You don’t own the property, you’re never going to be a landlord, but in reality, you end up having a lot of park-owned homes and you become a landlord again and you’re renting those park owned homes to the tenants.”
We scratched that and then we were left with self-storage. As I started to dig in, I started to see that the numbers for self-storage were just absolutely fantastic. Not only from the way that the state law treats our asset class, so codified in state law, but then also the way that it reacts in recessionary environments. This is a very apt time to be doing this episode because I think the S&P 500 has dropped at about 10%. It is very recession resilient asset but it also does very well when the economy is doing well because people start buying more things, they start storing those things.
When the economy is not doing so well, it’s called the trauma and transition business, when you’re downsizing houses, when you’re moving in with friends because you can’t afford your rent anymore, when you’re changing locations for a job, when you get divorces type of stuff, self-storage does really well.
Self storage does really well when you are downsizing houses, moving in with friends if you can’t afford rent anymore, changing jobs, or getting a divorce.
For example, during COVID, which is probably the biggest recession we’ve seen in recent times, self-storage was operating at a 80% year over year rent growth because the amount of people that had to move stuff out of their houses to create a home office or to create an area for their kids to go to school virtually and they put all that stuff into storage. It worked really well for us.
Same thing when you look at the last major recession, the great financial crisis of ’07 to ’09, I know you were very active during that time, the S&P 500 dropped 22% over that period. During that time, self-storage only dropped about 3.4%. That’s a minor hiccup to swallow compared to say your portfolio just being wiped out.
The self-storage, I think the demographic I heard was 80 million Millennials now became the largest demographic that we have active. That’s you, that’s me. That’s all the age group probably between your age, my age, who’s reading. It’s like 28 to 34 or something like that. Anyway, they’ve hit their peak earning years. This is why we have a housing shortage because there is the largest number of home buyers reaching that age, getting raises, moving up the ranks at their employers at finally at 35 and 40 years old. These people have tons of stuff. I look around my own house. I’m trying my best to be minimalistic and frugal but that Amazon truck just comes 3, 4, 5, 6 times a day sometimes. I think you’re also going to see a lot of this self-storage demand continue to come from people just buying more shit.
We have such an easy method in society in 2024 compared to 2004 to have stuff delivered. The Millennial expectation is I push a button on my phone and it’s there in two days. That is for me. I’m like, “Amazon can’t deliver this for two days? What the hell’s the hold up here?” That’s not how it was back in 2004 or 1984 or 1994. I think the ease and ability to get crap delivered to your door is a tailwind yet to be born out in the demand of self-storage. I think we’re going to continue to see that growth of storing stuff for people’s inability to part with the stuff that they’ve then collected.
I think that adds to another crisis that again started during that great financial crisis where a lot of contractors went out of business and decided never to come back. A lot of appraisers went out of business and decided never to come back. The amount of new homes that they were delivering dropped off a cliff. We have yet to catch up.
If we build in it on top of what we’re already building, if we build an additional million homes per year, it’s going to take another ten years before we’ll finally get to a point where supply will meet demand. In addition to that, you have this inflation that we’ve experienced over the last twenty years that has caused home prices to go through the roof. I’d call it 7% interest if you want to buy a home on a 30-year loan, but compared to that same home 20 years ago, it is now 3 or 4 times the cost.
What are people doing? Instead of opting for the 5-bedroom ranch in the suburbs, they’re getting a 2-bedroom apartment in the middle of downtown because then they don’t need a car. They can take public transportation, they can walk these walkable fifteen-minute cities, if you will. What are they going to do? Instead of having those extra three bedrooms, they’re just going to going to store everything that they don’t use on a daily basis in a self-storage unit. The things that they use maybe on the weekends like mountain bike or a kayak or whatever, you’re just going to go into your storage unit on the way out and pick that up and then drop it off before you come home.
Let’s say in summertime, instead of keeping all your winter clothes in your house, you’re just going to leave them in the storage unit. As the seasons shift, then you’re going to switch everything out. Now storage facilities are being used as like a second or third or fourth bedroom that these Millennials can’t afford now like their parents could during 20 or 30 years ago.
To build the houses now with inflated material costs and make a 7% interest rate work with the builder, the developer doing some rate buydown, they have to cut costs somewhere. That means where they used to be able to put a basement in there, they can’t afford to put the basement. That means where they would get 2,400 square feet a few years back when things were cheaper to build and finance, now maybe you’re getting 1,800, 1,700. Maybe you’re getting 1,100, 1,200.
It’s funny, you can go back through time, if you pay attention to all the public records that you look at in single-family houses, you can see how the economy was doing at different points in time. If you look at like a 1933 built house compared to like a 1926 built house, the 1926 is likely going to be a little bigger. They use stone versus brick or stone versus frame and stucco. A lot of little nuance details.
Fernando’s Current Business Model
You could track that and look at that almost like rings in a tree to see the age. That’s how the rings of the real estate market exist in the public record. You can like see how much water do we have in the economy at that point in timely. Fernando, let’s switch gears a little bit here. Would you mind giving us an overview of your business model and what keeps you busy and excited now?
Yeah, so at SSSC, we are a self-storage developer, wholesaler buyer. We do value add. We have three main legs to our stool. In the last six and a half years, we’ve done 56 properties combining to value of around $255 million. That’s across 24 states. The first leg of the stool is the aggregation play. Right now, almost 70% of the self-storage facilities in the United States are owned by mom-and-pop operators. These are people that own two or fewer self-storage facilities, something that is considered non-institutional.
The top six publicly traded companies in the self-storage space, they only own 18% of the entire stocks and they obviously want to grow that share. What they’re trying to do right now is buy more and more facilities from these smaller operators, but they don’t want to spend the time the manpower, the Ivy League salary for their data analysts to just work on one facility.
They would rather buy a portfolio of facilities because it’s roughly the same amount of underwriting costs from a manpower standpoint looking at 1 facility versus 20. That’s our first leg of our stool. We’ll go into these mom-and-pop facilities, we’ll buy them, we’ll expand them so that they’re institutional in size, which for us is usually like 60,000 square feet or larger.
We’ll will increase the revenue by using artificial intelligence to see what our current customers can pay and what they can absorb if we were to increase rents and how much we should increase rents per person. We’ll also do competitor analysis to see what is the market in the area. What are the competitors charging, are they losing clients? Are we able to steal clients away from them? Then the second half of that stool is then dropping expenses.
When you work on things at scale, you have economies of scale so you’re able to get better pricing on insurance. You can afford better attorneys to fight your property taxes, your operating software, you get better deals on those. You’re able to drop expenses that way. Not only are we increasing the size of the facility, but then we’re also increasing the net operating income, which commercial real estate is valued. The commercial real estate, the value is based on how much income it could produce.
