If there is one thing we get reminded of every day in our lives, it is that not everything is in our control. Often, the best of us in the industry move along and adapt. Tom Dunkel may have faced a number of challenges in his long career—jumping out of corporate life to entrepreneurial life to real estate, all the while navigating across the financial crisis and the pandemic. Suffice to say, he has gained a ton of wisdom from those experiences. And in this episode, he joins Jack Krupey to share some of those with us. He takes us across his journey of growing businesses from distressed mortgage notes to self-storage, where he is now the Chief Investment Officer at Belrose Storage Group. Tom then talks about the pitfalls to look for during a crisis and what you can do to avoid them. If you are interested in self storage, he then offers some great advice to get started in this niche.
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Overcoming Crisis In A Resilient Self Storage Market With Tom Dunkel
I have a great guest in this episode, Tom Dunkel. I’ve known Tom for many years. We’ve done business across a couple of different real estate asset classes. I’m excited to have Tom talk about their venture in self-storage. Tom, welcome to the show.
Jack, my friend, it’s great to be with you. It was fun to spend a couple of days with you in Miami.
It was a great time. I had a couple of small-world moments. You were certainly the biggest one of great minds thinking alike and reconnecting at these events. Why don’t you tell everybody a little bit about your background? You can go into how we knew each other back in the day as well and what you’re up to now.
I’ll try to keep it brief. I was a corporate guide. I have my MBA in Finance and Tax. I got into mergers and acquisitions and capital raising corporate finance when I was in the corporate world. I always wanted to do something on my own. In 2006, my timing wasn’t great, but I ended up jumping out of corporate life and into entrepreneurial life into real estate. Here I thought things were going to be easy. I’ve got an MBA from a great school. I had training from some fantastic people. I cut my teeth through deals. I was like, “No problem. I’m going to be able to rock and roll my own business. It’s going to be great.”
I proceeded to get my ass kicked for the next few years as the world crumbled through the real estate crisis. I was like, “This is not going to be easy. I better start getting around the right people and learn and tighten things up,” because I didn’t have at the time what I needed to make it happen. Fast forward, here we are many years later. I ended up going into the distressed mortgage note business, which you and I initially connected with.
I partnered up with Joe Downs, and we started a company called US Mortgage Resolution, which still exists nowadays. We’ve got to be going on $900 million or so of distressed second mortgages and unpaid principal balance. We’ve raised a ton of money and made good money in that business, but it was always very lumpy.
Along the way, we were looking at different things to help us smooth out our business and cashflow because from one year to the next, we could have these wild swings in income and not be sure where the next dollar was going to come from. We did look at doing some residential fix and flips. We had a hard money lending company. We tried to do that twice and failed both times. We had a title company for a little while that didn’t quite work out. We did start picking up some vacation rentals and Airbnbs, and those were really hot during COVID time. That portfolio still exists. What we’ve fallen in love with the last few years is self-storage. We started looking at storage in 2017 to 2018 timeframe.
Having had some experience at that point in building and growing a business, we didn’t jump right into it. We went out and got educated. We joined a mastermind group for self-storage and got ourselves around some of the best and brightest in the country. We then started putting our team together because Joe and I have pretty solid finance and deal backgrounds, underwriting, and that kind of thing. We weren’t great at the front end filling the funnel and reaching out to these storage owners. That’s where our partner Tim Kane came in because that’s where his expertise lies. We partnered up with Tim. The last piece of the puzzle was operations. We didn’t know how to operate a self-storage facility once we bought it.
We brought in Kathryn East, who has been an expert in the self-storage operations and management space for many years. We made her part of our team. That gave us the confidence to be able to go out of the marketplace and make realistic offers because up to that point, we were making these lowball offers that, thank God, none of them got accepted because we would’ve been like, “What do we do now?”
Since we got the team together, we were able to make realistic offers. We bought our first facility in 2020. We were able to quickly add value to that facility and exit eighteen months later. We then bought our second facility in January of 2021 and proceeded to buy three more that year. We’ve purchased four so far in 2022. We have four in the pipeline to close before the end of the year. We’re going to be cranking. We’re excited about our team and where we’re at in the self-storage industry now.
