All Forum Posts by: Henry Clark

Mr Erlanger, you need to read and understand people and text.  Stop trying to be the technical authority, without understanding the question and situation.

You did not take my hint about being useful.  This thread is not yours.  The individual who is just starting out in Real Estate, asked a basic question about Cap rates and his area of interest is House Hacking, when he finishes College.

You've heard the concept of KISS before during your career.  If not, let me know if I need to explain it to you, if you can't follow your own snide comment about the blind leading the blind.

I am telling him not to use Cap Rate for his pursuits. If he has to use it at a filter level, but when looking at the individual assets look at their value. He needs to know, no more about the nuances of Cap rate at this time, unless he wishes to delve in. I did use SFH in my explanation, since his interest is in that field. My comparison was at his area of interest, versus pulling in Shopping Malls and Apartment complexes for discussion.

Might I recommend you start your own topic on Cap Rates, to be useful to folks.  I will give you the following advice so you don't go down the rabbit hole.

Split the topic up as follows:

a.  Definition and examples of actual Cap rate calculations at a macro level.  Show variations of items included and not included at a more granular level.

b. Define areas of investment where Cap Rate is useful, and where not, and why on both counts.

c.  Explain why specific cap rates are beneficial or not beneficial from the perspective of the party.  Investor, seller, realtor, etc.  Example: 5% versus 8%.

d.  Give examples of your own deals, how you have worked your way through the usefulness of the seller or realtors cap rate presented to you.

If you wish, send it to me for review, to make sure you haven't digressed.

26 September 2020, 12:00 PM

Had someone ask why we weren't using perforated pipe.

Thanks for the question. I don't always cover everything. Just to make sure we are all on the same page. There are two reasons to put a pipe in the ground:

1. If you have your own septic system, behind it will be a leach field. This is to remove the grey water from your system.
2. Is to take water out of the ground to dry it up.

Both of these work with the same concept but in reverse.

The water and soil have a "wicking" process. The water will go to the soil where there is less moisture.

In the septic system you have a lot of water, thus it goes away from the pipe to soil with less water. The soil actually draws the water.

In the field drain system the dry pipe with air in it draws the water from the soil around it. Our field drain pipe will "wick" or draw water from 40 foot away on both sides. As the seep water from the hill above our property comes close to this line, it will start to draw the water.

Back to the question of why we didn't use perforated pipe?
Perforated pipe is normally used in septic drain systems. They have bigger holes since you want to "get rid" of water. To keep them clean because the holes are so big; you should put "clean" rock (rock without the dust and fines) both underneath it and on top. On top of the top rock, you should put garden mesh so the dirt doesn't filter through the rock and into the pipe, clogging it.

The agricultural field drain pipe and system was designed to take water out of the ground, not require tons of rock and to also not silt in. Thus in our situation we went with the Agricultural drain tile. You would think the water once it came into the pipe would also leave the pipe through similar holes. Due to this pipe having its end open to the air, a suction effect occurs and the water travels down the pipe and out the end.

Thanks for the question. If you have one please ask. I don't fully explain all aspects.

@John Erlanger

@Isacc Lightbourn

Folks this thread is started by Mr Lightbourn for his edification.  Not for our personal truisms.

Mr Erlanger please summarize to Mr Lightbourn at his stage of the game how to use Cap rate, from your perspective.  I believe your view is to not use them as all for House Hacking.  Just tell him that.  He either can delve into the calculation further, or he can take your advice and move on to the next aspect of valuation.  Which you can guide him down.

He is still in college and yet to graduate.  When he gets out on the Real estate side, he will try to do House Hacking.

Mr Lightbourn, my summary is this from above.  There are normal metrics used in any business field.  Use them as a base, but look beyond those at the value of the property.  Me personally I don't use Cap rate, even though it is used often in the Self Storage field.  I also don't use Cash over Cash.  I have already stated the metrics by which we run our operations.

Good luck in your endeavors.

@Isacc Lightbourn

Congratulations on working towards your college degree.  And hopefully starting to house hack after you graduate.  Although I did learn technical thought processes going through college (Accounting), the main thing I learned of value was there are different approaches and perceptions of the same concept.  Sometimes Perception or Reality don't matter, your just wanting to a make a good deal.

If you do get into real estate you will get into Cap rates and also Cash on Cash metrics.  Keep this in mind, I the seller am probably telling you the buyer the metric.  You have to both trust both of us have the same concept on how the metric is derived and also if we used the same info.  Basically don't trust me as the seller, you need to validate.

I don't use either metric, but then again I mainly do developing.  I worry about collateralization and cash flow.  How much do I have to put down up front for a loan.  I shoot for a loan with a 20 to 25 year amortization.  An operation with an 8 to 12 year payback.  Thus I am cash flow positive and if trouble hits, I have some slack; or I pay the loan off early.  Remember you make your money up front in your decision, its hard to make it later.

