James: Hi, audience and listeners. This is James Kandasamy from Achieve Wealth Through Value-add Real Estate Investing Podcast. Today I have Ryan Gibson from Spartan Investment Group. It’s an investment group that focuses a lot on Self-storage. They have almost 4,000 units. They have a lot of units in DFW area and a few other States. I think Ryan’s going to talk about in a short while, and they recently started to [00:32unclear] in a mobile home parks, which we’ll touch upon in a short while. Hey Ryan, welcome to the show.
Ryan: Thanks, James, for having me. It’s fun to get on your show. It’s great.
James: Yeah, absolutely. Absolutely. So why not you tell about yourself and your company, things that I’ve missed out?
Ryan: Yeah, so we are based in Golden, Colorado, and we buy existing and develop self-storage properties. And we do all of our properties and projects through syndication. So we raised capital from private investors and we go out and buy storages that we can buy and get existing cashflow on. And then we can eventually either expand them or just improve operations to make additional income. We also build self-storage from the ground up and we do a little bit of RV park investing as well, but storage is the primary focus. So, you know, previously, we were land developers and built condos and flipped houses and focused on storage mostly just because of the recession resistancy, you know, during downtimes. And when we were first looking at the industry, that really is what you know, attracted us to jump into the business. Was the, you know, kind of how it performed during the last two recessions.
James: Got it, got it. Yeah. I mean, I did a lot of research of different asset classes. I wrote it in my book as well. Like how many asset class, six asset class for the past 15 years and just on my own, this is not from Marcus and Millichap or this is not from CoStar. I looked at all the asset class and was looking at all the past 15 years report, which that’s a report called Integra Realty Resources. That’s the report that all the commissioner pays us a report to, that’s the organization. And I was looking at self-storage and multifamily and all that. I was surprised to see that self-storage did do well the past 15 years, even during the downturn. I know at the beginning, you know, 15 years back, they didn’t really allocate a specific asset class for it, but they did talk about it. And in general, I didn’t see any downturn, even though every other asset class goes up and down. So that’s very interesting. And why do you think is that?
Ryan: Because it relies on life events and life events never stop happening. No, I’m serious. You get divorced, typically, stuff goes in storage. You renovate your house, stuff goes into storage. In times of good times, stuff goes into storage and times and the bad time, stuff goes into storage. When you get downsized, when you move, when your job relocates, when there’s a disruption in the market that triggers self-storage events. And added onto that, businesses use it because not everybody can park their work truck in their HOA driveway, if they’re in a covenant restricted community and not everybody can have all their utilities and supplies in their house. And so, you know, simpliest way to say it, you know, for an extra 50 bucks a month, imagine having a whole other room in your house. And that’s really been a big driver for demand and self-storage.
We like it because unlike other asset classes, when a customer comes in, we have a lien against all of their stuff. So if they don’t pay, we can auction that off for a profit. So, you know, the revenue loss is much lower for you know, the potential when a tenant doesn’t pay. With COVID and everything, there was still a rental rate, great increases. We still had high occupancy. We still can host auctions and have people move out if they don’t pay. We held back on that in a couple of properties and a couple of markets, but for the most part, you know, we didn’t have the government restrictions that a lot of other asset classes had on that kind of stuff.
James: Got it. Well, I mean, I’m sure the audience is thinking why not James jump on self-storage. So but let me tell you why I didn’t, you can always debate this. So one thing I didn’t jump on self-storage at that time. I mean, of course, for me, focus is very important. I mean, every asset class has so many nuances in it. I mean, it’s not easy, even though self-storage is like four walls and there’s nothing in it, but there’s a difficulty in finding the deal and difficulty in executing the business plan and turn around and, you know, disposition and all that. So, I mean, but I didn’t do it because at that time there was not much of nonrecourse loan available, I think, unless you go really low on the leverage. So how is that right now?
Ryan: You can get a non-recourse right now on ground-up construction
James: On ground-up construction. Okay. Got it. What about on the…
Ryan: Oh, and of course you know, that would be rare in our industry. Of course, on buying existing self-storage properties, non-recourse is widely available.
James: Got it. Okay. So now it’s available right now, at what leverage level?
Ryan: It just depends. I think we just tied up a deal that around 70 to 75% non-recourse institutional loan. So, you know, it just depends on the lender. Depends on the deal. Depends on the play.
