In this eye-opening episode of the Truly Passive Income Podcast, we dive deep into the world of self-storage conversions with Erik Hemingway, the Co-Founder of Nomad Capital. Erik shares his incredible journey from a three-year sailing adventure around the Mediterranean to building a successful self-storage empire with his son, Levi.

Discover how Erik and his team at Nomad Capital add tremendous value to their projects through strategic conversions of old retail spaces, like Kmarts and grocery stores, into thriving self-storage facilities. Learn about the built-in safety margin that comes with forced appreciation and how you can increase your net operating income and property value by implementing energy-efficient solutions.

Erik also shares his insights on the future of self-storage, the impact of technological advancements on the industry, and his favorite way to give back through his family’s involvement in a nonprofit theater company.

Key Takeaways

  • Self-storage conversions offer a unique opportunity in real estate investing, particularly when transforming underutilized retail spaces like Kmart or grocery stores into thriving self-storage facilities.
  • This strategy allows investors to capitalize on the growing demand for self-storage units, driven by societal trends such as downsizing, death, divorce, displacement, and changing nature of retail.
  • Conversions can be more cost-effective compared to building new facilities, as they repurpose existing structures and reduce construction waste.
  • These projects often have shorter timelines and fewer zoning restrictions, which can lead to a quicker return on investment.
  • Self-storage conversions offer tax benefits, such as depreciation and bonus depreciation, which can significantly impact an investor’s bottom line.
  • Leveraging syndication for self-storage conversions can provide passive investors with the opportunity to participate in this growing market without the need for hands-on management.
  • Self-storage facilities can provide consistent cash flow, making them an appealing addition to a well-rounded investment portfolio.
  • The success stories shared by Erik, such as students gaining confidence through his wife’s nonprofit theater company, emphasize the importance of giving back and using one’s passive income to create a positive impact in the community.
  • For those interested in exploring self-storage conversions as an investment strategy, connecting with experienced professionals like Erik Hemingway can provide valuable insights and guidance to help navigate this unique market.

Time Stamps

[00:00] Intro

[01:55] Erik Hemingway’s background and journey into self-storage investing

[03:37] The advantages of self-storage conversions from empty retail spaces

[09:28] The role of syndication in self-storage investing for passive investors

[14:47] Importance of location and demographic research in self-storage conversions

[21:02] How Erik and his son, Levi, work together in the self-storage business

[25:53] The potential returns and growth opportunities in self-storage investing

[28:34] Erik’s favorite self-storage conversion project

[36:26] Erik’s favorite way to give back: a nonprofit theater company

[37:31] How to get in touch with Erik for more information on self-storage investing

Links and Resources

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Transcript
Neil:

What are self storage conversions? Why do we believe it is one of the greatest value add strategies out there in commercial real estate? And how can you get started using it for your journey to financial and location independence? On this week's episode of the Truly Passive Income Podcast, that's what we're going to talk about with our good friend Erik Hemingway from Nomad Capital. Welcome to the Truly Passive Income Podcast. I'm Neil

Clint:

And I'm Clint.

Neil:

Our guest today, as we said, is Mr. Erik Hemingway. Erik, welcome to the Truly Passive Income podcast.

Erik:

Thank you, Neil. Gentlemen, how are we?

Clint:

Very well.

Neil:

I'm doing good. Good morning. Good morning.

Erik:

Morning.

Neil:

So give us a quick rundown of your background and how you got into the self-storage.

Erik:

okay, sure. Yeah, so I've been in construction for a long time, 25 too long, let's just put it that way. was doing construction in Arizona, specs, customs, and, 2005 ish, found a piece of property. I'd heard from a few people, like, you have to get into self storage, like it's a cash cow and it's great. And I'm like, I have no idea. anything about the self storage business? So, found a piece of property right where I lived, you know, I pass it every day. It was a residential, farm on a highway and had to rezone a commercial. And, just had a long due diligence period, not really sure what, what I was getting kicked around, like a football at the county and what it took to rezone it to commercial. Thankfully, I had some very patient sellers who waited, waited through that process with me, but, Yeah, I had done some commercial construction before that, but this was by far the biggest project I'd done. yeah, built it through 2006 and opened in, late two six, our first facility. And, I was in the self storage business.

Neil:

So what did that. Re entitlement look like for converting that from a residential farm property to, commercial.

