Pitfalls and Opportunities in Self-Storage Investing

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Learn about the good and the bad of the self-storage space with our guest, Mark McGuire!

Mark is a limited partner in 12 syndications ranging from multifamily to industrial hospitality and self-storage. He talks about how storage units are becoming an increasingly popular asset, why it’s important to build relationships with brokers, and what bad investments to avoid in the market. Starting from the bottom of the ladder in his career, Mark also shares the lessons he learned as he worked his way up to success.

[00:01 - 03:08] Taking Action and Following Up

  • How Mark climbed the ladder to success
  • Investing time with people smarter than us

[03:09 - 21:03] What You Need to Know About Self-Storage Investing

  • The self-storage industry is controlled by a select group of brokers
    • This is the right way to approach and interact with them
  • Comparing the first and the last self-storage deal he did
    • Looking for locations
    • The landscape then and now
  • Mistakes multifamily investors make when transitioning to self-storage
  • How Mark and his team position themselves and make moves in the current market
  • The benefits of investing in self-storage
  • What is a bad storage investment?

[21:04 - 22:24] Closing Segment

  • Reach out to Mark!
    • Links Below
  • Final Words

Tweetable Quotes

“Find someone smarter than you, go ask them what you should do next, do that thing, And then once you're done, let them know that you did it and ask 'em now what the next step should be.” - Mark McGuire

“Self-storage is like the halfway house for recovering multifamily addicts.” - Mark McGuire

“The people who are willing to pay the most are young females and young females want properties that are well lit, and that are aesthetically pleasing, and have a lot of security cameras.” - Mark McGuire

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Connect with Mark at InvestingInMark.com and follow him on Instagram, Facebook, and LinkedIn.

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Want to read the full show notes of the episode? Check it out below:

[00:00:00] Mark McGuire: We've been in an atypical market where we've been up to the right for the last four years. So, you know, despite how poorly you've operated a deal or priced a deal like you could sell it just in spite of your knowledge base, but there will come a day when you reach the high water mark and then pricing starts receding. And then at that point in time, brokers are going to be calling you asking, what do you think this is?

[00:00:33] Sam Wilson: Mark McGuire's biggest passion is wealth building and investing. He's a limited partner in 12 syndications ranging from multifamily to industrial hospitality and self-storage. He's invested in multiple private companies in the biotech, finance and AI spaces. Mark, welcome to the show.

[00:00:49] Mark McGuire: Thanks for having me, Sam. I'm pumped, man. Excited.

[00:00:52] Sam Wilson: Thanks for coming on today. Certainly appreciate it. Here's three questions I ask every guest who comes to the show in 90 seconds or less: can you tell me, where did you start? Where are you now? And how did you get there?

[00:01:00] Mark McGuire: Yeah. So started in, as the maintenance guy, the assistant to the maintenance guy. So I started, if there was a bottom rung on the ladder, I think I started in the ground and currently now functioning as the chief investment officer at Hearthfire Capital. And we focus in the syndication of the self-storage space and, you know, my journey getting there was from, you know, doing all of the work that nobody else wanted to do and kept finding people who were smarter than me and asking them for advice and then executing on the advice they gave me and going back to them and saying, Hey, I did that, now what? If I could give one piece of advice, find someone smarter than you go and ask them what you should do next, do that thing. And then once you're done, let them know that you did it and ask 'em now what the next step should be.

[00:01:48] Sam Wilson: And that is the follow-up that I think 90% of people miss is that, Hey, I did it. Lots of people are willing, lots of people are willing to say, Hey, you know, what do I do? And then they listen and it makes 'em feel good to hear what they should do. Then one, they don't do it. And then secondly, they don't follow up and go back and say, Hey, I did it, now what?

[00:02:06] Mark McGuire: I mean? Yeah. Some of the smartest people that I know, people that have mentored me, you know, I've asked them after the fact, like, why did you choose to invest time with me? Because, you know, time is a resource that people who, it doesn't matter how wealthy you are, you can't make more of it.

[00:02:21] Mark McGuire: You can earn more money. You can earn more time. And the answer that I got from multiple people is you were a dealer. You went and you did what I told you to do. And then you followed up with action. So take action.

[00:02:34] Sam Wilson: Absolutely. That's an inspiring story. I think for all of us, I love starting, if there was a bottom rung of the ladder, I started in the ground. Did you, did you go to college?

[00:02:43] Mark McGuire: I did three semesters, non consecutively, and never graduated.

[00:02:47] Sam Wilson: I love it. I love it. That's one I'm my, now it makes the story even better. Tell me what you guys are doing today.

