How to Profit from the Most Stable Asset Class

The base of the business is very simple. You have very few employees. Some storage facilities have zero, some have three or four. You don't have tenant rights like you do in a lot of states where it takes you. You also don't have toilets to fix and air conditioners to fix. Yes, the building does, but it's commercial systems. It still had over 5% growth when nothing else did. It's just a steady, simple asset class has got predictable cash flow, so institutional buyers will buy on them once they're completed and stabilized. There's really nothing bad about the project. It's a simple business. People store their shit. They pay you money every month. They don't pay you, lock it up, rent it to someone else and sell the shit that's in there for the back rent. It's kind of simple, yeah. However, it makes a lot of money. And because it's got predictable cash flow, it's an asset where a lot of hedge funds and private equity and public companies buy it.

Welcome back to Capability Amplifier. I'm Mike Koenigs and today's episode is for you. If you're an investor who's looking for the perfect investment now, what's that? Well, number one is asset backed value creation with immediate equity. Number two, nearly immediate cash flow. Number three, that's recession and inflation resistance. So today I'm joined by my friend Arthur Hood. He's a strategic investor and capital raising wizard who's personally structured over half billion dollars in deals. In fact, I just watched him close a $65 million deal in the last 48 hours. He and his partner, Russ Colvin are experts in a real estate asset class that's consistently and quietly outperforming every other real estate class for the past year, 25 years, which is storage. So here are their historical averages from previous deals. 39% average IRR, that's internal rate of return, 2.6 time equity multiple 10% preferred returns from day one, and even opportunity zone tax advantages, which is a fancy way of avoiding capital gains taxes. Arthur is here to share their five investment principles. How pros like them manage deals and, and gain the trust of investors short and long term, which is the genius behind their approach. So here is Arthur Hood. Say hi, Arthur.

Hey, how are y'? All?

All right, well, let's begin. You can tell where you're from. Where are you from originally?

Birmingham, Alabama.

All right, and where do you live now?

Dallas, Texas, for about the last 15 years.

All right, well, we met through mutual friends, Stephen, and, and I'm going to just Begin with the big question that everyone should be asking, which is what is a perfect investment because you've been doing deals for a long, long time.

Well, I would say there's never an absolute perfect investment. But I like any investment that's got a piece of real estate or another form of tangible asset backing it where the cash flow is predictable. And I get both cash flow out of the investment and capital appreciation. So in other words, the asset increases in value and it pays me to hold on to it.

And one of the things that I've seen just in digging into all your deals here, and just for the record, my wife Vivian spent half a day with you looking at this deal. I had my own.

Family office looking at the deal. And, and I've talked to a bunch of your investors as well. So I've learned a ton over the past few days. Just digging in deep with you. But why don't you talk a little bit about self storage and why it's so great? Because it's not sophisticated, at least not on the surface. But how you do the deals is.

Definitely location structuring of picking the location, getting zoning approval that is somewhat sophisticated. Designing something that's aesthetically pleasing and doesn't look like a big warehouse is definitely a little bit sophisticated. But the base of the business is very simple. You have very few employees. Some storage facilities have zero, some have three or four. But you have minimal staff to operate a facility that is secure, well ventilated, fully climate controlled. So you don't have a staffing issue. You don't have tenant rights like you do in a lot of states where it takes you. Somebody quits paying rent, you can literally lock them out, auction it off, depending on the state, fairly, fairly quickly. Nothing takes very long versus you know, there are people that have horror stories in some areas. Take us a year to get a non paying tenant out. So you don't have that. You also don't have toilets to fix and air conditioners to fix. Yes, the building does, but it's commercial systems.

Yeah, I love it. And then now your Space America, your company with your partner Russ, you focus on institutional quality. Generation 5 facilities. So what is it that differentiates those from the traditional rust bucket outdoor hot as hell, God knows what's inside, what.

The smells, interior, interior corridors. You pull up to our facilities, in fact our newer facilities, quite a few of the facilities actually have air conditioning garages that you pull into. Then you can go into the corridors, go up the elevators, everything's climate controlled. They got timers and Motion sensors on the lights.

Cameras, secure, nice, aesthetically pleasing. The buildings are built to look more like a nice apartment building or a nice building complex or office. They don't just look like a warehouse on the corner.

Now talk a little bit about your partner, Russ Colvin. Some people called him the savant of self storage, which is kind of funny. And, and you know, when we got prepared, I had to study a lot of his stuff. This guy has been in the business a long time. He's handled over a billion dollars in transactions. But how did you guys get in.

The business in the first place?