Erik:

It was probably six months or so. Six or seven months. had to have some preliminary drawings. Had to go to the county and apply and it was even harder than just residential to commercial cause storage was, I don't remember all the details, but B2 was like general commercial and B1 was storage, so it was a little more stringent. And they, one of the requirements, I submitted a plot plan with what I was proposing to. And then they came back with revision saying, Hey, we don't wanna drive down the highway and just look at storage units. we want you to put a commercial building as a buffer between the highway and the storage units. So back to the drawing board. and we ended up putting a 5,000 square foot building there. So a little bit of back and forth there. Then I had to go in front of the planning and zoning commission, and then the county. let's call it the, like the county council for final approval. And there was just a lot of, I call 'em miracles along the way that just things that should not have happened happened. And I was at the final meeting, it was three commissioners that were yes or no, and you had to get a majority, right? There was a, another project, maybe 15 miles down the road. One, one thing I was really counting on is what they call a deceleration lane. So you had to, I had to actually put another lane on the highway. It's a six lane highway and off of the highway to turn into my property. Right. And so I was counting on that and had to go to Arizona Department of Transportation and all that process. Finally get to the county and I was up for, I gave them my spiel, said, I'm Erik, I wanna do storage. And initially they said no. And all three of 'em said no. They said, yeah, we don't think that's a good use. And I was ready to go back to my seat. The, attorney for the county piped up and said, gentlemen, I urge you to reevaluate because we just gave some, this hotel like 15 miles away, the right to do the deceleration lane for his project. And so we've set a precedent, so I don't think you cannot approve this one. And then they, and then one of 'em said, well, I motion we re-vote. And then it was unanimous So I mean, that one, that one decision, if that attorney hadn't piped up, it would've been game over right there. but that was my first foray to all that. And it was, certainly trial by fire.

Clint:

Wow. That's a, I didn't, never knew that part of the story, Erik. That's amazing. So that was 2006. Market was booming. Everything's going great. It's going to continue going great forever. how'd you choose that location? What was going on the community around there that made you think that was a good area for storage and then what happened over the next few years?

Erik:

it was a growing area. It's a suburb basically. I mean, Prescott, Arizona is already a small town, but this is kind of the outskirts, pretty rural area. but there. One project that was getting going, a new residential commercial or a new residential project. So I thought, okay, great, those houses are gonna help fill this storage. And then as I was going through the whole due diligence process and permitting, two more developments came up, on the books. So I thought, this is piece of cake, it's gonna be a slam dunk. And so two, we built it. 2006 and 2007. We're just starting to lease. Of course, 2008, we all know everything fell apart. All three of those developments, one actually started building. The other two never even got off the ground, never got even cleared land. all three went bankrupt. And so we went through a, oh eight to probably 11, three years or so of very slim margins to, to get through the recession. so thankfully we were at right at the point where we were about break. But then it fluctuated over those three years, like I mentioned, on, move-ins, 12 people move in, 11 people move out, nine in, 11 out, whatever. So it was just treading water for a while there. And thankfully we were able to hold onto the property and once 11 happened and 12 and it just kept getting better year after year. Still own it today. just finishing up a 30,000 square foot expansion on two acres next. That we bought a couple years ago. So the property's doing incredible, and that's really what motivated us to get back into storage. when we relocated to North Carolina in 2016, we got into North Carolina in 2012, but, by 2016 we decided like, let's get back into storage, earnestly and get serious with it. And so that's what we did.

Neil:

One of the things I love about storage is the ability to build in phases. I mean, you have this facility, you've figured out the demand, you've built it up, it's leasing up, and you get to a point where, hey, we're filling up, and it's a lot easier. It's not like a, an apartment building where once it's full, all your, pretty much the only levers you can pull is to lower your expenses or. Increase rents, whereas with storage it's a lot easier to, if you've got a little extra land around it, you can expand.

Erik:

Correct. Yeah. Abso yes, absolutely. And there was a lot of times where I wished I would've even phased the first part. So the first development was 38,000 square feet. And then like I mentioned, the 5,000 square foot retail building, and we had kicked. Maybe just doing, so the way it's set up is the buildings are on the perimeter of the property and we should, I, we kept thinking maybe we should have just done parking in the middle and then put buildings in there later. Would've been a lot, slower lease up had, had we known how long it was gonna take the lease up, and that would've probably been the way to go. But yeah, to your point, that's the great thing about it is you've got land, hopefully, or you can acquire land adjacent and. Maybe do boat and RV parking or a lay down yard for contractors, and then you have room to expand into that as the demand calls for it.

