Anybody trading cash flow for safety?

Question

Readers Digest version: tightening requirements but making less because I'm scared of getting "rona-scammed.

I recently sold a property and 1031'd into two B+ class properties instead of the typical C class property that is usually the "sweet spot" for cash flow yet decent tenants in my area.  I probably could have purchased 3 C class houses which would have cash flowed more per month, but I'm opting for what should be better tenants.

I'm also charging 2 months security deposit and only doing 6 month leases.  I'm underpricing the units by 50-75$ to get lots of attention on my ads but laying out a pretty strict rental requirements (3x rent in salary, 650+ FICO, etc)

The shame is that I probably could have cash flowed more and helped 3 decent tenants find 3 decent place to live, but now I am only helping 2 great tenants rent 2 great houses.  The government eviction bans, ostensibly designed to help tenants, are forcing me to play more defense and only rent to people who are probably on their way to be home owners in a few years anyways. Applicants who are "marginal" on paper, but might have been really good renters, are shut out of the game.

Nathan Gesner · Answer

It's becoming more common and I anticipate we'll see a reckoning this year. Too many Landlords were hurt by government interference and a lot of Landlords will sell off or stop renting to riskier tenants. The loser? Low-income renters that already have a hard time finding affordable housing.

I just purchased a storage facility and the more I look at it, the more I realize it's easier to manage and produces a much better return than residential rentals. If my numbers are correct, my net profit with self storage will be double what it is with my 30 residential rentals, but the self storage facility was purchased at 1/6th the cost. I'm considering selling off some more properties and investing even more in self storage.

Henry Clark · Answer

@Matthew Wilson

@Nathan G.

Matthew, Nathan is wrong about how smart I am.  Since he is from Wyoming, I will tell you my Wyoming story.

I like to hunt and a free week popped up and bought a Pronghorn antelope tag.  Planned the trip.  Wanted to hunt in the Thunder basin area.  Saw the route on the map.  Identified the town of "Bill" Wyoming as a good place to base near, for food, water and gas.  Headed out.  "Bill" is about halfway in the middle of the state with no other towns near it, for about 2 hours.  When I got to "Bill" found out it is two sheds, with no one living there.

With that said, I would build storage at "Bill".

Self storage:

1.  Determine your finance level.  How much money or collateral do you have and what will be your finance mechanism?  10% down SBA, 25% conventional, 40% conventional.  This will help focus your efforts.

2.  Wilmington has a population is 120,000 which would be 7,200 storage unit market, not counting just outside.  So its a good market.

3.  Competition.  I love Wilmington.  When you do a Google Self storage map search, at first it looks like a lot of storage competition.  But if you pause, you will notice the majority of the locations are along the highways.  Probably due to both easy zoning and yes customer flow.  Look for the nastiest commercial/industrial property you can buy with the least amount of cost.

4.  Get your city zoning map and future zoning map plans.  Ask them to explain every zoning code that might allow Selfstorage, even if with Special Use or Variance permit.  Also look at land that does not allow Selfstorage, but it is next to zoning that does.

5.  Look in the general areas of:  117/17; 74/17; around the airport (land should be cheaper); in the middle of all neighborhoods away from the major roads.  Yes it will be harder to find the correct zoning.  The harder it is to find  the correct zoning, the safer the investment.  Look for 2 acre minimum.

6.  Build 100 to 200 units at each site and no more, until you are experienced.

7.  If the price tag is to high in Wilmington, then pick a road and build at every small town or intersection.  50 to 100 unit location.  Highways 421/74/17/701/501/301 away from other storage.  See if Cargo containers are allowed.  Then you can add and sell as needed with not property taxes.  This is easier for you to get into the business.  Personally, I would build along these smaller roads at each intersection if I was first starting out.  To small for competition and lower $ entry point.

Start small and make your Big Mistakes Early.

Nathan Gesner · Answer

It's still real estate. Mobile home parks, strip malls, and self storage are all very different from residential rentals, but they are still real estate investments. I have real property that is rented out to people. I just don't have to deal with toilets, inspections, pets, and many of the other problems common to residential rentals. When you purchase a NNN property or a mobile home park, it's the same thing.

