Switching cities, buying a new house, or simply want to downsize? Self-storage facilities have been the go-to for keeping your personal space clutter-free. Fernando Angelucci, president of Titan Wealth Group, and Chief Operating Officer of Impact Self Storage, talks to Sam Wilson about building his self-storage business from the ground up. Fernando recalls how he stumbled upon storage rentals and how he saw the impact it could make on his personal life and on the community. Join in as Fernando shares how he diversifies investments by purchasing existing cash flowing assets and doing ground up builds.

—

Watch the episode here:

 

Listen to the podcast here:

Self-Storage: Rooms For Cashflow Growth With Fernando Angelucci

Fernando Angelucci is the President of Titan Wealth Group and he’s built a portfolio of more than $100 million in self-storage assets. He diversifies investments by purchasing existing cashflowing assets and also building ground-up facilities. Fernando, welcome to the show.

Thanks for having me, Sam.

The pleasure’s mine. Same few questions I ask every guest who comes from the show. Can you very quickly tell us where did you start? Where are you now? How’d you get there?

I started off by reading Rich Dad Poor Dad when I was sixteen years old. I eventually started investing in single-family, multifamily properties, scaling that up. In 2016, I was getting tired of the way the government was socializing our rental housing. I sold off all of my rental holdings and started investing in storage. We crossed over $100 million in assets building that up starting at the end of 2018.

In 2016, you sold everything off. You said, “All right, I’m out.” You briefly said the socialization of housing and things along those lines could make it challenging. What were some of the signposts that made you say, “I’m finally done?”

The majority of my portfolio was in Chicago. Chicago was starting to take after the New York cities and the San Francisco’s of the world, as far as housing laws. They view landlords as these big evil conglomerates that are full of money bags. When little does the government know, like 85% of landlords are 2 or 3 payments ahead on the mortgage compared to the rent that they’re receiving. To say, “Tenants don’t have to pay rent, but then landlords still have to pay their mortgage and property taxes.”

Now, you’re causing a lot of this middle-class to default and mess up their credit and their financial future. I didn’t like the way that was going. I decided to sell off all of what I call habitation real estate. I don’t want people living in my investments anymore. That’s when we started buying self-storage. Slow at first buying mom-and-pop stuff and start building these Class A regrade facilities towards the end.

The self-storage space is an industry that serves people in transition.

Have you found anybody living in their self-storage units yet?

We have. There was a facility that we bought in Tennessee. Two days after we bought it, a friend of mine sent me an article talking about like, “Does this ever happen in your facilities?” It was like a man and a child living in one of the units. I scroll down the article. Lo and behold, the facility I had bought two days prior. I called the manager and said, “I don’t know if you know about this or not, but you need to get these people out. This is illegal. They’re not allowed to live there. Why are you allowing a one-year-old child to live in one of your units?” We had them removed and connected them with the proper social services.

I asked that question, tongue-in-cheek in the sense that I think inevitably when you get to the real estate business, the stories are innumerable of the strange things that can happen. That does not strike me by surprise at all. What are some of the other advantages as you’ve got into self-storage that made you say, “This is why this is the asset class I want to be in,” and why?

If you look at several years of data, self-storage had the highest return compared to any other asset class. For example, the S&P 500 returned about 7.5% over the last several years. Multifamily did a little bit better at about 13%. Self-storage was at 17.4%. Now that 4% doesn’t seem like a lot but you’ve got to realize that it’s compounding year over year. If you had $100,000 to invest several years ago, you’d have about $1.7 million now if you put it into apartment buildings. You put it into self-storage. You’d have a little over $4 million. Double the return of what you’d have in apartments. People say, “If the return is so great, that must be in that the risks are also commencery to the returns.”

That’s not the case. If you look at the last two major recessions we went through, 2007 to 2009, self-storage only dropped about 3.5% in value, whereas the S&P dropped 22%. Multifamily dropped about 7% to 8%. If you look at the last recession, which is the pandemic, Trepp, a commercial mortgage-backed securities research firm, found that of the 1,700 CMBS loans that were made to self-storage investors in the first three-quarters of the pandemic, only three were delinquent. That’s a 0.17% delinquency rate. During that same time, multifamily was defaulting at a rate of 1,800% higher or 18 times the default rate of self-storage.

What are some of the things you feel like that attribute to that very low number?