Neil:

The adaptability is a great,

Erik:

yeah, ab, absolutely.

Neil:

So you built that open for business in 2008, correct?

Erik:

2006.

Neil:

2006.

Erik:

Yeah. Mm-hmm.

Neil:

So open for business 2006. You get back into the storage business 10 years later in North Carolina.

Erik:

Yes, sir.

Neil:

what was your next facility?

Erik:

my son and I were working together since we got to North Carolina 2013. doing residential renovations, crawling under old houses. Wilmington has a ton of historic houses we did a lot of that work for a few years and. I said I can't do this anymore. the fun is worn off. we hung the bags up and I said, by now the storage in Arizona's doing great. And we thought, Hey, let's get back into storage. Cause it's doing well and it doesn't take a lot of our time. Like, let's do a few more of these. my wife and I were having a beer at a brewery downtown and we had just kind of made the decision maybe a week or two before, like, let's see what we can find. And we're sitting there having a beer and looking at across the street and there's this big brick ugly building with no windows in it. I thought that would be perfect for storage. So I actually got up and walked around the building in the dark, with my phone and looking at 'em like there's no windows. It's got a loading dock, it's got, an office. So I called the realtor the next. walked it with him and said, I don't see why this wouldn't work. We had already known there was a lot of stuff going on downtown Wilmington, and I thought this might be a perfect, segue to get back into the business. yeah. So we ended up putting it under contract and that was our first storage in North Carolina. city Storage North.

Clint:

What do you think when you look at building a ground up storage facility like you did in Arizona versus doing a conversion with the warehouse, what are some of the pros and cons of the different strategies there and, how does that

Erik:

play up in terms of the cost to build it out, the timeline and things like that? yeah, so ground up. We've got two ground ups, projects going right now, and we've got several conversions going right now and. Just the time is huge and expense, right? the buildings that we're finding these days are old warehouses, old retail, a Kmart, or, a soda bottling facility or what have you. so much of the work is already done. Now you do run into risks. Are you gonna find asbestos or lead paint or buried oil tanks or fuel tanks? We had that with a Kmart where they used to have an auto center there and they would recycle oil, so there was a buried oil tank. there's some environmental risks, no question. But, I mean, you don't, ground up development is not free of risks either, right? what we've noticed is that the time factor is so much faster with. With a conversion as opposed to a ground up. ground up projects typically take six months in planning, engineering, civil engineering, structural engineering, permitting. I think our two ground up projects were at least four months into permitting each. and then you're starting from scratch, right? You're just scraping the lot, digging, footings, inspections, and away you go. a con, a conversion might be a year or just a little bit under. And, ground up is easily 18 months to two years could be.

Neil:

Wow. How are you determining the feasibility of a potential self storage conversion project?

Erik:

so we have somebody on our team that does underwriting and that's, you know, he's an acquisitions manager, so he's, we've got a few subscriptions to different softwares, radius plus CoStar. we follow demographics obviously. What's the population, what's the income level? what percentage of the population or renters? Cause renters typically use more storage than homeowners. What is the proximity to other storage facilities? How much climate control is already in the market? How much is non climate controlled? How full are they? what are their rates? Are their rates, at market rates? Are they lower? are they full because they're low or are they full because the market's demanding more storage? Right? a lot of, we, we do a pretty deep dive into all of that while we're identifying a property. And then if it starts checking a lot of those, then we move ahead with the project and, then we hire a third party feasibility study. As soon as we get the project tied up and double checking our numbers, making sure he's seeing what we were seeing. and so far that's proven true. What the stuff that we find, the feasibility study is really, really close to what we've come up with. project cost and lease up and rental rates and unit mix and all those kind of factors. It's not just a throw a dart at the wall and you know that they come, I think those days in the storage business are over, there's so many markets that are teetering on the point of saturation that you really have to do your homework. And, we had a chat with the bank last week and they've done storage in the past and. Thoroughly impressed with our underwriting and they're like, oh, like we've done storage projects but nobody has done has presented us with what you guys just laid out. We're like, look, we've already done all of our homework. We did this, we did that. The building's this, we know it's gonna cost this much to convert it. And so that goes a long way, even from a lending standpoint.