What we do is once those things are stabilized, we put them into portfolios of 10, 15, 20 properties at a at a time. We sell off that basically done for you portfolio to a publicly traded REIT or a private REIT because they have a much cheaper cost of capital than we do maybe they go raise a bond for less than 1% in Europe, maybe $500,000 or $500 million bond. They have a line of credit with Blackstone or Barclays that is substantially lower than what you or I can get when we walk into a bank. They’re able to pay much more and still double their money. For example, if your combined cost of capital is 2.5% and you buy something at a 5% cap rate, you just doubled your money on that investment.
They can’t have 2.5%, 1.5% cost of capital in this market, do they? It’s got to be a little higher right. Do you think bonds are selling for 3.5%, 4% right now?
Yeah, I’d say new bonds, but that doesn’t mean that they still have money that they need to outlay that they raised before. For example, Extra Space used to be I think the number three operator. They went to Europe and they offered a 0.875% bond to the European market and raised something like $500 million. What they proceeded to do was buy life storage to then leapfrog into the number one position as the largest operator in the country.
Do you know when that was that they issued that bond? Was that like a few years ago and they got it off 2022 or something like that?
I think it was when rates were still, fund rate was still like between 0% and 0.25%. That’s their equity. Their equity is less than 1% and then now you have the debt that was available to them during those times and I’m sure they locked in some pretty large amount of debt on revolving lines of credit. Their cost of capital is still substantially lower than say you or I
The whole point of that first leg of the stool is buy properties that they are not interested in buying on an individual level, increase the value add, increase the size, put them into portfolios, and now all of a sudden, when you put a $50 million price tag on that portfolio across 15 deals or 10 deals, then now they’re interested in in acquiring those.
It’s a classic private equity roll up strategy. That’s how private equity works. They have five businesses, each of them doing $1 million in profit, now you have a business that’s doing $5 million in profit, you could sell it up the chain to the next larger private equity firm who’s looking to buy $10 million, $5 million profit businesses all in the same space and then sell them up the chain again. I guess at some point, they end up on the stock market. Very interesting. The first leg of the stool is the aggregation play. What comes next?
The problem with the aggregation play is that these are facilities that are relatively small. We’re talking about when you first buy them anywhere between 30,000 to 35,000 square feet, up to 60,000 to 65,000. These large reits, they also want just big properties, especially in areas that are underserved. What we’ll do is we’ll buy land in hot markets like Lawrenceville, Georgia, Mokena, Illinois, and then we will develop a Class A state-of-the-art high tech facility that can be anywhere between 100,000 to 120,000 net rentable square feet.
One building that’s 2 to 4 stories tall is the equivalent of buying 5 individual mom and pop facilities or 4 individual mom and pop facilities. That’s our more aggressive play because no cashflow’s coming out of the deal for the first three years, but there’s a large pop on equity at the very end when we sell off the stabilized asset or the fully occupied assets to one of those publicly traded companies.
What is the third?
The third part of the tool is what ended up becoming an opportunity for us right after COVID. You were just talking about how easy it is now to go on Amazon, click 3 buttons and then in 2 days, something shows up to your house. During that time that was really hurting all of the retail stores. Sears buildings, Circuit City, Best Buy, things that usually people used to go out in the car to go looking, get a TV, etc. Now you can do that all online.
What we end up seeing is that these large buildings, 100,000 to 150,000 square feet that originally were leasing out at $6 to $9 a foot per year are now willing to sell that entire envelope for $9 to $15, maybe $20 a foot. Now we’re able to have an envelope that’s already up and that did two things. It solved two problems.
The first problem is during COVID, we had a supply chain issue where we could not get materials. If you needed conduit, if you needed RTU units, in some cases, if you needed concrete or asphalt, you just couldn’t get it. If you could get it, then you had massive pricing volatility where, at some points, right after COVID or during COVD, steel prices and wood prices jumped 300% to 500%.
That is really tough when you’re building a facility that is primarily made out of steel and brick and concrete. It’s difficult. If you can already buy a building that the envelope is up, then all you really need to worry about is putting the units on the inside and making sure that it looks nice and clean and well lit. That allowed us to do one thing, which is it dropped our time to completion by anywhere between 30% to 35% and then it also dropped our total cost to build by anywhere between 25% to 35%.
That was the third leg of stool. Nowadays, not much opportunity in that space. Out of all of our deals that we’re doing at any given time, that’s probably 10% or less now. Whereas after COVID, it was like 40% of our business. There are still some opportunities out there where people were just trying to hold on and thinking that their business was going to come back, the retail store was going to come back or someone’s going to come and lease their large big box retail store on a main drag near a mall or in a mall and it didn’t come back like people thought it did. There are some stragglers coming out that are willing to sell these things at pretty good deals.
Certainly in the last 24 months, we’re seeing some of the retail space into like 30,000 a square foot give or take type of box has been hot. It’s like a Ross Dress for Less and like a Michael’s side by side and they’re going in all over the place. TJ Maxx and the other one and they’ve got 10,000, 15,000 square foot concepts and so they’re eating them up.
If you’re getting up into like 80,000, 100,000 square foot big box like that, especially when they’re super deep, there’s just not a whole lot you can do with it. Are we going to put like twenty bowling alleys in there, like one next to the other? It’s hard to lease anything past 75 foot depth in a retail type of environment.
Those are the types of buildings that we want. If I’m going to take the time to build a new asset, I’m going to build an asset that’s institutional nature, which means I need at least 65,000 net rentable square feet. After you count about 25% loss to hallways and offices, bathrooms and mechanical closets, I need to buy spaces that are 80,000 to 100,000 gross square feet to hit that net rentable square foot target that I need to make an asset that is attractive to an institutional buyer that has a cheaper cost of capital.
The interesting thing about that big box retail conversion and even the Class A development strategy, which we’re going to pull that apart much further here, it’s different than a lot of the aggregation play, at least in the deals that I am an owner in for storage. The existing stuff was a little more in the middle of the block, maybe even off of the main beaten path. It’s like, “What the hell do we do with this parcel? We’ll put storage on it.”
It’s starting to transition now more into this I would say it was much more squarely industrial property where that was the location and it was fine. Farmland, like off the beaten path. It’s making the shift more toward this retail type of environment. Look at the facade on the design for the Lawrenceville project that we have.
It’s like way more fancy, way more retail style. It’s on a main strip and it’s got a parking lot and you’re driving by and you’re like, “What is that?” It’s like glass in the in the windows and everything like that. You have this retail structure that’s now being built for the Class A facilities. In the big box retail, clearly that was retail, so that location worked for retail before.
I think that speaks toward that same trend that we touched on a little earlier in the episode, Fernando, where it’s the third or fourth bedroom. If Starbucks is the second place or the third place, it’s like home, work, Starbucks, then this would be the second place for that apartment or the smaller house. Now it has to be like retail located within that same walking distance of the apartment buildings and driving distance of the large apartment buildings. Whereas that really wasn’t how it was done twenty years ago. It’s interesting.
