Ep 94 – How to Invest in Self-Storage and Mobile Home Parks | with Paul Moore

Single family rentals might be the thing that we focus on most at Rent to Retirement, but there’s a whole wide world of real estate investing that you can take part of. Today, Adam and Zach talk with Paul Moore, managing partner at Wellings Capital and author of, The Perfect Investment: Create Enduring Wealth from the Historic Shift to Multifamily Housing, about how an ordinary investor can get started investing in things like self-storage and mobile home parks.

The metrics don’t have to be complicated, the value adds can be simple, and the returns can be phenomenal.

Learn More About Paul and Wellings Capital Here: Wellings Capital


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Transcript:

Adam
Hey, Rent to Retirement, it’s Adam Schroeder here, and I am once again joined by the man, the myth, the legend, the founder and CEO of Rent To Retirement, Zach Lemaster. And we are pleased today to be joined by guest, Paul Moore. He is the managing partner at Wellings capital, as well as the author of books like the perfect investment, create enduring wealth from the historic shifts and multifamily housing. And he’s got a new book that is storing up profits. Capitalize on America’s obsession with stuff by investing in self storage. So we’ll dive into that a little bit. I don’t know about everybody else out there. But looking around my house. There’s definitely a lot of stuff. So Paul, thanks for joining us today.

Paul
Hey, it’s great to be here, guys. Thank you.

Adam
Yeah, absolutely. We always like to start by just learning about your journey, kind of how you got started in real estate and kind of what you went through to get where you are today.

Paul
All right. Well, I you know, I sold my company to a publicly traded firm almost 25 years ago. And I thought I’m a full time investor now. And I thought that sounded pretty cool. But what I found out was I wasn’t a full time investor. I was a full time speculator and I made a lot of mistakes, made some money lost a lot of money as well on the way and I so I went through years of doing stupid stuff. Also, flipped a bunch of houses flipped a bunch of waterfront lots at a resort called Smith Mountain Lake and Virginia, built seven or eight houses did a subdivision. And I always wondered how to get involved in commercial real estate but I wasn’t sure where the on ramp was until we ended up building a multifamily asset and then operating that for a number of years in North Dakota. So that’s what got me in, in 2011.

Zach
North Dakota.. what part of North Dakota?

Paul
We were in the area. We did a hotel in Miami, and then we did a lot of hotel Kwazii multifamily around Watford City and Williston during the oil boom.

Zach
Yeah, now that’s awesome. I was I was stationed in Grand Forks and oh, yeah, that’s where we started investing with North Dakota. But yeah.

Adam
How did you go from, you know, you’re talking to East Coast. Now you’re talking..

Paul
I had a petroleum engineering degree before I got out of school that was a most of a waste. And, but I thought I knew enough to invest in an oil and gas deal in the Bakken in North Dakota. So I invested in that. And my buddy, my business partner for many years had a small jet, and he could never find a place to stay. So he and we had to keep flying back out of North Dakota to find a hotel room for the night. And we said, hey, we know what we’re doing. We’re real smart. We Why don’t we build some housing for these oil workers, and we hit the ground running and did that in a short time.

Zach
That’s awesome. Yeah, the boom of anyone that’s familiar to real estate, I mean, it’s just crazy, crazy, crazy stories. And then, you know, at one point that went that went away. But you know, it’s interesting, you have this this story of like, man sold privately or publicly traded company and like, it’s you just and then put that money. I love that you said speculator because what it sounds like is now you have this money that you’re putting in these different avenues, right? And you’re trying to kind of see what, what works and what doesn’t. And of course, through that period of time, you know, just as most of us have lost some money and made some and, you know, learned what, what you want to really focus on which it sounds like there’s more transition into some of these commercial assets. And so, the first property you built in the commercial space was when you built it right. So you weren’t buying any commercial assets. That was the first one you broken commercial space with?

Paul
Yeah, that’s right.

Adam
Let’s go simple right?

Paul
Yeah, right. You bet.

