In this episode we’re learning why self storage can be a good real estate investment, what to look for in the area that you’re looking at purchasing, how to hire and manage the onsite manager for a self storage unit. We’re interviewing Ryan Gibson, a co-founder of Spartan Investment Group, he focuses on providing self-storage investment opportunities to individual investors. Ryan has organized over $12M of private equity for SIG to fund self-storage and development projects, he is responsible for investor relations and capital raises for projects. Ryan also owns and manages rentals properties in multiple states and has invested in apartment buildings, self-storage, and land development projects.

Why should real estate investors invest in self storage? 
Self storage is something that we looked at back in 2016, we made a pivot from investing in residential real estate, we were building condos, new houses, flipping houses, and we landed in self storage for a couple of reasons: 1. We liked how straight forward it was, how operationally easier it was to manage than a multifamily property. We looked at vacancy trends, rent growth, saturation and all the things that people like about self storage. It is also one of the least foreclosed upon asset classes during the last recession.

There is a retail component to self storage. What would that be?
It’s just becoming more retail oriented, when you come in it’s all about customer service: it’s about providing a clean office environment, it’s becoming a very customer focused industry and there’s a lot of upselling. There’s tenant insurance, notary services, PO Boxes, FedEx, UPS, shipping, etc that you can put at the facility. You can actually sell retail items in the store. For some of our facilities we’re considering putting in propane for example, putting in notary services, things that add value to the customer and are complimentary to the storage business.

What are some of the biggest lessons that you have learned when fundraising since you are syndicating deals out? 
Engage your network, find ways to add value to your investor network to keep people engaged. We’ve actually done a really good job of tracking where we meet our investors and how they end up pulling the trigger to do an investment, and a lot of our investors are personal relationships, people who we used to work with or people that we knew, friends, neighbors, family, people in sports teams, etc. Scott, my business partner is in the military and folks that were in the military with him. People that know us from different capacities and trust that we’re the folks that can get the job done. The other thing is referrals, we don’t really focus on finding investors, we just focus on taking care of the ones that we have. We do go out and try to find new investors, of course, but we really just to put a lot of emphasis on the investors that we have currently by sending them monthly updates, and that has inspired folks to reinvest and refer friends to invest in our businesses.

How do you guys go about deciding where to invest in self storage? 
We focus on 150 MSA’s across the United States. And those MSA’s have a key component of population growth. Population growth is the number one driver of self storage utilization, overall market saturation, job growth, demographics of our ideal consumer, income levels, job placement, migration trends, and we look for cities and areas, or an MSA that are trending positive and have a good outlook for population. We look at rental rates as well. We have a hard time justifying building in certain markets, brand new storage, if the rental rates are, say less than $6 a square foot, it would be difficult to do that.

Are there specific things we should be aware of weather-wise, or how the homes are built in those areas? 
I think what’s more important is knowing the hyperlocal market, what is the utilization rate based on the population? Is it seven square feet per person or is it six or is it five, and really understanding what the demand is in that specific market and in particular on the cross streets of where you’re looking to buy, or build, or expand a facility, it’s really important to understand what the market demands are in that area and what the current saturation is to make a decision if people are going to be leasing up the units that you build. If you build extra units, or if you want to try to position that deal in another way, or maybe you’re building ground up, or you’re looking to expand the rents. If you’re in a flood zone, we might either pass on a deal because you don’t want to be in a flood zone or perhaps you decide to build climate controlled units versus traditional storage that’s exterior roll up doors because you want to make sure that you can supply the market with what they want. If it’s like in Texas we’re actually adding on about 40,000 square feet of climate controlled storage because that is in a very high demand right now in that area.

What are some of the biggest challenges with self storage? 
I would say the number one challenge is finding the right projects. We looked at 880 projects last year, we put out six offers, and we bought three. It’s a very institutionalized asset class. A lot of projects that are over $5 million are getting all cash offers, so it’s very difficult to compete with a lot of the institutional capital, and larger players in the market because they have a lower cost of capital than we do. Because we’re offering our investors a market rate return on equity and they have a good team of folks that can find the same data that we’re finding. Although we’re pretty unique in that we can do all of that in house and we do subscribe to a lot of good data, make fast decisions, on this particular area, you may find a great deal that has an existing storage business and plenty of land to expand the storage business on, but then you go to find out that the market is completely saturated with storage and if you built that storage, the customers wouldn’t come, and you’d have an empty building and a lot of additional expenses on the property without the revenue.  It’s very important that you understand what the demand is in a certain market before you make a decision, little did you know that you didn’t check the building permits in the area, and now there are three other people are building around you, and that’s not going to work. Operationally there has been challenges, but for the most part, we directly run all of our own facilities, we do all of our own in house property management and asset management and that part of it is fairly straight forward for us, and the construction is very straight forward for us because it’s slab on grade single story buildings for the most part.

