Real estate is often considered as an alternative investment – and rightfully so. Today’s guest, Harvard Grace Capital CEO Stewart Heath, takes issue with that. He argues that real estate is the only alternative as far as Wall Street frames it as such. To him, real estate is the original investment. Whichever way you look at it, real estate is certainly a great way to boost your portfolio with recession-proof assets – if you do it right, at least. In this episode, Stewart tells us the lessons he learned from his 35-year career in real estate, particularly during the 2008 recession. He shares with us his thoughts on the current economic slowdown and how this differs from the one he experienced more than a decade ago. He also shares a bit about the Nashville and Huntsville markets, which are the closest to him. Tune in for some great insights on how to effectively navigate today’s market challenges!

Cashflow & Growth Through Self Storage With Lauren Brychell Of Spartan

Welcome to another episode of the show. Our guest is Lauren Brychell from Spartan Investment Group. Lauren, how are you doing?

I’m great. How are you?

I’m doing great. Thanks for coming on. I like to start off by getting an understanding of how you got into this niche of alternative investing in general. Tell everybody your story and also how you found self-storage as a niche.

Thank you so much for having me on. To start off, it’s a funny story of how I got started in this space. I was working in the CBD oil industry, which is different from self-storage, real estate, and all of that. I found Spartan Investment Group on LinkedIn. I was looking to move out to the Denver area and found them. We decided it would be a great fit mutually and started working for them back in 2019.

I started out in their marketing department doing all of our self-storage, corporate marketing, and property-level marketing. That’s how I originally heard of this whole sector. I would have never guessed that self-storage investing was a thing, even passively for the investors who don’t want to go in and buy their own facilities. I’m very grateful to have found it because it has opened my eyes to a whole new world and a whole new way to make money, and help people find financial freedom.

When you were in college or getting out of your initial job, is it just the traditional markets? Were you only aware of stocks, bonds, and all the boring traditional wealth management options?

Growing up, my parents did a couple of house flips and we had some vacation houses that we owned. I knew a little bit that real estate investing was a thing, but never the dimension that it could possibly become.

We all fall into this in different ways. Once you’re in, you’re hooked. That’s the same for me and almost everyone else I know that has found a niche in alternative investing. Self-storage is one of my favorite asset classes. I’ve been tracking it for years, even during 2008 when storage performed better than pretty much any other real estate asset class during the Great Recession. This will be great to do a deep dive. Why don’t you tell me a little bit about Spartan’s business model and how you invest in self-storage?

Spartan Investment Group allows investors who want to invest in self-storage to come in and invest alongside us passively in these deals. Instead of going out and spending a couple of million dollars in their facility having to learn how to run it, operate it, market it, and all of those things, we let limited partner investors come in at a $50,000 minimum, and have part ownership in our self-storage deals.

We go out as a fully vertically integrated company. By value add self-storage assets all across the country in high-growth secondary and tertiary markets, we are vertically integrated. Our construction company and property management company are in-house. We control every aspect of the project. We hold those, manage them, and add all the value over about a five-year timeframe. During that time, as long as there’s cashflow, our investors are benefiting from that monthly cashflow. When we sell or do a cash-out refi liquidate in some sort of way, our investors also benefit from that liquidity event. It’s a great way to invest in real estate, especially in the self-storage space, passively and having that mailbox money come in.

You mentioned value add. Value add is one of the key terms for our multifamily investments. That generally involves taking more of a classic unit and putting in new kitchens, new bathrooms, new flooring, and adding value. On self-storage, what are some of the things that you do to increase the value of the properties?

Self-storage is decently similar to multifamily. We’ll go to a high level. We raise the rent, repaint the dry walls, and fix any roofs or broken units at our national brand, which is called FreeUp Storage. We redo the offices and add insular streams of revenue such as U-Haul rentals, merchandise sales, cell towers, and FedEx or UPS drop-offs. One of the biggest ways we add value is we expand on the properties if we can. If there’s an extra parking lot or parcel of land that comes with the facility and there’s demand in the market, we have our construction company go in and add brand new units.

That’s great. What are the top few markets that you’re generally looking towards?

We follow migration trends. That’s Southeast Texas, a couple of Midwestern areas, and the Pacific Northwest. We’re in Colorado, but we’re loving Florida, Georgia, Tennessee, Texas, and places like that.

You probably know the stat better than I do, but from what I recall, isn’t there a great percentage of self-storage units that are still privately or family owned and maybe not run as efficiently as the way that you might run a unit?