Kudos to you for making an expansion. That’s something that I’ve done and talked a lot about over the last couple of years. I still get calls from people in the note industry asking me if I have loans available. Before the moves in interest rates, there wasn’t a lot of inventory, or the inventory there was extremely lumpy.
I came from the institutional side of things by the end of my tenure in performing loans or pricing at close to par before interest rates moved. It was getting very tough for a non-institutional investor to only focus 100% on the distressed mortgage business. Kudos to you for that, and I’m excited for you guys. You mentioned value add. Value add on the multifamily space, which I’m more heavily involved in, is usually renovating apartments, raising rents, and lowering expenses. What is value add in self-storage?
It does differ a little bit from multifamily. A little asterisk there is that I’ve been a passive investor in multifamily deals since 2013. I know that space pretty well. You hit the nail on the head, Jack. In the multifamily space, you’re changing out the lighting package doing those kinds of cosmetic upgrades, etc. Storage is different. At the end of the day, we have metal boxes with concrete floors and roll-up doors. When we talk about value add, it’s mostly around the operations of the facility because our turnaround process is pretty much done with a broom.
When someone leaves a unit, we’re able to go in there. If they did it right, and they don’t always do it right, we’ll be able to sweep out that unit and get it back up for rent sometimes that same day. Especially if it’s a market where there’s high demand, we could have emptied in the morning and rented that afternoon. There’s definitely a higher velocity to the turnaround process in storage, which adds to our value add there. You’d be surprised how low some of the rates are that some of these mom-and-pop storage facilities are charging. We’re about to close on a deal where the owner is 39% below market with his rates.
He’s aware that he’s below market. He’s old. He knows most of his customers. He doesn’t want to be pissed off. He likes to spend his time at the golf course, not marketing and trying to get new customers into his facility. He is happy with the amount of money coming in every month to mailbox money. He’s got it pretty well dialed in at this point because he knows what his taxes, insurance, and maintenance utilities are month to month. He’s making the money he wants to make to rock the boat. Especially during COVID, storage became very popular as a lot of families had to turn their spare bedrooms into an office. There are a lot of drivers pushing up the rents in many markets.
Meanwhile, rents are going up like this, and he’s down here. It doesn’t take too long for him to be way out of line as far as where the market is. That’s probably our biggest value add. It’s not rocket science. It doesn’t take a lot of research and analysis, even though we do that with a fine tooth comb in the markets where we are. It’s something that, as a professional organization, that’s what we do. We’re not afraid to have a little bit of turnover in the units. We’re not afraid to push the envelope there so that we are at or near the top of the market with our rates.
There’s a saying, “If you have 100% occupancy, your rents are probably too low.” That goes for multi and storage.
Also, hotels and airplanes. It’s all that. If we’re totally full, we’re not charging enough for sure.
Self-storage had a reputation. Even after 2008, it was one of the most recession-resistant classes. In 2008, people were losing their houses. They needed to take their stuff and put it into storage. It’s largely been resilient in pretty much every crisis I can remember since I’ve been around. What can go wrong, and what do you guys do when you’re underwriting? What are some pitfalls you look for and things you try to avoid?
To highlight what you said about resiliency, for the past decades, storage occupancy across the country has gently meandered between 80% and 90%. It generally is a very consistent income-generating asset class. One of the things we do when we’re looking at a facility is, as I mentioned, we dial into the market. One thing that can send your facility in a bad way is if there’s a new storage facility coming online. If you didn’t know that Public Storage, Extra Space, or CubeSmart, which is one of those big REITs, is putting in 120,000 square foot brand new shiny facility in your market, that is something that can suck a lot of the demand out of the market and away from your facility.
We certainly make sure to look at that. We have databases and things we subscribe to, so we can make sure we see what the pipeline of developments is looking like. We want to make sure we’re steering clear of a market where it either is oversupplied, or it might become oversupplied. On the flip side, we look at things like housing starts. Maybe if the market is at equilibrium now, but there aren’t any storage facilities coming online, and there are a ton of multifamily or other residential projects coming online in that 1, 3, or 5-mile radius, we look at that as a strong point and something that points to a deal that could work out well. We’re looking in the Southeastern United States where the demographics are people are moving there, populations are growing, jobs are growing big, and infrastructure investments are going in the Southeast. We’re finding some nice-looking markets down there.