Back to Cap rates.  Use them as a guide.  Determine your metric.  Just because a house falls outside of your metric you still might pursue it.  Example:

Exact same neighborhood, exact same price, exact same CAP rate.

House 1:  At the end of a T intersection, on normal lot. 2 BR, 1 bath

House 2:  Corner lot, 2 BR, 1 Bath

Even though the cap rates are the same, you pick house two, because it has greater resale value, and might have the expansion potential with land to a 3 BR, 2 bath.

Now someone will say, but they should not have the same Cap rate.  Hey the two Realtors calculated it.  Whether they did it correctly or not, you have to see past that.

Luckily you will work through this.  Do about 10 business calcs on you House Hack, before you ever get involved.  Have someone talk them through with you.  Join a local group.  The next 10 years of your career will be the best time ever, even though your hanging by a thread sometimes.  Step to the side every once in a while and pat your back for your successes and for your losses, say ouch, but great learning event.  Enjoy the ride.

I do Self Storage, so I stay away from houses.  In 10 years, call me and say hey, the 85 year old guy with the 35 rentals, does he want to sale?  Hopefully he is still alive. By then you should be able to take on an acquisition like that.  That is how much you will grow in 10 years.

Start small and make your Big Mistakes Early.

My first deal didn't have all of the facts, didn't have all of the questions, didn't, didn't, etc.  I'm a Controller/CFO by trade, thus a data driven and "critical thinker".  Probably only got to about 65% of the info I needed to make my first investment.  

Thought would I ever "get there" with the info and questions and decided I would never "get there" just researching and reading.  

Asked myself the following questions:

a.  For this investment what does failure look like or mean $????????  My situation, is self storage.  Even if we only got to 50% full, I would be losing about $1,000 per month or about $100,000 in total.

b.  If this failed, what would be the impact on me or my family or future?  The impact of losing $1,000 per month or $100,000 would have no impact.  My son would still go to college.  Would still have my house.  Would still grill a steak on Saturday.  Etc. Etc.

c.  If I did not make this investment or a similar one, would I ever move to a passive investment strategy or just keep working for a paycheck?  At this point I probably would never get a passive source of income and keep working for a paycheck.  Praying our company didn't get sold and downsized.  Or they didn't move to another state.  Or go overseas.

Good luck.  Make the jump.  Just do the numbers and make sure you can take it.  Plus it is never a loss.  This experience makes you better for the next one.  I have yet do do a project without making a mistake.  I just make sure I have 90% of all issues covered.  If I fail on one of the 5%, it won't hurt me.

Make a list of all of the things you can't take a big hit on. Example for a SFH:

a.  foundation,

b. Roof

c. windows

d.  facade

e.  plumbing

f.  electrical/HVAC

g.  abestos or mould

h.  ???????

Make sure you nail these.

The fact you got your interest rate wrong  4% versus 5%; downpayment or collateral $20,000 versus $30,000; rental market rate $700 versus $800.  These might make the project a "failure", but it doesn't knock you out and you learn to sharpen your pencil.

We can tell you all of our stories, you need to define your story up front and what failure looks like.  You got it.

@Ryan York

Here are some pics.  Has Two lights.  Looks like an airport at night.  Very bright.

Has two cameras.  The Box in the middle is a transmitter back to the Camera NRV.

@Ryan York

items above:

1.  A dump truck usually hauls 10 to 12 Cubic yards.  Depends on your soil type and moisture.  Usually you would put down 3 inch clean rock for a base.  Roll it in.  Them come back with 3 inches of "1 inch and fines" for a smooth surface.  If you use the fabric just do the 1 inch fines.  Take cubic yards and convert to 3 inch coverage.  Take this against the sq ft in an acre.  This will get you to your number.  About $10,000 for the rock over one acre for here.  Call there and get cost per ton.  Stay away from Asphalt in Arizona as a surface.  To soft in the summer.

2.  50k population is probably not millionaires.  For Enclosed RV storage, you have to charge around $225 to $350 per month to make it work.  Only people with $250,000 to $1,000,000 RV Class A homes will pay that.  Unless your within 30 miles of this type of market.  Self storage market is usually 1 to 3 miles.  RV storage market is up to 30 miles.  So you will probably go with surface or canopy parking.  Probably Canopy in Arizona due to the sun.

3.  Lay your parking out on the ground with strings and push in stakes.  Then get a large vehicle and drive around and park.  Get the "feel" of the layout before you commit to the set up.  Mix- we went with an even mix of 20/30/40 foot spaces.  We did not make any spaces for 50 foot since this is a limited market.