The nice thing about self-storage is that it’s a very cashflow-rich business. When you look at breakeven occupancies when I had multifamily properties, I’d have to stay about 80% to 85% occupied or else I wasn’t going to be able to pay my expenses in my mortgage. With self-storage, when they’re leveraged, as long as I’m above like 64% occupancy, I’m cashflow positive after debt service. Right there, you have a cushion of about 20% that you wouldn’t have in multifamily.

 

The second piece is that you have evictions in multifamily, whereas in self-storage, you have auctions. We aren’t guided by tenant-landlord law. We’re guided by lien law. I’ll give you an example of one of my multifamily properties in Chicago. I bought a property. It came with a tenant that wasn’t paying. The tenant refused to leave. They were what I call a professional tenant. They knew all the tips and tricks. They would pull out all the smoke alarms and the carbon monoxide detectors right before an inspector would come through and get the eviction pushed.

Eventually, it took me eight and a half months to get that tenant out. Before the sheriff removed them, they cost over $25,000 of damage on that one unit by cutting electrical lines and pouring quick-set concrete down the toilet. They cause some serious damage. In storage with lien law, I send you an auction notice if you don’t pay me within the five-day grace period. If you still don’t pay during that auction period where the notice is active, I overlock your unit, so you don’t even have access to your possessions. You can’t even get into the self-storage facility.

Within that 45-days, if you don’t pay me, I sell off all your stuff on an eBay-style auction online that returns all of the lost rent that I had experienced. It also allows me to charge a bunch of fees like a lien fee, late payment fee, auction fee. Makes somewhat of a profit on that. It’s not a real profit book. According to our accounting, it’s a net-zero but usually, our new tenant meets the auction buyer who has to clean out the unit or else they lose their deposit. I have a new tenant in place and I never lose a step. There’s not anything you can damage because all my buildings are made out of steel and concrete. You can’t do much to them on the side of turnover or repair costs.

That’s another piece. The last piece I’d say is that we have not only a very high sticky factor but also an industry that serves people in transition. When the economy is doing well, people buy many things. They usually buy more things than they have to store, so they end up putting things in storage or there may be moving. They’d sell their house and they decided to upgrade to a larger home. They need to use our services or maybe they’re getting a new job that pays better and they’re moving to another location. That’s another use of storage. For example, when the economy is doing bad, people are typically downsizing. They’re going ahead and using storage again, changing jobs.

Where we get most of our demand comes from the two largest generations. The greatest generation/Baby Boomers, they’re retiring at a clip of like 15,000 to 18,000 people per day. They’re going into assisted living facilities on the older end of that generation. They’re not getting rid of all their stuff. They’re putting it in storage. A lot of assisted living facilities require that you show proof that you have a storage unit for the possessions of the person that’s going into the facility.

On the opposite side of the generational divide, you have the Millennials and the Gen X-ers. They don’t want to live in the suburbs anymore. They want to live downtown next to the action, the nightlife, the restaurants. They’re opting for smaller living conditions like a 700, maybe 900 square foot apartment right in the middle of the action in a high rise and using storage as an external closet for their hiking gear, their biking gear, their seasonal wardrobes, things like that. Storage has always been in demand. It’s growing in demand now. 1 in 10 households uses storage at the moment. That number has been growing year over year for the last 30 years or so.

Thanks for breaking down the demand side of that business. You said something a while ago I want to circle back on. Going back to the way that you do a lien law. You said the new tenant meets the auction buyer. What did that mean?

Whether you’re moving, selling your house, or downsizing, the demands for self-storage are always there.

That we have as little interruption as possible. For most of our self-storage facilities, we have a waitlist of people who want to get in, specifically for the popular units, the 10×10, the 10×15 and 10x20s. It’s a little bit larger units. When an auction buyer makes a bid on one of these self-storage facilities or these units, it’s not like the TV show. It’s not like Storage Wars. That’s staged and it’s an extremely inefficient way to do auctions. It’s like eBay. Our manager will take a photo of the unit and take as many photos as possible without breaking the barrier. They’d put that up on these storage auction sites and somebody would make a bid and say, “I’m willing to pay $500 for this unit.”

If they win the bid, in addition to the $500, they also have to put up a $100 cleaning deposit, which means that after they clean out all the possessions of that unit, they have to not only completely empty it, but they have to broom sweep that unit. If they don’t do that, they lose that $100 deposit. What I usually do is I’ll have one of the new tenants on the waitlist waiting for that unit meet the storage buyer there so that once the storage buyer is done cleaning out the unit, they are ready to move in the same day. That way, I have no disruption in rent.

