Self storage using Solo 401k funds

[Jeffrey Radcliffe]

Has anyone successfully purchased self-storage units using their Solo 401K? I am looking for more information. Any help would be greatly appreciated.

Thank you

[Dmitriy Fomichenko]

@Jeffrey Radcliffe,

A self-directed Solo 401k can be invested in virtually anything except collectibles. You can also invest in self-storage units. A few things to keep in mind: the entire operation must be outsourced, and neither you nor your immediate family members can't be involved as you are considered "disqualified persons." Additionally, income from an active business inside of a retirement account will be subject to UBIT (unrelated business income tax), so be sure to consult with a qualified tax professional about the implications. 

[Henry Clark]

Not financial advice. 

Run the numbers.  I would and have cashed out my 401k (not Solo) to invest in Self Storage. Yes, you will only get about 50cents on the dollar, but you will be way ahead after your first deal.

Run the numbers.

[Rebecca Graziano]

@Henry Clark How do you source a self storage property?

I am using an off market property database software but it isn't consistent bc this type of asset is classified differently by county. 

Crexli and Loopnet are expensive but useful for research purposes.

What do you recommend?

Thanks!

[Henry Clark]

@Rebecca Graziano. We will be in Canton antiquing this Friday then in Bedford for my sisters birthday.  @Bruce Lynn. Let me know if you free up Friday. Can talk REI. Save me from a whole day antiquing.

Dont answer any of the following::

1. I would start from the beginning. Where are you studying self storage as an REI?

2.  How much downpayment money do you have?  What downpayment % does your finance mechanism require? 10/25/40%?  Use this to determine your deal size.  So you don’t waste your and other people’s time. Example if you have $200,000 and a 25% downpayment that is a $800,000 deal.

2.  Right now self storage is overpriced.  You should build versus buy.   Or if you can find a really small location like 50 units buy that to learn.  If your market area has 10x20 units renting $130 or higher.  If you build a 200 unit location of 10/15/20 drive up access it will be worth $1mm day one above your cost.  If you buy that location you’re paying someone $1mm to develop it for you.  Plus you’re gambling since it’s not rented.

3.  Use the lookup function. look for my post.  Use my name and “Will they come?”.  You need to be able to analyze the location you might buy or where you build.  You want to be able to compare several towns and locations and determine which has the greatest chance for success before you put your money down.  
4.  Back to your question.  Pick a driving radius. We use 40 miles from our house and have tons of business opportunities. In Dallas you will have more.  Pick an area and make an inventory of all of the locations. Based on my “Will they come?” Approach.  Identify the sizes that fit your deal size in 2 above.  Start driving to them and talking to the owners and not the managers.  You can find the owners using your property tax GIS map.  They are already getting contacted to death.  You need to be different.  Offer them solutions not just a deal.  Every 6 months stop by and say hello.  They will be bored.  

I would either buy a small location and

Just dive in.  Or do a lot more research.  Read my posts and vote on them.  My name and self storage in the title.  @Jeremy H. please tell @Rebecca Graziano how you are doing learning the self storage business. 

[Bruce Lynn]

@Henry Clark  Let's plan on Friday.  I was out Canton way yesterday, but did not stop.  On my way to Longview.
@Jeffrey Radcliffe. I am not up on all the issues, maybe your Solo 401k provider or Henry or someone else here can comment. One issue of doing it within 401k, is what happens if you spend all your money from there, and then have unexpected expenses or lower ROI than expected. From what I understand you can't pay let's say extra taxes or extra insurance or operating deficits from separate money outside the 401k. Not 100% sure about that, but think I have heard that. So what happens if the expenses are more than you have inside the 401k or it would be over your next contribution limit. No one plans for that, but potential reality in today's world if that is the case.

I ran the numbers and then had a nice guru run the numbers of 401k vs cash money and the net outcome was about the same from what I remember.  Probably easier to do with cash or bust the 401k from what I remember.   If I remember correctly potentially you can save on income taxes, but you can't use things like depreciation or accelerated deprecation to reduce the income.  That's part of the reason it is close to a wash for most people.   Long time ago since I had that discussion and I am definitely not a tax guy, so I could be 100% wrong on all of this.

[Henry Clark]

@Jeffrey Radcliffe. The reason I say cash out is because in your first deal you should more than go positive in the 401k.  Example.  $200,000 in 401k. Cash out $100,000.  If you do a 10% SBA deal that’s a $1mm deal.  Or a commercial loan 25% that is an$400,000 deal.  As long as you did your market analysis correctly either deal will net you $100,000 to $500,000 appraised equity on day one.  