[00:02:53] Mark McGuire: Yeah, so Hearthfire Capital, we currently own 12 facilities, about 420,000 net square feet buy, operate, manage, improve self-storage facilities. That's what we do.

[00:03:08] Sam Wilson: That space has seen, I mean, as all, I think real estate asset classes have, have just seen an incredible interest from the institutional side of things. How is that changing what you guys do, your strategy, your return profiles. I guess I asked that question and then like, we'll start there got too many questions for you, but we'll start with that one.

[00:03:30] Mark McGuire: Hey, fire away. It's interesting. I was actually just on a call before I hopped on here today with a broker in the space. Just asking them what they're seeing. 'Cause we've been, self-storage has really been controlled heavily by a small group of brokers. So it's interesting in self-storage, that's different from other asset classes is that it's not, like there's a bunch of people, especially everyone comes from multifamily. Everyone knows multifamily. It's the easiest one to get into requires the least amount of capital. There's the most amount of possibility, but there's not a lot of like good trophy properties. And they're, the brokerage of those properties is A, a lot of them don't ever get on the market that they maybe get limited bid at best.

[00:04:10] Mark McGuire: But two, there's a lot larger pool of brokers competing for the inventory versus in self-storage, it's controlled by like eight or nine groups that really do the vast majority of the industry across the country. So when you get in with a couple of them, you prove that you can perform, you sign deals up on the front end.

[00:04:29] Mark McGuire: You don't retrade them. You take them down on the back end, obviously, assuming that, you know, you didn't get lied to or debt didn't go up 200 basis points over the time in which you had it in your contract. That's how you get in with these people and self-storage is really controlled by a select view group.

[00:04:46] Sam Wilson: Got it. So how did you crack that egg? If you're coming in is the new guys on the, on the block, like what would you say to somebody if they wanted to get in front of these people and actually become a credible buyer?

[00:04:58] Mark McGuire: Yeah. So, you know what I would tell anybody who's looking to make that move, you know, reach out to them, sit down with them, tell 'em what you're looking for. And then when new offerings come in, that are what you're looking for, offer on them within like, you know, 24 to 48 hours. And, and if they don't work for you, tell them why that property wouldn't work and give them actual reasons, not just like, I don't feel like buying this today.

[00:05:27] Sam Wilson: That is, and I hear that over and over and over. I think I've heard that 10 times in the last three weeks from guests on the show and it's something I just think that just needs to be reiterated again. I mean, I, I can't thank you enough for saying that, which is tell 'em, tell 'em why it doesn't work.

[00:05:42] Sam Wilson: Communicate with your brokers. And I think that's, I need to go back and just kind of splice all these and put like a broker advice podcast together from about the last 30 guests and say, Hey, this is, this is how, you interact with brokers, 'cause it is, it is an interesting art and figuring out how to get in front of, and stay in front of them and what it means to be a valuable buyer to them.

[00:06:01] Mark McGuire: And so many people misunderstand that they, they have the relationship with brokers confused. People think that brokers are supposed to bring them deals and, you know, brokers are out looking for deals, but the expectation of you telling somebody that you want something one time, A, is bad that, that's a horrible assumption that they're going to actually remember that they talk to you, let alone remember the specific criteria that you gave them.

[00:06:28] Mark McGuire: And you want to find a way to bring value to them. 'cause sometimes brokers missed a mark on their pricing. And sometimes, you know, they look at it and we've been in an atypical market where we've been up to the right for the last four years. So, you know, despite how poorly you've operated a deal or priced a deal, like you could sell it just in spite of your, your knowledge base, but there will come a day when you reach the high water mark and then pricing starts receding.

[00:06:51] Mark McGuire: And then at that point in time, brokers are going to be calling you asking, what do you think this is worth? And that's where the true relationship, it's a true two-way street at that point where they're coming to you asking, Hey, what would you pay for this and help me understand why because if they're not getting the pricing that they told a seller, they want to be able to go back to that seller and articulate why, what's changed in the market that's prohibiting them from executing on what they said. 'Cause it's an all about reputation and integrity and if you don't have those two things, you're out of the business.

[00:07:19] Sam Wilson: Exactly. And you know, to the point, yes, you are a buyer. Yes, you are a quote client of the broker, but like you said, it becomes a two-way, the symbiotic relationship in the sense that you need them, they need you, yes, they get paid, but you also get paid by buying deals as well. So it's and it becomes very valuable when that last step, I think, occurs. Like you said, where they suddenly go, oh, okay. Hey, you know, Mark, what do you think about this?

