Industry sign banking north dakota month to month lease myself
today we're gonna be talking about commercial real estate specifically mobile home parks self-storage and I'm asking the question why is a multi-family author not investing in multifamily right now so we're going to talk about that I've been an entrepreneur I'm not really proud of being a serial entrepreneur anymore I just jumped around too much over the years but I've been involved in real estate for the last 19 years I've written three books on real estate investing the latest is the book on Self Storage it's coming out next year from bigger pockets been involved in all types of flipping and residential development commercial development operate a multi-family facility for a number of years in North Dakota and being involved in all this has allowed me to lose some money over the years and so I've got this podcast called how to lose money Ashley were you on there yet okay okay you can't be okay good so if anybody wants to tune into that it's on iTunes and we talked to people about their failure stories my failure stores on the way to people looting loot making a lot of money and growing into the great people that they are now so again why is a multi-family author not investing in multifamily right now first of all I was in residential real estate for a lot of years and if you know if you're chip and Joanna Gaines jr. and you can take this you know run-down house let's say you pay $300,000 for it and you can just turn it into a beautiful beautiful home like that let's say you add $500,000 to it you put in you know finish the attic finish the basement add on to it and you can turn it into something beautiful if the neighborhood it's only a $300,000 neighborhood you're still going to be limited by something called comps right so the comparable properties are going to limit you and that's one of the reasons I love commercial real estate because there's a value formula that a lot of you know that allows you to dramatically force appreciation and increase the value of the asset and the equity it's not limited by comps I used to hate commercial real estate actually this is a picture of a beautiful mall when I was a kid malls started out and there is all these great malls with you know the marble floors and 29 shoe stores and everything and then you'd go back years later and they look more like this you know and I always wondered about the fate of the people who developed and owned these I wondered I always thought commercial real estate must be a terrible place to invest but I didn't know that most of the Forbes 400 wealthiest people in the world almost all them either made their fortune or perpetuated through commercial real estate Jeff Bezos from Amazon gives us a great example of how the commercial real estate value formula works he went around and he took the lightbulbs out of all the vending machines in every Amazon facility and people thought that was kind of weird but he knows that that there's a cost to the light bulb there's a cost to replacing it there's a cost for the electricity and every dollar that he can save per month turns into twelve dollars a year and when you multiply that by the p/e ratio the stock price to earnings ratio that translates into a couple hundred dollars in the value of his portfolio and it's very similar with commercial real estate that again the value formula I want to briefly I don't know what I did wrong here what'd I do wrong something so the value formula I want to talk about the value of a dollar in commercial real estate investing so if you can add a dollar to the bow at the bottom line that means you increase the revenue or decrease the expenses by a dollar that obviously turns into twelve dollars annually twelve dollars annually there's a value formula which is value equals the net operating income divided by the cap rate so cap rate as you probably know is the rate of return on a specific asset in a specific location a specific point in time and cap rates used to run around nine or ten percent now they're running four five six seven percent take a 6% cap rate twelve dollars which again as a dollar a month divided by point zero six is two hundred dollars added to the value of the asset it's pretty powerful and see it's not limited by comps and two hundred dollars asset value can be multiplied even further to the shareholders the equity holders by the fact that you have you have safe leverage so if you have say sixty percent loan to value ratio you can increase that even more in the pockets of the equity holders I'm going to give you a few examples of that in a minute here so what are some examples of this value formula at work so if you filled fifteen vacant apartments at eight hundred twenty-five dollars each that's 15 times eight 25 times 12 divided by six percent that's two point four million dollars increased value of the asset if you took if you did water if you pass back the cost of water to the tenants twenty five dollars a month times one hundred twenty five units that's a six hundred twenty five thousand dollar increase in the value of the asset if you were able to raise the lot rent at a mobile home part by just fifteen dollars a month times 300 spaces times 12 months divide that by six percent cap rate and it's a $900,000 increase in value of the mobile home park it's powerful if you were able to do cable that would be another you know six hundred twenty five thousand dollar increase value just by twenty five dollars a month if you spend a hundred thousand dollars to add paid outdoor storage now this is I want to camp on this for a minute this is a real example from some thing we invested him this mobile home park owner he'd this developer he got in there and he noticed that there were a lot of cars parked around the trailers the mobile homes and sometimes he would see three or