Neil:

Yeah. So three key metrics you're probably looking at are population within a 1 3, 5 mile radius, what's the competition?

Erik:

Yep.

Neil:

and what's their blended, what sort of rates they're getting? Correct?

Erik:

Rates and occupancy rate we wanna see, I mean, even if there's one close, or quote unquote close. but they're a hundred percent, well, they're really not, they're not really a competition anymore because they're full unless, you know. Things radically change, but any anybody else that's gonna try to rent in that area, they're full. So we're gonna be the only other option. So I'm, I don't have a problem going close to another competitor. Cause in my mind it's really not competing. Now, if two sites are starting out, both empty, then you're, that's, there's a risk there. obviously you can get into a price war of who's gonna fill up first, so that's the stuff we check.

Neil:

Well, nationally they say the market stability in storage is considered to be about seven and a half. Square feet of storage per capita, that's what they call market equilibrium. Mm-hmm. You hear that you hear that a lot if you play in the storage circles. But in our experience, and I, and probably your experience as well, is that it's very market dependent. You can have a market that has 10 square feet per capita, but everybody's full.

Erik:

Right? Yeah. I mean, I think you, if you follow the trends, you'll see that number has. More people are using storage than ever basically on a per capita basis. And I think we're comfortable at 10 plus 10, 11, even 12. I mean, some markets are at 15 and most of the sites are still full. That's something that's fluctuated. I know this, the seven square foot number was used for a long time. I think the demographics have changed a lot and the people that are renting storage and why they're renting is, has all changed a lot in the past, five years, certainly through the pandemic. interesting fact is that millennials and Gen Z, each make up a bigger portion of storage users than Gen X or, baby boomers, which is, was pretty surprising when we learned that fact, 18 months ago or so. and they're not using it where they just put stuff there and check on it two or three times a year. I mean, they're going several times a month. They're using it really as an extension, of their house, of their living space. So climate control is a great reason for that. And, typically they're renting an apartment so there's no room for sports equipment or, all of the kinda things that people use for storage.

Clint:

Erik, I got a question for you. It sounds to me like you've got this really dialed in. There's a lot of science involved, a lot of management, and frankly, it sounds like a very, very active business and business model that you have. Our syndication, topic that we discuss a lot of times for the sake of the listeners of the podcast is podcast is called Truly Passive Income. so one thing that we focus on is you've got this really active business model going on, but how is there a way for other people to be part of this and how does this work for people that are not, active investors like you are? And you're not getting outta here without a question about what you and your wife did during the years when the market really turned on you in Arizona. And one of the things that you talk about a lot. that risk is a muscle, and you brought that up in a lot of conversations and the way that you've taken risk over the years for yourself. Some of the developments you've done on your own, some of the adventures that you took with your family when the market dictated that, and just listening to the market and what the market's giving you and the way that you've built and worked that risk muscle. And I would argue, one of the things you bring up is the difference in risk versus calculated risk and eventually taking those steps. Being willing to tolerate risk, building those muscles going on the adventure that you did ending up in Wilmington, getting back into self-storage, and then talk about how you took that and moved on from a private business owner taking risks on your own to taking the knowledge that you learned and earned over time and turning that into what is called nomad capital. So briefly, I know that's a lot, but I'd love to hear that quick version of how you get to where you are now.

Erik:

Sure, sure. yeah, passive income is the elusive thing that everybody's chasing, right? What is passive income? And people get into short term rentals and, Airbnbs or what have you, or single family rentals. what is really, what is truly passive, right? to me, in my mind, truly passive is 100%, hands off. and you still get income from it. Literally mailbox money or today's, direct deposit money. we certainly don't, aren't, passive, we're not receiving passive income. There's another thing I like to talk about, which is residual income, right? So it's not passive, it's not quite active, like. Every ounce of work that we do is not tied to our income, but we do have, set up a good stream of residual income, which is, we already did the active part, and there is a stream of income coming that is minimal effort, right? That's where I would call residual income. And then passive income is something that we wanted to, so my son and I are partners, so we thought, well, we could keep going like we are, and. Do the next deal and maybe do one deal a year or one every other year if they're bigger deals. but we also realized the value of truly passive income. so as you mentioned, we were able to take an a, extended time abroad. We lived in Costa Rica for a year and a half and then lived on a sailboat for three and a half years. all around the Mediterranean, all during the '08 to '12. Recession and we had the storage the whole time and it wasn't a hundred percent passive. I mean, it was, it involved a few phone calls a month, a few trips over the years. And, just talking to my storage manager, I have a fantastic manager there. She basically ran, she did, she ran the property for us while we were gone. And, that was passive income. And so that's where we thought we want to try to be able to, Help others achieve that, right? So we want to, if they don't want to learn everything there is to know about the storage business. They don't like it. They don't care. They don't want the risk, they don't want to go sign on a multimillion dollar loan and, find, figure out how to manage it and lease it and build it and hire, you know, it's all, it's a mess, right? so we thought maybe there's a section of people. a group out there that would love to get involved in storage as really a passive way. and then it allowed us to do more deals cuz we were finding deals that we couldn't do, just for lack of capital. And thought, there's probably an overlap here where, they have the capital but they don't want to do the business. We know the business and we are willing to take the risk and do the project. so maybe we can all win. And so that's when we started Nomad Capital a year and a half, I guess. and, it's been fantastic.