Tell me about him.

About 1.2 billion in his last company. He just really enjoys storage. He enjoys real estate in general. He came out of commercial lending and other forms of real estate, apartments and so forth. Found that storage was really the best asset, the best class of asset, the easiest to manage, some of the highest returns. And he just kind of took off. He left another big company where he had built it up form this company. And then he got together with a good partner and associate of mine that I've known for 20 years, Robert Papiri. And then Robert pulled me in. The three of us have kind of built this, this company into a pretty substantial developer of generation 5 new storage facilities, mostly climate controlled RV parking.

Any boat storage actually at our one facility in Mount Hood near the Air Force base will have both traditional climate controlled storage as well as boat and RV storage. It's a 15 acre site. So we've got lots of sites in very good markets where we have high housing growth, high transient populations, military bases, etc. And we've really started to develop that Russ's development background and especially getting municipalities to approve storage, which they don't always want to approve because it doesn't provide a lot of jobs, but it's necessary in every market, right?

Yeah. When we looked at the stats, which are pretty crazy.

At some point in time, I believe it was 1 in 11Americans have self storage. When you look at the high end ones, like the ones you represent, tenants stick around for like 30 months. I mean it is a machine, it's a cash flow machine.

Oh, absolutely. You know, I had an opportunity, jumped in a cab one time in Vegas and happened to be going to a storage and found out the cab driver had been paying storage for seven years at a facility. So people tend to do that. And as we see both housing developments get built where houses are not necessarily as large or a lot of people living in condos and apartments. You know, if you've Got, if you live in Vegas, you got ski gear, you're going to drive up to Reno, you're going to do something like that. You got to have a place to store that stuff. Unless you have a big house. And a lot of people don't. You know, a lot of the houses that are being built in these neighborhoods, and especially the apartments and condos, you need a place to store things. Ski gear, camping gear, sports gear. A lot of people have small businesses where they're storing stuff they sell. I mean there's, Everybody seems to have a use for it.

Yeah, no, it makes a lot of sense. And talk a little bit about the economic background. Meaning specifically, it's been one of the most secure, stable, inflation recession proof investments for a long time.

For well over 30 years. It's been followed. It was actually the only real estate asset class that was up that I'm aware of during the 2008 Great Recession. It still had over 5% growth when nothing else did. It's just a steady, simple asset class has got predictable cash flow, so institutional buyers will buy on them once they're completed and stabilized. There's really nothing bad about the projects.

Yeah, no, I'm, I'm blown away. So. And I've known people have gotten involved in it and my.

In the past I was like, yeah, I don't understand it. I just didn't understand it.

Well, look at one thing logical. Look at some of our deals. We got over a thousand units in a deal. Well, you've got a thousand people paying you a relatively small amount of money. That becomes a very large amount of money. Even if 5, 10, or 12% of the people, which doesn't happen. But even if they did not pay, you still have so much revenue from the balance, you're fine. So, you know, you don't have to worry about tenancy risk. And if somebody doesn't pay, you lock them out, sell the stuff, go to the next unit, and you got a thousand people paying. Well, if your default rate's only 3%, it doesn't matter. Yep.

Right. So one of the things, there's two things that I wanted to do with you today. One of them is I wanted to go through some deals. But also.

I learned a lot in deconstructing your business, talking to you and Russ, interviewing some of your clients. And we ended up seeing some of your core investment principles. So I'm going to give you a choice here. Do you want to cover the investment principles first or you want to deconstruct some deals and how they work.

Well, let's go through the investment principles first.

Yeah. So let's start with the formula. And I think we've already covered what is called the perfect investment formula, which is asset backed value creation. I'm going to have you go through that a little bit deeper. Immediate cash flow, recession resistant and inflation resistant. And the fact that you have control. I think we ought to add that to this. Why? It's perfect.

We definitely have control. But one of the other things is our site selection. We're finding undervalued sites. Most of the time these sites are not entitled for self storage or even zoned correctly. And we will take the time to lock a piece of property up under contract for a fairly reasonable price. We'll take the six months to two and a half years depending on the municipalities and governments involved in state to then take that property, get zoning changed if we need to, then design a project that fits, get that project entitled to that property and, and just that business could take a, you know, hypothetical number here, but could take $1 million acquisition price of land and by the time we're finishing entitled it, it may be worth 4 or 5 million before we've built on it. We create value in the dirt because we buy the dirt. Right. And we take care of zoning and approved and entitlement.

Yeah, that's something. In one of the interviews that we did, this is Steve said this, Russ is the superpower behind this project. His ability to get the city to improve these jobs that he does is amazing.