four or five or six cars parked in front of the mobile home and sometimes he would see that there was an RV or a boat or work trailer so he paved a vacant acre out in front of the mobile home park that he owned and he put a fence and a gate around it and he spent a hundred thousand dollars to do that well and that's fully leased I said nine thousand a month here it's actually ten thousand dollars a month if every space was taken he can go out to the community and advertise boat and RV storage as well well ten ten thousand dollars a month is obviously 120 thousand dollars a year 100 thousand dollar investment one hundred twenty thousand year that's 120 percent annual return that's great on that investment but it's better than that because 120 thousand dollars divided by a six percent cap rate is two million dollars increased value to that facility you see what I mean about the force appreciation but if that facility cost if that mobile home park cost five million dollars in the first place as an example let's say that was three million in debt and two million in equity that two million equity just went up by two million it doubled just by adding this pave lot in putting you know cars and boats and all that in front of it it's it's a powerful strategy and this is the power of buying from a mom-and-pop owner that mom-and-pop owner had that vacant acre out there for years that they weren't taking advantage of but a professional operator would take advantage of it a couple more examples adding u-haul at 3,000 dollars a month that's a $600,000 increase value adding point of sale items like LOX boxes tape and scissors at a self storage facility that would add two hundred thousand dollars value and then adding insurance and late fees this is one of my favorites if you could add five dollars a month insurance and late fees times eight hundred storage units that would be an increased value on paper at least of get this eight hundred thousand dollars to that storage facility so it's powerful so sometimes a mom-and-pop owner might say well I don't have time to add insurance or late fees well they're leaving a lot of money on the table and this is the power of self storage in mobile home parks right now because we found that a lot of apartment owners have run the value out of the apartments but these mom-and-pop owners haven't and that's why I think there's such an opportunity here I one of the reasons I didn't I don't like being called a serial entrepreneur anymore as I used to invest like I did like I did starting businesses I would basically swing for the fences and sometimes struck out a lot of the people on the how to lose money podcast said that that was the mistake they made the problem is low-risk leads to low return high risk doesn't always lead to high return it could leads to higher potential return but also higher potential loss so as we invest in commercial real estate I just want to encourage people not to roll the dice not to play double or nothing if you play double or nothing with all of your assets then you might end up with nothing you'll have nothing left to double this is my favorite investing quote as we think about investing versus speculating and this is another quote I love wealth gained hastily will dwindle but whoever gathers it little by little will increase it now I want to talk about multifamily briefly before I jump into self storage and mobile home parks multifamily is a great asset class because you can look down the road you can see you know what gen Z what millenials what others are doing you know the population surge that's driving this thanks to the government we had a huge increase and then a huge slide in homeownership over 20 years and it resulted in about 6 million new renters which drove this huge spike in multifamily popularity and pricing over the last few years the delinquency rate of multifamily is incredibly low it was only 10% as high as single-family homes during the recession and now it's only 2% of the single-family foreclosure rate baby boomers are the fattest smallest but fastest growing group of new renters and multi-family Millennials are the largest demographic in American history they are renting more than buying a lot of them don't see the point of tying themself down to a 30-year mortgage for a seemingly overpriced home when they might have new opportunities new friends new jobs somewhere else next year u.s. immigration is continuing to increase and on average immigrants rent more often and longer than than others there's also Gen Z why I didn't put on there but even though the demographics the default rate the recession resistance is great it's as a lot of us have found out it's significantly overheated cap rates are at a record compressed level part of the reason is there's 1031 exchange investors investing at a record amount we are selling apartments right now and a 1031 exchange buyer is knowingly overpaying rather than pay that to Uncle Sam and that really helps IRA investors self-directed IRA investors are investing at a record level there's international institutional money I had a guy from China say to me that we would invest in US commercial real estate with a zero cap rate if necessary because they want to get involved in US commercial and they want to get in their money put into US dollars because they feel like that would be a better investment for them it's really hard to compete with that you know tax reform act added a lot of fuel to the fire a lot of a lot of people 51% people thought multifamily had already reached its peak in 2017 after the tax reform Act that went down to 29% and it's proven since then the nuru impact I'm trying to coin this word if you all can help me it it basically means new gurus these are people who weren't investing in real estate at all before the Great Recession and now they're teaching other people they're