There’s a pretty high percentage of mom-and-pop owners that are the typical sellers.
One of the things we like about storage is most people think that the big guys, Public Storage, Extra Space, or CubeSmart, are the dominant forces in the market, but they really aren’t. They control about 25% to 27% of the overall market. There’s another layer of the larger regional and more sophisticated players, but 60% plus of the market is still moms-and-pops that have 1 or maybe 2 locations. They’re not running it like a business.
It’s like a side thing. They get their mailbox money and are not pushing rents or doing marketing. They’re not on Google. A lot of them don’t have websites. One of the things we’re excited about as we continue to grow because we have some lofty goals here moving forward is there are a lot of moms-and-pops out there where we can buy their facility and create a lot of value.
How does someone get involved? I have a lot of conversations with a vast majority of investors. They either think just buying a REIT or the stock market and traditional investments, or they have to go in and buy a single-family house themselves. They think they can do it. It’s not that difficult to end up creating yourself. You want to do it for passive income, and you end up creating a job that ends up harder than your regular job. How does somebody get involved passively in buying a multimillion-dollar storage facility?
Part of our mission is to get out there and help passive investors create wealth for them. You’re right. If you’re out there as a real estate investor and are trying to buy a self-storage facility, it is super competitive. Our own internal acquisition program is robust. We use virtual assistants who are calling all the facilities in our markets. We’re doing direct mail. We have a whole pretty sophisticated system. If a single investor’s going up against Belrose, not like we’re the biggest and baddest in the market, but we have a solid acquisition program. It goes to underwriting. We have a whole sophisticated underwriting program. We have lenders and equity investors lined up.
In that regard, we certainly have a competitive advantage over a single real estate investor. What those folks should do is they should look for an experienced sponsor, like Belrose Storage Group. That’s what we’re here to do. On my wall here in my office and everybody at Belrose on the wall in their office, we have our company purpose on there. It’s pretty long. The gist of it is we want to touch a lot of people. We want our internal employees to grow and be very well financially educated and financially well-off people. We also want everyone else that we touch to be financially well-off.
We want them to use our expertise to help them reach their financial freedom goals. We talk a lot about security, income, and growth of the offerings that we provide. It’s a real asset. It provides security for folks who are maybe concerned about the upcoming economy and what’s that going to look like. I lived through the internet bubble. Crypto is a little bit of a flashback to me to the internet bubble era where there’s so much hype around it, but there’s nothing there. It makes me a little concerned about all the folks flocking to try to make a quick buck in crypto. We offer hard assets, and these assets are throwing off income.
Our cashflow payments to our investors can be 6%, 8%, or 10% annualized each year, and then growth. Everybody knows that real estate goes up over time. There might be bumps in the road from time to time, but I’ll take those bumps in the road over the Wall Street casino bumps in the road any day of the week. We take pride in putting these great offerings out to our investor community. We’re trying actively to grow that community.
It’s one of our primary folks now, which is why we’ve joined the Raise Masters group. We want to get out there, help build our list, and get the investors in that we can help. We have these great, fully vetted, and fully underwritten offerings that we put out from time to time. It makes us feel good when our investors come back. They come back deal after deal. They’ll bring more money. They’ll bring their friends. That’s real great evidence that we’re doing a good job for our investors.
What’s great about this business is pretty often, real estate is a team sport. Some may say, “We’re competing,” but we’re not in a self-storage business. We’re in the alternative investment business. What’s great is we also run a diversified fund. Our fund is the type of fund that will invest in your types of offerings. If someone’s looking specifically for a storage operator, you guys are great. I highly recommend you guys. If you want broader exposure to multifamily, storage, and other asset classes, you could invest through JKAM, which in turn allocates money to your fund as well as some other multifamily and alternative assets. It’s a great way to create a win-win between our groups.
It’s great. Whether it’s directly from one of our investors or through one of your funds, we want to help people honestly get out of Wall Street. A little bit more about my history is that I used to work for publicly traded companies. I worked for three publicly traded companies in their finance organizations. In fact, at a couple of those companies, I was in charge of writing the financial analysis that went into the quarterly and annual reports. I had to describe what was going on in the company in very plain terms.