And he does, he's done a wonderful job of that, all of our projects. And then out of my background, I've gotten several large subdivisions approved that I've sold personally to Dr. Horton and some other homebuilders. In my other business I did some land entitlement where I buy tracks of land, sell to home builders as well as I'm a home builder myself in another company. So we both, Russ and I know what it takes to get entitlement done.

Yeah, yeah, that's the, that's the part that you can, you know, an inexperienced investor or, or you know, he. What Steve said is just, you know, thousands of companies that can build mini warehouse but very few can get them approved and do the hard work and have the relationships and know how to put it together. So that was something that I found super, super fascinating. So let's go into part two. Unless you got something else to add to that?

No, no, no, I think we're fine there.

All right, so number the second is this contrarian Opportunity spotting and which is trends, site selection and where the industry's headed. So why don't you just break those down. Talk about.

Well, we've had some successful projects by going to areas that do have some storage, but they're very old, outdated, out exterior corridor, not climate controlled. And we, we go into these markets and we bring a nice brand new facility that's comfortable, that's safe, that's secure, that is climate control. Where you're, where your nicer items will be fine. And there's a lot of value to that. We know we also, you know, we're building right next to down in downtown Phoenix area next to Diamondback Stadium. The whole area is got a tremendous amount of rooftops in the area plus multifamily housing and condominiums. And everywhere you turn.

Those people need a nice storage facility. And this will be the nicest facility.

Bar none downtown. Okay.

And why don't you talk about the.

Trend spotting where you and Russ are really paying attention to what's going on. Job market, how far in the future are you looking forward?

We're always looking five, 10 years in the future.

Okay.

And then the other one is just strategically your mindset. So again you're looking at job growth, you're looking at building, you're looking at trends. In that case looking at next to a stadium, which is super premium. But you're also thinking about the exit. And I know we're going to get to the exit now, but is there anything about the opportunity spotting involving that, how you're predicting the future?

Well, I mean in every deal you go into, you're going to go into an understanding. Your exit. You know, we, our exit could be selling to another large storage institution or it could be holding on our books and harvesting the cash flow for the next 10 years or putting a big package together and exiting to a reit. We have lots of options, but they're very deal specific.

Okay, so next one is the way you do the capital structure. So you're always doing interesting financing solutions. And I know this big deal that you just completed was a debt deal, but you're also raising money. We talked to a bunch of your investors.

Yeah, we raise equity. We have equity in every deal.

We put some of our own cash in the deal and then our general equity that we targets around 30% is equity, sometimes as high as 40% equity. And then the balance will be some form of debt. Bank institution, family office, hedge fund, private equity group, but some form of reasonable price debt.

Okay, so let's talk about you know what that looks like? So let's say I put 100 grand or half a million dollars into one of your deals. So what's the typical structure? When do I start getting money? When do we get out? What's the. We'll call it the normal average. And then let's look at one end of the spectrum.

Well, well, a normal average. Most of our deals, I'd say our average investor is somewhere around a half a million dollars. We've had some at 100,000, a lot at 250, and we've had some larger ones at over 5 million. However, I'd say our average investor is half a million dollars. And we're certainly open to people for 100,000 or something along those lines. But just for easy Math, let's use $100,000. You put in $100,000, you start earning a 10% preferred rate of return from day one. So that'd be 10,000 bucks a year that accrues until there's distributable cash flow. So if the project takes two years to get built and.

Operational, once there's income from tenants, you'll start getting a payment plus your 10% preface until such time as you have your capital back. Generally speaking, we're able to refinance most of these projects.

At somewhere between 24 and 36 months and return all the capital, hopefully depending on interest rates. Can't guarantee that. And you might only be a portion of the capital, but you get a chunk of your money back, if not all of your money back, plus your pref. And then you'll have your pro rata share of the deal going forward. Then when we exit that deal, whether it's three years, four years, five years, or six years, you know, most of our deals are seeing historically 39% ROI, or, excuse me, 39% IRR. And then, you know, capital appreciation, that 100 could be worth 300,000, could be worth 250. On a short, quick one, it could be worth 350. We're seeing good equity appreciation.

Yep. And talk a little bit about the tax advantages that you get, because this is a real estate deal.

Well, it's real estate and you have to consult your tax professional. I'm not going to get into deep tax advice. But you are a K1 member. You're going to get a K1. So you get your pro rata share of the depreciation. We do do appraisal once it's completed. So we'll have accelerated depreciation the first few years.

Which can really help offset your income.

