Jacob Vanderslice - Investing In Self-Storage Centers
LISTEN TO THE FULL EPISODE ON:
Have you heard about investing in self-storage, heard about the great returns, and been curious to learn more and dig deeper into it? This is your episode! Jacob Vanderslice is Principal at VanWest Partners, which has built a portfolio of $195mm in assets, primarily focused on self-storage centers across the United States. He talks about their companies strategies in finding markets to target, finding sellers, and what else they look for in acquiring self-storage properties. He also discusses the per capita supply ratios they aim to hit, their strategy to increase rates, and what percentage of off-market deals they are able to find. If self-storage investing intrigues you, soak up Jacob's 15+ years experience that he shares.
In this episode, hosted by Mike Swenson, we discussed:
- When targeting acquisitions, look at the history and compare it to other comparable rents.
- Target deals that are below market rents, add some amenities, upgrade facilities, then raise rates over time.
- Development is got to be done in the right markets and sub-markets.
- Three ways to invest in self-storage as an asset class:
Buy Self Storage stock in the stock market
Buy your own deal and operate it
Invest privately with private equity operators
- In investing privately, you’ll get the tax benefits, all the depreciation flows, cash flow distributions and upside.
- If you're not investing in real estate, you're not participating in it. Buy a fix and flip or invest in somebody's fund or syndication.
- Focusing on hard assets that produce cash flow is a defensible strategy.
Timestamps
0:00 - Intro to Jacob’s Career
2:27 - Starting with single family
6:26 - Analyzing deals
8:39 - Development Opportunities
10:49 - Sourcing deals in 3 different ways
14:37 - Finding financing
17:30 - Investor partners
19:55 - Jacob’s advice
22:02 - How to find Jacob
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Full transcript here:
Mike Swenson
Welcome to The REL freedom podcast where we inspire you to pursue your passion to gain time and financial freedom through opportunities in real estate. I'm your host, Mike Swenson. Let's get some real freedom together.
Mike Swenson
All right. Welcome everybody to another episode of The REL Freedom Podcast where we talk about building time and financial freedom through opportunities in real estate. And so today, we are going to talk all about self storage. And it's a topic that I've wanted to cover for a long time because I know a lot of people in the real estate space are interested in it. They want to learn more. And so we've got Jacob Vanderslice here, and Jacob is the principal at Van West partners. We are based out of Denver, and you guys focus on acquisition and management of self storage centers and other opportunistic real estate throughout the US and you have over $195 million in real estate assets. So definitely an expert on the topic and love to chat more about what you guys do. So welcome to the show, Jacob.
Jacob Vanderslice
Mike, we're excited to be here. And thank you again, for having us on very kind to dimension we're based out of Denver, we get started investing in real estate full time, about 15 years ago, we did a lot of single family. In the earlier parts of our careers. Up and down the Denver Front Range all over the country, though, we got to commercial real estate and 13 and 14, we've done a fair amount of adaptive reuse retail projects, kind of converting old buildings into restaurants, breweries, yoga studios, coffee shops. And then we got self storage in 2015. And we looked at the asset class for a while, we liked the fact that it's been historically recession resistant and scalable, durable, repeatable.
Jacob Vanderslice
So we started off with a number of ground up development projects here in Denver, we're actually selling all of those at the end of May, kind of our first really big round trip, we've sold some other deals here and there. And then we expanded to the Midwest and about 16. And most of our deals leading up to 19 were single asset syndications. And we launched our first fund in June of 90 and close that in August of 20. launched our second fund, early 21, we closed that early this year in q1. And we're in the process of launching fund three. So self storage is made that we focus on we've got a 37 facilities around the country, got some development deals in the pipeline, some acquisitions in the pipeline, and it's been a good asset class so far.
Mike Swenson
So how did you guys decide to start with single family kind of back in the day, and would love to just kind of hear the thought process of the migration there, because I think it's a natural kind of career dread trajectory for a lot of people as they, they start small. And even to I know, there's people out there that they're like, forget the small stuff, let's just go big right off the bat. But we'd love to hear kind of how one thing led to another there and how you kind of evolved over time, and have advanced in your thinking and your mindset around this stuff.