Neil:

It sounds like you've been sitting in mine and Clint's meetings. you bring up such a great point about the difference between passive income and residual income. And in order for you to get that residual income that you were getting from that storage facility that you built in 2006, Took an enormous amount of work upfront and your experience, your knowledge, your own money and your own risk. and then set in addition also setting up. The systems in order to keep that going, or at least the man, you know, hiring the right people to keep that going. And it still required not a lot, but it still required some ongoing effort. And that's where we try to really draw a bright line between passive income and residual

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income.

Erik:

Mm. Yep. Yeah, it is a big difference. Yeah. And I mean, residual income, in my mind is still a disproportionate factor. your activity compared to your income, right? You're working 10 hours a week, but you're getting paid as though you had worked 40 hours a week, for example. so that's, residual income. Passive income, to me, in my mind is, almost no effort on your part, and you're still getting paid, like you are working 40 hours, right? So that's, active is of course you're working 60 hours and paid like you're working 40 Yes.

Clint:

Listen, let's make no joke about it. Even in passive income, someone's doing the work, right? the difference is with residual income, you've preloaded the work and the other people from the outside looking in it, it looks easy, it looks passive, but the reality is you just did a lot of it ahead of time and laid that groundwork with you in all the deals that you've done on your own. It's a combination of time, experience, and. And the idea with a syndication is it still takes experience and it still takes time. The idea is somebody can put their money in, and as long as you still have those three things, time, experience, and money, you still have opportunity to have success with the right analysis and feasibility study and everything else. So it's still being done. The time is still being spent, the experience is still there, and there's still calculated risk. But, it is truly passive for the people that just put their money in and they get to pawn that, the workload off to the person that knows how to do it. And you and Levi certainly do,

Erik:

Yeah, absolutely. I mean, that's what we like about it. And to your point about the time, I mean, that's another reason we like the, conversion so much more than the ground up because if we are gonna syndicate it, we're shaving potentially a year off of that process. from closing the property to renting units, right? And that year, as we know, at 8% interest, or eight and a quarter, whatever it's at with the latest hike, that's a bitter pill to swallow. You've got a year of interest on a few million bucks at 8%. it's makes the deals harder to, to pencil. so if you can shave that year off and find a conversion and be renting in 10 months, well now all of a sudden, This market is opened up. and how much quicker are you gonna be than the competition that is gonna go find a piece of land, find an architect, find a contractor. we're way stealthier and way, more nimble to pop into a market that we identify and be like, yeah, we'll be, let's do it. We'll be up and running. and that, difference in the long run is huge for investors I think. it just makes it us able to offer much better returns for them, much more attractive returns. and they, they're actually in on the deal. They're on the llc, they're, they're a limited partner, but they have, full ownership of their shares of the LLC and we're all in this together. I think that's a great blend of everybody's skills and talents and, money.

Clint:

Yeah, you kind of answered my next question honestly. I was gonna ask, what are some of the differences between Nomad capital and what you see with most other syndications? And I think you just answered a lot of that. You know, a lot of times the lion's share of syndications that we see are multi-family apartment complexes that are being bought and renovating, maybe putting in granite countertops, increasing the rent by 15, 20, 30% to increase the net operating income, but it was an apartment complex before. It is an apartment complex after. The valuation formula is still the same. There's only so much you can add there. so I think it would just, that's really what the difference is in Nomad Capital is the projects themselves, the timeline

Erik:

and how you push it forward. What does it look like for

Clint:

the investor? Like when you find a deal, you've got something that's coming down the pipeline and you do all the homework on it. From the investor's standpoint, what does that process?