training others they're they're out there saying hey you know it's ok to overpay and that's a real story a lot of you probably know who this is but I was at a Miami conference last year in December and a guy walked down stage he's probably the most famous multifamily syndicator in the world and he came out and he said it's ok to overpay for multifamily in fact I recommend everybody overpay and I thought he was kidding I really literally thought there was a punch line coming and there wasn't he was serious he said go ahead and overpay just get into multifamily well that flies right in the face of Warren Buffett and Charlie Munger and all these great investors like Ray Dalio Howard Marks they say you should do the opposite of that you know you know be greedy when others are fearful and all that well he was saying it's okay and it just kind of made me think he wasn't I don't know I just made me feel kind of funny so I don't think it's a good idea to overpay knowingly so so we expanded we decided about a year and a half almost two years ago to expand into self storage and mobile home parks and so I'm going to talk briefly about that since that's why we came self storage is really recession resistant there are caveats to that but I'll tell you this that during the last downturn a lot of people who were downsizing from a large home to a small home for a small amount of money put their stuff in self storage and during good times people are filling up their Walmart card and their amazon card and they're putting stuff in storage and there's also boomers parents who are passing away now and there putting I mean we put you know stuff in storage that my mom left the rents are price elastic if I had a thousand dollar apartment I was renting it to you and I raised it six percent you may not sign that contract to pay $60 extra month or seven hundred twenty dollars for the year but if I'm renting you a self storage unit at a hundred dollars a month and you had a month-to-month lease you're probably not gonna take a Saturday rent a u-haul get your friends together to move your junk I'm sorry treasures down the street to save six dollars a month right and so it's it's very true and and some of the self storage companies that we work with raise rents twice a year like six percent each time you can't do that very often in multifamily there's really high switching cost people think they're only going to be there a really short time anyway they think the average Self Storage person you talk to you says I'm only gonna be there two to three more months and you know that turns into a long time fragmentation about 75% are independent operators the industry is 5353 it's about 54,000 actually now strong and over 40,000 of those are run by independent operators and a lot of those are mom and pops so they're leaving meat on the bone as we talked about it's really easy to manage a mediocre facility I know it's a mom-and-pop but it's hard to manage a great one so the business plan would be to acquire from a mom-and-pop improve it and then sell to an institutional buyer we talked about increasing the net operating income earlier if you can if you can buy from a mom-and-pop at about a 7% cap rate and sell to an institutional buyer at about a five and a half percent cap rate just that alone not including the net operating income that alone can increase the value of the asset 20 to 30 percent but if you take leverage into account that's increasing your equity what 60 to 80 percent just from selling to the right buyer it's powerful great operators reconfigure the unit sizes as needed it's yes just sheet metal and rivets it's easy to change but a mom-and-pop typically wouldn't do that there's all kinds of ancillary income there's all kinds of value adds we can do there's just a whole long list and it's surprising as a multi-family syndicator in the past I kind of chuckled when I heard value ads and self-storage I was thinking was just sheet metal and cement but there are actually a lot of value add opportunities this is a chart showing mobile home parks and self storage as the top increase of all the asset classes on this list and to be fair some of these other asset classes were a lot more mature so it's easier to increase the value when you start at a lower number but at any rate this this is where it's been over the last you know since the year 2000 this is showing the average annual return by REIT sector and again I think it's skewed a little bit since self-storage started behind the others but it is a lot higher that compounded 17% annual return in these REITs over thes
over the 17 year period is a huge number you know how that compounding thing works even the 17% versus residential at 13% is a huge increase to investors I don't like that slide the mom this is kind of a summary of capitalizing on the mom-and-pop opportunity mom and pops typically don't have an online they don't have an online presence limited hours sometimes they'll say you know I only come in about once every two weeks if you want to rent a unit there's no after-hours assistance I know one mom-and-pop I don't understand this to this day but they say just bring the money to this to this month to your own storage unit and slide it under your door and we'll we have a key to your unit we'll go get the money that's how they that's how they collect money how does that how does that work I'm not sure it's even legal but I know I know a self storage facility that they will not take they won't take credit cards and they won't take like automatic ACH payments so basically people have to come in there every month and bring cash or check where they mail it in and they're reminded every month right this mom-and-pop is reminded that this tenants are reminded every month that they had that stuff in storage in there you know potentially wasting their money but there's