Jacob Vanderslice
I really missed the single family days. Those were Those were fun days. And kind of simpler times, we started off I was in the fire service. So a lot of time on my hands. So I did a few deals with a buddy of mine on my on my days off, we buy him renovated them. So they renovate them ourselves, lease them out, hold on to them. And then I always want to be an entrepreneur, so equipment fire job and started doing real estate full time. And a lot of the deals that we did, for many years were sourced at the auctions or trustee sales, as we call them here in Colorado. And we'd show up with a stack of cashier's checks, we buy two to eight deals a week, rehab them, sell them run around town or shorts and flip flops. And it was a great business. But what we didn't like about it is it was kind of overly transactional meaning you're you're buying making better and selling kind of too often and too quickly. And much to our everlasting regret.
Jacob Vanderslice
We didn't hold on to many of these as rentals we should have, we had no idea how good the market would get, of course, you know, back in the day financing was tougher. Market was a lot more frothy. It's getting frothy again. But that's another topic. So yeah, we did a lot of single family. We've done over 1000 fixin flips and rentals over the years. So we were doing big volume, but the average transaction size just wasn't that big. And that was kind of one of the reasons we shifted to commercial is just generally doing bigger transactions that are more cashflow focused than they are. Turn and burn focused. So that was kind of the genesis.
Jacob Vanderslice
We didn't really stopped doing single family and start doing something else. We kept doing single family and we layered in our commercial line of business. And, you know, the single family market tightened up so much we basically shut the program down about two years ago, it was just too tough to find deals and it's gotten even worse. There's a lot of people in Colorado that are better at deal flow on the single family side than we are but we were just not finding the product type that made sense. So it's all real estate though, whether you're building a $20 million storage project After buying a, you know, a small single family deal, you just have to know, what's it worth, when you make it better? What does it cost to make it better and you kind of back into what you can pay for it
Mike Swenson
dipping into the Self Storage piece? What made you guys think you wanted to start? And is it just obviously the the opportunity, the numbers, maybe hearing what other people have done, and you're like, oh, gosh, these returns are nice when you want to get into it too, or, or what kind of puts you over the tipping point to start to explore that as a real option?
Jacob Vanderslice
Well, one of my partners had built a storage facility with his parents in high school, he was out there during the summers, running a front end loader and helping GC, the whole project. And they still on our facilities who had some storage experience, and the deals gone very well for them. And so we kind of knew a little bit about it. We'd also studied it from a downside protection perspective, like which asset class did really well during the financial crisis. And storage was kind of at the top of the list. And we thought we were coming up on a correction, you know, three or four years ago, and we were wrong, right? It just kind of kept going COVID happen and values got even higher. So we just liked the history of it. We like the fact that was scalable. You're you're leasing out metal boxes to 1000s of customers, they're all month to month leases. That's been historically durable and repeatable. So that's why we jumped all in. And it's been a good business for us so far.
Mike Swenson
So when when you're looking at analyzing the deal, you had mentioned even building some new facilities, acquiring current facilities, what are some of the things that you have to think about when analyzing those deals?
Jacob Vanderslice
Well, depends on what you're doing. Whether you're doing an existing acquisition, or you're building something new.
Mike Swenson
Let's just start with an existing acquisition, somebody's out there, they've got their their facility, they're looking to sell it, maybe they don't know they're looking to sell it, you approach them? How do you analyze that?
Jacob Vanderslice
Well, the first thing, you look at our market rents, and you look at where the existing market rents are historically on the facility you're targeting for an acquisition, and how those compare to other market comparable rents in the sub market. And what we see pretty often is we'll see opportunities where the deal is full, you know, mid, mid 90s, occupancy, sometimes higher. And the reason for that typically in storage, you don't want to be too full, because it means your rates are too low. So you'll have these kind of mom and pop operators who fill their units up. They don't want to bear with rate increases or revenue management just want to keep it full and keep your cash flow coming in. So we'll target deals like that, that are below market rents. And we'll add some amenities to the facility like a new gate system, camera systems, upgraded software customer service, and will raise rates over time. So yeah, one thing you focus on initially are market rates, how they compare to what's at the facility currently.
Jacob Vanderslice
Another thing we look at, too, are supply ratios. So nationally, there's about seven or seven or eight square feet per capita of self storage. And historically, in markets that are over that number, they kind of become oversupply. And under that number is prime for acquisitions or development. It kind of depends on the market, that's something else, we'll look at two or supply ratios and the one three and five mile trade radius, that there's a lot of facilities and a lot of plan deals in the development pipeline. And occupancies are fairly low and rates are low, it's probably not a good place to invest, because it's gonna get worse.