[00:07:43] Sam Wilson: Tell me this is a project we're looking at. What's it worth? And, and they'll, they'll smell. They'll smell it. If you, if you're not telling, you know, giving 'em accurate feedback, low balling 'em with something that, that doesn't make market sense. That's a cool point you make there. Tell me about your first deal you did, and then compare it to the last deal you did. And tell me how things have changed and maybe what you guys are doing differently from the first to the 12th.

[00:08:07] Mark McGuire: So the first deal that we did with Hearthfire Capital or the first deal that I ever did relative to one that I just did with Hearthfire Capital?

[00:08:12] Sam Wilson: Let's talk all self-storage.

[00:08:14] Mark McGuire: Okay, cool. Very first self-storage deal we did, we purchased for, I think it was about 1.7 million. We're actually on market right now at 3.5 million to take that full cycle as we speak here. A lot smaller facility worth about a third of the value. And actually it's worth less than a third of the value.

[00:08:37] Mark McGuire: It's just less, it's less decimal points. That's all it is at a certain point though, you know, if you're playing for big, for more decimal points, you got to really know your craft because when there's bigger decimal points, you can create more wealth. The process is the same, but the stakes are higher.

[00:08:56] Mark McGuire: You want to kind of start a little smaller, so that way, if you do make a mistake, it, you don't get, I'm going to say totally crushed and knocked out of the game. Go a little smaller in the beginning and that one had no expansion. That one was just a pure revenue play, a pure, you know, optimization, doing some parking lot renovations and converting a particular area, the facility to climate control.

[00:09:19] Mark McGuire: And the one that we just did, we bought a 31,000 square foot facility with a 34,000 square foot expansion that we'll be doing. So we're building 34,000 square, effectively taking this facility size to 65,000 square feet and upgrade in the class of that facility.

[00:09:34] Sam Wilson: What was the purchase price on the 12th one?

[00:09:36] Mark McGuire: Man, now you're testing me. The equity, I think, the purchase price of the, the 12th one was like, you know, dirt and existing facility was like 4.7 million stabilized values going to be in the eight or 9 million range.

[00:09:55] Sam Wilson: Okay.

[00:09:55] Mark McGuire: And the first one was 1.7 million going to three, three, somewhere between three and three five. We'll see how it shakes out.

[00:10:02] Sam Wilson: Right, right. So, so yeah, I mean, obviously you're getting into bigger projects. It doesn't sound like you're playing for the 1.5 or 1.7 million dollar projects anymore. You guys are looking at bigger assets. Tell me on a square foot basis. Like I know 31,000 square feet, is that a small, I don't, I don't own, no, I don't own any, I have a passive investor in self-storage. I don't own any personally. So tell me you know, what's the size of a good facility for you guys? Like where do, where do the numbers make sense?

[00:10:28] Mark McGuire: Yeah. So from a sizing, it really kind of depends because, and, and, and I hate to say that, but it's the truth. If you're already established in a market and you can get economies to scale by pulling a property manager from a local facility nearby, and then getting cost shares on the operations side of things, you can go and take that facility and that facility makes sense. If you're going to go and penetrate a new market and stand, set up a flagship, buying a 20 or 30,000 square foot facility is, is going to be challenging unless there's a big, like we're doing here a big expansion on the backside to really get that economy to scale. So if we're, we call them bolt on sites.

[00:11:06] Mark McGuire: So if we're going to look at a bolt on-site, we would do 20 to 30,000 square feet. If we're looking at a flagship, it's going to have to be 50 to 60,000 minimal.

[00:11:15] Sam Wilson: 50 to 60,000 square feet is a, okay, so that that's kind of the entry-level where you say, Hey, we're starting in a new market. It's gotta be at least 60,000 square feet. How have things changed on the buy side competitively? Like what, what's that landscape look like now for you?

[00:11:31] Mark McGuire: You know, it's funny you say that literally that was the call I had this morning with a couple of brokers. I've been reaching out to some brokers I have relationships with 'cause we've been swinging and missing on some deals. And we're just getting outbid and it's, and like, these are deals that when we hear what these things are selling for, I'm like the IRR at the investor level was like 11%. Nobody wants them, invest in a private equity deal with an expansion component for 11%. That assumes everything goes right. If anything goes remotely wrong, you're toast.

[00:11:59] Sam Wilson: Right. 11 became 4. Thanks at best.

[00:12:02] Mark McGuire: Maybe at best. Yeah. So, you know, we're, like you alluded to earlier, there's a lot of capital pouring into this space and there, and this is like, I always say self-storage is like the halfway house for recovering multifamily addicts.

[00:12:16] Mark McGuire: And it's everyone who's sick of chasing diminishing returns and doing stupid stuff to try to acquire a facility that's way overpriced and overbid. And you know, there's not a lot of meat on that bone, it's been picked over. Now all those people are coming into self-storage and people are starting to put non-refundable deposits, which is stupid.