James: Oh yeah. I had a friend who was like 85 years old. He’s a broker, but he’s a very healthy guy. And he said he started multifamily and moved on to storage and he owns a lot of storage unit and I was calling him and he said, maybe at that time, he said, yeah, it’s hard to find non-recourse loans. The other challenge in storage is, you know, I mean, anybody can build a new self-storage development in front of your storage unit. It’s very easy to build
Ryan: Maybe. Yeah. So, you could say that as a general statement, that wouldn’t apply everywhere. So there’s a lot of moratoriums on storage. There is a lot of restrictions. Some communities don’t have zoning for it. Some cities quite frankly, would not allow you to use it at all. So, you know, it just depends on where you are. Some jurisdictions it’s, Oh yeah, come build it. No problem at all. So you just need, you know, it just depends on the market. You know, we have markets where there’s no zoning and we could build whatever we wanted and there are markets where it’s taken us 40 years to get a permit. So it really just depends. And then there are some markets where you get your permit and then they slap a moratorium on there and you can’t build your storage anymore. That’s happened out here in Washington and a few places.
So you really got to pay attention. And, you know, and I think really if someone was like, what’s the one thing that I could take away from talking to a storage operator? It’s the market study. It really comes down to: do you have the demand and is there the supply of people and demand essentially in the market to fill up your property or execute your business plan? It’s huge. You know, someone might say, is storage a good play? I don’t know, make up a city, Austin, Texas and I will say, well, generally, no, it’s not, it’s actually a terrible market, no offense, but it might be good on one side of the town and catastrophic on the other side. It’s a three-mile business so it’s like whatever’s happening around in that immediate micro-market is really what it comes down to. So some markets are generally better, some markets are generally worse, but at the end of the day, it’s right in that five, 10 minute drive time of the property. In the market study, that makes the difference.
James: So, all your details that you’re telling me right now, that’s why I say there are so much of nuances in any asset class that outsiders may not know. I mean, it’s easy to say, you know, it’s easy to build but there’s so much of a market research knowledge that, you know, only the operators who are specialized in it knows about it. So, and I do have a lot of respect for every asset class operators. There are definitely people who are really good at that. So let’s walk through a deal in self-storage. So not in terms of deal underwriting, but let’s look at the demographic of that storage. Let’s say you found land in a city. Walk us through the steps you would take to say whether this is a good site for a self-storage facility?
Ryan: So a couple of things. The first thing I would look at is what’s the population. So I would drop in on the facility, we have data and maps that will show us the drive times. And then based on those drive times, we’d get the population within the drive times of the property. And then we would look at saturation levels.
James: And what are the drive times? Minutes?
Ryan: Yeah, four minutes. I think we use eight minutes and 15 minutes. Think of it this way. If you’re in an urban core, you’re not going to drive 15 minutes across town, you’re going to drive eight minutes so that there’s relevancy to where you are in the market. But what we look at is, you know, we’ll look at what are the comparable rent comps to what our subject facility is charged. So, you know, we might be getting $15 a square foot on the average but it’s important to know kind of what type of facilities those are: three-story glass, Class A facilities, are they first-generation roll-up metal buildings, you know, big difference. Is it non-climate controlled is it climate controlled and in that market, is it a hot market, like a warm climate that likes self-storage to be climate controlled? Or is it a market that prefers drive-up or, you know, climate control would be overkill and people would be unwilling to pay the extra money for that.
So we look at price per square foot, you know, probably just like multifamily. And then, for Spartan, we look at the ability to add onto that property, you know, can we expand it and what is the existing dirt that’s there? What is it? Is it flat gravel? Are there stormwater requirements, setbacks, easements restrictions, how usable is that land, and how much would it take to get the land pad ready? Cause we’re developers. I mean, we take properties and develop them into bigger…
James: What about zoning?
Ryan: Zoning is important. That’s kind of a little bit further down on the checklist. The top thing is demand. Cause you know, you could have, Oh, this is a zone for self-storage. And of course, everybody knew that. And then everybody built, a bunch of storage is there and there’s no demand.
James: But is it easy to change as zoning from, let’s say in multifamily to self-storage?
Ryan: Ah, that’s a loaded question.
James: Maybe not multifamily. I know residential has a lot of high priority in terms of city development. Let’s say, commercial office building, commercial land to self-storage.
Ryan: I mean, it depends. I know you don’t like the word, it depends, but it depends. So like if you are looking in a market where, you know, we entitled the self-storage project in a city that had no zoning for storage. So everything was a conditional use permit. Everything was a public hearing. The public had come in, the city had to make a recommendation to a hearing examiner. Huge process. We’ve taken a residential land and rezoned it into commercial so we could build self-storage. We had to go in front of the board of county commissioners. We had to go in front of, you know, there had to be room for public comment. There was opposition, but we were successful and got the land entitled, but every jurisdiction is just a little bit different.