Jacob Vanderslice
And likewise, in markets where they're tough to entitle tough to replicate pretty low supply, those are good markets to buy in. So supply ratios, rents, and outside of self storage beyond that just good real estate fundamentals, location, population density, is the economy growing or contracting, what's the unemployment rate look like? Are people moving there? Is there in migration or out migration. So those are really the three main data points we look at when evaluating a new acquisition.
Mike Swenson
So then if you're in a spot where you see obviously, there's the ratios are low, then you're looking at development opportunities in those cities,
Jacob Vanderslice
Development is got to be done in the right markets in the right sub markets. And it's got to be done carefully. So that the main risk of development is, first of all, it'll take you almost a year to get a project entitled, depending on the market you're operating in, it'll take you 12 to 15 months to build it, then it'll take you another 18 to 24 months to lease it up and stabilize it. So a lot can happen during that pretty long timeframe. So you're looking really carefully what the risk is of new supply being introduced to the market at some point during your development period or your lease up period, how that's going to impact your rates, historic rates, historic leasing velocities, and other competitors in the sub market. But generally development, you've got to do it in markets that are very tough to get entitled. And that creates higher barriers to entry for other competition to come in and build a competing facility.
Mike Swenson
Where have you guys been focusing on in addition to the Denver area?
Jacob Vanderslice
So we've got, we got actually very few of our deals are on the Denver Front Range. We did an acquisition in Loveland in December of last year. That's about 45 minutes north of Denver, but most of our deals are in the Midwest and southeast. We've got projects in Illinois, Wisconsin, Michigan, Ohio, Tennessee, Florida, North Carolina, Georgia. So we generally like the Midwest and the Southeast. And we found those markets are kind of a good blend of current cash flow, but with also capital appreciation and upside. We generally are not targeting, you know, Class A primary coastal cities just because the yields are so compressed, it's tough to pay a four cap on a stabilized product and really extract any value out of it. So we found those blend those to kind of a good blend of current yield, and of course, upside as well.
Mike Swenson
So you identify a market that you want to get into? How does that process work? Do you just open up, open up the Yellow Pages, do some Google searches of storage units and start calling and try to maybe find some of those kind of mom and pop operations where you can add value right off the bat? Or how do you go go hunt down and find those deals?
Jacob Vanderslice
Well, we're sourcing deals in three different ways. One way, which doesn't work very often are just widely marketed deals. Chances are, if it's if it's marketed by a national professional brokerage outfit, we're not going to be able to pay a price that makes sense, given how competitive the market is. So we weren't, we rarely win those deals.
Jacob Vanderslice
Our second deal flow channel is just broker relationships. We've we've done a lot of deals over the years with various brokers around the country, they'll bring us something with a seller that wants to sell quickly. They don't want to take it to market, they don't want a competitive bidding process. They just want someone who's going to close it their price. So I'd say about 65% of our deals have been off market meaning not publicly marketed. And the other part of our off market acquisitions pipeline or just direct to seller marketing. So we've got a marketing team that reaches out to self storage owners that have owned the facility for X number of years. They're not institutionally traded. And we'll call them or send them a letter just saying, Hey, we're your storage investors. We're not brokers, we'd love to buy your deal. And so let's get on to some good acquisitions as well.
Mike Swenson
And what types of facilities do you guys like to invest in? I'm thinking more like kind of the indoor versus the outdoor Do you guys have kind of a layout that you like, or even a size range that you guys like?
Jacob Vanderslice
Yeah, we have a mix of kind of all different storage facility types. So we generally don't like to target deals that are below 30 or 40,000 square feet, that just kind of becomes too small. We'll buy deals that smallest part of a portfolio, but in a new market as a single asset acquisition, it's probably too tiny. We have facilities that are traditional self storage, single storey drive up, non climate control, just rows and rows of building and garage doors. With drive aisles we'll have deals that are also single storey but a combination of climate control and non climate control. And then we'll have deals that have a multi storey component with an elevator access but also with single storey drive up and climate non climate controls in addition to the to the multi storey.