Yep, yep. And then you also have gotten into opportunity zones as well.

We have four projects right now that are in opportunity zones, which basically means you can defer your capital gains tax.

Into 2026, really 2027. But that's definitely. Talk to your tax professional. And if you, if we. As long as you're invested for 10 years, when you exit at the end of the 10 years, there's no recapture on the depreciation throughout the hold period and then your exit money is tax free. Now that may get extended. I mean there's a lot. I don't know if it's going to get extended, but I think with the current administration there's a good chance he's a real estate developer. It may get extended.

Yeah, yeah, that totally makes sense.

No, I love that.

It'S one of the. I've known a lot of people who've made money in storage and I'm not one of them and I intend to change that. Okay, so next up let's talk about the operational excellence. So setting up the deal, setting up right with the investors buying the dirt, creating value, knowing where and when to build and also understanding the business model and reducing the risk. But operating is about keeping the most money and continuing to build long term equity for you and your investors. So talk a little bit about the partners you have, industry experts operationally and also the design of these places which you've already said, you know, you're creating top of the line, fifth generation storage.

Yeah, I mean the design of all of them is done such to fit the neighborhood they're going into. So they all have a certain look which changes a little bit. Then we have operating partnerships. You know, we do deals with the major storage operators with the national networks and they manage our facilities. And you know, and frankly they could easily be our best buyer when we decide to liquidate at a later date because they're already managing facility and they're large public companies.

Got it. And what about the contractors and the managers you're working with too? Because you've got.

We use a long tier construction company that's able to provide a completion guarantee that's actually worth the paper that it's written on. And we'll do contracts that are pretty close to fixed pricing so we know what our construction cost is going to be.

Yeah. And then also the, the operational side. So you've got operators that are working and operating these things for you with single digits. Meaning it's. It doesn't cost a lot.

No, it does not cost a lot. You know, whether it's extra space or public storage, we have operating relationships. They'll run the property project. And we don't build a project unless we know who the operator is going to be first.

Yeah. Now, one of the other things that I didn't talk about, but. So.

It'S really how you treat your investors. So we interviewed a couple, three of them. And then we also talked to someone this afternoon who's put just shy of a million dollars in one of your deals. And what they all said consistently was they loved the fact that you and Russ are super enthusiastic. You have a background. You've had no failures between the two of you in this entire time, which says something about you. And we've had business.

No failures in the storage space whatsoever. I mean it's. But you'd have to work pretty hard to fail in the storage space if you go to the right location. I mean, you'd have to try.

Yeah, that's good. It's like.

Yeah. Having a hungry audience. The next thing though that they said is they loved the fact that you brought them to sites and then we've logged in. You've got this portal so people can see what's going on pretty close to real time. They're seeing site construction photos and the development. So what consistently came up multiple times is I loved the fact that I could see exactly where my money was going. So just talk about taking care of your investors.

Yeah, we've always taken care of investors. And as I've been an investor in a lot of projects as well, I like data and information.

So we try to almost over data. While something is in pre development stage or pre construction, you'll get at least a monthly update. When stuff is under construction, we send out a weekly update. And a little bit depends on who the superintendent and the foremans are on the site. But we have a photo deck for each job site that's set up. And we've had some. Some superintendents put photos in there three times a day. Some put stuff in there every other day. But every week you'll see the progress on the project.

Yeah. That seemed to give everyone a lot of comfort just going, okay, I can see this. I can see this.

And knowing that in the phases when they're doing dirt work, you see a lot. The first few days you don't see so much. When they, you know, you do your utilities in the ground, you don't see so much, but is when they first start pouring the slab and.

And then start framing up the steel, it. You can see a difference between morning and night.

Yeah. No, that's awesome. How about.

You know, we talked, I asked your, your clients about their fears. So every, every investor is going to have the same fear, which is, is it safe? When do I get my money out? Who the hell are these guys? Can I trust them? They ask tax questions and oftentimes there's the things you, you don't know to ask for unless you're super experienced.

And I do understand that the tax implications and tax structuring quite well, but that I have to work on an investor with an individual basis because there's too many people that will give tax advice in this forum without enough detail to give tax advice, and that's dangerous. There are ways to offset income.

Yes.

There are ways to have tax exempt income. There are lots of things that can be done within the tax code. It's designed to do that. But that's more of an individual basis with someone and understanding their situation first.

Got it. So talk about some of the other fears that you frequently overcome that you deal with that show up over and over again and it allows you to basically say you're not a right fit for one of these deals.

