All Forum Posts by: Scott Krone

@Gabriel Craft  Interesting question, and thanks for spurring a discussion.  I consider MHP, SS and MF all very similar.  A few distinctions is where in the sprectrum of cost basis one's asset lives.  Certainly there are other distinctions, ie.  lease structure for the mobiie home, self storage is a retail business as well, and apartments have distinct tenant laws.  From a macro perspective all three asset classes rent rooms/space on a montly basis.

@Will Fraser makes very solid points about the operator, risk and rate of returns.  Nevertheless, assuming all factors being equal, I would argue that self storage has a greater variance in asset classes.  Each of those asset classes have different yield projections.  Class C (first generation, smaller, rural, drive up) we classify as Penny Stock.  Good consistent cash flow, not much growth.  Class B (second generation, mid size, suburban, drive up, may include climate control)  equal to a Blue Chip stock.  Very stable and solid returns.  Class A (urban, large, drive in, climate control) equates to Growth Stock.  Growth as well as cash flow.  

For the most part, I have not seen that great of divergence in the mobile home parks.  Sure there are larger and smaller ones, nicer and not so nice facilities, but the fundamentals are generally the same.  When we have conversations with people who want to get into self storage, one of the first questions we ask is what are your goals for the facility:  small stable asset, medium solid returns, or larger and growth.  It helps them narrow there search criteria for self storage facilities.

@Ty Gibson No such thing as a dumb question. Typically with a second home or vacation home that is used as well as a rental, there are IRA implications. As I am not a CPA, I would suggest consulting with one. My understanding is with a second home that is a rental, you are allowed "X" number of days per year unless you are working on it for personal use. In the past that has been 2 weeks.

I believe the difference with a short term rental is if you ever intend to use it as a second home, and it is strictly rental income. For instance, you have a primary home and two other homes. One you intend to use as a rental/vacation/2nd home, and the third is a STR.

@Arturo Fuentes - @Paul Moore recently published a new one through BP:  

Storing Up Profits: Capitalize on America's Obsession with STUFF by Investing in Self-Storage

@Dwayne Clarke  - @Greg Franck makes some great points.  Similar to those thoughts: completing the financial analysis for the first, second and future properties.  Lenders will want to know more than just purchase price and gross rents.  What are all of the expenses, and do you have the ability to cover debt payments.  It is always good to look at the entire financial model, and then determine what is the best strategy for the capital stack.  When presenting to banks, this will also give them confidence in how you are assessing the property.

@Kenzie McIlvoy - defining what you want to do is the best first step.  It appears your aunt and uncle have provided some specific goals for you all to focus upon.  As others have pointed out, self storage is a real estate vehicle that can accomplish many of those goals.  Nevertheless, it is also a unique real estate asset class as it is also a retail business.

To further help define the goals, we describe self storage in 3 asset classes:  Class C - penny stocks, Class B - blue chip, and Class A - growth stocks.  Each have their own unique tax strategy as well.  For us when we purchase, identifying all available tax strategies is as equally important as understanding the valuation of the property.  We have implemented numerous tax strategies to enhance the rate of return of the property - again to enhance.  The deal must work on its own fundamentals.

@Paul Moore recently wrote a book for BP on storage called:  Storing Up Profits.  It is a very thorough overview of storage, and covers some of the tax strategies that can accompany the investment.  Full disclosure, Paul was kind enough to interview us for his research and include us in his book.

@Celest Southwick - an interesting question.  35 units per acre is a significant development.  As @Christopher B. pointed out there are many components to be considered, and quite frankly many more.

That being said, "How do I get an actual cost estimate" and "where would one find an investor, if needed".  The questions appears to be focused on the equity side of the equation, while Christopher response was focusing on the implementation side of things.

The simple answer is, there is no way to get a cost estimate based upon what you asked.  It is impossible.  Nevertheless, there is a method to obtaining your answer, and it involves many of the things Christopher mentioned.

A bit longer answer is, it requires experience to assemble a team to help determine those costs.  A GC, zoning department, lenders, CPA's are all a part of the team.  A developer is the person or company that assembles that team, and based upon experience creates the vision for the property.  The vision must conform with zoning, meet a need in the market place, be built within the market pricing so it can be financed.  

For instance, you may be able to build 35 units per acre, but does that take into account parking requirements, water retention, market demand (the community may not want condominiums or townhomes), how much will it cost to build all of the municipal requirements and at what price will it sell.  That is why the expeience of a developer will give you the best opportunity to answer your question.

So, there are two ways to work with a developer:  sell to them or invest with them.  Most prefer the former.  An easy way to find out which developers would be interested in working with you is to put the property up for sale.  That will attract developers.  Then you can begin to assess what to do with the property.

@Anthony Bonafide - to be clear.  The builder is not charging you more than what was agreed upon.  The lender for the acquisition has been arranged by the builder.  The lender hired an appraiser to obtain the appraisal for the loan.  The loan is for "X%" of the contract price or appraised value.  The agreed upon price is $572,000 and you have $44,000 in deposit and expected to pay another $5,000 for closing costs.  So, if I understand this correctly, you assumed a loan of 92%.  But because the appraisal came in $50,000 lower ($522k) you have to close the gap.  Is this correct?

A few thoughts if those assumptions above are correct.  There is $102,000 in upgrades.  The builder would not have promoted the lender if they couldn't finance the "basic" package.  The lender would not have selected appraisers who would not support the "basic" package.  A loan of 92% is a high debt to loan value.

Options after requesting to see the appraisal:

1.  new lender new appraiser

2.  contest the appraisal by reviewing the comps and seeing if there are better ones, or if the assumptions the appraiser made are correct.

3.  ask the lender to compare the appraisal to other homes in the subdivision

4.  contest the upgrades with the seller based upon the fact they appraised at 50% of the amount charged.

5.  Pay the $50,000 at closing, move in and enjoy the home.

What are they saying about the appraisal is true:  Only can be determined if they show you the appraisal.  See if the comps are accurate.

What does this mean for the property value:  Maybe nothing.  When a bank (NOT THE BUILDER) requests more equity it is because they don't feel secure, and they are "hedging their bet".  The bet is if they have to foreclose will they be able to sell it at or above the loan value.  The lower the loan, the more security they have.  It is strange for the builder/agent for the builder to be communicating to you what the lender requires rather than you talking directly to the bank.  I would call the lender directly and ask for the appraisal, then base my decision upon that.

@Bridgette Luce - I would agree with you that 100% financing, for anything let alone for undeveloped land, is very difficult.  I would suspect most lenders would require 30%-40% equity.  Each area and local banks have their own requirements.  To answer you question, the best way to get financing is to put together a financial proforma including an absorption rate for selling off the parcels.  The proforma will demonstrate how much interest is required, length of time for bank payoff and the exposure for the lender.

We had a client who was purchasing a property with the goal of demolition the house and building a new one.  During our inspection of the property, I went out to the garage to complete the inspection.  I went back and told him, "I think we have an environmental problem."  When he asked what the problem was I showed him the garage had WWII bombs in it.

Turns out they were just the shells without any ordinance.

@Brandon Shaw and @Jason Gilmore - we are currently working on a facility in VA. I can connect you to the broker for the deal. PM or reach out via email so I can connect you.