Zach
No, this is cool. You You’ve done a lot clearly and I think there’s a lot we will really want to unpack with you but I kind of actually want to go through more into the asset classes you have this you know, barrage of different stuff you’ve done but you’ve knit now at this point in time you’ve really focused in on self storage as well as I believe you know, mobile home parks, but can we talk a little bit about just like the why like why those assets?

Paul
Yeah, absolutely. So my dear wife was sick and tired of me chasing shiny objects. And you know, when I wrote the perfect investment part of that, you know, title was a stake in the ground saying this is it I found it this is I’m not going to do anything else, but multifamily for the rest of my life. And you know, on Part of the problem that arose in the next four or five years was we had a terrible acquisition team. I’ll admit that. But part of the problem too, was we started looking at the apartment deals we were seeing at least. And again, part of it was our poor team. But the deals we were seeing were so overpriced that they were back in the speculation realm. And we felt like, well, wait a minute, I was trying to get away from speculation, I didn’t want to do that anymore. And so finally, we got really frustrated and decided to look for assets that were largely owned by Mom and Pop operators, you know, these are the folks that are doing really, really well cash flowing, typically, but they don’t have the desire or knowledge or resources to upgrade their asset to increase net income and therefore maximize shareholder value. And so paying these Mom and Pop operators, full fair price, gave us an opportunity to go in and significantly improve these and you know, sometimes, you know, raise the income within a year by 40 or 50%, therefore, raising the value by the same amount and raising the equity value by you know, maybe 100% in a year. And that’s very, very common in self storage, mobile, home parks, maybe in two years at an RV park. So that’s why we like those asset classes.

Zach
So huge value, add opportunities, what I’m hearing, and really, the strategy here is you have an operator that, you know, maybe maybe operated quite successfully for many years, but there’s just that upside potential that, hey, you got to put some more work into put some money into it, increase those rents, you know, maybe decrease expenses and have some better operations. And that’s really the value add, and a lot of people just a, it’s been good for them for many years, they’re not going to do that. Were there any seller financing involved in that? I mean, I’m just curious that a lot of times, we’ll see that scenario play out for people.

Paul
But that’s funny. A lot of the smaller and older owned mobile home parks, they think that the they still think that the only type of financing available is seller financing. So they’re ready to do that. Sometimes that comes into play, sometimes, you know, you swoop in with a cash offer, because they’re in real distress. Like these five kids I saw, you know, who were their parents had sadly passed away and they owned a self storage facility, these five kids were running it even though it was a large facility, they were running it into the ground. And you know, our app, our operating partner acquired it for 2.4 million, and literally in just three and a half months had an appraisal for 4.6 million, bought it for cash, put 2 million in debt on it after the appraisal, that would have been an 83% LTV, you know, loan to cost, but it turned out to be in 43%, loan to value loan. Much, much safer when with that new value. And so that was you know, that kind of scenario is quite typical.

Zach
That’s interesting. And I guess Yeah, it’s one thing I’ve heard too, is if you have different owners that have had a property for a while, and sometimes even maybe they’re not really distressed, but just like an exit strategy for them is, you know, they don’t want this huge, this huge lump sum of capital and paying taxes on it. This is like, okay, they’ve done well, and now they want to ride right through the rest of their retirement, just getting paid for that over time. So that’s an opportunity. But that’s interesting. Yeah, I mean, that’s, I kind of look at that deal, you just explained is really applicable to I mean, that’s self storage. But I mean, that could be very applicable to just a house, right? I mean, it’s the same same type of story in the parent inheritance. I want to just ask this more on the personal level, when you talk about being speculative and buying properties that are over overvalued, and maybe that was in the multifamily space. I don’t I don’t know. Could you could you expand on that? Like, what, what that really means? Are you buying like off the market or just like a typical cap rate on market deals? Or what do you mean by being speculative in that regard?