Nowadays, it’s over 65% of the customer base that you’ll have at a given facility. The storage facilities located within or less than ten-minute drive time from either where they work or where they live. Obviously, if you put a storage facility in industrial corridor, no one lives near that. If you put them out in the farmland, maybe some people live there but like not the major populations that you’re trying to go after.
You can’t lease them. What’s the percentage? It’s like 40%, 50% come from someone drove by and saw the sign. Am I far off with that?
No. We’re still a very visually triggered option. People never see self-storage. They’ll drive past six different self-storage facilities and they’ll never even register until the day they need it. They’ll be driving one day and they say, “There’s a facility I can go to.” That’s the largest percentage. The second largest percentage, and we can talk about this too, which shows the importance of bringing self-storage into the 21st century is the second largest percentage of people they find their storage facility by typing in self-storage near whatever city they’re in.
People never see self storage until the day they need it.
Self-storage in Lawrenceville, self-storage in Bucktown, what have you. Whatever search results show up, most likely that’s one of the ones that they’re going to look at and see if it’s on the driving path by clicking on Google maps. If you don’t have a facility that’s online that has a Google business profile that shows up on Google Maps, shows up on the front page of Google, at least in the first three slots, you’re going to be losing a lot of business.
How important is it for that same operator of self-storage to then have a website where you can book right there online, get the credit card in before you even drive over with your pickup truck full of junk? Is that important?
That’s super important. Just like in your business, a seller is the most motivated the second they call you every minute that you have missed that call and you haven’t called them back, their motivation is dropping or they’re already starting to call competitors looking for other options. Have a system that makes it easy. I always think about Apple. In the old days, their whole concept was you need to be able to do everything on your phone within two clicks or less. If I can get somebody to come to my website, find the unit they need, click to reserve and then put in their credit card information, that’s a win.
It speaks to the same thing we were already talking about. It’s like the Amazon effect. We have to have a seller have to call them back right away, but if your toilet is clogged or your water heaters leak, you want that same instantaneous service from the plumber. I don’t know that that was any different 20, 30 years ago as it is now, but those who embrace technology and have the ability to digitize businesses like this are, it’s another trend that’s happening as we speak.
The Big Box Retail And Staying Resilient
The big box retail, I know that some of the big box retail I personally looked at for this strategy, it was tough a lot of times. Not in my backyard, the township, city, village, whatever they’re called in that locality doesn’t want that there. They want Kmart to magically come back from the grave and have blue light specials again. It’s not going to happen a lot of the time.
I don’t know, it feels like it’s a little harder to select maybe the site based on the big box retail than it would be for the Class A. Is that accurate or would you say that choosing the right development for self-storage is equally as much finding a hidden gem that takes a lot of effort and a lot of research to find. Would you mind pulling on that thread, Fernando?
You touched on a great point here. First of all, if I was able to go out and get a big box that the municipality really wanted, everybody else is going to be competing against that for that piece of property and then the price goes up. The easiest properties to develop self-storage are typically the most expensive and where you’re going to lose money.
You need to go out and you need to find things that are, like you said, a diamond in the rough, no pun intended. What we like to do, let’s say on the retail side, and then we’ll talk about the land side. On the retail side we are looking at areas where the municipality is very tough to deal with. We’re looking at areas where it’s going to be a win-win.
Let’s say you have a defunct attachment to a mall, Sears building. Prior to you coming in and making an offer, you have people that are using it as a crack house. There are vagrants sleeping in there. That obviously doesn’t look great for the municipality, especially if it gets on the news and then they’re saying, “City council people, what are you doing to clean up this area?”
That’s a win-win where we say, “We can come back in here, we can start paying increased property taxes on this retail. We can revitalize the area, add additional security. If you want us to make it look pretty, you’ll have to look at our plans.” A lot of things with municipalities is they’re stuck in the past. When you say self-storage, they think about the old school, just metal boxes in a line on gravel roads.
That’s not what we built. Just like you said prior to this, it’s like a very sexy retail. It’s got glass and colors and different textures and lights. They’re very good-looking buildings. That’s what we look for on the retail side. The nice thing about these retail spots is that they’re on Maine and Maine. I always joke that I want to be able to see Walmart and smell McDonald’s. If I have those two things, I have a pretty great site for a self-storage facility because those are massive demand drivers. Revitalization, that is the play when you go to the municipality for these big box retail stores that have been vacant for 5, 6, 7 years, maybe they’re behind on their property taxes. Maybe they’re causing an eyesore.
Shifting gears over to like the class a land selection and site selection, the same type of thing applies. If I were to go out and find a piece of land that was already zoned for self-storage, it’s going to cost me an arm and a leg. It’s going to be $500,000 to $1 million dollars an acre in the type of areas that we want to build in, these hot areas that are on major thoroughfares like highways next to McDonald’s and Walmart, that type of stuff.
What we do on the other side is we go find stuff that is not zoned for storage because that’s where we’re going to make a lot of protective equity for us and our investors. Perfect examples are Lawrenceville site. It was two single-family homes on large lots. Each lot was like 2 acres and change, almost 3 acres each. Both houses on each one of those lots were in demo court.
They were already slated to be demolished because they were in just poor shape. When we came and made an offer to the seller, he was like, “Yeah, if you’re going to offer me this amount for these two houses that need to be torn down anyway, let’s go for it.” The offer we made was way cheaper than what we would’ve bought self-storage land for.
Let’s just say on the lower end of the range, zoned as of right self-storage land, you’re looking at $500,000 an acre in a prime location. We were able to get 5 to 6 acres for a total price of $500,000. It’s less than $100,000 an acre because we were willing to put the work in, spend the two years with a super difficult municipality to make sure we were doing what they wanted and getting the rezoning in place. We had to install sewers underneath the highway. It was like a whole thing. They definitely saw us as like a checkbook. At the end of the day, I don’t care because I saved something like $2 million just because I was willing to put in the work for two years to develop in an area that is extremely hot.
Was this 1 seller or 2 separate sellers?
One seller.
The one seller probably left them. It’s retail, it’s a busy street, so he never put a dime into the house. He knew this was a land value thing at some point, right?
Exactly. That had to be the case because the properties were in such bad shape and it is on a major highway running through one of these booming towns in a suburb of Atlanta. I think he was assuming that it was going to be, maybe they can get a rezoned to retail, maybe a Chipotle or one of those type of stores in in place. The fact that we were able to come in and get it for store it, the biggest thing is that the retail guys, the apartment guys, they could pay way more than we can for land. If you can get a deal that those guys are competing against you for self-storage, you’re going to crush it.
They’re not out there right now. There is not a lot of competition. I think I was just talking about this on the last episode that we did and it’s like we are at what I would consider to be, maybe it’s not the bottom and maybe there’s still some more pain in front of us. However, I would say that a lot of the best investments that you hear the stories about were made in times like this where the market’s had a dip and everyone’s scared to death to invest a single penny in anything right now. That’s why the S&P is down 10% or whatever the statistic was. When you think in terms of private placements like this development play and like doing funds that buy self-storage or individual units or investing in multifamily, whatever it is, we’re at the bottom.