Well, there's a couple of fears. Everybody has the fear that when you're raising the equity capital, what if you don't raise all the equity? It's always a fear. And the bottom line is there's always a what if. But so far that hasn't happened. It's not going to happen. Both myself and Russ have some money of our own that we can kick more in if we had to. We also have some really wonderful partners that if we need to bridge a little money to get under construction while we finish a raise, we can do that so we don't have that fear. And then we use a contractor that's going to finish the deal. Our contract is, you know, cost plus with a guaranteed maximum or just a fixed price contract. That's the deal. So we know it's going to be finished for that price.

Yep. Now that's. And when do you, when do you say no to investors? Like, when do you know that they made like a total right wrong fit? And you'd be like, nah, I'm not even going to take your money.

There are some investors who, on a smaller scale, lower amounts of money who you can just tell going into it, too many questions, too many of the same question seven different ways. And some of that's fine if you're learning. I have no problem with that I'll answer the question 100 ways till Sunday if you're wanting to learn. But there are some people that you can just tell you're buying a future problem and we're just not interested in doing that.

Yeah, so, yeah, it's always the low ticket. I call them the PETAs. Right. Paint on the rear end, folks. So you don't. Yeah, you just don't want them. All right. And you already talked about the typical minimum investment, but.

Let'S set this up. I'm curious when.

You'Re talking to our.

Minimum investment, but you do have to be a accredited investor.

Right on.

You got to meet that qualification. You can put that out on your million dollar net worth. The whole.

Right on. Yep. I think it's quarter million in annual or. Yeah, annual income and a million dollars in assets.

So excluding your primary residence. Yes.

Yep. Good job. So next up though is. So let's say you're just talking to someone, they say, I want to do.

Storage investing. What are some of the big questions, the important questions people should be asking that we haven't covered?

I think the most important question is understanding the location that they're going to invest in, understanding who the developers are and who the developer is using for a contractor. You can have the world's best developer, but if you don't have a contractor capable of building it and on budget and on time, there's a problem. So location, understanding the market, which that all goes into location. Locations. Understand your market, know your competition, know the demographic, understand your 1 mile, your 3 mile, your 5 mile radius for rooftops, population, type of housing, all of the demographic factors. That's part one, part two is who's going to build the damn thing and making sure they're a sizable enough contractor to get through it on time, on budget, making sure the developers understands costs enough to make sure that the bid is reasonable.

Got it.

And then clearly you got to know the exit plan and hopefully you're going to ask them questions about their history. And.

I don't know if there's anything else that I think we answered all this. No.

I mean it is a simple asset class when you break it down.

Yeah.

I mean there's complexities and there's intricacies to do it and do it well. It's almost an art form to create a warehouse that doesn't look like a warehouse, that's aesthetically pleasing and so forth. However, once you get beyond that, it's a simple business. People store their shit, they pay you money every month. They don't pay. You lock it up, rent it to someone else, and sell the shit that's in there for the back rent. I mean, it's kind of simple. However, it makes a lot of money. And because it's got predictable cash flow, it's an asset where a lot of hedge funds and private equity and public companies buy it because it's predictable cash flow.

All right, so.

This is pretty easy. So I know we've got. It's really easy. You go to yourspaceamerica.com you can get a deal prospectus, you get more questions and answers, there's more videos there.

And also there's a place where folks who are really interested can get site visits.

You can go to your space.com and go to info which will go to.

One of our. One of our guys. Or you can even go, if you've got a little bit bigger deal or more complexities, you can reach out to me directly either through Arthur at your space or arthur@arthurhood.com. either one. But that'll come directly to me.

Awesome. Okay. Anything else that I should ask you that I didn't?

No, I think we've kind of more or less covered it.

All right, well, here's what I got then for you. I've just had a blast hanging out with Arthur. I've had a ton of fun getting to know him. And my team and I have been able to digest an enormous amount of data. We've been working with them on their plan, their marketing, their book, their content. And it's very rarely that I feel so convinced of something in such a short period of time. And I also feel like we've gone on a journey that's lasted a year already, even though it hadn't been that long. So I'm excited about this. I've learned a lot. I hope you have, too. But go and check out yourspaceamerica.com if this is something you'd be interested in learning more about. Talk to Arthur, talk to Russ, look behind the scenes. And also you can see they deconstruct some of their most recent deals. You'll see how they're set up and where they're located. They really are beautiful spaces, and I'm looking for forward to being part of this as well. So with that, this is Capability Amplifier. I hope you had a blast watching it. And this is Arthur Hood. Let's say goodbye.

Have a good evening, y'. All.