I would try to do the best I could, but I have to tell you that, and this is horrible to say, but when I would turn in my draft to the chief financial officer and the chief executive officer for them to review it, they would always spin it and make it sound better. They would try to confuse things and make it sound like it was incomprehensible, so investors couldn’t make any sense of what ultimately was published.
That always made me feel like, “What the heck are we doing?” That always made me feel bad. Not only that. By the time a retail investor even gets that information, it’s 2 to 3 months old. All the professionals already have that information if the company’s followed by any Wall Street analysts. It’s a very uneven playing field for retail investors. That was one of the reasons I wanted to get out. I felt I could do a better job as an alternative investing expert for those folks that are truly looking to build wealth, protect their wealth, and get some passive income going.
That was great. I’m glad you did. We’re in the fourth quarter here of 2022. We should talk about taxes as well because it’s one thing we haven’t touched on yet. The taxes are way more advantageous in private real estate offerings and syndications than they are for REITS, especially. I was trying to google the average yield. Is there a publicly traded REIT for the storage industry that you know of?
Public Storage, Extra Space, and CubeSmart are the big publicly traded REITs out there.
If you’re a high earning professional, those REITs are not qualified dividends. This is not tax advice. I own some in very small quantities myself over time. They get taxed 29.6%. Because the REITs aren’t first taxed at the corporate level, it passes through. It’s basically ordinary income with a small discount. They say you’re getting a 5% or 6% dividend, but you’re really losing 1/3 of that to taxes. How do things work on syndications when you own a piece of the syndication and the property itself through the syndication?
It is a huge advantage to these private real estate partnerships. What we do is we have a couple of classes of membership interests. Not to get too complicated, but the folks using self-directed, qualified money from either their self-directed IRA or the self-directed 401(k) are not able to take advantage of the taxes and, specifically, the depreciation deduction.
We have another class of shares, which is for investors that are using taxable accounts. They are able to get depreciation deductions. What that boils down to for an investor, and this is one of the things I love when I get my K1s for my multifamily deals, or the K1s we send out for our self-storage deals is, on the top, it will say your net income or real estate earnings could be negative, but you look down the other column, and it shows your distributions.
That can be big positive numbers. In other words, you’re getting cash, but you’re paying taxes on a much lower amount or might even be a negative amount. That’s one of the beauties of investing in commercial real estate or lots of other kinds of real estate. Uncle Sam wants investors in real estate. There are incentives in place to get investment dollars in real estate. That’s a big one. The other thing is accelerated depreciation. There are different components.
A storage facility is not just one big facility. It can be broken down into its own little pieces like the doors, walls, or office. All these different things have their own depreciation schedules. We can hire a professional to come in and do a cost segregation study. They can tell us, “That’s not a 29-year asset. That’s a seven-year asset.”
You have seven years to depreciate that, which accelerates that depreciation. The government is incentivizing this kind of investment. Some things are even available for immediate depreciation, for which you get huge bonus depreciation. It helps drive that top number on your K1 even lower or negative. It’s a big advantage that a lot of investors don’t quite understand and sometimes overlook. They should talk to their CPAs and get the proper information about that. It’s a big advantage.
As a fellow note investor too, and I know we’ve got a lot of our fellow colleagues that we knew through the years reading this, I’d been a real estate professional prior. After 2008 pivoting into Wall Street, I had somewhat forgotten about the tax benefits and quickly remembered them when I started paying taxes in New York. You’ve had a couple of years where you had to stroke the government, probably a bigger check than you would’ve liked.
That’s tough on the distressed mortgage debt side because that interest income is typically ordinary. That’s rough, which is another reason why we are enjoying the self-storage space.
For the note investors who are reading, it’s something you should expand into. There’s room for continuing to do the distress loan business as opportunities present themselves. Everyone should be more diverse and have multiple streams of income. With inflation, it’s good to have assets that you could have smart leverage on as well. Sometimes, in an inflationary environment, it’s good to also be a debtor in addition to owning the debt. Everybody should take a deeper look at the self-storage space. Tom, do you have resources available? Is there an eBook, a guide, or something for passive investors?