We are like at the bottom or on the way down and the market is full of fear right now to invest in these things. That’s exactly the time when it looks like a foolish investment or feels like it from the outside for someone who sits on the sideline. This is the planting of the seeds where the stories will be told in 2027, 2028, 2029. “That guy looked like a genius. They made $6 million on that thing. Can you believe he bought those two pieces of land for $500,000?”
What does Warren Buffett say? The time to invest is when there’s fear and blood in the streets. Something like that. I think we’ve been staying the course. We know that our asset class is very recession resilient. When there is recessions we still operate really well. The nice thing about recessions for our asset class is that the very first thing that drops in value is land because land is extremely speculative.
If we can go up and clean up, get a bunch of land and then ride it on the way up, we’re doing the construction building, by the time everything’s a hunky dory in 2027, 2028, we’re going to have a stabilized facility that’s 90,000 square feet full. Now you have a bunch of buyers that have Wall Street money because the S&P has dropped back. It has gotten back to all-time highs and they’re looking to buy assets that not only provide depreciation and tax efficiencies, but also produces really great income.
Taking On A Zoning Risk
I have two more follow up questions on the Class A. Lawrenceville’s great market. I know Lawrenceville. Many of the readers know Lawrenceville. That’s why I’m in this project. A lot of readers probably remember when we were doing some of the raise for this project. That’s a totally separate thing. First question is, you bought and closed on this what, 30, 60, 90 days after the seller and then went in to get it rezoned afterwards.
I guess the question’s two part. How soon did you close after the contract was signed with the seller and what answers did you get, what questions that made you comfortable enough to take on the zoning risk? Every other person that I talk to who’s done land entitlements developments of this nature, it’s very rare that anyone closes and then does the two-year zoning themselves. It’s interesting that you took on that risk, but I’m curious, what were the questions you ask during the closing window before you moved forward and said you were okay with the risk?
Yeah, so a lot of land developers, they try to put the risk onto the seller. They’ll say, “Mr. Seller, I need a three-year due diligence period with all governmental approvals clause in our contract that gives me an out until the very end, until they rubber stamp my permits.” The problem is, first of all, sellers don’t want to do that. If they are willing to do that, they’re going to make you pay a premium for that.
Knowing that you can execute and you can get into these zoning meetings and know that you have the experience to get these rezonings done, that allows you the flexibility to come in, make an offer that is pretty low and be able to close quick because you’re not relying on the seller taking the risk for you. When I do these types of deals, I do it all with my own cash. I only bring investor money in once everything’s ready to go.
The things that I looked at in that 60 to 90-day closing period was what is the demand in the market? You look at competitors, you say, “First of all, are the competitors on my level or are they not? I’m building a Class A-plus facility. Are there any o other A class facilities in the area? If they are, what is their occupancy?”
In self-storage, we consider an asset stabilized at between 85 and 92% occupancy. The reason for that is you never want a 100% full self-storage facility because that means you’re leaving money on the table. A self-storage has so many units, let’s say 1,000 units in 1 facility, as a certain type of unit starts renting up, let’s say 10 by 15s are really popular in this market, then what you start doing is jacking up the street rates on the 10 by 15s specifically, and then the people inside the 10 by 15s that are already in there, you start putting them on a program of increasing their rents every 4 to 9 months.
You never want a 100% full self storage facility because that means you are leaving money on the table.
It’s better to have 1 or 2 or 3 units of each type that you’re just shooting for the moon on rent prices because eventually someone will say, “This price works for me.” That’s how you test the market. That’s how you’re constantly pushing the market. You never want to have no units available of any given type. The second thing is when you look at supply and demand, there’s two metrics. The first metric I look at is in the field, our other facilities, are they leased up and if so, are they using any type of rent discounts, first month free or first three months 50% off? If not, what’s the trend on their rents? I have software where I can go back five years and on a month-to-month basis. If they have a website where their rents are on that website, it will pull all those rents per month.
I could see the trend of is our rents going up? Do rents go up during the summer and then come back down in the winter? Do the rents go up for a three-month period of time, AKA college towns or military towns? You could see the trends there. If the trend is, in general, going up and occupancies are staying at that stabilized level, that means there’s pent up demand in that market and it needs more storage.
Now the more like calculation-based metric is called supply index. That is the number of net rentable square feet per capita per person in your trade area. Typically trade areas are going to be anywhere between a 10-to-15-minute drive time from your facility or even easier to calculate like a 3-to-5-mile radius around your facility.
If you see a facility that’s in the seven square feet per capita, that market’s pretty stabilized. If you see five square feet per capita, then all of a sudden, you’re starting to see that there’s some pent up demand. If you see stuff like on this Lawrenceville project where you’re below four square feet per capita, then you’re saying this market is primed for self-storage.
You can reverse that calculation based on the population and you can say, “In this market, we have three square feet per person that is needed. That equates to something like 300,000 and let’s say 350,000 square feet of additional storage that needs to come online for this market. That could be at equilibrium. I’m only building, call it 80,000. I know I’m coming in and even if some competitors come in behind me and fight to the two-and-a-half-year fight with the municipality to get something approved. I’m always watching our permits being requested for storage, etc., by the time they’re able to get a shovel in the ground, my facility’s going to be basically full and I’m ready to sell it.
When you have people with smart money like the REITs, instead of them trying to compete with me but start and I have a two-and-a-half-year head start, they’ll just say, “Fernando, I’m just going to wait until you’re done leasing it up. I’ll just buy it off you because that’s just easier and lower risk for us and our investors.”
That was another thing that we always look at, that supply index. Of course, like your general demographic information, I want to see high vehicle counts on the curb cut. We’re on a highway, so that’s no brainer on that deal. I want to see high median incomes. Lawrenceville is an affluent suburb and it’s getting more affluent and I want to see population growth. Lawrenceville is booming. They’re putting up houses left and right.
People are moving to that suburb. It’s like a bedroom community or a workforce community for Atlanta. People that are high income earners in Atlanta, they’ll commute into the city and then commute back into Lawrenceville. Those are the main things that I’m looking for on a Class A and why that deal had so many green lights and that’s just first level underwriting.
I want to make sure I’m not wearing any rosy colored glasses because as investors, we have ways of fooling ourselves into like, “This is a good deal,” etc. What we do is then we hire a third-party feasibility consultant that’s been in the business for 30, 40 years. We have to pay them upfront. Their results are not dictated by if we’re going to pay them at the end of the study or not.
That report is what usually the banks use to say, “Are we going to lend on this deal or not?” Might as well just get it up front before we even go out to the banks to say, “This is a good deal.” It’s not that expensive relative to the deal size. This is a $14 million or $16 million deal. That report is $10,000 to $12,000. It’s a fraction of a percent just to see am I pushing money after a good project or should I cut the string now, cancel the contract, etc. Once I got all that stuff back before we close, I say, “This is a great deal, let’s just close on it and we’re going to work with municipality.” Of course, you call the municipality while you’re under contract and you say, “Here’s what I’m thinking about doing. Is this something you’d be receptive to?”
