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.
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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)
Watch the episode here
Listen to the podcast here
Self Storage Development With Fernando Angelucci
Fernando Angelucci, welcome to the show. How are you?
I’m doing good, Dan. How are you doing?
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? Not The 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.
These two books have counterpoints. One is against, but it’s good to have all the knowledge. I would read Principles for Dealing with the Changing World Order by Ray Dalio and then I would read, The End of the World is Just Beginning by Peter Zeihn. It’s a counterpoint to Ray Dalio’s Principles for Dealing with the Changing World Order.
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.
I appreciate it and thank you.
Important Links
- Fernando Angelucci
- Rich Dad Poor Dad
- The Lord of the Rings
- Traction
- Principles for Dealing with the Changing World Order
- The End of the World is Just Beginning
Relevant Episodes: (200+ Content Packed Interviews in Total)
- Benefits of Scaling to $350 Million in Self Storage with Kris Benson
- Transforming Big-Box Retail into Self-Storage: A Conversation with Clint Harris
- Inside the Self-Storage Industry with Jacob Vanderslice of Van West Partners
- Self Storage Redevelopment with Scott Krone
About Fernando Angelucci
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.