Paul
Yeah, I feel like investing is when your principal is generally safe, with a margin of safety, and you’ve got a chance to make a return. And speculation is when your principal is not at all safe. And you’ve got a chance to make a return a lot of times investing, you know, in the investing around, we’ve got more of the, you know, assets that are already cash flowing assets that are already, you know, have a safe, healthy debt service coverage ratio, or can at least get one pretty quickly. And speculation like the oil and gas deal I did in North Dakota, you know, there’s no cash flow, and there’s a chance there never will be, of course, you’re rolling the dice hoping it’ll be 100x. But sometimes it turns out zero like ours did.

Adam
Did you find yourself, you know, with the recent run up that we’ve experienced having to go during the COVID time to slightly more speculative speculative or have you been able to keep that deal flow? pretty constant, and not as speculative during that time?

Paul
Yeah, so I will honestly tell you that I felt in the spring of 2020. And through the summer. We just didn’t know what we didn’t know. Right. And so I thought that a lot of what we were doing was speculative, for example, I thought, what if they put an eviction moratorium on mobile home, parks on mobile homes, and they say they these people don’t have to pay and you can’t kick them out? Well, all of a sudden, you’re very safe. cash flowing investment. Seems like it’s not and but I’ll tell you, after that brief fear, you know, moment of about four months, we found that, you know, really, everything was normal for us again, and self storage came roaring out of COVID. Wall Street Journal in New York Times, both did articles in the fall last year saying they came out with the top performing commercial asset class, you guys have probably heard that RV parks are just going incredible. I mean, just amazing numbers from RV parks as well. And mobile home parks, I mean, there really is a housing affordable housing crisis. 10,000 people turn 65, daily, about 4000 of them, four of the 10,000 have even $10,000 save for retirement. And these people need a place to live. And a lot of them are turning to mobile home parks and other manufactured housing.

Zach
A lot I want to unpack there and dive deeper into since we talked about COVID, you know, a couple years ago, and that history what what’s happening right now, in your viewpoint in the asset classes that you’re you’re looking at? Well, I mean, what what how should we be viewing the next couple of years and investing in real estate in general?

Paul
Well, I think it’s more important than ever, right now to, again, find these assets that have tremendous intrinsic value, you know, have that have much more potential value to tap into and harvest than is than meets the eye. And these are typically, you know, from Mom and Pop sellers. And we get a lot of those in self self storage, many more percentage wise, in mobile, home parks and RV parks. And so we really feel like that’s really, really important. I mean, when you can get an asset, like the one I talked to you about a few minutes ago, that almost doubles in value. In a short time, you know, that’s offsetting a whole lot of interest rate risk. I didn’t there is very real interest rate risk. And I think a lot of folks who got these very, you know, variable, floating rate loans that you know, that were they’re barely covering the debt service, if at all, are going to be at real risk. And I think it’s a better time than ever to be really, really careful about what you’re investing in.

Zach
So when you talk about interest rate risk, you did make the point of people that have I mean, that are subject to variability, right, with things changing if we go up another three or four points that could dramatically change the cash flow setting. So yeah, all right. No, I mean, that’s, you know, no one’s got a crystal ball. But I mean, definitely underwriting the fundamentals of real estate as you always should be, I think, is really a key point as well. But having that the value add opportunity. I mean, that’s, that’s the space that you work in, can we unpack? Can we unpack the Self Storage a little bit more on like the operational side? So obviously, there’s an opportunity to, you know, have maybe an easily I guess, rather easily find some just Ma and Pa owner undervalued property just based on, you know, poor management or under, you know, things like that, that can be increased rather quickly. But I mean, what what is, what else? Is it about self storage that really makes it a great asset class? And how are you underwriting in evaluating these deals is simply on market comps and p&l and things like that and implementing your own systems or..?