[00:12:36] Mark McGuire: And they're starting to do, you know, waving due diligence. Stupid. I mean, it's just literally like, let me just increase the risk factor as much as I possibly can and be as ignorant as possible so I can absolutely make sure to get burned.

[00:12:52] Sam Wilson: Do you see, I guess that, and if, and if that's the way you, I guess that is the way you see it, is that eventually they will get burned Where do you want to be when that happens and how are you positioning yourself for that?

[00:13:04] Mark McGuire: Well, I don't want to be competing for their deal. I don't want to be competing for the deal the first time, I want to be competing at it after they've lost their shirt and the bank calls their note because they don't make their debt covenants.

[00:13:13] Mark McGuire: That's where I want to be. But we're right now, like in order to acquire, I mean, it's an off-market game right now. I mean, and self-storage has for a long time, been controlled by brokers and a lot of the inventory was traded by brokers. And self-storage didn't have that popularity. And I mean, there were times, man, these things are trading for 10 to 12 caps. And that same property that traded for 10 to 12 cap five to six years ago is now trading for six. Like, it's nuts.

[00:13:44] Sam Wilson: Right. Yeah. It's absolutely insane. What are the economic things or the environmental moves that maybe have to occur for you to think that it will return to a point where you can then pick up these properties at a discount when these people can't cover their note?

[00:13:59] Mark McGuire: So self-storage, what no one talks about in the whole recession resilient thing about self-storage, during 2008, 2009 as a part of CMBS defaults, self-storage was at 0.03%. That is three-hundredths of a percent. Like that's a lot of decimal places in, in front of the decimal, smallest. The next closest, I forget whether, I think it was industrial, I think was the next closest. And it was like, not even close. So self-storage has traditionally been low leveraged. You're talking 65 to 70% loan to value. And you have people that, like, it's not a lot of money. I mean, you're talking like a hundred dollars a month for a unit and the alternative is put it in your house.

[00:14:49] Mark McGuire: Well, if people don't have the space in their house, they don't have the money or the income to go buy a bigger house. Guess what? A hundred dollars a month is cheap alternative. So that all being said, I completely forgot the question.

[00:14:59] Sam Wilson: What has to happen economically for you? Because you had said, Hey, you see people taking a huge risk, people doing things, you go, gosh, that doesn't make sense. You guys are just, you're making this as risky as possible, paying the most you can. And when you get burnt, you can't cover the note. Then I want to be there to pick it up.

[00:15:15] Mark McGuire: So what has to happen is that people don't do their due diligence and a new facility gets built in the three or five-mile ring that totally crushes that other facility who had marginal returns to begin with.

[00:15:28] Mark McGuire: And they, and, you know, either they don't meet their debt service or they just barely meet their debt service and, you know, make it out, you know, by the skin of their teeth. But the deal returns are you know, super compressed.

[00:15:40] Sam Wilson: Right.

[00:15:40] Mark McGuire: So it, honestly, it just takes patience and time.

[00:15:44] Sam Wilson: Yeah, absolutely. Tell me about, you know, again, but you just kind of stay on the economic times conversation. You've invested as in, as a, maybe even an active investor in industrial and some other asset classes. How do you feel like you guys are going to weather any, any economic uncertainty and really, why have you favored this asset class over another?

[00:16:05] Mark McGuire: So self-storage just provides a really unique aspect to it where it kind of blends hospitality in terms of the dynamic pricing of the rates.

[00:16:16] Mark McGuire: But it, it manages that and then has a better sticky factor that's more along the lines of multifamily. But it's got agility to it. So what I mean by that is people don't want to go and move their stuff. With self-storage, if you think about multifamily, right? And your rent is 2000 bucks a month, and someone says, Hey, I'm going to give you a 10% rent increase every six to eight months.

[00:16:40] Mark McGuire: If you go from 2000 to 2200 to then, you know, 420 dollars within 12 months, you're going to be like, I'm out of this place. Forget it. Self-storage has 30-day leases. And, you know, if someone's unit rent is a hundred dollars a month and you raise it 10%, that's meaningful in terms of your revenue collected in your NOI.

[00:17:02] Mark McGuire: It's not meaningful to the person who's renting the unit who has to then rent the U-Haul truck, pick up all their stuff and then go put it down somewhere else. At which point they may be able to find a place that's the same and probably not cheaper, probably more expensive. And then they got to take the time to move at all. Nobody wants to do that. For $10 a month, you're not moving that. You're not moving your stuff.

