My first storage deal - part 1

A major reason I chose to do storage for a living came from something I read about 4 years before my first storage deal. 'Creating and Growing Real Estate Wealth' by HBS professor Bill Poorvu.

He described various paths to success in real estate, and some involved sourcing deals from your existing network as a broker or some other clever angle, but another path is to go with an operationally-intensive business and outwork the next guy (I still today think there is truth to this in self-storage). I knew I was too dumb and not connected enough to try to do some clever thing, so I bugged an old friend who was making $12/hr at a few different Extraspace locations. “Cmon man let’s do a storage deal.” Clearly he was a storage expert, right?

Andrew had spent weeks at a time alone at some of these facilities. He leased units.  He chased down late payers. He learned how to do bollard repair with his own hands. He auctioned units. He had access to the facility budget.

And it would be fun, because we had a history of doing dumb things at a younger age; e.g. we used to hijack construction machines to take joyrides at night.

I texted him a very poorly-created Loopnet listing. You could either buy it for $500k or lease it for $2500 plus landlord reimbursements for his property taxes/property insurance/etc. “This could work.” He visited the facility a couple days later and there were tons of mangled and/or missing roll-up doors and trash everywhere:

I remember being on the phone with Andrew while he walked it. “Ya know, it’s really not that bad!”

And he was right. The roofs didn’t need to be replaced. There was no dented exterior metal because it was a concrete-block shithouse. The leasing office was fine. I would love to buy a facility like this today, just a little bigger than the 91 units / 9500 rentable square feet that was there.

Only 18% occupied, but as little as I knew about storage at the time, I knew that was a fluke. I would love to find such a well-located store with such low occupancy again. It was a highly visible stretch fronting 30k cars/day.  Plenty of people. Some amount of growth, even if the area was kinda shitty.

I put on my “analyst hat” and threw together a pro forma. Andrew was already interested in leasing it for a couple thousand dollars a month because it seemed so within our reach and didn’t require going to someone else for money (this mindset has served him very well in the years since then). And the $500k asking price, or $53/sf, felt high to me, and many others, at the time (late 2015).

I knew that most of my “smart friends” in real estate would have turned their noses up at master-leasing someone else’s property, but I was too excited about this possible misadventure. So I went out and talked to some guys who I figured would have some thoughts on it. For instance, one had explained to me that some parking garages are master-leased to an operator who pockets the upside every month. Or it could be profit-sharing, could be done many ways. But the best advice I got was: protect the value that you create. One way to do that was a purchase option.

That option price needed to be high enough for the owner – a man named Paresh Patel who owned the adjacent gas station – to feel like he would eventually get the sale he wanted from it. But low enough that I felt like we’d be “in the money” some day.

To persuade the owner/explain the issue, we presented him with a before and after model. I laugh today at how silly some of the assumptions were, but it was clear enough.

And after:

We got the owner on board at a $475k purchase option + a gradually escalating monthly rental payment to him. Our rent started out really low, so we weren’t eating as much shit during renovation/lease-up.

Around the time we signed the lease and took over the property, I found out Andrew had quit his job and dropped out of school for this little project. Shit just got real.

[to be continued - next week]