We’ve bought properties that are zoned for storage and we’ve gotten the entitlements and they can take anywhere from two to six months to get it, it’s a building permit, you know, depending on how fast you’re pushing and assuming no closures in the city and things like that. It just runs the gamut. You know, as I said, I have colleagues in the industry that have bought property, they got the entitlements. So yeah, you can build storage here. And then the city puts a moratorium on storage and now they can’t build anything. So they bought this land, they got the entitlements, they’ve spent all this money, now they can’t even build it.
James: How do you prevent that kind of thing from happening?
Ryan: You don’t.
James: Because you’ve already bought the land.
Ryan: I mean, you could negotiate the contract to close upon building permits, but then you’ve got to find a willing seller and you know, of course, that’s always a negotiation.
James: It’s too messy, I guess.
Ryan: But yeah, when you develop, I mean, it can be riskier and there’s a potential for a bigger return but you also introduce a lot more risks. So yeah. I mean, is it easy to do? It can be, and it can be very difficult to the point of being impossible so it really just depends.
James: So when you guys raised the money from your investors, have you already done that, let’s say for a [13:57unclear] project. Have you already done that part or are you are still looking at that entitlement?
Ryan: Yeah, we’ve really learned our lessons through the year. So you know, we bought a storage property and when the rezone of the land from, you know, so you have kind of a couple of different phases of development when you’re doing like the paperwork to get it ready to go vertical. So the last thing you get is their building permit. So your building permit is pretty straight down the fairway; that is meeting building codes, getting your building permit, not a lot of risk in that – a risk, but there’s not a lot of risks. But the phase just before that might be your entitlement so that you can actually do what you want to do, or might even be some type of site plan development where the city has to approve your site plan but you don’t necessarily have your drawings done for the buildings they’ve just approved. Okay. Building here, building here, building here, this is your height. This is your step back. This is how much square footage you’re going to deliver and a site plan approval. And then you have the zoning that might be before that. And it might already be zoned that that might be your first step. You know, do I meet the zoning if I don’t, I might have to rezone that could take years.
So, you know, we just kind of look at the projects and negotiate with the seller to buy the property. You know, when it hit a point where we’re comfortable with closing on the land, and then we negotiate the purchase and sales agreement as such, and then we do the raise in accordance with how we feel our comfort level to be. Because we don’t want to raise the money until we know we can do what we want to do. And you know, we’ve really refined our processes for that over the years to know that, Hey, we can close. And we’ve gotten better at negotiating. Like how can you expect me to buy this land and I don’t even know I can do what I want do with it? If it’s a hot market, you know, make a decision; you either want it, or you don’t. If it’s a property that’s been sitting on the market for a year, you can come up with some pretty creative ways to keep the property tied up while you go through that process.
James: So how many percents of these 4,000 units were developed versus how many were bought from….?
James: 25% newly developed. Okay. Are you guys more trending towards development rather than buying?
Ryan: That’s a great question. I would probably say we’re buying more than we are developing right now for no reason other than our development pipeline is full enough. Development is expensive and development requires a lot of cash and you don’t want too many of them going on at one time. So we have two very large, about $22 million right now with development. Actually, no, we probably have about $30 million in development right now and that’s about our comfort level. That’s our spend for 2020 for development and we really don’t want to get much past that. We also only develop in the states that we live in so Washington and Colorado. Adding onto a property is not a big deal, but we don’t like to do ground-up development where we go through the whole process if we live out of state, because inevitably if you want to get things done, you gotta be down at the county, down at the city hall, down at the office, all the time. You’re going down there all the time. Oh, you want this? Okay. No problem.
James: Otherwise, it’s going to just take forever to get a project done.
Ryan: And who wants to fly an hour and a half somewhere to drop off a piece of paper and then fly back? I mean, it’s just not efficient. So we just like to be in town. I can’t tell you how many times I’ve gone down there to, you know, shake the trees and get progress.
James: Yeah. I’ve done a small land development beside my apartment. We were converting it. We were combining the adjacent plot of land into the apartment. And that itself was a lot of work already. But the city was supportive and it went through well by just the amount of paperwork, the amount of bureaucratic process that you have to go through. So, absolutely. What about a demographic? I mean, we talked about demographics. How do you say that this particular submarket is a good demographic for a good self-storage business?
Ryan: We like at least 1% growth. We like to see trending growth. We like to see 50,000 income. We like to see saturation levels like a seven square foot per utilization for storage.
James: How do you get that data? Seven square feet per utilization?