I think the real value for me is cash flow. My residential rentals are earning about $200 cash flow per month each for a total of about $72,000 a year. This single storage facility will cash flow more than that and it doesn't take 1/4 the effort of my residential units. No leaking toilets, no broken appliances, no barking dogs or noisy neighbors, etc. People can find a space, rent it, sign the lease, and move in without even talking to me or coming to an office. The workload is extremely low compared to residential.

I can't think of a good reason not to sell off my residential and move over to self storage.

Jay Hinrichs · Answer

I see self storage more as a business and not necessarily apples to apples with residential rentals.  especially now with all the modernization that has come to the industry.. I owned SS in Portland in the 2000s and it was somewhat management intensive but now with the kiosks etc.. I think its really just buying a small business.  And many times small business are far more profitable than high leverage low equity rental properties folks buy.. where you win with those is when the values really go up and you get some really nice organic appreciation and then can sell and roll up or cash out and pay the cap gains.. IRR is the name of the game..

AS for SFR rentals we divested ourselves of the hundreds of C D class and moved to A class and next move is NNN

Damaso Bautista · Answer

@Matthew Wilson

I believe that you are working through your plan that is well thought through.  I also believe that there is no right or wrong answer when it comes to an individuals financial plan because it is personal to you.

I am happy that you are mitigating risk in your plan and making it so it is not only comfortable for you but also profitable.

Good luck in your journey!

Michael Plante · Answer

I left a couple places empty.  Waited for the market to increase the price and am now selling and taking my profits.

Happy I’m in a position to not need to rent.  Maybe there is a silver lining to having to pay cash for most of my properties?

Nathan Gesner · Answer

I don't have any magic formula. I already own some residential rentals and manage about 400. Someone hired me to manage 200 self storage units in January 2020. It was a pain, particularly because I was just getting started when COVID hit, but once I got my systems down, I discovered it really doesn't take nearly as much work as residential rentals.

That same owner asked me to help him find more storage units to buy. There weren't any on the market, so I just started calling facilities. Long story short, the owner of this facility wanted to sell but my buyer didn't like the facility because it's a little rougher around the edges. I saw tons of upside, so I made my own offer and now I own 150 storage units. Occupancy is currently 44% and that's after I rented eight units in the last two weeks, so there's nowhere to go from here but up!

Like any asset, I think it's best to find one that's been mismanaged and neglected so you can fix it up and increase your return. Mine had almost 60 units occupied by the owner (seriously!), 40 were just sitting empty, and the rest rented. Of the units that are rented, 12 of them are at least two months behind on rent. There are also two houses on the property, both 5-6 months behind on rent. I've already set up a Google page, facebook page, newspaper ad, and am working hard to clean up the image and get the units rented. I anticipate we will be over 90% occupancy by the end of August. But even now, I'm only spending 6-8 hours a week on the storage units.

There are some very helpful people on BP that are much smarter than me. One of them is @Henry Clark who has a ton of knowledge and loves to share it.

Nathan Gesner · Answer

Agreed. I know there's a risk of saturation in the self-storage market and vacancy could increase quickly, but I don't see much difference between that and fluctuations in residential or commercial space. People are consumers and can't stop their addiction for buying more stuff they don't need. Since the cost is low, they tend to forget about it. It's amazing to see how much people will spend to store items with no value.

Jay Hinrichs · Answer

U will find out very quickly when they dont pay and you open it up to haul it all to the dump..  I had hoarders fill them to the roof with crap and cost 3 years of rent to remove it all..  LOL.. But you know peeps.. all in all I am very happy for you sounds like a great fit in your area and best of luck with it..

Paul Moore · Answer

Hi @Matthew Wilson. You got some wonderful feedback here. I agree that self storage is a great option for you. You may want to consider mobile home parks as well. Both have a wonderful advantage: you can often acquire them from mom and pop operators. This often means you can buy them with significant intrinsic value that can be unlocked if you know what you are doing.

Feel free to reach out to me if you would like to get a few e-books I’ve put together on this topic.  Good luck!

Anybody trading cash flow for safety?

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