That makes a heck of a lot of sense. Let’s shift gears. Thanks for breaking that down. I didn’t quite follow that. That’s a brilliant model if you have zero vacancies. If you got 45 days or whatever, it is when that tenant hasn’t been paying, but hopefully, you’re recouping most of that via the auction. Let’s talk about that. That brings up another question. Anybody that’s interested in these auctions has to be within a certain radius of where that facility is located to even be interested in an auction taking place. Is that correct or not?

You’d assume, but we’ve had some crazy buyers here. As soon as they win the bid on the auction, depending on the state, they have anywhere between 48 hours to 7 days to come and collect the possessions. We’ve had people drive across state lines for some of these. Especially the bigger units, they have a bunch of boxes and they don’t know what could be in there. They’re hunting for gold, I guess. We’ll have people from all over the place bid on these things.

How do you protect yourselves from a challenging auction? Let’s say that the owner of the goods comes back and they try to sue you or throw a fit or threaten your people working there. That sounds like a recipe for disaster. How do you work around that?

Luckily, the way that all the state laws are written, the compiled statutes are completely in the self-storage owners’ favor, as long as we follow all the rules. We follow all the laws to a T. The biggest thing is we send auction notice to the owner of that unit. We also post it on their unit as well as on the facility itself. We put a notice into a local circulatory. Like a legal newspaper and we run that ad twice, spaced by one or two weeks at a time. It says, “Here’s the date of the auction. Here’s the unit we’re auctioning off. Here’s the address of the location. You have until this date to come completely current on your unit or else it’s going to be sold.” The law protects us in allowing us to do that.

We typically try to work with the tenant first. Before we get to that point, we’ll try to give them phone calls, emails, text messages, saying, “You’re late. Do you want to jump on a payment plan? Do you want to figure this out?” Typically, what happens is they ghost us to put their head in the sand. They don’t answer any of our calls, texts, email addresses, anything, then we go through the auction process.

 

That makes a heck of a lot of sense. Let’s talk about a value add, what it looks like in storage. Even more than that, storage is becoming a very competitive landscape. It’s a hot commodity, as in a lot of commercial real estate is, but there’s a lot of interest. Especially from an institutional side of things in the self-storage industry. How are you finding opportunities, and what does value add look like inside those opportunities?

Let me start backward from your question. The institutional buyers are our target audience. Every time we’re doing value add or building facilities to sell them if we’re not holding them long-term, we’re looking to get institutional buyers in place. The reason we like working with them is typically, they’re all numbers-driven. There are no emotions involved like you’d see typically in single-family homes or small multifamily. They are cash-flush. The majority of our properties are bought either 100% cash within 30 days or 50% leverage. Strong buyers.

We’ve noticed that the institutions typically like to outlay larger checks if possible. They’re not interested in things below 80,000 square feet. There’s some that’ll go down to 65,000, but for the most part, they want to be in that 80,000 plus square footage up to anywhere. If it’s a single property up to like 140,000, 150,000 net rentable square feet. If it’s a portfolio of property, then the buyers start getting interested after about the $10 million to $20 million strike prices where you’re going to be seeing some good cap rate compression on the buy side.

What we do is we have three main verticals. The first vertical is we buy existing mom-and-pop facilities. These are typically facilities that are not being run well. The owner is not sophisticated. This is maybe a second business, a third business. They’ve retired once or twice before. They’re cutting deals for friends, things like that. We’ll come in. On those properties, right off the bat, we’ll create a marketing plan because typically, they’re not listed on Google. They don’t have any advertising. They don’t have a website.

We’ll go in and we’ll raise all the fees up to the statutory limit. We’ll also raise all of the rents to the market. We’ll come in and do a competitor study seeing what the similar properties in the area of charging and raising our rents. That’s usually one of the biggest value adds we can do. Typically when we buy these mom-and-pop facilities that are anywhere between 25% to 40% below market, we’ll go ahead and auction off any units that are sitting there.

What we find is a lot of these mom-and-pop facilities, they’ll let people not pay for 1, 2, 3 years and think that they’re somehow going to get that money back eventually. It never happens. We’ll start doing CapEx-style value add. That’s going to be putting automatic gates, keypad entry and exit, put in cameras, security, lights, kiosks which allows you to automatically rent a unit without even having to interact with a person. It lowers our labor costs and then we’ll put an additional unit. We’ll expand the facilities either with permanent structures or if we don’t have room for permanent structures or there are easements or setbacks, we’ll use these modular units that are moveable with forklifts.