4.  Lay your poles out in the middle of the rows.  They have to be tall enough to see over the closest RVs.  Put two cameras and two lights on them.  Trench underground electric and cables as you lay out facility.  Two lights on the pole is to get better coverage.

5.  The license plate reading cameras are specially built just for that.  Don't let your security guy sell you "Great" cameras, they won't work.  Has to be able to see through headlights and taillights.  Best mounted about 8 to 10 feet off the ground, at a slight angle to the vehicle lights.  If you want to, you can have the cameras send you a message when someone passes through.

6.  Wouldn't do dump or wash station unless your going primo.  Enclosed, concierge service- plug in before trips, tire checks, dump/wash station, vehicle washing, Parking service, etc.

RV/Boat storage is a low return project.  Make sure you don't have a great business analysis for this.  Should have a 12 to 15 year payback or longer.  "Unless" the market is a lot better down there due to "snow birds".

Good luck.

Out in the country most places don't have fences, gates, cameras or lights.

How you set up your operation depends on how much time you want to invest.  For example: We don't do late fees or deposits.  They make good financial sense.  We don't want the extra calls or communications about why was my charge higher or why do I still owe more?  Or how do I get my deposit back.  Also competitively most locations don't charge deposits.  We don't do these to avoid extra communications.  Have 7 locations with a total of 800 units.  No employees.  So we want to run as smooth (less communication) as possible.  Otherwise we need to hire a $50,000 with benefits person.  We don't mind losing some money, so we don't have to pay out a salary.

24 units is the right size to start. Once you have a system down, then the numbers don't matter.  

Leaving trash and skipping out.  I would recommend locking people out after 1 week. They still have valuables left.  If you wait a month, they will have cleaned out and left trash.  $25 deposit needs to be zero for competition or higher as a deterrent.  It would cost me over $100 to clean out a unit.  I wouldn't mind leaving trash for a $25 deposit.  Key is to lock out quick.

*******************************

25 September 2020, 05:44 PMThe excavator completed putting in the 24 inch drain pipe for the parking lot drainage from the apartment above us. Next he capped the 24 inch pipe and then inserted a 6 inch field drainage pipe. I didn't catch this operation. He did change the shovel heads to a smaller shovel. That way we have less dirt that needs to compact and less chance for our roads to develop cracks in them.

The guy in the ditch is measuring the depth versus the tripod gps locator. They are putting in a 2 % grade to have the water drain out.

The drainage pipe is on a large reel behind the pickup truck. As they hold it at the end, then someone drives forward and unreels it.

The close up of the pipe shows the slatted holes for the water to seep into the pipe then run down the pipe. There are three ways to "Rest" the pipe in the ground: a. Put the pipe in first and then put loose rock in above it. So water will seep down to the pipe. This is the revers of a sewer field where you want to loose the grey water. There you would put the rock down first, with the pipe above it, so the water seep down., b. Your pipe has a "Sock" over it to keep dirt getting into the pipe and clogging it up., c. This contractor for this type of pipe is just laying it into the ground and covering it up. Since it is not very heavy duty, he can't tamp the soil above it down. This leaves greater risk for the concrete road above it to develop cracks since the soil may not have compacted over the winter.

@Stephanie Southerland

Congrats for the investment.  Your seeing the worst stage of the business, the take over of an existing location.  Even if run cleanly.

Just going to run off a few thoughts.

a.  Join your State Self Storage group.

b.  Check the legal requirements for changing rates.  Could be a letter and one month advance notice, even on Month to month contracts.

c.  This is more of a question of your other business needs, versus what is best for the storage business.  If you want to "fix" everything at once, then do it all at once.  This is a lot of work and will take you about 8 weeks to cycle through.  Or if your already busy, do it in stages.  Example:  Do all of the items below at once or in stages.

Stage 1.  New management letter.

2.  Late fee addition letter.  Lockout rules.

3.  New Rate change.

4.  Auction and eviction notices.

5.  Auction.

6.  If your really trying to automate and your location can take the hit.  Then notification you are moving to just Autopay.  No Checks or cash allowed.  This is also a credit check since most of your bad customers will not have a credit card or bank account with sufficient cash for autopay control.  Your quality of customer will automatically improve.  Make sure there is enough demand in the area to support this policy.

7.  I'm like an untrained dog.  If you have left your food on the table before, then I will keep taking it.  Send out the above notices and your people will change their habits or leave accordingly.  But you have to set the new rules.  Don't eat the food off my table.

8.  We have found it takes about 3 customers to settle into a good customer.  Just part of the business.  Cycle through the bad ones as fast as possible.

Great investment.  No painting on Saturdays.  No animal stained carpets on Sunday. etc. 

Watch our "Self service" youtube to see if this helps with your business and personal lifestyle.