so many opportunities like this to just improve on these I mentioned this earlier Self Storage ownership 76% independence probably fifty percent of those or more or mom-and-pops seventeen percent or higher you know better operators and seven percent are the big REITs like public storage but in multifamily 93% of the apartments 50 units and above are owned by corporations who are typically ringing the value out of those before we can get our hands on them there's a portfolio premium I kind of mentioned this earlier if you can sell to a REIT or a life insurance company or a pension fund you can get a better cap rate and therefore you can get a higher total price for the portfolio than you would selling these individually so why I love manufactured housing communities that's the politically correct correct word I guess for mobile home parks they're recession resistant the I mean people typically aren't going to move in a recession because their next step is I mean often sadly under a bridge or something I mean there's no place to go down from a $295 that's the national average I think lot rent of a mobile home park there's a shrinking supply it's unique in the fact that there's no other asset class that we've ever heard of that has a shrinking supply yet an increasing demand every year the affordable housing crisis is driving some of this I mean we know that jobs are a lot of jobs are going to part-time now there's a lot of people who can't make ends meet and there are 10,000 people a day turning 65 and six out of ten have less than 10,000 saved for retirement it's a staggering statistic but a lot of those folks have equity in their homes and they're willing to trade that in to buy a mobile home and go to a mobile home park sometimes by choice some of those people have BMWs and they take great vacations but they want to live on a lower cost and I know a doctor who recently retired and did that and he lives in a mobile home park high switching costs these folks paying two or three or four hundred dollars a month in lot rent if they know they have to spend five thousand dollars to move their mobile home down the street to save thirty bucks a month they're typically not going to do it it's almost impossible and so it's very very unlikely that they'll move I just want to make a little comment here you've probably seen the documentary out there by that comedian can't remember his name but he was really ragging on mobile home park owners because of this it's really important for us to invest with operators who don't gouge their tenants that's just a kind of a side comment there just because we you know I mean we're trying to invest with operators who are raising the rates up to the level of market not gouging tenants because of this fragmentation 40,000 or so of the 44,000 mobile home parks in the u.s. are owned by mom-and-pop owners very low maintenance and capital expenses again mobile home park this model that were espousing here is not owning the mobile homes it's just leasing the land it's all it's called a land lease model if you will and there's very few capital expenses they're pretty predictable there's also less competition I mean if you thought about it a year ago or five years ago like I did you probably thought mobile homes well that stigma has kept a lot of people out of investing which is a great advantage to those of us who have invested my favorite quote on this is Robert Helms live where you want and invest where it makes sense Green Street that bottom quote there you know Green Street is these this great advisory firm that does all these stats and they said we don't buy these but if we were gonna buy any asset class mobile homes will be among the best to invest in that was a quote from about a year ago that last quote is again that 10,000 baby boomers are turning 65 every day and these are some stats I have a lot of these in a special report I can get you if you want a copy of that this is a hard to read graph on the right side is the size of single-family homes apartments in manufactured homes and the star on the graph represents the size and then the left side is the cost so you can kind of get the gist of what they're manufactured homes have the lowest cost $500 a month again the national average that a lot rent alone is 295 I guess that's the total cost including the the cost of the mobile home but the size you can see the star way above it as much higher apartments are obviously much higher cost and then single-family rentals are much higher and then this for an average lower size so this is this is showing the average lot rents of typically a three-bedroom mobile home versus a two-bedroom apartment you can see it's triple in places like Connecticut the cost of renting a mobile home site is like less than a third of what it would cost to rent an apartment so this is really compelling for a lot of people especially people you know want a fixed income or who just want to live in a mobile home park by choice like the doctor friend of mine in California capital expenditures I mentioned earlier manufactured housing has the lowest capital expense ratio of any of these asset classes and for somebody who just got a hundred and seven thousand dollar bill for one pipe break in a an apartment that we own this is a great stat because there were 19 there are 19 apartment buildings in this apartment complex in one building just had the cast-iron break and it cost 107 thousand to fix it's scary to think about what happens to if the other 18 break you know that shouldn't happen typically as much in a manufactured housing settings so it's a lot more predictable capital expenditures I mentioned the stigma earlier we think of that place I grew up I'm just kidding on the Left we think of that as a mobile home but really we're investing in more of the type of thing on the right you know which is