Paul
Yeah, so there are about 53,000 self storage facilities in the US, which is about the same as Nike or Nike. What am I saying? McDonald’s Starbucks and subway combined, I’m combining another analogy there I think. And but 75% of them are owned by independent operators and two out of every three of those are mom and pops with one asset only. And like I said, these folks typically don’t maximize the value and cash flow. And so I when I first heard about self storage, and somebody mentioned value, add self storage, I think I laughed out loud. I mean, where’s the value? We’re talking about four pieces a sheet metal, some rivets, a floor and a door? You know, what do you do sweep it out between tenants? Okay, great. where’s the where’s the upgraded appliances and lighting and flooring and you know, dog park and all that? Well, there are a lot of value adds and self storage, in fact, identified about a dozen big ones in my book. There are things like I mean, we invested in one in Grand Junction Colorado that had 80% occupancy then norm full normal falls about 90, let’s say, so they were you know, double The vacancy they should have but more significantly than 80% delinquency. And the cool thing about self storage is it’s very easy to fix delinquency. I mean, we don’t have to go into the details of that right now. But I’ll tell you, we’re leveraging their stuff. And so and there’s no eviction moratorium on self storage, right. So it’s pretty easy to fix. So that’s, that’s one. A lot of them have low rents, their goal is to stay 100% full, they don’t want to do any marketing. That’s great. Adding marketing, and raising rents. But to the market level, sometimes you can raise rents, I’m thinking of one in Florida we invested in last month 24% In one month, rent increase another 130 6% over two months. So rent increases. Another one is adding a showroom with you know, selling retail items like locks, boxes of tape, scissors, adding U haul getting a contract with U haul, you can produce anywhere from a couple 1000 A month up to even 10 or 15,000 a month, that’s not the norm, the norm would be two or 3000 a month in commission, take let’s say it’s 3000 a month, that’s 36,000 a year 36,000 A year use our little math formula for commercial real estate, divide the increased income divided by the cap rate, let’s say 6% to be conservative, 36,000 a year by 6%. You’re adding $600,000 to the value of that facility, just by setting up U haul rentals. And you know implementing that there’s no capex, there’s no big cost to that. It’s just a little bit of hassle. And you actually increase your occupancy by 5% on average by doing that as well. And so lots of wonderful value adds including boat and RV storage, adding a propane filling station adding an ATM adding a billboard I’d never seen this done, but I would think you could add a cell tower sometimes. Lots of fun value adds.

Zach
Mind repeating that list for me real quick?

[All laugh]

Paul
Not really [laughs].

Zach
I’m just kidding. Read your book, right?

Paul
Yes. Read my book [laughs].

Zach
Just got my wheels turning here because you said some super creative things that, you know, or seemed like rather easy implementation.

Adam
When you talked about, you know, no eviction moratoriums on the Self Storage. When you look at markets, do you do you stick with, you know, the areas that are good for investors, like of single family and multifamily where, you know, there are, you know, landlord friendly rules? Or is it kind of just everywhere, it’s fairly landlord friendly, because if they break their lease, you can put them on Storage Wars, and suddenly, I don’t even know if that’s still a show anymore, but you know, get their stuff out.

Paul
So I had a lot of rules when we were doing multifamily syndication for where we would or wouldn’t buy but self storage. I mean, that deal I told you about earlier, it was in Beeville, Texas, population 12,000, we have another huge Self Storage deal, it still blows my mind in Ishpeming, Michigan, 160,000 square feet, which is like 60,060%, larger 60,000 square feet larger than those big ones, you usually see. Its population 3500. But there’s a regional, you know, draw for a place like that. So yeah, the I mean, even in California sell still, storage works. Well. I’m not saying there couldn’t be eviction moratorium someday. But at this point, there’s not.

Zach
A couple of questions I have is just on the operational side with with self storage, are you typically when you’re acquiring these, I guess a few questions would be just in general, as we tried to kind of unpack this asset class, you typically have an operational team and what does your team look like? That’s, that’s operating? Do you have boots on the ground? Is it depend on the size of the facility? That managing the property? What does that look like? And what does that look like on self storage?