Erik:

yeah, typically we get in front of them with a offering memorandum and show them what the returns look like. and as I mentioned, because we do heavy, we focus on heavy value add properties. That's what we, that's the lane we like to stay in. We like storage and we're builders, so that's a good blend of our skills. so that's, we're able to put storage where you. Everybody else has to buy Retail is the way I put it. And I get those emails every day. You know this property that property's for sale. And it's similar to a multifamily project where it's like, yeah, I could probably get insurance for a little less. I could probably do something with management and save some money. Probably push rents up, like you said, 15%. So those are, as Neil mentioned at the beginning, those are the levers you can pull with an existing facility. Whereas with the conversion, it's essentially as though you're coming. To a market as a ground up, but you've, but you trim, like I already talked about months and months off of that process. so yeah, so we, we're looking for a specific type of investor. They're comfortable with a certain level of risk. but as we've already talked about, it's calculated risk. We've already, we've done our due diligence, we've done our feasibility, we've getting environmental on the building, so we know that's squared away. So we want those investors that are willing to partner with us and, come along for the ride. And, we like longer term holds. We're not looking to do some quick, turns in three years and get everybody out. And we look at it as a relationship and a partnership where, look, we're gonna try to build, we're doing our very best to build you a stream of income here that is passive. That you don't have to, you don't have to worry about your money's. it's doing exactly like we told you it was gonna do. You're getting a great return. there will be refinance options along the way. Every deal's a little bit different, but, most of the deals we're looking at now are 10 year holds. And, so it's a longer track. and we like that because we've seen what happens through these assets over 10 years, especially from the one in Arizona. We've had it 15 or 16 years now, and really saw what. Things transpire after 8, 9, 10 years and going on. Cause your debt is fixed and your rents keep going up and that margin just gets wider and wider. It's like, I don't wanna get off the ride. It's still, we still have a couple loopteedos to do Yeah. So I think we've discovered that and so that's what we wanna share with investors.

Neil:

Got it. Can you speak about any unique or creative solutions that you've implemented in storage conversion projects that were facing a difficult situation such as a property with a unique shape or limited access?

Erik:

let's see, let's think here. trying to think. we've had some situations where, we had a dirty environmental on one and, just had to get creative with how to mitigate that. Do we do the phase two and what does that look like? we've done two projects like that where we got to the phase two part of the project, environmental study, which, just for the listeners, a typical phase one environmental study might be 2,500 and a phase two study is probably 12 to 14,000. If you get to the phase two stage, you're spending real money and you're wanna be pretty sure that it's gonna move forward before putting that much money at risk. And it's still our money that we're risking, We don't, it won't be on the investors until we get to the finish line. but yeah, every project's a little bit different, layouts as we use these old buildings. there's, they've been I think two or three of our projects right now, they've been added onto. Over the years. One, one building is 80 years old, so it's had multiple additions. So that, we just have to be very creative with how we lay out unit mix and hallways. And, thankfully we've got some great architects that help, they're used to that and used to thinking creatively and how can we maximize the square footage within this footprint. So does that answer your question?

Neil:

Yes.

Erik:

I got, I got on tangent there.

Neil:

All good. The traditional view that people have of self-storage is of a building that's sitting in, an industrial area. It may have a little office there and it's got a manager sitting behind the desk from nine to five, Monday through Friday. They maybe have apartment on site where the manager lives. How have you seen that model change with the integration of technology such as keyless entry and online rental options, things like that?

Erik:

Oh, a ton. I mean, when we did the one in Arizona 15 years ago, it was, that was the only way to do it, right? You had to have a manager. I mean, that's just a number you have to put into the project that you're gonna have to have someone sit there and hand sign every. And walk the tenant to their unit, show 'em how to go through the gate or whatever. we've all seen the storage sites with the golf cart, and that's what you do. You drive around and show 'em the, which unit do you want and all that. So that's changed tremendously over, over the past 10 years and especially since, The pandemic because so much has gone, technology has gone to online. we use a QR code on our doors, so if our manager is out for weekends, they can easily scan the QR code. Covid kind of trained everybody how to use QR codes, so they scan it, they rent, takes 'em right to our website. They can rent online. Online rentals were not a thing when we first got in this business. And slowly it was like somebody's gonna be the first ones to do online rentals, cuz it was still a legal thing where you had to have their wet signature on the lease. And those kind of things have all evolved into email, DocuSign, what have you. And it's, it's seamless. So it's, I think it's gonna keep going that way. there's a lot of companies out there doing third party management. Contactless or whatever you want to call, remote management is all, and we're experimenting with all those different options and seeing what works for us. We have one site that has no manager on site, and then we're toying around with third party management and they don't use an onsite manager. So there's all, it's really however you want to design it, is available today. So yeah, plenty of options.

