by Katherine D’Agostino

There are as many ways to get self-storage investors as there are REITs in Florida. I sat down with two industry veterans to learn how they did it, and how you can do it too.

These guys built their portfolios on a base of $1-10 million deals with the help of multiple equity partners. Their approaches are similar in that they operate in many sizes of markets, their debt is secured by the asset, and they control their day-to-day business operations.

Step 1: Figure Out What Investors Want

“The first thing we did was study the market to learn what investors are expecting today; then we designed our offering for investors around that,” says Mark Helm, author of Creating Wealth Through Self-Storage and founder of the StorageWorld Analyzer.

Mark explains when you are getting started structuring a deal with investors for the first time, you typically have to offer a higher rate of return to compete with other real estate investment opportunities.

“When I looked at the other real estate opportunities investors were looking at, I saw there were a lot of apartment funds offering an 8% preferred return and a 15-20% internal rate of return. I saw what the market was, and because I was just getting going realized we would have to beat the market. We offered our investors a little bit over what our competition was.”

Step 2: Then Figure Out How You are Going to Structure Your Deal

In three short years, John Manes, CEO of Pinnacle Storage Properties, and his investors bought $85 million of self-storage and increased the portfolio’s worth to $110 million. You read that right: he added $25 million in value in three years.

How John Does It

After debt service, John splits cash flow 70% investors/30% Pinnacle Storage Properties along the way. He charges 4% on the front end in fees and doesn’t take any asset management fees along the way. On the back end, John splits profits 60% investors/40% Pinnacle Storage Properties.

How do investors get paid back? “I guarantee one thing to my investors and that is that they could lose all their money. They are not guaranteed anything because it is an investment,” John says. “We collect all the revenue, pay all the operating expense, pay the mortgage, and whatever is left investors get 70% of that money and we as sponsors get 30%. It benefits me to increase cash flow and decrease expenses on every asset, so we make as much money too. We are truly partnering with our investors.”

John set up his corporate structure as a single-purpose LLC wherein everybody gets a vote. “If I syndicate a deal at $50k a piece, a supermajority vote of 67% or more is required to spend a large sum of money for improvements, refinance or make a sale. If the property leases up and we want to cash out in three years, we take a vote. We underwrite to a five-year exit, but it is really dependent on the vote to how long we keep that property,” he elaborates. At that time the LLC either sells or refinance the facility.

How Mark Does It

Based on his research, Mark knows what investors expect. “In our case, we offered them an 11% or 12% preferred return,” he says. “While their money was invested, it earned 12%, and we would be giving them their money back with any unpaid preferred returns within five years. We underwrote the deals with the confidence we could refinance in year five and pull our equity out.”

Like John, Mark uses a single-purpose LLC structure. His company owns 60-70% of the LLC shares, and his investors own 30-40% (usually 35%) just like in the example in Mark’s book. Mark raises the money, and while the money is in the deal, investors get a 12% return. In year 5, literally at month 59, he gives them their cash back, assuming there are no unpaid preferred returns (if there are any accruing, investors receive the balance due).

Mark explains, “At that point, investors are still in the deal, and they own 30%. While their money was in it, they got literally 100% of the cash flow, because that’s what it took to hit their preferred returns. So, we’re motivated to add value to refinance it. Once they get their money back, investors stay in the deal because at that point it’s just like an annuity.”

John and Mark agree, that there is no one right way to set up a private placement. Under Mark’s structure, while the investment is still in the deal, investors have safeguards and rights that they don’t have once he gives them their money back. In other words, to sell it, there must be unanimous consent, and he can’t put any more loans on the property against the first mortgage without permission until investors get their money back. “Once their money is returned, then we’re running the deal, and we can decide when it gets sold and for how much,” Mark clarifies. “Until then, they have a say in it. That’s how we’re structured, but there’s a lot of ways to do it.”

How to do a Deal if You Don’t Have $$$ Yourself

When you are just getting started, you can still acquire or develop a self-storage facility using investors for the down payment.

In Mark’s experience, many investors are willing to let you set up a deal in which you’re not putting any equity in, but you are the one who is on the hook guaranteeing the loan. When you are not putting in equity yourself, he advises positioning the deal to investors as follows, “Tell them you’re not on the loan (we’re the ones on the loan), you’re putting the equity in, we don’t get much or a substantial piece of the cash flow. You get all of your money back plus you get your preferred term. They feel safe because you are the one signing on the loan.”

