45) Self Storage, Stupid Questions & Supply

House Money Weekly

In this week’s House Money Weekly segment, Lauren and Alan get together with their special guest Nick Hooyman. They discuss blog 143, 3 Wrong Questions Real Estate Investors Ask at an Open House. Alan recently did an open house for duplex in Atlanta and wrote this blog based on that experience. The first wrong question to ask is: can I add a driveway? The investor said he would want a driveway if they lived there. Take your emotions out of it and understand what you're buying. Nick also did something very similar to this on his first flip. He built a shed and a fire pit and when it was time to sell it, six months later, they demolished the shed and then planted it over the fire pit. Lauren tells investors especially for short term rentals when you're thinking about adding an amenity or changing something, wait until you go live and see if anybody mentions it. The second wrong question to ask is: what's the cost to convert the range from electric to gas? What Alan learned from his lower income tenants is that they don't want gas because it typically requires two security deposits, one for the electrical bill and one for the gas bill. As an investor, it's not what you want but it's understanding what your tenant wants! The last wrong question to ask is: can I add a fence? A lot of new investors think a fence provides protection and tenants want a fence for their pets. Alan learned over 25 years of real estate investing that typically a fence becomes the gateway of clutter, then the whole fence line is filled with clutter that the landlord has to take care of. One reason Lauren doesn’t like fences is because they are expensive and high maintenance, but a fence is a good idea and you can look at it as an investment if you’re able to charge more rent because of it.

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Real Estate Is Easy Interview

Lauren interviews Tom Dunkel, the Chief Investment Officer at Belrose Storage Group, which has acquired over $40 million in self-storage properties in recent years, generating $60 million in revenue. Tom explains that self-storage offers homeowners and commercial property owners a solution for storing excess belongings, as many accumulate more items than can comfortably fit in their living spaces. He notes that storage plays a crucial role in people's overall housing strategy. Lauren asks if there are trends towards people having more stuff and smaller homes and Tom suggests that millennials tend to adopt a more minimalist lifestyle compared to their baby boomer parents. However, they still desire to retain belongings acquired for themselves and their families, leading them to seek additional storage options. Lauren also asks Tom what they are looking for in selecting self-storage properties to purchase. The first thing they look for is a strong market with a preferably growing population and strong fundamentals such as low poverty rates and solid employment figures. Then, they’re also looking at the particular asset. They love to take over facilities from mom-and-pop operators. The size and quantity of storage units vary by market, but those data points are significant factors considered for revenue generation when acquiring or constructing facilities. Lauren asks about the impact of multi-story storage facilities. This asset class has been extremely steady over the last 40 years although it has occasional fluctuations, self-storage occupancy gently meanders between like 80% and 90% nationwide. We’re seeing a shift from mom-and-pop operators to middle operators and bigger, sophisticated money. Tom shares that just like any other real estate asset classes, self-storage goes through its cycles where there's overbuilding and then they will stop building and then the demand catches up and then the demand exceeds and then they will build again and it's a cycle of mismatched timing. Tom then shares the numbers on their recent deal from Wilmington, NC, where they bought a contractor garage facility. They purchased it for $4.5 million at a 6.5 cap rate based on the seller’s numbers. Their year one cap rate is 8.5%. Tom makes real estate easy by having a great team around them. It’s so much easier than corporate America! Alan reacts by pointing out that you need a good team in order to outsource. Nick adds that you need to learn tasks before you outsource them. Understand that some of your team may make mistakes or not do as well as you do, but that’s OK because you get some of your valuable time back.

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Guest Host Segment

Guest Host Nick wonders what is ahead in the real estate market. Nick finds that there is less activity in real estate due to the rate lock problem – rates have gone up so much that people feel like they can’t move. Nick asks Alan and Lauren if there’s going to be enough supply to come on the market to keep prices at bay if they lower the rates. Alan sees it getting worse because history has taught us that when interest rates drop, home prices go up and when interest rates rise, home prices plateau. The housing shortages each year are getting worse and it's going to become more and more unaffordable. That's why getting a house now is what Alan suggests. Lauren thinks of this in terms of short-term rentals when the pandemic hit. People were unable to travel so in 2021 and 2022, there are a lot of people from other states that had not been able to travel for a long time came and visit and occupancy was high that the average daily rates were high. Lauren sees something similar right now, there is pent up demand, creating a lack of supply because people are locked into these rates. She also points out that in a lot of other developed countries it’s more typical for people to rent. It may be inevitable that a lower percent of people will own homes in the future.

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