Erik Hemingway never planned on becoming a self-storage conversions expert. His background was in building custom homes in Arizona. But in 2006 he took a chance on a new business venture that ended up being incredibly lucrative.

On a recent episode of the Truly Passive Income podcast, Erik shared his journey from constructing his first self-storage facility to launching a national self-storage syndication company called Nomad Capital.

Getting His Start in the Self-Storage Industry

The self-storage industry was brought to Erik’s attention by several contacts telling him it was a “cash cow.” He found a residential farm property along a highway near Prescott, AZ, and spent 6-7 months getting it rezoned from residential to commercial use.

Erik hoped new housing developments in the area would drive demand. But then the 2008 financial crisis struck, the housing market crashed, and those planned subdivisions never materialized.

For 3 years, the facility barely got by with fluctuating occupancy. But Erik managed to hold onto the property. Once the recession eased around 2011-2012, the facility’s cash flow improved steadily.

A Three-Year Family Sailing Adventure

In 2008, the Hemingway family moved to Costa Rica for a year and a half, then bought a sailboat in Greece and sailed throughout the Mediterranean for three years, culminating in an Atlantic Crossing in 2012.

Relocating to North Carolina

In 2012, Erik and his family decided to give up the nomadic lifestyle for a bit to settle in North Carolina for a new adventure. Erik and his oldest son Levi fixed up and flipped historic homes in Wilmington for a few years.

By 2016, Erik was eager to get back into self-storage investing because of how much easier it was to scale than building houses. One evening while at a brewery downtown, Erik noticed a big windowless brick building across the street. He immediately thought it would be perfect for a self-storage conversion project.

Erik contacted a real estate agent to tour the building and soon had it under contract. He saw major potential in transforming old warehouses and retail buildings into climate-controlled self-storage facilities.

Upgrading Existing Self-Storage Facilities to Climate-Control

Erik shared a great example of an existing non-climate-controlled self-storage conversion where the previous owners had exorbitant $2,200 monthly electric bills. They left inefficient high-pressure sodium lights on 24/7 because they took 30 minutes to warm up.

After acquiring the site, Erik immediately switched all the lighting to energy-efficient LEDs. He obtained a sizable rebate from the local utility to help fund the upgrade. Even after adding an HVAC system to the facility to upgrade it to climate-controlled, the LEDs cut the monthly electric bill down to just $800.

By adding air conditioning and heat, he could justify increasing the rental rates substantially. Despite the higher rates, tenants were thrilled to have a conditioned space. The drop in total expenses and increase in revenue increased the cash flow of the facility and dramatically increased its value. This example illustrates Erik’s strategy of forced appreciation to maximize returns.

Launching His Self-Storage Syndication Company

Given the success of their previously boot-strapped storage investments, Erik and his son Levi decided to launch Nomad Capital in 2019. They realized there was a huge opportunity to allow passive investors to partner with them on their deals.

Nomad Capital focuses mostly on heavy value-add self-storage conversions rather than acquiring existing stabilized facilities. This allows them to “force” appreciation and provide superior returns to their investors.

They target potential deals across the Carolinas, Virginia, Georgia, and Tennessee. In 2022 alone, Nomad Capital completed conversions on five properties including two former K-Marts and a grocery store. Despite rising interest rates, they plan to continue aggressive expansion.

The Benefits of Self-Storage Conversions vs. New Construction

Self-storage conversions have several advantages compared to new construction projects:

  • Faster Timeline: New projects take 18-24 months to complete and lease-up, whereas conversions can open in 10-12 months.
  • Lower Upfront Costs: Construction costs are minimized by utilizing existing structures.
  • Avoid Zoning Issues: Conversions sidestep challenging zoning and permitting processes.
  • Adaptive Reuse: Gives new life to vacant, obsolete buildings.

The key to successful conversions is identifying the right properties. Before acquiring a site, the team at Nomad Capital conducts detailed feasibility studies analyzing area demographics, income levels, renter populations, competition, rental rates, occupancy levels, and more within a certain radius. They use software like CoStar and Radius+ for market analytics.

If the numbers look favorable, Nomad will proceed with an environmental assessment and Phase 1 study before closing. While conversions carry risks like asbestos or lead paint, the quicker lease-up tends to make them ultimately more profitable than ground-up development.

Leveraging New Technology

The self-storage industry has changed dramatically in the past 10 years thanks to new technologies. In 2006 when Erik built his first facility, an on-site manager was required to show units, sign leases, and handle operations.

Now, online rentals, digital payments, keyless entry systems, and remote monitoring have become standard at most facilities. This allows sites to function with minimal or even zero on-site staff, keeping costs low and profits high.

Giving Back to the Community

When he’s not busy converting big box stores into climate-controlled storage, Erik enjoys giving back to the community. Along with his wife, Erik helped launch a local nonprofit children’s theater.

They put on several productions each year and the entire Hemingway family participates. Erik says the program does wonders for building confidence and public speaking skills in kids.

Key Takeaways

  • Find an experienced partner if you want to invest in self-storage
  • Converting existing buildings can provide competitive returns to new construction, with potentially shorter timelines and lower risk
  • Utilize technologies like keyless entry and online rentals
  • Look for value-add opportunities such as upgrading lighting to energy-efficient LED, adding HVAC, and especially look for asset class conversions
  • Conduct thorough internal and third-party market feasibility studies before acquiring a property

If you’re interested in passive real estate investing, self-storage can provide excellent cash flow without high maintenance costs. Listen to the full Truly Passive Income episode for Erik’s full story and insider tips.

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