If you are in the business of getting into self storage, you are in the business of putting cash into deals.
This is the fourth skill set it takes to start and grow a self storage business. All seven skill sets were covered briefly in an article I wrote for Inside Self Storage.
I know it seems obvious, but in reality, I have seen this trip up a lot of people.
If you have the cash, or if you are getting it from the sale of another property, great. My coaching is to make sure you use financing in a way that maximizes your return at the lowest risk tolerance level you can stand.
Perhaps it is better to put your cash into more than one deal to spread your risk and to use the financing to leverage your returns.
Let’s use the example of being in a 1031 tax-deferred exchange with $2 million in cash and $3 million in debt from the sale of an apartment complex. You can buy two or three facilities to replace that as long as the debt is at least $3 million and all of the $2 million goes in as equity.
Finding Investor Money
If you don’t have the money, which is where I was when I started in the self storage business, you have to raise it.
How do you do that?
You have to talk to people with money who are interested in investing it.
“What if I don’t know people with money to invest? How do I find them?”
That is literally the million-dollar question.
In my past, that was the position I was in.
When I got in the business, I knew a few people with money to invest, but not many.
I presented my deals to anyone who had any money or who seemed successful at whatever they did.
I took in low amounts of investment money from people. Some as low as $10,000 to $25,000 investments.
Not a fun way to go, but I wanted to be in the business. I had deals with as many as 17 partners.
What changed for me was finding someone who knew people with more money than I did. They traveled in circles, primarily country clubs, I wasn’t a member of at the time (I am now).
They wanted to be in the business with me and wanted to be part of the vision I had for a self storage company.
This opened up a whole new world of potential investors for me.
Many of these investors have become friends, mentors, and advisors. I developed as a business person, and my life has been totally enriched in a way it had never been before by getting to know them.
And our company has grown.
If you are just starting out, my advice is to do something along these lines. You don’t have to copy me exactly but start with successful people you know.
If they can’t or won’t invest, they know others who may and can introduce you.
It’s possible to do two or three deals by yourself. But if you want to grow a business with a large portfolio you are going to need support. I was fortunate enough to find someone who knew that world of country club money, and who wanted to be part of growing the business.
You could also look for those people as well.
Creating a Fund
Another route, one that I am not personally familiar with, is creating a fund.
I am not the person at all to coach or advise on this.
From what I have seen, it is a hard way to get into the business. This may be a valid way to go after you’ve been in the business for a while, raised some money and have a good track record.
It is one my partners and I are exploring now. But be careful. It is expensive, highly regulated and in reality, you are in two businesses, one is self storage business, and one is a fund manager. Both are full-time jobs.
My only coaching is to be careful if this the way you want to go and get very good support.
Why People Will Invest With You
Understand that there are a lot of people who have money that you can help them grow.
Self storage is the safest place for people to invest money if they are working with someone who knows how to find and analyze deals.
Even in the market today of 5% – 6% CAP rates, we are able to buy value-add properties and give 10% and greater preferred returns to our investors. We can also return all their money within 5 years or so.
The majority of the facilities out there are small mom and pop operations. There is no limit to the number of these facilities that will hit the market in the next decade. Many of these can be purchased and repositioned and/or expanded to create the returns needed for your business model.
You are solving a problem that people with money have if you can:
- Find those value-add facilities for sale,
- See the opportunity they represent, and
- Demonstrate that opportunity to others.
What problem is that? The problem of where to put the money that is relatively safe and can generate above market returns.
Remember, self storage is one of the lowest foreclosed on assets there is.
In my business, we are able to give investors above-market returns and their money back before we get much, if any, of the cash flow from the facility. After they get all of their investment money back with their preferred return, the investors have the option to get some of the ongoing cash flows and some of the sales proceeds when we finally sell.
If you craft an investor-friendly deal, do well on the first one, you will have investors for your next deal waiting.
People like to invest where their friends do. That was our experience.
In my humble opinion, it all comes down to three things:
- being able to see the deals
- figure out the cash flows
- be able to tell that story.
If you are good at that or develop that skill set, you will soon have more money than deals to put it in.