Instead of calling the zoning board, what I usually like to do is I call the economic development committee first because they’re the cheerleaders for the municipality. They’re the ones that want to bring business, want to increase tax revenue, want to increase sales tax revenue for the city. There you’re going to be your cheerleaders and they’ll have an inside line to the zoning and building department saying, “Fernando wants to do this here. Is this something that you think we’d be into?
If so, what are the stipulations? What do we want to see? Do we want to see some type of facade that’s really nice? Do they want to make sure that they’re putting in very nice landscaping package?” We’ve had a project where we offer to build a park that we donated to the city, but we did all the maintenance on the park.
There are different ways to get through committee. Just always got to realize like what is the goal of the municipalities. They want to increase revenue, so tax revenue. There are multiple ways to do that. Property tax, sales tax, etc. They want to basically have a win for the community without putting any type of blight or any type of resources at stake. Self-storage, not a lot of traffic.
I’m building a deceleration lane off of the highway for the municipality for them. I’m upgrading the sewer system in front of our facility. I’m putting in sidewalks. All that stuff shouldn’t be my responsibility, but I said, “If this is what gets it done, I’m willing to just put this into the deal cost. We’ll just amortize over the return.” Just make sure it makes sense.
Those were the things that over that 60-to-90-day period when we were in that due diligence/closing timeline, we said, “This deal makes sense. It’s going to be a long time,” because everything I’ve heard from investors in this area is that it’s very difficult to deal with this municipality, but it’s not impossible. That means that I have a barrier to entry for other competitors coming into the market.
Closing on the deal is sure a big set of stones there, but for four foot per capita square foot, that’s the lowest number that I’ve ever found in any of the underwriting I’ve ever done on all of the million or so square feet of storage that I’m involved in. Four feet’s the smallest. I’m like, “Really?”
It’s the thing. It’s like markets like this only exist for like a very short period of time because then other people like me, they say, “Four square feet per person, I better get in there and develop.” It’s one of those things where you have to catch it in a very specific time in a growing market like Lawrenceville to be able to get deals like this.
Cap Rate On New Development Vs Retro Fit
Yeah, and we’re going to edit this piece out too to make sure that the public at large doesn’t find out about it. JK. Let’s talk about the cap rate on an exit. Do you get some cap rate compression? If we had a vacant Kmart down the street, 100,000 square foot, $80,000 net whatever. It matches exactly what we’re going to build on what we’re already building on Lawrenceville, brand-new construction, Class A. It’s one of those going to sell at a 5.5% cap and the other one a 6%? Will there be some better cap rate on the new development deal versus the retrofit building?
Absolutely. When people buy assets, especially if it’s a stabilized asset, they’re very concerned with maintenance. If you have a brand-new building, everything is brand spanking new, you just took off all that like plastic film off of everything, they’re going to pay a premium for that because they know over their hold period, whatever it may be, 15, 30 years, there’s going to be much less cost that goes into the maintaining that building.
A lot of these big box retail stores weren’t put up put up very recently. The heyday of building malls and big box retail, that’s like 20, 30 years ago. You have these buildings that have been around for some time. Just the fact that I used the word Sears building. Sears already dates the type of time where this type of stuff was popular.
You’re definitely going to get a cap rate compression. It’s going to be anywhere between 50 basis points to, in some cases, up to 150 basis points, depending on what type of building you built in, what type of operator was in that building before. For example, Sears buildings, they may be old, but Sears, before they wound down and sold that the buildings, they did a bunch of preventative maintenance on those buildings to make them more advantageous to sell later on. Versus say a Kmart, which is just like an old beater car where they’re just going to run it until everything falls off and then they sell the asset. Those buildings were just horrible. We typically will not buy Kmarts. We look at them, but we will not buy them.
They’re like a $1.50 a foot or something.
It had to be pretty low. It’d have to be something like $4 a foot or lower for something that’s at least 80,000 square feet or higher.
On the exit for square foot, just to give context for the readers, it’s like $4 a square foot. You build it all out, maybe you have a build per foot cost and maybe you have an exit cost. What would those numbers be if you’re throwing darts?
In 2025, as I’ve been getting quotes for other projects, you’re looking at anywhere between $100 to $125 a foot all in on your build cost. That’s everything.
Including the building and dirt?
Correct. That’s the total project cost. That’s everything. If you’re in markets where land is a lot more expensive, let’s say Florida or California, then you could be reaching into that $150, $160 range. In the markets that I typically operate in, good cashflow markets, Midwest, Southeast, you’re looking at stabilized exit prices of around $200 to $230 a foot or a float between a 4.75% to a 5.25% cap rate for Class A brand-new product that is now full.
These have traded in the last twelve months in this range, right?
Yeah, last six months.
That is telling. Do you remember what they were in the heyday in 2021 or 2022? Were they a little lower than that on the cap rate?
Yeah, we have like this pre and post raising of the federal funds rate. When we were still in like 0% Fed policy times, the cap rates were ridiculous. Things were trading in 4, even slightly 3.75 for like trophy properties. That wasn’t even stabilized. There was a lot of cashflowing through the market, through the economy, and it needed a home.
When you have that much extra money chasing returns, all of a sudden, you start buying things that are riskier to make that same return, just to be able to have your money working for you. We were seeing certificate of occupancy deals, so brand-new Class A facility with no tenants, 0% occupancy, trading as if it was full at five caps, which is insane. Nowadays, if I were going to buy a certificate of occupancy deal, I would probably pay 20% above cost, so 20% above $125 a foot, something like that.
When you have that much extra money and suddenly see returns, you start buying things that are riskier to make that same return just to have your money work for you.
I’d do it as a like return on cost type spread where I’d want maybe for that lease up risk, I’d want an 8.5%, maybe 9% even some cases, depending on the market, a 10% return on cost. It was crazy the way people were. I sold assets to buyers that were buying stuff. I had a brand-new facility in the South suburbs of Chicago in Mokena and the buyer bought it for our five-year exit prices if it was 100% occupied when we got certificate of occupancy, it was crazy. Those days are long over. I don’t think we’ll ever see stuff like that again. Unless, who knows, maybe we go into a great depression and they drop rates back down to zero, but you never know.
New And Growing Ventures
I don’t know if it’ll go to zero. There’s definitely froth. We exited one. I forget what the cap rates were, but we got this remarkable amount of money in an off-market deal and so we took it. We’re out of there. That one was a 26 IRR, I think, on that project. It’s pretty good. I think you have a little bit of money open in the development and then you’re also doing a raise for the fund, if I’m not mistaken. Do you want to talk on that subject a little bit, Fernando?