Neil:

Can you discuss any measures that you've taken to improve the energy efficiency of a converted self storage facility and how that's impacted the net operating income and then ultimately the value?

Erik:

Yeah. it depends on the state or where it's located, but there might be local, state, or federal tax incentives or credits. So after we did the conversion in Wilmington here back in 2016, there was a property that came up for sale not far from us, and we, took a look at it. The utility bills were really expensive. I wanna say $2,200, $2,500 a month. And, they were using high pressure sodium lights, but because they were the kinda lights that, like an old gymnasium when you turn them. you hear this huge clunk and then like 30 minutes before you actually get light from 'em. Cause they have to heat up the ballast and all this stuff. Well, because they take so long to turn on, the owners just left them on all the time, 24 7. So their utility bills were $2200-2300 a month. and the building was not air conditioned. So it was hot in the summer, cold in the winter. so we, when we bought the building, the first thing we did, changed all the lighting to l e d and that was a situation where we were able to get a credit from the, from Duke Energy, the, uh, power company in North Carolina. And they paid for, I think 80%, 90% of the upfit costs, through a federal tax program. so we changed all the lighting to LED and then we added, 40 tons of HVAC air conditioning and heating to the. And now even with adding all of that air conditioning and doing the l e d, our bills are $800. So the bill went to about a third and we got brand new lighting and now it's climate controlled. So we were able to take the rents from, I think they were $79 for a 10x10 non climate controlled. And I think now we're at $159, somewhere in that neighborhood. I mean, that was really a fantastic, win on both sides. Cutting expenses, raising rents, and being able to justify the raised rents. Cause even after we raised rents, we were having our tenants, we were expecting them to come in with pitchforks and torches, angry about the rent increase. And, all we got was compliments, like, oh my gosh, I have to come here and organize my stuff, and now it's air conditioned and now it's heated. Like, I don't dread coming here like they used to just. In the summer in there. And, so they were grateful. I mean, for them to pay another 40, 50 bucks and actually get some productivity done there, was huge for them. So they were really happy with that. And of course that just helped the bottom line, explode. So that was a great win. So that's what we do routinely. Now, we, first check an old building, we're like, we know we're gonna save a ton on the lighting right off the. and depending on which state, which qualify, which programs we can qualify for. But yeah, we definitely like to explore every option there. cause we set, we're trying to set 'em up for long, long holds, right? We want new equipment, we want trouble free lighting. We want, motion sensors on lighting so they're not on all the time and all those kind of things. All help.

Neil:

Well, and again, I'll come back to you, Clint, again, it comes down to, it's another one of those levers that you can pull, you increased your NOI by what, $1,200. Now you divide that by a cap rate, and yeah, you've not only, you've increased the cash flow on that property, but you've also substantially increased the value.

Erik:

Right. Yeah, absolutely.

Clint:

Tell me about the deals that Nomad did, in 2022, and obviously in 2022 we had some pretty significant shifts in interest rates as well. So tell me about what you did last year and what you guys have coming down the pipeline and expect to do in 2023.

Erik:

Oh, great. Yeah, so last year was our first year, officially syndicating the whole year. So we were able to do five deals. two Kmarts, one Kmart in North Carolina, one in Virginia. the first Kmart is open. we opened about right at 60 days ago, so we're leasing up there. bought an existing facility, which is not something we normally do, but, it was an opportunity that came to us off market. and we couldn't pass it up. So we did that one. working on a grocery store in Georgia as a conversion and a, soda bottling facility in Charlotte, just outside of Charlotte, as well. So five deals and, yeah, looking to do more of the same. We've got, just got another project under contract. got a full pipeline ahead. It seems like we keep finding deals and. Just having fun exploring. So our, the states that we're focusing on right now are North and South Carolina, Virginia, Tennessee, and Georgia for now. we feel like there's plenty of, or to be mined in those states and, yeah, interest rates are making it more challenging. But another reason we like conversions, like we've already talked about with the timeframe of what it takes from closing to leasing up. and we're just. Keep our eye on the market and the future, but we really feel like because we're in the heavy value add niche, that we're able to force a lot of, appreciation and add a lot of value. that gives us a built in safety margin, across the portfolio. So we feel good. We're ready to, we're ready to.