more of a beautiful manufactured housing community I already mentioned this earlier these are projected returns for the different classes self storage and healthcare tie for second and manufactured housing is the top return for these commercial asset classes according to Green Street Advisors and again manufactured housing and this one is much higher than the other ones this is a self storage facility we invested in in Denver it's brand-new ground-up construction this is a manufactured housing community I think this is in Lancaster Ohio south of Columbus this is one in Gillette Wyoming again it's it's nice there you know newer pickup trucks outside of these there's a you know again there's a lot of economy of scale there when you get that many mobile homes in one community this is Austin Texas self storage facility it looks like a kind of a artist rendering but that's a real picture it they just have a Disneyland clean standard there this is just a reminder to me this is the Lindsey family they're in tech sarcana and this is just a reminder of the that these you know these some people call these metal boxes that spit out money but these are real families these are real people and it's really important to me and to our company to invest with operators who really really care about the people there who really you know view these as families as individuals I mean this metal box is actually these kids childhood home there it's a place where they're gonna be creating memories and it's really important I think for all of us to you know give back and think about the people who are living there this mom was in the office one day and the little the youngest girl asked mom what are we doing here today and she said we're buying a home and this you know buying this home this mobile home and living for a lower cost is allowing her to not perhaps perhaps I don't know her whole story but perhaps not have to work two or three jobs or maybe it's an allowing her to save up money for these girls to go to college so it's it's it's really wonderful to know that we're part of something that's actually helping people and I think that was the contrary view to what that comedian John Oliver did on this documentary a few months ago where he was saying you know is that the you know these mobile home park owners are only hurting people well there was a New York Times reporter named Gary Rivlin who went to he had exposed the whole payday loan industry and then he decided he was going to expose the mobile home park industry and he actually went and lived in the mobile home park a few years ago for I don't know if it was a couple weeks maybe a month every single tenant he talked to was positive about it every single one was glad to be there every single one spoke positively about the owners it just changed hands and the new owner had improved the streets and the sidewalks and they'd only raised the rent maybe $30 and so he had to do I guess he found his you know his integrity forced him to write an article in the New York Times in April of 2014 I think it was that said mobile home parks aren't so bad and the one I stayed and everybody was positive about it so again this is really important to us I want to take a few minutes here to go over one I went over an example of the value formula for a mobile home park by adding that parking area I want to go through a self-storage example before we wrap up we recently invested in one that had 650 units 71 thousand square feet had 114 RV spots the the mom-and-pop owner was sort of I don't know if psychotic or neurotic is the right word but she had handwritten books which means it was really really hard for to get a loan from a bank looking at these handwritten books but anyway our operator that we invested with took over last November the delinquency get this was eighty percent eighty percent of people weren't paying or paying late our operator got it down from 80 to 5% the occupancy was eighty percent which isn't that bad and our operator got it up from eighty to ninety two in the first six months he added a showroom retail he's selling locks boxes tape scissors he added u-haul he's making thirty nine hundred dollars a month from u-haul which is sort of like an ATM adding an ATM to the facility because that's spitting out thirty nine hundred dollars a month he doesn't have to do that much work there's no capex involved that's forty six thousand eight hundred dollars a year that's a six hundred sixty eight thousand dollar value on paper increased just from adding u-haul he added a website deferred maintenance he rebranded it he took the net operating income from two hundred ninety five thousand when he acquired it up to four hundred fifty-seven thousand in six months when he bought it the value the price II paid was four point three million which was a very fair 7% cap rate he added two point three million in value so he's got the value up to six point six million on paper right now it's throwing off a twenty one percent cash on cash return the equity he had a sixty five percent loan when he bought it so the equity was only one point five million and this is why I love the bankers didn't get to share in that increase because though at one point five million in equity holders just increased their equity by two point three million in six months up to a three point eight million dollar value so the asset appreciation was fifty three percent on paper at least in six months and the equity increase though was a hundred and fifty percent in just six months now that's assuming a constant cap rate of seven percent if he was able to get sell to an institutional buyer at a five and a half percent cap rate that increases the value another twenty one percent at the asset level and another sixty percent to the equity holder so if he he's probably gonna be tempted to sell this pretty quick because