All Forum Posts by: Drew Petro

Hey all, for those with multiple properties and a Holding Company structure, two questions that I am struggling with. We have 6 properties (5 self storage) and are looking to properly structure via a HoldCo. No investor groups or LPs involved, and we also have a property mgmt company that will most likely be outside of the HoldCo structure. With that said, do you have any input/tips/advice on the following:

1. Expense management - e.g. do we need 6 separate credit cards for each SubCo LLC? I mean if we double the portfolio and have 12 properties, carrying around 12 credit cards seems crazy ... ?

2. Can our external property management company (outside of HoldCo) collect revenue on behalf of each property? The goal would be to simplify check deposits to have all 6 accounts for collection under 1 Proeprty Management LLC and then electronically distribute the revenue for each property once per month (this in theory would save tons of time at the bank during deposit time).

Any other tips or tricks while we plan the HoldCo structure would be greatly appreciated! Thanks in advance for all input and insight!

Hey guys, thanks for all the great value and knowledge! As we continue to grow our portfolio, I am curious what your thoughts are on current caps rates in tertiary or c-class markets (eg towns about 1-2 hours outside of a city). What are you seeing currently and how do you expect the cap rates to play out over the next 5-10+ years (eg decompression of cap rates).

As we do our underwriting and due diligence on some of these properties, we are seeing cap rates of about 7%-8% (we are in SW Michigan). I am curious if you are seeing the same currently and also how you think the interest rate increase environment over the next handful of years will impact the cap rate (eg could the cap rate decompress to ~10%???) 

We are confident that over the next couple of years there will be some sort of cap rate decompression, but not sure what a realistic magnitude could be. We are focused on purchasing properties that have a ton of value-add potential (eg very low market rents, no technology, web presence, etc) for this reason. I believe that if you buy a stabilized asset now, it will be a painful situation in a couple of years. 

Thanks in advance for all the great insight and opinions! 

Is the facility gated / fenced? Definitely what Zach said by starting with an updated state-specific lease and being consistent with following it. Push credit and debit card payments hard, to make life easier for you (auto-payments), and make cash payments very difficult to do and/or not accepted (eg no office onsite, etc). Mailed checks are fine, timing is always suspect though. I would rather pay the 2.4% credit card fee than deal with checks. 

Define your delinquency stages and stick to them. Overlock units on time. Enforce what is in your lease (eg no loitering, no drugs, no overnight stays, facility closed 12am-4am, etc). 

Good luck! Value-add facilities like this could be a huge opportunity! 

We use Storable company for our facilities. They do the website, software (Storedge), and even gate access control (on the cloud). It has been a really easy one-stop-shop with a storage-specific company. They definitely arent the cheapest option, but they have saved us so much time and energy in managing while giving a super professional look and feel to the business. 

We would love to connect with other investor / operators in self storage. We currently own 2 small facilities (9,000 sq ft and 15,000 sq ft) and love the asset class. Simple to self-manage,  automate 75% of the operations process, and less headaches. Also, much easier ways to "force appreciation" and valuation through rent raises and fees. 

Feel free to connect with us if you are an investory in the self storage industry!

My 2 cents ... if you plan to sell to an investor, you will need to find a tenant to place there first on a long-term lease (with personal guarantee). If you are trying to sell directly to a business owner, it may sit on the market for longer. 

To justify a $490k valuation using rent as the income, and a 10-cap, you can work backwards. NOI of $49k, if you do a triple net lease, expenses should be low, so 75%-80% NOI of gross? $49k NOI at 75% = gross of $66k, thus rent of $5,500 per month. Is that reasonable for your area?

@Don Konipol -- such a valuable thought! Thank you! "you have to account for real depreciation of equipment as a very real expense, and not just a tax advantage." The extreme use and wear of the equipment is a very real thing that you must plan for. Good insight. 

@Joel Owens - agree. I think it would interest two different types of investors. NNN lease investor are looking for more of a passive investment. Car wash is definitely more hands on, but has the potential for good monthly cash flow, if that is what you are prioritizing. Also agree with the idea of the "express wash" you describe... which is a big competitor to the DIY washes, as the cost per wash sneaks closer together. If I can pay someone $8 to wash my car for me, and its $4/$5 for me to do it, I may have someone else do it! You are very right, and needs to be considered.

@Joe S. to touch on your clarification question ... if you plan to do a conventional residential mortgage in your own name, the lender will most likely require you to wait the 6 month seasoning period. Fannie and Freddie require a 6-month seasoning period. You can cash-out refi with a conventional loan within 6 months ONLY on the purchase price; but it isnt until the 6 month mark that you can cash-out refi on the APPRAISED value. So most lenders will either sell the loan to Fannie/Freddie or want the OPTION to sell to them, thus they will follow the 6-month rule instated from F/F. 

You may be able to find a small bank and convince them to give you a portfolio loan, which is much more leniant. Or you could try to go commercial loan, but not sure on the timing/rules of those for SFH.

@Daniel Fang ... @Account Closed hit the nail on the head. Do you research on how commercial real estate is valued by a lender. They will take the NOI (you need to know this term inside and out) and calculate the valuation based off of that. If you are living in one of the units, that is 1/6 of the rent NOT coming in, and with most other expenses steady, that is a huge valuation loss. You will then get less of a loan and ultimately sell for less since the valuation of sale price is also based off of NOI.

I do think you are doing the right thing by speaking with banks already. Most banks will value a 4 unit or less (1-4 doors) against comparable houses / buildings. Anything with 5+ doors most of the time will be valued off of NOI.

I think your best bet, if you want to house hack, would be to look for a 4 or less door building and try to get a personal FHA loan against it. That will require much less money down (dont need to sell all/most of your stocks) and will at least pay for your mortgage, if not cash flow monthly. If you do get a residential loan, however, keep in mind that most banks will not allow you to put it into an LLC (especially if they plan to sell it to Fanny Mae or Freddie Mac). It will have to be in your sole name, against your own credit. We did this with a couple SFH, and just increased our umbrella insurance coverage with our broker to about $2 million dollars with 2 incidents max per year. We feel comfortable with that protection outside of an LLC.

Hope this helps! I would strongly recommend finding a partner or mentor through this before taking the plunge on anything bigger than a duplex.

@Joseph Cacciapaglia and @Rich O'Neill make really good points on this. I was in this situation as well. For me, I didnt want to rush into anything. I spent time researching which asset class I wanted to play in (and thought may be of-interest to my then-not-interested wife). That time researching also showed interest and motivation that I was serious about the idea. I discussed how it would help diversify our investments as well as add cash-flowing assets to our portfolio. Also - personal connections help. Family friend, relatives, etc that have done it successfully before give a sense of ease. Sharing social media posts (Kiyosaki's Rich Dad Poor Dad quotes or Bearded Brandon's getting started ideas) helped the causet. The appreciation of real estate helped the discussion. Ultimately, I needed to make the initial plunge myself, knowing that my wife may not be fully invested emotionally, but that she wouldnt divorce me for the move! Since then, she has slowly grown interest and actually helps manage the property!