That’s what we do on the existing side. We’ll do to get those ready for institutional buyers by putting them together into large portfolios. We’ll take 5, 6, 7, 10 of these facilities and wrap them together. We’re doing that now. We’re selling a portfolio of ten of these smaller facilities to an institutional buyer. To get to that point, what we found is that in storage, the leverage available to us is absolutely phenomenal. You can go get an SBA loan and get a 10% down loan on a 25-year fully AMD loan. That’s unheard of in the multifamily space. The rates are in the mid to high 3%, maybe low 4%.

The self-storage industry gives you the opportunity to work with the local community and impact people who support your business.

Once you get to the institutional side of the debt stack or the CMBS markets, that’s when you start getting some good terms where you can get a 10-year balloon on a 30-year AMD in the 2.5% to 3% interest range. You can get all ten years of interest only and those loans are non-recourse, which is fantastic. That’s the small side of the business, then you’ve got the large side. We started developing these class-A large facilities because we found that once we started getting between that 65,000 to 80,000 square foot range, we kept getting beat out by what we thought were insane offers.

These 4% cap rates, we’re typically buying these things at 9% caps. What we realized is now we’re competing against a more sophisticated buyer that has basically free money. The only way to compete against them on those is to build them, so we control the deal. Never have to compete on them. What we started doing was we buy 4 to 10-acre plots of land and we’ll put up these 100,000 to 150,000 net rentable square foot build things.

They’re typically class-A, regrade. They’re three stories tall, with state-of-the-art technology and security. They look beautiful, well landscaped, things like that. Those ones cost us about $10 million to $12 million to build. We can typically build them at anywhere between $95,000 to $110,000 a foot. We sell them off for anywhere between $18 million to $25 million within 1 to 5 years of us building them. We’re usually able to double our investor’s capital within 1 to 5 years.

That’s fantastic. I love that. There’s a lot of moving pieces there and I wish we had more time to dig in, especially on the ground-up development side of things. That’s fantastic. I love what you’re doing, Fernando. This has been awesome. Thanks for taking the time to come on the show. Explosive growth and I look forward to seeing where you guys go in the self-storage space in the next few years. Here’s a few final questions as we wrap up the show. The first one is this. What is one tool or resource that you find you can’t live without?

This may be a cop-out answer, but if you’ve never read Traction by Gino Wickman, that is one of the best books to help you scale your business. We love it so much that we’ve hired EOS-certified integrators to come in and implement the EOS process into our business. That’s how we were able to go from a $1 million facility up to $100 million of property in about three years.

Second question, what is one mistake in real estate you could help our audience avoid and how would you avoid it?

Due diligence, go see the property, pay third-party advisors, get an environmental assessment, get a civil engineer to do a property condition assessment, get your lender to put eyes on the property. I cannot stress the amount of due diligence that is needed. As long as you do everything right upfront, the rest is easy.

 

The third question for you is this when it comes to investing in the world, what is one thing you’re doing now to make the world a better place?

The reason I like storage is because it’s a hyper-localized business. Typically, 60% to 90% of our customer base comes from a 3 to a 5-mile radius from around our storage facility. What we do is we support a lot of these volunteer organizations and charity organizations in the local community that impact that 3 to 5-mile radius. We are working with police departments for school drives and food drives. We are working with fire departments giving free units for people that have lost their houses to fires. We sponsor Little League teams. We help batter women’s shelters all within the local community because these are the people that are supporting our business. They’re the ones that are helping us make a profit. We want to give back to those that are supporting us as well.

Fernando, if our audience wants to get in touch with you or learn more about you, what is the best way to do that?

I’ll be honest. I know this is a weird thing to do but give me a call or shoot me a text message. My cell phone number is (630) 408 – 8090.

Fernando, thanks so much for your time. I do appreciate it. This was great.

Thanks, Sam.

Important Links:

• Titan Wealth Group
• Rich Dad Poor Dad
• Trepp
• Traction
• https://www.Facebook.com/TheFernandoAngelucci
• https://www.Facebook.com/ImpactSelfStorage
• https://www.ImpactSelfStorage.com/

 About Fernando Angelucci

Fernando Angelucci worked at Dow Chemical, a Fortune 50 company, rolling out a flagship product estimated to gross $1B in global revenues. When he was 23, Fernando started doing real estate in the residential side with wholesaling and acquiring residential rentals. Fernando then went on to build a multi-family rental portfolio spanning the Midwest. In preparation for the next down cycle, Fernando and the team divested from residential real estate to focus on self storage.

Fernando graduated from the University of Illinois at Urbana-Champaign with a B.A. degree in Technical Systems Management. Fernando currently resides in Chicago, IL.