So, if you are getting into the self-storage business, or if you have found a deal you are excited about, congratulations. But what if you don’t have enough to fund the down payment? You may be asking, how can I raise money to do this deal?
Well, basically, you have two main ways to go:
- Partners with money
- Investors with money
Let’s explore the pros and cons of each approach.
Partners
For most, if you are new to the business, this, in my opinion, is a good way to go. The reason—less liability on your part.
With partners, usually everyone has the same type of ownership and voting capabilities. Their ownership percentage usually defines their voting voice and cash flow distribution. Not always, but usually.
Also, all partners are usually on the loans, reducing your debt obligation.
The game here is to find a self-storage deal that works, underwrite it showing your strategy for generating the upside potential and cash flows and value created, then be able to explain it in a way that motivates potential partners to say, “Yes, I’ll jump in this deal with you.”
Many of my past 477 episodes explain just how to do this.
What Makes a Good Partner?
You want to find people who are creating wealth through real estate and/or self-storage in particular.
These are people actively looking for deals to do—social media groups, your sphere of influence, real estate organizations in your local area such as apartment investor groups, single-family investor groups, or exchange groups.
Be sure to highlight what your strengths are, such as finding self-storage opportunities and underwriting them, or being able to run the project or oversee the management of them. Whatever you bring to the table, use it as a benefit to a potential partner.
You also must realize you are giving up some, or even a lot, of control in exchange for a partner or partners who can help you execute the deal. It’s important you and your partners have the same goals in mind, such as how long to own it, an exit strategy, and what roles and responsibilities each member may have, such as who is responsible for tax matters, generating K-1s, and making tax decisions, etc.
This is where a good attorney comes into play—one who can create the right operating agreement. My suggestion is you find that attorney and have a draft ready for your potential partners to review before you ever discuss it.
I have done many deals this way and like it. Usually, our LLCs are “member-managed,” removing a lot of legal liability off my shoulders. Also, I can often negotiate “imputed equity”—that is, equity over and above any money I put in the deal for finding it, underwriting it, and bringing it to potential partners.
Again, if this is your first storage deal, and especially if you have a limited track record in real estate, this is a great way to use other people’s money to do your first storage deal. I still use this method.
Investors
Creating a syndication is also a way I, and many of the people I have worked with over the years, go.
Without getting too much in the weeds in this episode, the difference between working with investors and having partners is the fact that investors are handing their money over to you and stepping back. You are responsible for generating the cash flow, equity, and profit.
I do offer a Fundraising Course specifically designed for self-storage. There are also a lot of other good resources out there.
There are different types of syndications one can do, which determine what type of investors you can have. It is absolutely critical you have a good syndication attorney and that you follow the guidelines they lay out for you.
However, syndications open up a big world of people trying to invest their money into deals that generate above-market returns while not losing their investment money. Nothing can potentially do this better than self-storage, so if you have a deal that works and a good story about the deal, this can be a great access to capital.
Usually, there are two or more classes of ownership. There is ownership for sponsors—the ones finding, controlling, and executing the strategy laid out to generate the projected cash flows and equity creation—and investors, the ones bringing the cash into the deal.
Also, investors are not usually on loans. Think about it: if someone brings all the cash and is on the loan, then that is their deal. You have no control.
The world of real estate syndications has really evolved over the past couple of decades, and investors looking at your deal are also looking at many others. It is important for you to know what other types of real estate investment offerings include, and what other storage offerings may be offering at any given time.
When I got started raising money, I attended as many webinars presenting offerings and looked at as many different asset class offerings as I could get my hands on so I could organize my deals in a way that could compete. This also helped me understand how to underwrite them. This is my coaching to you.
What Makes a Good Investor?
First, understand the main difference between a partner and an investor.
Investors usually have made their money and are looking for opportunities to place their wealth in such a way as to beat the market (let’s say the S&P 500 or the NASDAQ) and not lose their money.
Partners are people looking to create their wealth.
Investors are not on loans. That is usually the role of the sponsors.
In the Fundraising Course, I have a module on how to identify your “Ideal Investor.” This is usually someone with whom you can create some kind of relatedness. For example, if your spouse is a doctor or in the medical field, that could be your way into working with doctors. Airline pilots are another one someone I worked with created. I have worked a lot with people who sold a family-owned company and are looking for places to invest money, so people who have sold family businesses are my ideal customers.
There are a lot of courses, groups, and masterminds specifically organized around fundraising that can support you if you go this route.
So, if you need more money than you have to do your first storage deal, these two options are where I suggest you start exploring. This was the way I got going in this business—it allowed me to grow portfolios and control way more than I could have ever done with just my own capital. I also helped many people in the process make good returns.
Good luck, and keep us posted about your storage journey.