Yeah, sure. I’ll keep it general just to make sure I’m not violating any SEC rules here. Up until recently, we have done only single assets indications. The stool, you have existing assets that already have a history of cashflow. Those are going to be in the 16% to 18% targeted IRR. You then have the stuff that are ground of development or purchase and substantial construction like a conversion or a mom and pop that you’re doubling the square footage. Those were going to be in the 18% to 24% internal rate of return. Those were the targeted irrs. If you look at our open and close projects, we’re averaging between 30% to 50% internal rate of return just because we’re able to exit earlier than we assumed.
We always write our deals as 5 to 7 year exits, when in reality, our average exit time is like 3 years, 4 months. The longest it’s ever taken us to exit an asset was 4 years and 2 months, and the fastest was 13 months like that Mokena deal that I told you. The nice thing about going to the fund model is we have a lot of retail investors. We have 822 investors that have trusted us and put money into our projects.
Those are retail investors, though. They can’t stroke $10 million checks. As we started getting appeal from these larger institutions like family offices, pension funds, etc. Their minimum check size is on the small side $5 million, but more likely $10 million, $15 million, $20 million, sometimes $50 million. If I kept doing single asset syndications, those guys would never have an opportunity to participate.
That’s why we decided to roll out the fund. It’s going to be a $25 million equity fund and it’s going to be a diversified self-storage fund. Not only will we do value add projects, ground up development, purchase and expansion, but we’ll also put in proceeds from our wholesale deals. In 2024 alone, we made $3 million from wholesale and self-storage facilities to other operators.
Good deals that just didn’t match our buy box. It was either too small, too big, not in a market we liked, etc. Those will be also into the fund. We’ll also do pref equity in that fund to our wholesale buyers. If they got debt, they need a little bit more spread there, maybe they need reason another 10% in equity, we’re willing to do that at pref equity rates and that’s going to go into the fund short-term pref, 6 to 12 months, maybe 18 months, depending on the points that they use to renew.
Lending, taking first position loans on, again, deals that we have underwritten, our own wholesale deals, and getting a little bit of consistent cashflow coming through from the debt deals that we do. Those are going to be the things that fall inside of at Fund 1. We decided to start small just to test the waters, see how the appetite is not only from the institutions which are really looking forward to this, but also our credit investors and our retail investors that want to get into that fund. Depending on how Fund 1 goes, Fund 2 will probably double it to make it about a $50 million equity fund.
Right now, is it anybody who is an accredited investor could participate in the fund or any of your other deals? Everybody has to be accredited, right?
For the most part, all we do is 506(c) or accredited investors only. Every year, we usually we’ll have 1 or 2 small deals where we’re only raising like less than $1 million and we’ll do a friends and family raise because I want to help my non-accredited sophisticated investors get to the point where that they are also accredited as well.
On these smaller deals, typically they’re cashflow deals, something existing, maybe it’s only 30,000 square feet or 35,000 square feet. We know we’re going to put it into a portfolio that we already have in the area. It doesn’t need to have a large construction component to get it up to 65,000 or 70,000 square feet. We’ll do 1 or 2 506(b) deals. We aren’t allowed to generally solicit we, so we can’t market those deals specifically.
Let’s say if I have deal A, it’s in this market, I can’t do that. Those deals only go out to people that are already on our email list because of the SEC rules. Whereas like in a 506 (c) deal, I can post it on Facebook, I could put it on LinkedIn, I could do radio ads, I could put it on TV and I could solicit it to people I have no previous relationship with. That’s why we do a majority of our stuff, like 95% of our stuff is a credit investors only.
Before we do a little wrap up round of questions here, is there anything else I forgot or just didn’t think to ask that you feel like might be important?
No, I think we’ve covered a lot.
Fernando’s Crown Jewel Of Wisdom
Let’s do the crown jewel of wisdom, Fernando. We’ll set the stage. You’re getting into real estate, I don’t know, what year was it you originally got in?
2013.
Knowing everything you know now, what would be the crown jewel of wisdom that you would share with yourself then?
I always thought that you had to stair step your way up. Start with crappy single-family home in the hood that you can buy for all cash for $20,000 and then do a couple of those. Buy one in a nicer area and then get some rentals and then 2-bedroom rentals and 3, but then then a 4-unit apartment, 12-unit apartment, all that can be skipped. All of that is a waste of time and you’re actually making it harder for yourself.
When it comes to raising money, when it comes to getting debt, every time you add a zero onto the equity check or a zero onto the debt check, it becomes substantially easier and it only requires an extra 10% of your time. You may be a doubling or tripling of your profit, you may be making it twice as easy to raise that capital or get that debt, but maybe take an additional 10% of your time. That is totally worth it.
Every time you add a zero to the equity check or a debt cheque, it becomes substantially easier and yet only requires an extra 10% of your time.
Knowing what I know now in 2013, the very first things I would’ve learned instead of trying to just learn how to wholesaler or whatever. Number one, I would’ve learned how to raise money immediately. That is number one goal. The number two goal is, at a minimum, start doing deals that are $5 million or higher instead of $50,000.
Do you still own any of your residential rentals or did you sell all that off?
No, absolutely not. I got into self-storage because I don’t want to deal with the three Ts, no toilets, no trash, no tenants. That is where all my stress came from, those three Ts, you couldn’t pay me to do a residential deal now.
I’m going through this little personal crisis now. I sold off a bunch of my apartment buildings. I have like a couple of 1030 ones that readers know, people in my newsletter. I’m shopping for a home for the money. I may just pay the tax. Even though I was spending, probably breaking even on these apartment buildings, there was this false sense of security that was involved in owning them. “Someday it’ll be paid off.”
Someday, there’ll be five evictions that year too, just like there is this year, that will eat up every single dime of cashflow, including all the paid off portion that now is going to the mortgage. I made money on it. Not a lot of money, but I’m like, “I might be a terrible investor. I don’t know what to do here. This is bad. I didn’t wait long enough for the cashflow to compound,” but it’s already the peace of mind.
There’s like a lot less mail coming now that I’ve gotten rid of more than half of my residential portfolio. Mail from code enforcement officers and building court summonses from the city of Chicago, the insurance dropping on it. I’m staying the course as well and I’m much heavier into these larger deals with a lot more partners, a lot more people on the team. Really enjoying that level of peace so far.
I always tell people that’s the goal. The goal is to go from small properties to large properties and then eventually go from being an active owner, AKA GP on a large property to being only an LP. All of a sudden, now you just got mailbox money and you got no problems. You don’t even hear about a tenant or something happening. Once you’re an LP, you just get the check in the mail.
They email you once they’re about to sell it, say, “Do you want a 1031? Do you want to roll into another deal?” That’s the way to go. Obviously, to get to that point, you need to have a good nest egg to start with. That’s why you have to do the active investments first. I’ve already started. Every time I get paid on a deal, my portion of that deal that comes to me personally, I just roll them into LP investments and then I just let that work for me while I’m sleeping. I cannot wait until twenty years from now, I don’t have to ever pick up the phone, talk to a lender or talk to a municipality. I just send a check to some guy that knows what he is doing, some girl that knows what they’re doing and then I just get checks in the mail. That’s what I’m waiting for.