I don’t know the stat on top of my head of how many mom-and-pop owners there are versus bigger firms like ours, but I know there are 40,000 operators in the US, which includes all of the single mom-and-pop owners. We’re in the top 100. There are not that many big firms running these things. It is a huge percentage of mom-and-pop owned. They still don’t have websites. They still are having some of their tenants pay with cash. It’s different from what we’re used to.

When you say vertically integrated, is that fully managing in-house as well other than a local general contractor to handle the actual construction itself?

We have some general contractors on our team that are licensed in certain states that we build in often. We have the superintendents in-house, general contractors occasionally in-house, and project executives in-house. We then hire out the subcontractors locally.

As far as looking for deal flow, what’s the process for finding new opportunities?

Our process varies a little bit. We’re looking for off-market deals all the time with half of our acquisitions team. We have databases of every single storage facility in the United States. We have certain square footage that we’re looking for and a certain minimum number of units and then go from there. On the other side of the acquisitions team, we have great broker relationships with the top self-storage brokers in the United States. We are always in contact with them. We are constantly looking at what they’re putting on the market and what’s coming up in the market.

From there, we look down our criteria list. We do our feasibility studies before we even go under contract on our property. Since we do that, we have a 100% contract-to-close ratio. That helps our reputation in the buying space because the broker knows that if we go under contract, we’re serious and we’re going to close unless something astronomically goes wrong.

That’s powerful. I’m sure there are times when you’re either getting the last look or maybe you’re not quite the top bid, but the seller knows that you’re going to close. You have a reputation, so you may win a deal on more than just price.

We win deals all the time based on our reputation even if we are under the highest bid.

If someone has a potential off-market deal, is there a specific acquisitions person or a specific acquisitions email to submit a potential opportunity?

We have an Acquisitions page on our website that has a form on it. You can go in and submit your property information. Tyler Burke is our Vice President of Acquisitions. Tyler Burke would be the person to reach out to.

There is a lot of economic uncertainty over the last few months with interest rates. I’m curious. What is the firm’s perspective on how to navigate 2022 with some of the economic changes going on with rates and inflation?

All of our teams are very aware of it. We are looking in the future at how much could rates potentially rise, and being able to underwrite that extra conservatively because we don’t know exactly what’s going to happen. We’re assuming that they are going to rise a couple of more times this 2022. We are trying to lock in as many loans as we can. All of our acquisitions are under contract or about to go under contract. We are trying to get those loans signed immediately. Keeping an eye on everything that’s changing and underwriting extra conservatively is how we are going to try to mitigate as much risk as we can with this.

As far as leases go for the actual tenants in the storage facility, the stickiness of the tenants as far as long-term renewals are probably as much as any industry, but what are your typical lease structures? What are your renewal rates? If the rent inflation continues, how much flexibility do you have to increase rents with inflation?

That’s one of the things we love most about storage. We don’t have long-term leases. We are month-to-month. We have dynamic pricing. If we need to raise the rents by 5% to 10% every month going forward, we could. That is one of the things. It’s got to head a little bit against inflation. People are still going to need storage. If we’re increasing it slightly if needed, the chances of moving out are pretty slim for an extra 5% to 10% a month.

Do you have any industry statistics on what percentage of people renew?

Since we don’t have long-term lease renewal, I don’t have that statistic. I know that our average tenant stays for 48 months. People are staying for a decently long time. During COVID from 2020 to 2021, rental rates were 12.7% year over year. We’ve had high growth in rental rates during the last couple of years. We’ve seen people stay because if we’ve raised their rent for $30 and they want to look for other options, the other options out there are going to be as highly-priced as ours potentially.

That’s great. Correct me if I’m wrong. Historically, Spartan has went deal by deal for raising capital, but you’re moving more towards a fund structure.

We have 54 assets under management. All those were deal by deal with the exception of a couple of portfolios we bought in one swoop. We had 29 properties closing Q4 in 2021. They were all value add in high-growth markets that were similar returns across the board. Our investors became a little confused. They were like, “Which one do we choose?” That’s why we decided to start a fund as well as a couple of other reasons. We’re packaging all those up this 2022 for the fund to be 60 to 80 properties in our offering.

Is that a Reg D 506(c)?

That’s correct.

That is great. That’s similar to what we have. Our fund is working on putting together something that we hope is a win-win for investors. Spartan has a specific asset class for investors that raise more than $1 million. Is that right?