Neil:

Well, and that's such a great point you bring up, is that forced appreciation that you're creating gives you that margin of safety, that a lot of other asset classes have a harder time generating.

Erik:

Yeah, absolutely.

Clint:

All right, Eric, it is time to manifest it into existence. Where is Nomad headed over the next five years?

Erik:

Fantastic question. I wish I knew No, we, so that'll do it. No, we, it's hard to put five years. That's a long time. I mean, I never dreamed we'd be doing this five years ago, we just want to keep putting one foot in front of the other, making smart choices, finding great deals. I don't know. we'd love to tackle bigger projects. I'm a dreamer, so I always have big ideas. we'd love to look at a portfolio, a fund, to give us more flexibility and not be so tied to deal by deal. But for now, that's what we're doing. We're happy to do it. And, yeah, we'd love the self storage space, so, I can't imagine. we won't be in it in some capacity, but, we'll see where it goes.

Neil:

So I have one more question before we let you go. What's your favorite way to give back?

Erik:

Well, what we, my wife has started a nonprofit theater company, several years ago. And so that's something that actually we all do together as a family. I'm in the plays. My son's in the plays. All my kids are in at some point my wife directs and we have anywhere from 40 to 60 other, kids, teenagers, adults that are in, theater productions. We love it. It's a great thing that we do. a lot of people are like, well, theater, that's kinda weird or whatever, but we've been able to see kids come out of their shells. It's really a public speaking class. It builds confidence in kids. We've seen kids that couldn't even stand in front of a group and say their name become stars on the stage, and the pride that they feel going through that and it's fantastic. that's what we do. We're both involved in that. And a lot of, income that we generate, we put back into that. and it's really a cool thing, so

Neil:

Love it. Well, Eric, thank you so much for sharing with us today. If any of our audience wants to reach out to you and find out more about you, what would be the best way for them to do that?

Erik:

Hundred percent. Yeah. email is great. Erik, E.R.I.K., Norwegian spelling erik@nomadcapital.us is my email or cell phone (910) 431-3855 Happy to chat about storage and life and investing and whatever with anybody. So, yeah, cell phone or email is the easiest and, or if you're in Wilmington, pop by for a beer.

Neil:

Alright. Love it man. Thank you.

Erik:

Absolutely. Thanks guys.

Neil:

Okay. That was Eric Hemingway from Nomad Capital. Always great talking to Erik. he's somebody I've known for a long time, as I think I've previously mentioned on some of our other episodes. And he's just one of those great real estate stories that I, I love talking to

Clint:

Neil. I feel like that is exactly what we are trying to accomplish here. The idea of truly passive income is investors and listeners being able to educate themselves, look for opportunities to create truly passive income. And one of the only ways to do that is that you still have to be partnered or leveraged with someone else's time and experience. I think Eric and his son Levi have put together a tremendous real estate, active investing business, self storage, especially with the conversions, the way they're able to add value, it's tremendous. And especially the way that the leverage can be rolled forward into other deals in order to be in a situation where the hole is greater than the sum of its parts. And for them to scale, they're willing to take on investors, specifically passive investors. So this is a situation that we've talked about before in syndication where they can take their time and experience and the lumps that they've taken over the years to learn how to do things the right way. Take advantage of the federal tax benefits and things like that, partnered with. External capital from passive investors to continue to scale and take on projects greater than the, what they would be able to do on their own. So this is a classic, truly passive syndication scenario that is creating a true win-win between the passive investors and the people that are actively using these investment strategy.

Neil:

Got it. Okay. Well, thank you so much for listening to this episode of the Truly Passive Income Podcast. If you liked the show, if you think it would be useful for someone else, the greatest compliment you could give us would be to share the episode with a friend and leave us an honest review wherever you listen to podcasts. If you have any questions, don't hesitate to let us know on Twitter @TrulyPassive and remember, with truly passive income comes freedom of. Place and the freedom to pursue your higher purpose.