I don’t even want them in the mail. I like them now. How they’re set up, it’s just like I log into my account, there’s some emails talking about a distribution. I might read the statement, I might not, but I’m going to check my account to make sure that ACH hit. When like 5 or 6 of them hit in one month and it way covered my main house mortgage and my Florida house mortgage, I’m like, “Okay, this is great.”
Fernando’s Book Recommendations
Whereas that fucking apartment building I got rid of, I have to send a check off to it like 3, 4 times a year and it wipes out every penny of the cashflow that was there. Yeah, going to continue. Cool. Fernando, I know you’d mentioned Rich Dad Poor Dad. Are there any book recommendations you’d make to the reader inside outside self-storage, maybe business? NotThe Lord of the Rings or something like that.
Number one, if you’re a business owner, you’re trying to build a business, Traction by Gino Wickman. It was a game changer for me. I even hired one of their implementers to implement EOS system into our business. It led to explosive growth. That was fantastic. I really recommend that. Another one, if you just want to think about macroeconomics, because if you can understand what’s happening around not only the US but the world itself that can inform investing decisions over the short, medium, and long term, I would recommend two books.
Both of these books talk about macroeconomics on the scale of governments and what’s going to happen in the future as we are de-globalization. We’ve already starting to see it with this new administration, this push towards deglobalization, tariffs, shoring, bringing chip plants from Taiwan onto US soil, etc. These two books are very great and they look at things from each side of the coin.
Before I ask my final question, where should readers go to get more Fernando and SSSE Storage?
Yeah, so two ways. If you’re more of like a passive outreach person, go to our website, SSSE.com. You can book a call, you can subscribe to our newsletter, you can go on our investor list. You can become a buyer for our wholesale deals. If you’re somebody that’s more aggressive and you want to call me right now, you just read this and you’re fired up or you just want to chat about storage, this is my cell phone. It’s my real cell phone. My number is (630) 408-8090.
Being Surrounded By People Who Love You
I finally got your cell phone number. No, I’m kidding. Cool. Final question. Fernando, what is the kindest thing anyone has ever done for you?
That’s a good one. I’m lucky that I’m surrounded by people that do love me. Without sounding cheesy, just like giving me their time. At every fluctuation point in my life, whether it was going to school or deciding to become an entrepreneur, there was mentors, there was people that cheered me on when things seemed risky or they gave me the time to teach me their business even though they were literally creating a competitor. Giving someone time and truly listening and spending time with people, that’s one of the kindest things that you can do for somebody.
I got pages of notes. I had a blast. I really appreciate you giving us your time, Fernando. Thank you for coming on the show.
Fernando Angelucci is a seasoned real estate investor and entrepreneur, specializing in self-storage development and investment. With a background in engineering, Fernando has transitioned to focusing on self-storage facilities, emphasizing value-add projects and innovative investment techniques. He is known for leveraging market trends and data analysis to identify lucrative opportunities in real estate, all while navigating challenges posed by economic shifts and regulations.
How to Retire with $1 Million & NEVER Spend the Principle
A few months back I wrote an article on retiring with $3.2 Million. That article made some assumptions on high risk, high reward investments. There is a place for that all-in strategy mapped out in that article for some investors-probably earlier in their investing career. If you’re on the other side of your investing career, perhaps within 5 years of retiring, or already retired, the types of deals mentioned in that article (distributions don’t begin for 2-3 years) may not provide for your goals.
How I Envision a Perfect Retirement – from a Financial Perspective
The goal in a perfect retirement is a steady income which covers all expenses and NEVER touching the principle. For me, there seems some security in reaching retirement under these minimum assumptions:
Paid Off Housing
$80,000 income generated from $1 Million invested at 8% per annum receiving monthly or quarterly distributions at exactly that amount, or more.
I’ve chosen $1 million as the example here, but depending on earning power, current financial position and lifestyle, this number can be cut in half, doubled, etc and the plan still works. $80,000 per year plus social security should cover the property taxes on that Paid Off Housing and allow for all living expenses plus some travel, leisure, birthday gifts to grandkids, etc
How do You Receive 8% Returns without Losing Principle
Many reading this article know how to obtain 10% returns & even a few points by making short term Private Mortgage Investments to fund Diamond Equity’s real estate deals. Maybe you even have a few more fix & flip investors to whom you loan money. If you’ve made loans like this you know the challenge is keeping that money working for 12 months straight.
For example, you loan $200K on a deal this month, it pays off a few months later at $210K. However, the next available deal is only $140K. So $70K sits around waiting for a $70K deal which comes 18 months later. Right now, many investors I talk with have a certain amount available at any given time and they’d love to be able to place that money and simply keep receiving returns. Perhaps an even 8% return is earned when you do the final calculations over the course of a year.
The Reason I’m Writing this Article
I have two friends who run debt funds which pay 8% preferred interest monthly. Both of their debt funds exceed $35 million in size. They borrow at 8% and then reinvest in large hard money loans that pay 10-15% depending on the risk. They shoulder the burden of losses and also the burden of paying the 8% even when the money is idle. Their investors love it because of the regular distributions and the lack of “down time” while their money sits idle. They live on that 8% return.
Finding an 8% even paying, passive return anywhere else in the market is very rare.
I am considering creating a fund of this nature myself to streamline the returns for our investors. I’ve written this article as a public method of thinking through the idea. Perhaps you have some feedback on whether something like this would be attractive?
No promises on whether an “8% Diamond Equity Debt Fund” will be launched, but in the interim, I am willing to pay 10% & 2 points on our short term loans. You can get detailed info on how those loans work and receiving the next Private Mortgage Investment Opportunity at www.FundRehabDeals.com
The obvious answer, and the purpose most people begin Real Estate Investing is to make money. A better place to begin is asking, “What is money?” I believe money is the lifeblood of the human super-organism. Money is the channel of reward, like Dopamine, which propels humanity forward. An incentive program for continuing human evolution. Without money, humankind would not have the ability to cooperate at a global level, or even a local level.
When I got into real estate investing it took me 6 months to close my first deal. I was pretty much broke at the time, 26 years old, and living with my mom. My 5 year old daughter was in town, and with no one to babysit, I had to bring her along to the appointment to meet the seller. It was a high crime area, but I didn’t really know that at the time. I signed a contract for $5,500 & found a buyer willing to pay $11,500. That $6,000 profit changed my life. It was about the money back then, until I realized the wide ranging impact of investing with purpose.
Our Purpose is Evolution
Back then, the sole purpose of the business was to make money. Now, with a few thousand deals under my belt, the purpose of Real Estate Investing-actually all of my investing activity, has become Evolution. I’m looking to further impact human evolution with every deal I work on. Even if that means simply improving one house on one street in one neighborhood. I’m sure the neighbors on either side are happy once we are done flipping a house.