That’s right. Bump for return and bump for cash-on-cash return.

One of the things that JKAM is working on is putting together a feeder fund to hit that million-dollar threshold so that we can allow our investors in at the higher asset class. That’s something I’m pretty excited about working together with the Spartan team.

We love the feeder funds that come in with us. We love working alongside them and getting them to their goals to invest with us at a higher rep. It’s great. It’s a win-win all around.

Who’s your typical investor? I know there are a couple of different avatars probably, but what are a couple of types of investors you might have seen that are good fits for the fund?

Our first type of avatar is someone who has been an active real estate investor for many years like the landlord. They’re someone who has maybe a couple of small multifamilies and a bunch of single-family rentals, and they’re tired of being a landlord. They want someone to manage their new investment for them. They don’t want to answer phone calls in the middle of the night about the toilet leaking or something like that. That’s one of our top avatars for investors. They’re tired. They want to have more freedom but they still want the cashflow.

Other than that, we have a lot of busy professionals who are executive C-Suites. We have people like that who don’t know a ton about investing in real estate, but they know enough that they would love to do it. They don’t have the time or the knowledge to do it themselves and go out and buy their own facilities, so they invest with us. Third, are folks that are retired high net worth individuals who are looking for some extra cashflow. They retired early and they love real estate. They understand it, but they don’t want to go out, buy their own storage facility, and manage it full-time.

That’s very similar to us. I know with the Reg D, everything goes. All official terms are through the portals, but the bond market has been crushed and returns are almost zero. Are you comfortable talking about what typical cash-on-cash returns are at least on an annualized basis, and what the projected overall returns are?

For our fund, we’re targeting a 4 to 6-year hold. We’re looking at anywhere projected from 5% to 8% cash-on-cash cashflow per annum paid out monthly. An annualized 15% to 20% is our projection. We’re looking to almost double your money in five years is our general projected goal that we strive for every investment.

As far as taxes go, are you doing cost segregation on a majority of the buildings as well to lower the tax burden?

Yes. We do cost segregation studies and take 100% bonus appreciation in year one. Our losses are a little bit less than multifamily but still great at about 20% to 25%.

That means if someone is making 6% to 8% or 5% to 8%, whatever the first-year preferred return is, they’re still showing a loss. It’s a tax-deferred cashflow at a bare minimum. The cash-on-cash returns are likely tax-deferred for that five-year period, and then the bulk of the taxes, if any, are paid when a majority of the building sells. Is that accurate?

That’s pretty accurate. Everyone’s tax situation is a little bit different. Depending on everyone’s situation, talk to your CPA. The tax losses do potentially help with that cashflow.

That’s one of the biggest items that I’ve recalled from conversations with various investors. Even some that are higher net worth and had REITs, their tax rate, they’re paying 29% on their REIT dividends. Whereas in a private fund or syndication opportunity, they’re receiving that cashflow tax-free or at least tax-deferred until the end, then there are always opportunities to reinvest in another deal and take new depreciation. It’s a little bit of a hamster wheel once you’re on it, but if you pay attention to it and structure it right, it is way more tax-efficient than any of the traditional public offerings for REITs.

That is one of the huge benefits of investing in syndication or limited partnership like this.

Do you have any closing thoughts or advice for passive investors or those looking to dip their toes into alternative investments?

Do a lot of research on the sponsor. Make sure you understand their team and their vision. Make sure that they know what to do in good times and bad because real estate is not always going to go well. Make sure that the team is capable of handling the bad times and bouncing back from them. Also, understand the backend, the PPM, and the legal language behind it. There are a lot of great videos on YouTube or our website. They’re all over the internet these days to make sure that you understand what you’re investing in and how everything works.

That’s great advice. I know I’ve run into you guys at a couple of different conferences this 2022. Are you attending anything else in the next couple of months where people can meet you in person?

We are going to be at the Information Management Network Family Office Forum on the East and the West Coast coming up. We’re going to be at the Quest IRA Conference in Houston. I believe we’re going to be at the MoneyShow in Las Vegas as well this fall 2022.

You’ll have to let me know when that Vegas event is. I always look for an excuse to get back to Las Vegas. Thank you so much for all the information provided here. It’s always great to catch up with you and the team. We look forward to seeing you again at a future event and investing together in self-storage. Thanks again for being on the show.

Likewise, Jack. Thanks for having me.

Important Links

• Spartan Investment Group
• Acquisitions Page – Spartan Investment Group