Paul
Yeah, so debt is very similar to apartments. It’s Fannie Mae, Freddie Mac agency debts available. CMBS is also available. Typical, you know, LTV, LTC would be 65 to 75%, similar to multifamily debt constrained in the same way with you know, 1.2 or higher debt service coverage ratio. As far as operations just to be clear, we we strategize we pivoted about four years ago and decided to be a fund manager and so we do not operate any of the assets we’re talking about. But the way the operations works, I mean, you know, self storage depending on the size might have, some of them are automated and some of the medium size self storage now are automated with a new technology, but typically have one to three employees that have self storage In a mobile home park, one employee a very large one, maybe one plus a maintenance person. RV parks Interestingly, these destination RV parks that we’re investing in have 100 employees in the summer, amazingly. But yeah, there’s a property management team, typical regional property manager, just like with apartments, and then local property management team.

Zach
That’s very cool. We had as I’m kind of thinking about this, like one, one potential value add, I would think would even be just the simple automation factor of it and reducing your overhead employee costs, which can be dramatic. Sometimes, there was we interviewed Kevin Bob, who was another guy, you probably familiar with him in the space, but he was telling stories about auto parking lot automation, and replacing the parking lot attendants with just meters and then also having dynamic meters. So that was kind of interesting. How are you finding a lot of these deals, Paul is is finding, well, now you’re operating in the fund manager side. But I mean, when you’re when you’re looking for an undervalued type of storage facility is this a lot of just like your direct marketing, cold calling broker relationship with these?

Paul
95% of these deals are off market. So it’s not through brokers, the best acquisition team that we know of has seven or eight people working the phones, text, email, full time, so 40 hours a week, seven or eight people calling through a list of 44,000 mobile home park owners, and 53,000 Self Storage owners, of course, they’re not calling everyone but they’re calling the non institutional owners of those assets. And you know, they’re texting them, calling them staying in touch emailing them. I mean, one situation in Michigan, the guy they call, he was 88 years old owning he ran a large mobile home park, and they called him quarterly for seven years. And when he was 95, his niece called them and said, Hey, he’s right here, he’s ready to sell Finally, well, let’s take that offer you made two or three years ago. And that in my operating partner said, Well, that was kind of a low offer for now. And she said, What’s he going to do with the money anyway? It’s fine. So..

Zach
I mean, I’m surprised you said anything after that.. just, “okay send us the contract” [laughs]. No, that’s so cool. And I think that, you know, there’s just having, you know, obviously, being creative to find those undervalued deals, but I mean, that the timing of that is just, you got to obviously meet with the right owner at the right time, and then keep them on your drip campaign to stay in touch with them. What um, so just let’s unpack your business a little bit, we can learn more about how people can find out about what you’re doing. But if I understand this correctly, so you’re you’re managing a fund that basically underwrites and evaluates different deals to partner with, is that accurate? Or can you explain that?

Paul
Yeah, we’re pretty obsessed with finding the right operating partners, we’re trying to follow the Buffett Warren Buffett model, you know, he has 28 people on staff of the seventh largest public company in America 28 People in the headquarters at least. And so we’re looking to partner with the very best operators in these recession resistant asset classes. And we go through a pretty stringent due diligence process to bring them on board. And then we’ll usually invest in everything, that they have come down the pike for a while. Sometimes we just pick and choose the deals, but we let them do the heavy lifting on the underwriting, we want to make sure that they’ve, you know, put a lot of their own skin in the game that they have a track record, a team technology, everything like that.

Zach
And that was really my next question is, how do you how do you vet them? But I think he went through, you know, pretty high level and a lot of it his track record, I think, right?

Paul
Yeah, we have a 27 step vetting process. And, I mean, if somebody wants to see how to vet, you know, something like this, they can, you know, come to our website and get our list of, you know, our vetting, you know, our due diligence list, or they can go by Brian Burke’s book, the hands off investor, which gives much more detail than we have.

Adam
When you’re looking at these ones. Because I mean, I’ve heard of Beeville, Texas since I live in Texas, but I wouldn’t think that that would be a great place for storage, because like you said, 4000 people, how do you? I mean, I know we just talked about vetting. But how does one go about and say, you know, this is a good place for storage, this isn’t a good place for storage. You know, if you’ve got a place that has like you were saying 80% occupancy, well, maybe it’s because it’s just a bad place for self storage. You can’t you know, 90% might be the average, but maybe this place is bad. So how do you determine whether it’s a good or a bad place for, you know, self storage or an RV park or anything like that?