Jacob Vanderslice
And then lastly, we'll target deals that are multi storey elevator access climate control deals. And those are generally in denser markets with lower supply ratios. What we've found on a lot of deals we've analyzed over the years, if it's an overly suburban nation, people don't want to ride an elevator, if they don't have to, they just want to walk in the main floor. So those first floor units will lease up very quickly and for pretty good rates. And the operator ends up cutting rates on the elevator access units much lower than anticipated. So the multi storey strategy works, but it's got to be done in pretty pretty infill low supply locations. Yeah, I
Mike Swenson
mean, that makes sense. I've always thought about that, you know, driving through Minneapolis, there's a kind of a big self storage facility off the main highway, and it's three or four levels high. And I always think as I drive by it at night, when it's all lit up thinking like yeah, who wants to drive up all their stuff up four floors, all their stuff back down four floors, it just doesn't seem very functional.
Jacob Vanderslice
Not just that, but if you have to push your car, you know, 100 feet to the elevator, wait for it to go up, push it another 100 feet to your unit rinse or repeat four or five times while you load and unload. That's not something that customers want to do. Unless there's not really any other options in the sub market,
Mike Swenson
the Self Storage that we've used in the past, it's just nice to be able to drive up, roll up the door, open up the the pickup truck, throw the stuff in now, you know, we've got the problem where I think the last time was helping somebody with a self storage unit was one of those days where it's like negative 20 below wind chill. So it's like, okay, we live in Minnesota. We've got to do this, but But yeah, and that makes a lot of sense. So how do people go about funding these then, you know, what are options for them? If I'm sitting here saying, okay, Jacob, what you're telling me is really good here. I'm interested to learn more. How do they go about finding financing?
Jacob Vanderslice
Well, you can. If you want to invest in self storage as an asset class, there's really three ways to do it. One way is to buy Self Storage stock in the stock market. Extra Space cube smart public, there's a lot of big players out there. The advantage to doing that as your your position is very liquid, you could sell your stock and get a wire transfer to your Schwab account. Over the disadvantages, you know, prices ebb and flow often, and you're also not getting the tax benefits. The second way to go out and invest in self storage is to buy your own deal and operate it, but you got to invest a lot of time and money into it and doing that. And the third world way to do it is to invest privately with private equity operators like us and other folks out there.
Jacob Vanderslice
And there's really two types of vehicles in the real estate investment world as people are out raising capital from private investors. One is a syndication, which is typically a single asset deal, one LLC, one address, and the other vehicles a fund. And a fund typically is identical to a syndication but a fun is a collection of assets. It's almost like a mutual fund of self storage to a degree. We do both we generally gravitate towards the fund strategy, because of the the geographic and cashflow, diversification that a multiple multi property folio offers versus one deal. Inevitably, in a given quarter and a 10 property portfolio, you might have one deal that's behind forecast, but the other nine are kind of balancing that out. And then sometimes that shifts.
Jacob Vanderslice
So yeah, the advantages to investing privately is you, you get the tax benefits, all the depreciation flows through to you as an investor, you're getting economics along the way, you're getting cash flow distributions, and of course, you're getting upside as well. So those are really the three ways to do it. You know, it's easy to buy a stock, it's easy to invest privately, it's a it's not too easy to go out and buy your own deal, you really got to commit to it.
Mike Swenson
So then in terms of those funds, you're essentially just shut selling shares in those funds for a certain amount and you say, hey, you know, funds or shares or X amount of dollars? How many shares do you want? Or kind of how do you fill that fund up?
Jacob Vanderslice
Yeah, we typically sell our shares at $1,000 a share. Or last last year, we deployed about $40 million in equity, across one syndication, one syndication and our more recent fund, we're launching our third fund here very soon, we're going to target 115 equity in that fund. And as we raise more capital, more shares are created. And people get a preferred return, they get depreciation, they get upside, and they're an owner member of the entity that's owning all the storage facilities. So it's kind of a good way to participate in the equity side without having to be on the operation side.
Mike Swenson
How are you finding the investor pool for that? I mean, obviously, you guys have developed those relationships over time. Do you kind of have your Hot List of hey, we've got a new opportunity. These are the folks that have invested in a lot of our stuff over the years, we're gonna go chat with them first are kind of how do you how do you find those investor partners?