[00:17:24] Sam Wilson: Right. Yeah. You're going to spend eight hours and 500 bucks moving all of it. And it's like, well, I'll just pay the 10 bucks a month to be done.

[00:17:31] Mark McGuire: So then if you go and get another 10% rent bump in eight months, people were like, eh, I don't really feel like moving it for another, you know, $11. That's what happens. And this is how it's just like, you're just tweaking the dial and turning the heat up. And that frog doesn't realize that that water's getting hot. But man, before you know it, it's boiling, that frog is cooked.

[00:17:50] Sam Wilson: Right. Right. Tell me about this. What are some storage units right now that you just look at and you go, man, I wouldn't buy that if it were free? What's some garbage out there on the market that makes a bad storage investment.

[00:18:03] Mark McGuire: Man, so, you know, what's interesting is aesthetics are such a, an important part about self-storage. Self-storage was used to be marketed to the cheap and three or four years ago, people realized they started doing more analytics, data.

[00:18:19] Mark McGuire: I'm sure it was always being done, but it became more widely understood that the people who are willing to pay the most are young females and young females want properties that are well lit and that are aesthetically pleasing and that have a lot of, they have security cameras and solid gates and fencing.

[00:18:40] Mark McGuire: They want to feel safe at the facility, 'cause if they feel safe while they're there, then their belongings are safe and therefore it's a good place to rent. And if they have to pay more for that. So be it. That's sanity that's well spent. So a couple of things I wouldn't buy. A, a facility I could buy, you could, you could build an A class facility in, in an oversaturated market that can't support the rent and I don't want that facility. So a facility that's located in an oversaturated market and how do you know if it's oversaturated? You know, there's base rules around square foot per capita, and it's historically been eight to 10 square feet.

[00:19:15] Mark McGuire: I think that's totally busted. It really depends on the three and the five-mile rings. You gotta really understand your supply-demand analysis and how to execute that. Once you execute that, or you understand that, like the 8 to 10 square foot per capita is a great 1% rule of thumb, if you will, for storage, but it could be six square foot per capita, but there may not be enough population there to support the demand. Or you got stuff that's built to the wrong sizes. So if you go in and when you're doing your supply demand analysis, you're noticing that this facility is way under-rented, but it's all five by fives and five by tens. And the, the, the market wants ten by twenties.

[00:19:54] Mark McGuire: That's a facility that I don't want, like, 'cause you could be 50% vacant. You're like, oh man, there's so much occupancy I could use here. But if it's not what the market commands, unless you can convert it, I don't want it. And then, I mean, ultimately it comes down to, I want a facility that looks, that looks nice, or I have the ability to make nice. And if I can't, the turd is a turd all the way through, and there's no amount of polish that's going to make it sparkle. I'm out.

[00:20:20] Sam Wilson: Right. That makes a lot of sense. No, that's really cool. I was just curious, you know, again, with the, with the buying frenzy, it seems like that we are in on so many fronts, you know, what it looks like or...

[00:20:30] Mark McGuire: It's asset class agnostic, man, the buying frenzy doesn't care what asset class it is. There's just a ton of liquidity and there's sovereign money coming in now. Where these people, I mean, sovereign wealth funds where they're losing principle balance by not being spent. So these people were like, Hey, if I get 5% on my money, I don't really care.

[00:20:47] Sam Wilson: Right. Yeah. That's, that's really, really interesting, but still even in that, even in that buying frenzy market, I'm always curious what those, who are active buyers, aren't, aren't buying and why. And you did a great job of kind of explaining deals that just simply don't make sense even right now. So thanks for doing that. Mark, thanks for taking the time to come on the show today. It was great to have you on learn about your business, what you guys are seeing in the market, how you guys are interacting with brokers, what you guys are doing to get deals sent to you. Again, I love the, you know, just the, the, the information you gave us about how to interact with brokers, how to stay in front of 'em and then, of course, your info there on mentors and how to be of value to them and let them know that you are actually doing what they're saying, and then get them to continue to pour into you by, you know, giving them feedback and following exactly what it is they say to do.

[00:21:31] Sam Wilson: So I think that was all awesome information. If our listeners want to get in touch with you or learn more about you, what is the best way to do that?

[00:21:38] Mark McGuire: Yeah, best way is investingwithmark.com. That'll put you right through our, our website and capture or contact form and or if you're in on socials Instagram slash investingwithmark. Facebook, same thing, LinkedIn, same thing.

[00:21:51] Sam Wilson: Awesome. Yeah, we'll make sure we put those also in the show notes. Mark, thanks again for coming on today. I certainly appreciate it.

[00:21:57] Mark McGuire: Awesome. Thanks Sam.

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