My post “Will they come?” Will show you how to analyze allocation.  Read my post that has the following two strategies in it to optimize your overall game plan. Use the Wagon Wheel or  Daisy Chain approach. 

[Jeffrey Radcliffe]

Henry,
I appreciate you taking the time to respond to my post. @Dmitriy Fomichenko's insights were valuable and served as a reminder of the various aspects involved in this type of investment, particularly the need to outsource the entire operation. I have decided that focusing on equities and passive note investing through my Solo401K is the most suitable approach for me at this time. However, I remain committed to expanding my knowledge in this area and will continue to follow your posts to understand better how to analyze these investment opportunities. I enjoyed watching your video and was thoroughly impressed by how you manage your operation, ensuring a smooth experience for your tenants.

[Jeremy H.]

@Henry Clark @Rebecca Graziano

There's a lot of different ways to source self storage - I think first you have to decide development vs buying an existing facility (an existing facility doesn't necessarily need to be a storage facility). I'm currently doing both. I'm analyzing existing properties while I research the development side - I would really like to develop, but it just depends where the best location and returns are going to be (but I love a clean slate). You can also contact mom & pop places. I would suggest going local for the first one - I think it's much easier to manage.  

Next you need to calculate your size deal - generally speaking we're talking 10-25% down. So if you have 100k downpayment then you can do a 1mm SBA loan or a 250k 25% down commercial loan. Make sure you keep plenty in reserves. I don't think starting a small place, say an acre with 50-75 units would be a bad place to start (can buy smaller tract of land, closer to town for cheaper) also less risk due to the overall cost...

I created a spreadsheet that I use to analyze existing storage units. You would use a similar one to analyze SFH/MFH deals - except your self storage one will be a lot more in-depth - how many units, size per unit, rate per unit, unit mix etc. Then you need to vary the rate and occupancy to find where your success/failure points are. Then calculate your cashflow/payback period/roi from the expenses and income.

Once you can analyze then you can source. I'm using loopnet, crexi, google maps, various websites that sell commercially zoned land - I generally leave the filters open for property type - I don't care what is existing as long as the zoning is right. There are some self storage brokers as well (bellomy, argus etc) - google search for self storage brokers, sign up for their listings and flyers then start to analyze the properties. You'll see if deals pencil out or not based on your spreadsheet. 

For me - I must have value add - whether that means expansion, increasing rates, occupancy %, moving to automation and managing remotely etc - there needs to be a for sure way I can add value and streamline operations. Also the location has to be great - that's the one thing you can't change about a property. 

Also - don't rush the process. There is a ton more involved than BRRRRing a SFH - you have buying/developing, managing, operations, various softwares (RM, CRM), security (cameras, gates, lighting, signs, locks), lockouts...the list goes on. I made an account over on self storage talk .com - lots of stuff that you may not have thought about over there.

And remember there is always another one - if you fail to prepare then you prepare to fail...and as Henry says - start small and make your big mistake early. This cannot be emphasized enough - if you STAY in the game you will win - the key is staying in the game...

[Jeffrey Radcliffe]

Thank you for sharing these great tips and information. It's greatly appreciated. 

[Todd Goedeke]

@Dmitriy Fomichenkocould you please provide clarification on owning RE inside a Solo 401k, particularly RE upon which a business is operating. If a person triple net leases ( or leases)the property to a business owner there is no UBIT? If I own A duplex and lease it to a management company that rents it out as a short term vacation rental there is no UBIT? Similarly if I own a property with storage units and a garage on it and lease that property to a business owner that has no UBIT implications?

[Todd Goedeke]

@Henry Clark why would you cash out a 401k when you could transfer those monies to a Solo 401k with no tax consequences and then invest in a property upon which there could be storage buildings, vacation rental, etc.

[Dmitriy Fomichenko]

@Todd Goedeke,

All income from passive investments inside a Solo 401k will be sheltered from taxes (or completely tax-free in the case of a Roth). Income from an active business will be subject to Unrelated Business Income Tax (UBIT). Talk to a CPA regarding your specific situation to determine if income is passive or earned (active). 

[Henry Clark]

Quote from @Todd Goedeke:

@Henry Clark why would you cash out a 401k when you could transfer those monies to a Solo 401k with no tax consequences and then invest in a property upon which there could be storage buildings, vacation rental, etc.

2 reasons.
We can pay 50% in penalties and taxes and do 100% to 400% cash on cash in 2 years.  That is not true for most REI types.  So not for everyone.  

We actively manage the projects.  It’s not passive for a 401k.