In this scenario, Mark’s investors get a preferred rate of return, usually the first 8-12% of the cash flow. At the exit date, there is a liquidity event in which the facility is refinanced or sold to return the investors’ money. Once the investor’s money comes back, the investor decides whether to stay in the deal or not.

Typically, investors receive the majority of the cash flow until they get their money back, and then the structure changes whereby Mark’s firm gets the majority of the cash flow and the investor is along for the ride for the next few years.

As Mark says, there are a million potential ways to do this, and this example is the path he followed when he was just starting out.

Running the Facility

This is one of the areas Pinnacle Storage Properties shines. “The majority of people I meet cannot do storage like we do storage—we are good at it,” John says. “Doing deals is not as hard as everybody thinks, but there is a lot of work that goes into structuring the deal and then running the property. If I am a mom and pop, I would analyze my risk, but also analyze the time, energy, and effort needed to manage a property successfully.”

In other words, this is why investors need you.

Instead of charging a formation or asset management fee, Mark charges a property management fee. If there is an expansion of the facility, he also charges a fee based on the costs of construction with a cap on it. “To build up our portfolio using other people’s money, we try to create an investor-friendly investment,” Mark says. John charges a 6% of gross revenue asset management fee or a $1,750 monthly fee, whichever is higher.

Step 3: Set Up Your Funnel

Think about how you are going to track and communicate with prospective investors. It doesn’t need to be complex, and could include one or more of these options, whatever you know how to do:

• Database - Whenever John gets a new contact, into his database they go. Each new entry automatically triggers a series of six emails explaining self-storage.

• Social media – Connect with prospective investors through LinkedIn and your company Facebook page.

• Text and e-mail – Use them together so your news, updates and first and last name in the under first name offerings aren’t lost in the clutter. “In my phone contacts I put ‘investor’ as everyone’s last name who has ever told me they’re interested,” John says. “When I’m raising money I sit on my sofa and type out a text message and I say, ‘I’ve got a deal in the pipeline, it’s in Katy, Texas, it’s a $1.5 million raise we’re selling $50k units, get back in touch with me if you want to know anything about it.’ I send that same message and copy and paste it. I go through my phone. One night I text messaged 98 people watching a football game. After texting 98 people within 5 days I raised $1 million.”

• Referrals – Whatever medium you choose, encourage investors to share your opportunities with friends and family. “A lot of people will invest deal after deal, and then their friends start investing with them,” says Mark. “And once you find investors, my experience is that investor has a circle of friends who will also want to be investing in the same thing that person is. The number one concern an investor has is they don’t want to lose their money; and number two is they don’t want to miss out on an opportunity.”

• PowerPoint – Mark recommends covering two topics:

1. Self-storage in general – why self-storage is the best asset to invest in. “My goal for every first meeting I have is that afterward, every time the person hears the phrase self-storage for the rest of their life, they think of me.”

2. The deal you are currently working on, or future deals you are most likely to offer investors. In other words, ask the question: if I came to you with a deal like this or better, would it be a deal that you would seriously consider?

Step 4: Start Kissing Babies (AKA How to Find Investors)

Both John and Mark advocate fishing where the ponds are stocked. John recommends using MeetUp.com to real estate and investment meetups. Mark suggests attending CPA conferences as well.

“When we’re looking for investors, we’re not looking for people to create their wealth. We’re looking for people who’ve already made their money and are trying to put it places where they can beat the market,” Mark says.

John explains how attending conferences worked so successfully for him:

“I am not a country club kind of guy—I don’t run in those kinds of circles and did not know where to find those kinds of circles. I was not willing to spend ten thousand dollars on membership to a country club because I am a fisherman, I’m not a golf person. Because of all of that, I had to find country club kind of people in a different setting.

A lot of these people show up at investor conferences to compound the money they’ve made. But the novice shows up there too—a guy that makes $75k a year that has managed to accumulate $30-40k that he can invest in something—that novice shows up there as well. I talk to everybody; it doesn’t matter to me!

At an investor meetup or conference, there is a preconceived notion attendees are going to be solicited while they are there, and because of that, I can go and solicit investors at these conferences, but you should check with an attorney about disclosures. I go meet people and add them to my database. I have had this conversation a thousand times in the last three and a half years. I have over a thousand names in my database right now. Therefore, when I do get a deal, I email blast those thousand people, and in an instant, I have the money I need.”