I know that many business owners & their customers are happy at our Desert Oaks Plaza shopping center, now that the vacancy is cured and the improvements have been made. The center has been transformed by our investment in both time & money. That deal is available for sale, if you’re interested in a well located, stabilized Las Vegas shopping center with rapidly rising rental rates.
Our Purpose is Making Dreams Come True
When you flip a house, you are evolving that property into an even better state than you found it. The buyer likely has a dream of homeownership-buying a newly renovated house. They lose sleep during the contract period-maybe like you, the flipper-hoping & praying that the deal closes. Once it closes, you have fulfilled that buyers dream of homeownership & made that neighborhood even better. Oh, and you’ve made a few bucks doing so.
Transform Communities One Property at a Time
This is Diamond Equity’s #1 Operating Principle: “Transform Communities One Property at a Time”. Every deal you successfully complete serves to continue the ongoing transformation of our existence. While an investor could, in theory, just buy a property and sit on it-in decrepit condition, this is NOT how we choose to invest. We believe in the impact our efforts & money can create. This is good.
The Real Estate Super Organism’s Purpose
Every person who applies effort in our field of real estate contributes to the evolution. Without the Broker, the deal may never begin. Without the lender, there is no money to buy, and certainly much lower prices across the board if they didn’t exist. Without the contractor-even the laborer-the building never goes vertical. And of course without the Principle-those of us who spot the deal, make the offer, & take the risk, none of this would happen.
Plus, God said So…
Genesis 1:28, “And God blessed them, and God said unto them, Be fruitful, and multiply, and replenish the earth, and subdue it..” Our purpose as real estate investors is to be fruitful, and multiply, and replenish the earth.
My first job in life was delivering the Town Talk newspaper. It was a free newspaper you’d deliver to every house and then go door to door to collect the fee monthly. I’d get half of that collection, plus $6 per week as my total compensation.
My first business was mowing lawns. My best friend & business partner, Paul Haggarty, usually preferred that I was the one who’d go knock on doors to ask for business. He probably remembers it exactly the opposite, if I had to bet! We made good money that summer which covered the cost of the equipment, our lifestyle, & even a few BMX bikes. We were all about that in 1992.
Notice how both of those early successes included knocking on doors for business? Many of my mentors have had experience door knocking in their early careers. Chris, a friend of mine, recently bought Easter wreaths from an online wholesaler, developed a script, and then took both of his young daughters door to door to sell them at $10 each. His goal is to develop sales skills early in life. They made enough money to buy an above ground pool-which they love & cherish as fruits of their own labor.
Do You Have Door Knocking Experience?
I’m hoping someone reading this has experience as either a successful door to door salesperson OR a leader who has developed a door knocking team. I’m talking a lot more professional than the experience I mentioned above.
I’m hoping to form a partnership with someone who can build a team of door knock reps to knock on the doors of the owners of properties which we are specifically interested in buying & set appointments for our Acquisition Manager to close the deal. If this is you, please reply back and let’s talk soon.
If you happen to live in the Atlanta, Chicago, or Philadelphia region and would like to be a door to door sales rep to book appointments for us, please reply back with a resume and a cover letter explaining the area you’d be willing to work. We pay per qualified appointment, commission only.
I’ll define Equity Investments here as investing in a partnership. This might include going 50/50 on a fix & flip or investing passively in my Self Storage Development in Lawrenceville, GA. Private lending is when you lend money in the form of fixed debt-usually using a Note & Mortgage. I personally allocate about 70% to Equity Investments and 30% into Debt Investments as a Private Lender.
These two investments come with very different Risks, Rewards, & Tax Implications. I’m not giving tax or investment advice here-just sharing from my own experience. Please note-the structure of Debt & Equity investments can be very nuanced and anyone considering any investments should seek proper legal council before doing so.
Private Lending / Debt Risk:
Secured by the Property: If the Borrower cannot complete the project and pay you back, you could become the owner of the property you’re lending on. If the loan is well below the actual value of the property, this might be a good thing.
Borrower Risk: Does the operator with whom you’re investing have more cash available to cover your interest & guarantee your principal-even if they lose money on the deal you’re lending on?
Construction Risk: The more construction being completed on a project, the greater the risk of cost overruns & delays. Back to the Borrower risk-do they have enough cash reserves to cover unforeseen issues like this? I personally never go back to my lender for cost overruns. It is always paid out of pocket.
Market Risk: If the market for the property you’re lending on declines, will the Borrower have enough cash to return your principal? And Interest?
Private Lending / Debt Reward:
Defined Reward: I pay my lenders 2 points & 10% interest, no matter what. We lost $150,000 on a single deal and our lender made about $80,000. His reward was defined & his selection of Borrower (Diamond Equity) was ideal because we had plenty of cash to cover that shortfall.
Principle Protection: When I borrow money from my Private Lenders, I am agreeing to pay their entire principle & interest back, no matter what. I’m contractually obligated to do so-which is the defined principle protection, in writing, which are expected on Debt Investments
Private Lending / Debt Tax Structure:
Short Term Capital Gains: Debt is normally taxed as short term capital gains, or ordinary income
Equity Investment Risk:
Principle Risk: In Equity Investments, or Limited Partnerships, your principle is NOT guaranteed to be returned. No matter how much cash the operator may have outside of the deal you’re investing in, they are not agreeing, or obligated to pay back the full amount you invest. If the deal fails, you may lose some, or all of your investment.
Equity Investment Reward:
Contingent Upon the Outcome of the Deal: If the deal succeeds, Equity Investors participate in that upside. If the deal breaks even, Equity Investors receive their money back, with no interest. If the deal fails, Equity Investors lose some, or all of their money. That last outcome isn’t really an Equity Investment Reward, I guess…
Equity Investment Tax Structure:
Long Term Capital Gains: Right now, the US Tax rate for Long Term Capital Gains is 20% for those in the highest tax bracket. Short Term Capital gains are 37%.
Depreciation: Many Equity Investments come with tax losses, such as depreciation, which help minimize tax bills. You can listen to this podcast for more detail on this tax benefit.
The Right Time & Place for Each type
Equity Investments that I currently own were made for these reasons: first, the tax efficiency of the gain. I’m making good money now and have heavy taxes to pay. Making Equity Investments that will distribute profits later as Long Term Capital Gains help me maximize the money I’m left with after taxes. Second-the expected greater return. I’m aiming for 20%+ returns in all of my partnerships.
As mentioned, I’m about 70% in Equity Investments right now. This is a lot of risk. Since I’m not yet near retirement age, this risk is acceptable to me right now in search of greater reward-and a more efficient tax structure.
As time goes on, I’m intentionally moving more toward Debt Investments. Defined risk & defined reward are more desirable long term-as you are better insulated from market swings. Of course this assumes you’re lending to a well capitalized, high quality Deal Maker. If you’d like to view my projects which are available to lend, please sign up at www.FundRehabDeals.com
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