Ryan: We have Radius Plus and we use a couple of different programs. Radius and there’s one other program that
James: So Radius is a software for self-storage investors?
James: Okay. For them to see the demand, I guess.
Ryan: If you gave me an address, within 20 minutes, I could tell you what’s the drive time around it. I could tell you the demographics. I could tell you the demand. I could tell you all the permits in the pipeline. So that’s another thing. This is great. I can tell you everybody who’s building, everybody who’s applied, who’s canceled, who is coming. And then of course we do our boots on the ground research where we go knock on doors and go to the city and ask them like, Oh, Hey, you know, is anybody else? Oh yeah, John, you know, he was over here last week. You know, that doesn’t show up on record but the intent. And then you go talk to John and you say, Hey, you’re really going to do this because we’re thinking about doing it too. And we’ve got into situations like that and you know, either we’ve given up or they give up or whatever, and we just move on to a different market if the market can’t supply all that additional.
James: So does the self-storage purchase involves stringent requirements or stringent terms like what multi-families like day one, hard money, you know, very tight on inspection, do due diligence process?
Ryan: It’s extremely competitive. And it might be as competitive or more competitive as multifamily. Because when people think of storage, they’re like, Oh, I’ve never really heard of that. I don’t know what that is. And then they do multifamily and they’re like multifamily is really hard. You know, there’s always people doing it and Oh my God, there’s so much competition. Maybe I’ll go try storage because it’ll be less competitive. And then they go over to storage and they’re like, Oh, there’s a lot of people that do this. But what the difference is there are so many multifamily properties in the United States. Self-storage, you can’t even hold a candle to the wind. I mean there are 50,000 facilities total in the entire United States. So yeah, when you’re talking about competition, if you’re looking at a property that’s a million dollars or less, no problem. You can go bid on it as a mom and pop.
When you go a million to maybe 6 million that you can reposition or that, you know, show some signs of a mom and pop operations, you’re competing against the best of them. You know, the all-cash, close in 30 days, 60 days, whatever it might be. But generally what we do is we do about 10% earnest money deposit…sorry, not 10%. On a $6 million facility, we might put up anywhere from 25 to 50K. And that doesn’t go hard until due diligence is completed and signed off on.
James: Oh, okay. So that’s not bad. It’s not like day one hard money, like what’s happening in multifamily, right?
Ryan: No. And if we were in that space, we wouldn’t play that game. So yeah, whether you think it or not, you’re competing with yourself at that point. You’re worried about losing that money. I mean, we have a 100% contract-to-close ratio, so everything that we’ve put under contract we’ve purchased. I mean, we had a bank pull out three days before closing, we went and raised a private loan. We did our own deal. So we’ve done everything to really help get the deal closed and we’ve got that reputation to close. And I think that people value our relationship a lot more than they do necessarily how much earnest money we put up. And we’ve had a broker bring us a lot of deals and just keeps bringing us deals because we make it real simple on them. You know, it’s a very simple process with us. We get everything on the table. We are very transparent and as you know, in multifamily that’ll go a long way. Any business, right?
James: Yeah. That’s true. That’s true. Yeah. I mean, brokers, love people who are easy to deal with. Because you know, this is just multimillion-dollar deals and you do not want to have a tough person to work with when you’re going to such a big transaction. So at a very high level, what are the value add that you usually do in self-storage?
Ryan: Cameras for security, rental rate increases.
James: So what, you put a camera and you get higher rental rate or it’s just…?
Ryan: People walk in and they want to feel secure. So our target customer is a 70-year-old woman, that’s who rents our properties. So when they walk to your property, is it dark, are there cameras, is it secure? Does it feel like the fence is going to fall over? So we take the properties, we’ll put in a new fence, we’ll put in new cameras, we’ll paint all the doors, we’ll replace doors, we’ll rehab the office, we’ll put in notary services, we’ll put in ice and vending machines.
James: Why do you need a notary service in a self-storage facility?
Ryan: Convenience. So we like to be a shop of convenience. So if somebody has got an Etsy, Amazon, they have a home-based business and they can come to our storage facility, they can drop their FedEx/UPS deliveries off at one of our properties. They can get their items notarized. They can ship, they can store. We even have a car wash at one of our properties. So, we try to be a place of convenience for people. Not that we were going to make any money on it. It’s just a place where people can go and know that I rent my Uhaul truck to move my goods somewhere. At your property, I can notarize my documents, I can store my belongings, I can do a lot of different things to transact and do my business obligations. And so what we try to be kind of a helpful facility. Not all of our facility does that because not every facility even has an office. But the ones that do, you know, we sell retail.