he's increased the value so much in such a short time but if he holds it for years he's projecting a forty seven percent IRR and a four point two x multiple on invested capital so I would ask a lot of folks who are doctors dentists IT people who are trying to flip on the side and do a lot of this type of stuff a lot of them I talked to you every month and one of them recently said why am i working harder than I need to to make less than I could and this lady had just realized the power of investing you know in one of these commercial deals and really not having to do all this work I've got a no pitch self-storage special report if anybody wants a copy of it you can just text your first name and email to that number there it's a self-storage special report there's also a mobile home park special report and it just explains again a lot of these statistics and quotes I've used today I can send you a copy of my book as well free and a PDF and again you can just get all that just by giving us your first name and texting it your email address at that phone number so that is it any questions yes yeah yeah so the question is what would stop you in self storage from having a competitor open up something next door or something maybe nicer newer bigger that is the number one risk in Self Storage great question Self Storage has I mean it's easier to build it's faster to build and a nicer a better competitor can come in next door so when we invest in these things we can't guarantee that that won't happen but we're looking for locations that maybe are infill like we're investing in one next month in Colorado Springs that's surrounded by other stuff there's no vacant land anywhere near it there's um my ebook on this has this cover but I'll tell you real quick you're looking for a demographic ring like a three mile radius for example around a self storage facility that has approximately seven square feet of storage per person or less that's the national average so if you find a place like we did in Minneapolis recently that has two square feet of self storage per person in a three or four mile radius and they also have a new zoning requirement saying you can't build self storage except in industrial parks we got our hands on a piece of land our operator did right on the main Boulevard in town and it was already grandfathered for self storage so it was an awesome opportunity but that is the number one risk and that's why I didn't do that in the 90s when I thought about it if I would have done it in the 90s I'd be a mom-and-pop owner by the way but anyway that's another story yes yeah yeah yeah yeah right yeah yeah right yes it sure does okay yeah mm-hmm right okay right okay so for the audio I'm supposed to repeat the question the first question was to what extent do communities discourage manufactured housing from coming in there's this not in my backyard type mentality there's a lot of people in neighborhoods who would fight these the communities really don't like these because they add very little to the tax base but the average number of children in a manufactured housing community is very high and so they're actually a drain in their mind on the tax base and so they really don't like manufactured housing communities in fact they fight them
so there's about a hundred a year we believe being eliminated in the u.s. from for all kinds of reasons and there's only about ten being built every year and it honestly takes a long time to fill them up so there's not that many new ones being built the second question was should you add self storage to a manufacturer to a mobile home park I always thought yes I would absolutely thought that was a great idea I've heard a few people who have done it are only getting about half of the rental rate on the storage that they thought they would so it they've said it's not a good idea and the reason apparently is people when they come to a self storage facility they want to be beautiful and clean and safe and they get some kind of a feeling when they go into a mobile home part that it's not and so supposedly I mean I from what I've heard it's not a it's not working well so thanks yes yes J that's a great question so yeah J thank you that's a great question so the question is it was that last deal I went over was that a really unique one-off type deal that operator that we invest with has a team of four or five full-time people working the phones calling this all the mom-and-pop operators that they have the cell phone and numbers for in the US and so they get opportunities like that about once or twice a month and so like an example of just the other day called me and said hey I called this 88 year old guy with a big mobile home park back seven years ago and I've called him quarterly ever since and then the other day his niece called he said/she said he's 95 now he can't run this place anymore we're gonna sell it for whatever price you offered us a couple years ago and so he said are you he said are you sure that's enough she said sure so I got time for one more question I'm gonna take yours I'm sorry I missed earlier so the question was is if you have older self storage versus newer nicer is either one more profitable I think the sweet spot for that is to get a an older facility that has room to build more and that's kind of a cop-out answer maybe but I mean putting a new nice showroom for by the road putting in new climate-controlled to go with the non-climate controlled we've had a lot we have one in Greenville South Carolina we invested in like that and it worked out wonderfully and so I don't know that that's a great answer but I think most of the mom and pops are non climate-controlled I heard of one amazingly in Texas that was actually converted to climate-controlled I don't know how they did that but anyway so am I out of time Jeff okay thanks everybody [Applause]