Jacob Vanderslice
Yeah, we there's a lot of different ways. One, the most obvious is just long term relationships, guys who have been with us for 10 or 12 years, they're always good for a one or $200,000 investment, whatever we're up to. We do a fair amount of marketing, we'll do webinars and email blasts, we have a lot of investors who just fill out a web form on our website, we had a zoom call, they invested, they've been happy. We have some registered investment advisors that have brought their clients to us. And then we have our higher net worth individuals, some small family offices. So it kind of runs the gamut. We've got people anywhere from a horse jockey, to dentists, to doctors, to attorneys, to real estate entrepreneurs. But I'd say our kind of typical investor avatar is people with busy professional lives that are fairly high income earners. And they need a place to park their cash and they don't want to go out invest in real estate themselves. We work with a lot of folks like that, too.
Mike Swenson
So when you find when you find those people, you kind of talked about that, like you get, you get the preferred returns, you get the upside, you get the tax benefits, the depreciation, all that kind of stuff is that essentially the pitch to that type of person is, hey, I know you're busy. I know you've got money, you want to park your money somewhere, here's where you can do that. Here's what the you know that potential return is for you and go from there.
Jacob Vanderslice
Yeah, yeah, we are waterfalls, pretty simple. We have an 8% preferred return, every distribution thereafter goes to return investor capital. So investors are getting 100% of the distributions, the fund makes until preface paid until their monies back after that it's between 7030 to 8020 in their favor, depending on how much they invest. So it's pretty simple structure. If you do the math investors are getting the majority of the upside. We have some some fees baked into our deals that allow us to keep our lights on until the very back end. Because people want sponsors to kind of survive and make a living during during the whole period, of course. So yeah, in that that's really our waterfall works. And as I mentioned, the depreciation flows through pro rata to everybody.
Jacob Vanderslice
If you're, if you're getting $10,000 a year in distributions, the majority of the time your depreciation from a k one will wash out a big piece of that. So even though you're getting 10 grand in cash, your taxable income be two or $3,000. So there's some tax benefits to investing in real estate, either as a direct owner or passively, of course.
Mike Swenson
Yeah, cool. Was there is there anything that you get asked a lot or any other advice that you might Want to share for somebody that is considering either getting into the space or even like you just want more passively investing into it?
Jacob Vanderslice
Yeah, I think the first deal that you might passively invest in is kind of scary, right? You're giving someone else your money, you don't have a lot of control. But a lot of our investors, they've got money in 15 or 20 Different syndications and funds. So I guess my only advice is do your due diligence on sponsors, get to know them, make sure the economics they're representing in return targets are reasonable, make sure that the set of assumptions that go into producing those returns are also reasonable. And, and take a risk, right, it's really easy to sit on the sidelines and do nothing.
Jacob Vanderslice
But if you're not investing in real estate, you're not participating in it. And it's, you know, you can overthink things pretty easily. So go out and buy a fix and flip or invest in somebody's fund or syndication. It's in this inflationary environment with a lot of uncertainty out of us, I think, focusing on hard assets that produce cash flow is a defensible strategy.
Mike Swenson
For sure. I mean, I just I just saw in a in a Facebook group posts this morning, somebody was talking about, hey, I'm one year away from retirement, and my 401 K account just got wiped down by $100,000 because of the stock market dip, and they're like, What do we do? What's the strategy? And you know, a lot of people are like, well, you kind of got to just ride it out now, like, you're not going to pull your money out and take the loss. But a lot of people are saying, you know, double down on it, you know, stocks on sale, that kind of thing, but but that just shows like, you know that that power of diversification and having something in a cash flow producing asset versus the stock market. You know, there there's, there's a lot of benefit to that.
Jacob Vanderslice
So yeah, that's one of the reasons I like real estate. I mean, look at Netflix a couple of weeks ago, I think it went down 30 or 35% in a day. Real Estate's great. It doesn't go up 35% a day, but it doesn't go down. 35% a day either. Right. Well, a little more steady.
Mike Swenson
Cool. Well, thanks so much, Jacob, for coming on the show for people that want to learn more about you guys. How can they find you?
Jacob Vanderslice
Yeah, we always love to connect and talk shop about real estate, they can go to our website, which is vanwestpartners.com they can email me [email protected] or hit me on LinkedIn - Jacob Vanderslice.
Mike Swenson
Awesome, thank you so much for coming on. It's really exciting to talk about self storage. You know, like I said, we wanted to chat about it for a while and you've got a lot of experience.
Jacob Vanderslice
Mike, we appreciate it. Thanks for having us on.