Folks, go to our website, which is BelRoseStorageGroup.com. We have a resource there. We’re getting ready to revamp it and do an updated version of it. We call it SAFE Investing. It’s a due diligence framework for passive investors to break down a lot of the barriers that they run into to getting into alternative assets like multifamily, self-storage, lending, etc. SAFE is an acronym. S stands for Sponsor. The book has all kinds of questions you need to ask about your sponsor. A is for Asset. What is it that you’re actually investing in? Back to the crypto and the internet bubble, I don’t think a lot of those folks understood what they were investing in. Self-storage and multifamily are pretty easy to understand.
F is for the financials. What are the projections? Are they reasonable? It’s that sort of thing. E is Exit. How do you get out of this thing? You can’t go to Schwab.com, and click and sell your position in a Belrose Storage Group deal. You have to be comfortable as an investor, knowing that your money’s going to be tied up for a couple of years, depending on which deal you invest in. That’s a resource that’s available. Where that came from is my personal experience over the years, having been an accredited investor since 2006. I’ve had ups and downs. I’ve made mistakes. I’ve made some good decisions and been in some good deals, but I’ve also been in bad deals with bad sponsors. I’ve lost money.
I wanted to put this resource together so that someone who’s busy, like a doctor, a lawyer, or an engineer who wants to get into something passive and alternative investment but doesn’t know how, it gives them a due diligence framework to say, “Here are the questions you need to be asking.” If at any point you get an answer from your sponsor or do some research and start to not feel right, forget about that deal. Move on to the next one. There’s always another deal to find out there.
In addition, at our website, folks can sign up on our Investor Portal. That’s where all the good stuff happens. That’s where we post our offerings. That’s where the private placement memorandum is, the investor deck, and all of those documents. It’s also where our investors can drop in their banking information. They can get our distributions direct deposited into their account. That’s where our tax documents live, so they can share those documents with their CPAs. Our investors seem to like the portal. It’s a very handy resource and keeps everything in one place.
It’s amazing with the technology now. I remember several years ago before they changed the rules, it was tough to advertise. It was risky to run a fund unless you were in a country club and had enough rich friends that you could advertise a deal without really advertising a deal. It has expanded from what I’d call country club deals to deals that the average accredited investor can get exposure to. A majority of people are underexposed to alternative assets. One of my other guests on a prior show said he takes exception to real estate being called an alternative asset because it’s the original asset.
I say the exact same thing, and I was about to say that. I was about to get on my soapbox. Real estate and lending are alternative assets? These things go back to biblical times. It’s ridiculous. What’s alternatives are options and stocks. Talk about alternatives, like crypto. All of that stuff, to me, is alternative and derived from the financial engineering that goes on at these publicly traded companies. It’s crazy.
Before we finish up, I got to ask about Storage Wars. Does that happen in any of the markets you’re in? Can we get a YouTube video of it?
There are certainly plenty of fun stories. Our operations expert Kathryn East got amazing stories to share about her experience. That’s all made-for-TV stuff. Everything is online now. You just have to go to the auction website and buy somebody’s junk that they didn’t pay to store. It’s not as dramatic as all that.
Thanks for coming on. One more time, give us your website and any social media you want to promote.
Thanks again, Jack. I’m Tom Dunkel, the Chief Investment Officer at BelroseStorageGroup.com. There you can see all the background bios of our awesome team. I’m super proud of the team that we put together. The best way to reach me is through there. Fill in any questions you have out there that you know might have popped up from our discussion. I’m always happy to jump on a call or trade an email. Reach out.
That sounds great. I look forward to chatting again. We can talk all the time, especially as this economy shifts and stuff. I’m sure there will be more to talk about. Everyone who’s reading, please subscribe to the show on your platform of choice, Spotify and iTunes. We also post these on YouTube as well. Please subscribe. Give us a like and a review. Read again for the next episode. Thanks, everybody.
About Tom Dunkel
Having spent my early career as an accomplished corporate finance leader with over $1.2B of middle-market M&A and financing transaction experience and a proven track record as trusted decision-making partner to C-level executives, I have turned my entrepreneurial energy and enthusiasm toward building a self storage investment business.
My transactional experience, financial savvy and leadership training by top executives have provided me with the foundation to build a world-class organization focused on helping alternative investors build wealth while improving communities.
I create value for my partners by developing and executing disciplined real estate investment initiatives with open communications style and unwavering integrity.