For ground up development how long does it take from beginning to end on average? 
At least three years, but also it depends on the market. The entitlement can get challenging, we’re actually nearing the completion of getting full entitlements on a 127,000 square foot facility just south of Seattle. It takes about three years to go from what we say trees to keys, from the time you find the raw dirt to the time that you open your doors is about three years. If you’re buying an existing facility in a relaxed jurisdiction with matter of right, you can get building permits in a couple of months or maybe less. And then depending on how large the expansion is, depending on how the site work or what site work is needed, you could go out there and you could have an addition completed in a year or less. It also puts up a very large barrier to entry because if it takes that long to start up a business, you’re separating yourself from the competition that may be building behind you.

Would it be easier to actually buy, let’s say, an industrial building and convert it to self storage, or it’s something that you wouldn’t even touch? That’s something that has been very popular right now. A lot of people are doing that, dark conversions, converting old Kmart, Sears, or a car dealership, or something and do a self storage. That is something that the start to finish is a lot less. Obviously if you have an existing building you’ve already got the water and underground utilities in place, you already have the walls, and the roof in the building already up, and you’re basically coming in and retrofitting the corridors we’re actually looking at five or six of those conversion opportunities right now.

I recently visited a self storage facility here in the Bay Area and the owner not only had the self storage buildings, but he also put metal containers and rented them out. If we were to buy any self storage property, do we need permits to put those metal containers on the property up and rent them out? 
It depends on the jurisdiction, I would definitely check with the local municipality. We have a 350 point due diligence checklist before we make a decision on any particular deal. Some jurisdictions will allow you to put down portable containers and over easements in areas where you typically put a permanent structure. Some areas have restrictions, they don’t want to see self storage doors from the road, or they just don’t allow temporary buildings. It’s rare to find that, but that land may not have the use approved. I would say yes, it’s definitely possible in many areas, people do that and a lot of the portable storage companies that provide those storage containers will help you find out if it’s feasible in the land that you’re purchasing, or in the storage that you currently own. It just depends, but it’s definitely possible in some areas.

Moving on to property manager, how do you select and hire the best property manager and what do they do all day long?
Some folks will hire third party property management companies like Cubesmart, Extra Space, West Coast Self Storage, Public Storage. They might hire a company like that to come in and do the property management for them, but they’re still going to have to hire somebody that works at the desk, that the owner is responsible for covering that expense. The property management companies will take a fee, usually 6% of gross revenue, to manage that facility. We do the property management asset management in house. Spartan Investment Group has folks on our team that do that in house. We hire somebody to staff all of our facilities, the sweet spot is usually three people for each facility. We like to buy a facility large enough to support three managers: a full time manager and two part time, or maybe one part time and a maintenance person. The day to day of a manager at a facility that’s running the operation is the person that you’re going to talk to book your unit, they’re actually doing lock checks every day to make sure that somebody didn’t hop the fence and grab a unit overnight, or put their stuff in the unit, they’re looking at every unit every day. They answer the phones, interact with our customers, call customers that are delinquent in rent, send letters for rent increases, execute leases, they are doing everything that make the facility run. We have them get certified as notary so they can notarize documents and then they just help with the collection of rent, and items that we may need them to help with.

I only asked that because I recently got my very first storage unit, and it seemed like she had nothing to do all day, which is great, but it just felt like there could be more that the property manager could be doing.
We like to have our managers be as free as possible, we like to give them as much automation as possible: the backing of a call center, backing of our headquarters, for example, we do a lot of the rent increases from headquarters. So the front staff isn’t sitting there and jamming envelopes all day. Having somebody who’s available to the customer, to put that touch in there is important, and we like to give our folks as much training as we can, in sales, customer service, follow up, etc.

What is your second favorite asset class after self storage and why? 
We own an RV park in west Texas and that has been my favorite deal ever. Very similar in characteristics to a mobile home park in that the tenants are there full time and they live there right now, rent is about $800 a month (and utilities are included in that). Not to have a whole lot of amenities and have the lowest entries for housing, we just collect a lot rent and the folks bring in their own RVs and mobile homes, they purchase their own homes, it does well in good times, and in bad times. We’re actually in the middle of putting up a brand new mobile home park development under contract, which is very unique because you truly can’t really build mobile homes anymore. It’s a declining asset class, so you’re actually taking them away and we have an opportunity to potentially have all city water on it too. So it’s a very good asset class and it’s something that a lot of folks are getting into at this point.

It does sound very interesting at $800 per month. That is crazy actually for Texas. Does that attract a lot of trouble tenants? And how do you guys go about dealing with that?
Our tenants have been great, we have 116 units. You know, you’re going to have issues. But I really love Texas and people there are just the hardest working people that that I know and they work really hard. A lot of them are in energy and oil.

Is there anything else that you think our audience should know?
If you’re looking into the self storage asset class, just be aware that there is a lot of competition in it. Just make sure you do your demand analysis, or your feasibility study before you get too far down the road in the project.