Paul
Yeah, so let’s take self storage, you draw a circle around the location in a typical average suburban area, you might draw three mile circle around it with a three mile radius, and then you would check the population to fool the total population that area. And also check the total number of square feet of self storage, including your own. And you divide that and you’re looking for an average population, you know, square foot to person ratio of seven or eight square feet as the national average. If you’re much lower than that, that’s likely a good location. places like Florida, Texas, and California that don’t have a lot of attic and basement storage can go much higher than seven or eight square feet, places like Wisconsin, Michigan, Indiana might have a lower ratio. And they would also be places that would on average, maybe have less toys, less stuff. And so so that’s what we do, we use a tool called radius plus, radius plus is a software that allows that, you know, for a pretty reasonable price will do that analysis for you, you’re also looking for a highly traveled road with high traffic count, with a great visibility on a plus visibility on that road, and you’re looking for a medium to high income area doesn’t have to be real high, but at least medium.

Adam
And just touch real quick on kind of the mobile home kind of what’s the big thing you want to look for there.

Paul
You know, it’s kind of funny, it’s just it’s if that sounded scientific, this will sound so unscientific. We want to be within five miles of a super Walmart, in a town of 5000 or more. And there’s and we want to be on public water and public sewer, that will be about it.

Zach
And actually, I think you did a great job of breaking down not not going to like high level. But just like here’s some concrete criteria that we look at for both those even self storage. I mean, that’s, those are key points. I love the point you made about the location geographically and how the houses are built? Because yeah, you want to think about that with with basement and attic storage, like you just need more places to put your stuff. I mean, what is the lease look like on self storage? I think surely most people would probably use self storage at some point in time. But do you typically you sign people up? And this is going back to you know, maybe the operational side of things, but just out of curiosity, you get people on a year lease and what other like value adds are there on the leasing side?

Paul
Yeah, the so on the leasing side, the some of the value adds would be adding tenant insurance, which we might, you know, as an operator, get half of the, you know, a 50% commission on that, for example. Another one would be, you know, upgrading the, you know, Hey, would you like to get a corner unit? Would you like to be on the main floor? Would you like to go from a 10 by 10 to a 1015 10. By 15. That’d be some of the value adds all of the Self Storage leases that I’m aware of ever, or month to month, which is a great opportunity to capture inflation.

Adam
That’s how you get that 18% in the month, right? [laughs]

Paul
Yeah. Right.

Zach
Oh, this is very cool. So Paul, if people want to learn more about kind of, you know, participating in maybe just give a quick pitch on your organization, and you know, the benefits of working with you and how people can potentially learn more about you and invest with you.

Paul
Yeah, thanks. So a lot of our investors have, you know, decided that they’re too busy with their job or their retirement or their family or all the above, to, you know, be hands on and they want to pat, you know, they want to passively invest and they’re looking for somebody to invest with. While we’re, you know, we do due diligence and find the very best to the best operators that we can find to protect the downside, provide income and equity growth in these different arenas. If they want to get ahold of us, they can go to Wellings w-e-l-l-i-n-g-s Wellings capital.com (www.wellingscapital.com). And if they’d like a free special report on these different asset classes, or just investing in commercial real estate in general, it’s Wellings capital.com, forward slash resources. (www.wellingscapital.com/resources)

Adam
And don’t forget his his latest book, “Storing Up Profits: Capitalize on America’s Obsession with Stuff by Investing in Self-Storage”. So, Paul, thank you so much for joining us today. We really appreciate it. To all our listeners, you can check out what we do at renttoretirement.com That’s renttoretirement.com really appreciate you leaving a review on our whatever podcast platform you use. And if you have any questions, send them on over to podcasts@renttoretirement.com. That’s podcast@renttoretirement.com and we’ll talk to you on the next episode.

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