Step 5: Keep Kissing Babies

When you are in acquisitions or development, you are always raising capital, and you want to have a group of potential investors identified, so you are ready when you actually have a deal. That is why you need to keep your prospect pipeline full, and to do that, you need to find more babies to kiss.

Both Mark and John volunteer for articles like this. They have blogs, do videos and newsletters, and speak at investor and industry conferences whenever possible. Pinnacle Storage Properties even employs a ghostwriter to create content.

“That’s how I’ve been able to kiss as many babies as I have, so that I get money,” John explains. “It’s not as hard as people think—you can’t be shy—if you sit in the corner, you won’t get any money.”

John and his team are famous for the jackets they wear with their company logo. “These are the most obnoxious jackets you will ever see,” he laughs. “When I get invited to an investor conference where everyone is wearing blue and gray suits, I walk around in cowboy boots, a big belt buckle, and an obnoxious jacket. And everybody says, ‘nice jacket’ and I reply, ‘thanks, what do you do?’ The jacket is a conversation starter every single time.”

Mark suggests finding a partner if you don’t know potential investors or are not comfortable pitching your opportunity. “Even if you don’t have a partner, you can hire someone to help you. There are people who will raise money for you and charge a fee,” he adds. “You can also create a website, post offerings, and bring in people you don’t know. You need to talk with an attorney and figure out disclosures, accounting, and the processing of doing that. But if you don’t know these people, give it to somebody who does.”

Step 6: Rinse and Repeat

“If I’m giving advice to somebody on how to do the same, I would tell them don’t shut the hell up about storage. Period,” John says. “When I sit down at a baseball game by the time it is over I know what the person next to me does, where they live, their hobbies, and all that, and I have all their contact information to put them on my distribution list as a potential investor. I keep them all organized and now I give them to my VP of investor relations. When I started, I kept them all on paper in my day planner.”

Mark concurs. “My suggestion is to always be in capital raising mode, always presenting the self-storage story, always looking for deals,” he says. “I don’t necessarily have a script that I go through, but I have an investor database, and when I find the deal that works for a particular investor, I know exactly who I am going to go and present that deal to. Find the deal that works then raise the money for that deal, rinse and repeat! I always tell the investors that these aren’t home run deals; these are solid deals. The few home runs that I’ve had, I never knew in advance they would be home runs, but I knew they were solid. If you put ten or twenty solid deals together, then you’re going to have good returns.”

More Pearls of Wisdom from Mark and John

Buying versus Building – According to Mark, ground-up deals are harder to place with investors because it might be 3-4 years before you are able to start making distributions to them. “I’ve raised money on a ground-up deal and it was the hardest. Most investors like buying existing and expanding, or even a conversion which will usually, within a year, start to be profitable,” he cautions. “If you have very patient money, ground-up can work. In today’s world, especially where a lot of markets are already overbuilt, just be really careful on a ground up. Don’t overestimate your resell.”

When You Need a Co-Signer for Your Loan…What you’re looking for is an operating partner who will go in on the loans with you as opposed to an investor. “In that case what I’m looking for are people who want to use self-storage to make their money. Investors are people who have already made it and want to protect it,” Mark says. “When I first started, what I did was find people who wanted to use storage to make wealth, who understood the business and were willing to sign on the loan.”

Investors Love Self-Storage During Economic Downturns – In Mark’s experience, you will do well raising money in recessionary times. “That’s probably the best time to raise money. Few investments perform as well in a recession and that’s why self-storage is so sought after, because in the last recession it was one of the three shiny stars. If you’ve got money that you’re trying to put somewhere before, during, or after a recession, and not lose it and get a return on it, self-storage is the place.”

Your Pact with Investors is Sacred: When someone gives you their money it is a real act of trust. Both John and Mark treat that capital as sacred and do not take it for granted. Mark reminds the self-storage owners he coaches, “When someone invests with you, you’ve got to perform pretty much like you said you would. Not every deal performs as good or better than you predicted, but most of them will if you know how to underwrite them. You should only present deals that you’d have your family put their money in.”

About the Author

Katherine D’Agostino is the founder and sensei of Self-Storage Ninjas, a feasibility-analysis firm delivering unbiased reports resulting in facilities with high occupancy and the highest possible returns. She offers a free, weekly newsletter that provides insider techniques, ready-to-use calculators, downloadable spreadsheets and data sources. For more information, visit www.selfstorageninjas.com.