We start, you know, people pay cash, we get rid of cash payments and we go to as many automated payments as possible. We enforce the lease. You know, a lot of these facilities we take over, tenants might not even be on adequate leases. So without being on an adequate lease, you don’t have an adequate lien against their belongings. You can’t do an auction.
James: Have you guys done auctions?
Ryan: All the time.
James: It’s like Storage Wars on TV, right?
Ryan: Yeah. Yeah.
James: That really happens?
Ryan: Yeah. The semantics are true or the actual process is true, but the way that it’s carried out is not true. So nobody goes in person, you know, there are some old school places that still kind of do that, but we do them online. So you can go to selfstorageauctions.net, you can register. And then in your neighborhood, there could be a storage auction and you get alerted like, Oh, Hey, this unit is going up for auction. You can kind of log into your account and see, Oh, what’s in there.
James: All right. I can see all our audience and listeners are doing that right now. I didn’t even know that. What was the website?
Ryan: I think it’s selfstorageauctions.net. And so as a company, what we do is we say, you know, that the storage auctions is revenue producing or whatever. They’re not really revenue-producing. They’re basically just to get you to get out and get a new customer in. Like we clear out the, you know, and it’s the threat of losing your stuff, right? If you don’t pay, you lose your stuff.
James: So it’s like an eviction process, I guess.
James: Except the government can put the moratorium like what they did in multifamily right now.
Ryan: The government hasn’t touched us. So usually within 30 to 60 days, if you’re not…so let’s say, your rent is due today. If you haven’t been paid in five days, you get a late fee and your unit gets locked automatically. So the gate code that lets you into our properties, the revenue management system will automatically turn the gate off.
James: Really? [26:40crosstalk]
Ryan: We over-lock your unit. You can’t even get into your unit.
James: You don’t pay your rent and after five days, it locks by itself?
Ryan: Just like that. And then we’ll over-lock you. So we’ll put a red lock on your unit as well. Some of our properties will have the smart locks where it’ll lock behind the door so you can’t get in, you can’t get into your stuff. So if you don’t pay after five days, you’re automatically locked out. So we liked that. We don’t have to really manage that too hard. I mean, there’s, you know, we have property managers are onsite staff that deals with that, but the gate code, that’s automatic. And then once you pay it, we’ll let you back in. But if you don’t pay, you’re locked out. So now you don’t have access to your stuff and after 30 days we do our notices, our legal notices and then, we can take pictures of your property, do our publications and then it goes on this website and then people can buy your stuff.
And then you know, any earned income from that auction goes directly to us first, to recoup the costs of whatever the tenant owed us and then any costs of legal fees associated with it. And then anything that’s left over after all of our money has been recouped, goes to the tenant, you know, cause they gotta be compensated for their stuff. So, we get paid first and then, but most importantly, we get our unit back and in multifamily or residential, they might trash the place. They’re gonna do whatever they do. In storage, I mean, you can try to trash the place, but I mean, it’s a box. And you know, we just sweep it out. They moved their stuff out and they’re gone. And then, you know, for us, we just get our unit back and we let our customers know when they book, you know, Hey, sign up for our online auctions. You know, so they can bid on stuff and they can also know that, Hey, we do online auctions.
So a lot of places we take over, I mean, the delinquencies are a mess when we take over and that’s a way to increase value. So we took over property last year, for example. And I just heard from our management that, you know, auctions were like, I mean, there were people that were 180 days delinquent and the manager just wasn’t collecting on the units, they just weren’t enforcing the rules. So we’ll come in and we’ll just follow the rules. You know, your lease says this, if you don’t pay with this, you go to auction, you know, and then we make money on late fees. And some facilities that we take over don’t charge late fees. I mean, if you don’t pay on time, you should get charged a late fee. So there’s a lot of different things we can do. You know, and plus we’ll repaint, we’ll redo the doors. Some doors of the old cabinet doors, you know, to open up the lock, the storage locker, we’ll put the roll-up doors on them. We’ll improve the lighting, we’ll redo the asphalt, whatever it might be, we just get it nicer so that the customer feels safe and secure and they feel like they’re getting good value for their money.
James: Got it. Got it. Got it. All right. Why don’t you tell our audience how to get hold of you and your company?
Ryan: Yeah, sure. So my email is Ryan@spartan-investors.com. Our website is spartan-investors.com.
James: Awesome. Thanks for coming in and adding tons of value to our listeners and audience. Thank you.
Ryan: Yeah, you’re welcome. It was nice meeting you, by the way.