Self-storage facilities have seen a surge in popularity as commercial real estate investments in recent years. In this episode of Truly Passive Income, Neil Henderson and Clint Harris dive into the world of self-storage syndication. They interview Drake Massa, the Director of Acquisitions at Nomad Capital, to gain insights into how his company leverages self-storage syndication to acquire and transform old retail and industrial buildings into lucrative self-storage properties.

About Drake Massa and Nomad Capital

Drake Massa graduated with degrees in finance and marketing from the University of North Carolina Wilmington in 2021. During school, he started a successful landscaping business that funded his college education and allowed him to purchase real estate. Upon graduation, Massa brought his entrepreneurial spirit to Nomad Capital, a firm specializing in self-storage syndication.

As Director of Acquisitions, Massa is responsible for sourcing potential self-storage conversion opportunities, analyzing deals, negotiating with sellers, securing financing, overseeing due diligence, and ensuring smooth acquisitions. He works closely with Nomad’s founders, who have over 20 years of experience in the self-storage and commercial construction industry.

The Appeal of Self-Storage Investments

Compared to other commercial real estate asset classes like retail, office, and multifamily, self-storage offers investors several advantages:

  • Strong growth: The self-storage industry has experienced tremendous growth over the past 5 years, outpacing all other real estate sectors.
  • Recession resilience: Demand for self-storage space stays relatively steady, even during economic downturns.
  • Low expenses: The operating expense ratio for self-storage facilities averages around 30%, versus 50% for multifamily properties. 
  • High cash flow: With lower expenses, more rental income flows through as cash flow to investors.
  • Less management intensive: Self-storage tenants require relatively little oversight compared to other commercial or residential renters.

Self-Storage Syndication Business Model

Rather than expecting investors to buy a whole self-storage property, real estate syndicators like Nomad Capital employ self-storage syndication. They pool funds from various passive investors to acquire larger facilities. This model allows investors to tap into commercial real estate deals that might otherwise be unattainable.

The operator manages every aspect, from evaluation, acquisition, financing, and conversion, to selling the asset. Investors merely invest in the self-storage syndication, receiving passive income distributions, cash-out refinance distributions, and a share of profits when the facility sells, typically within a 5-10-year holding period.

Self-Storage Investing Strategies

There are four main investment strategies for self-storage:

  1. Acquire an existing facility, increase rents/improve operations
  2. Acquire an existing facility with room to expand, expand/add units
  3. Acquire a vacant building, and convert it to self-storage (Nomad’s specialty)
  4. Build a new self-storage facility from the ground up

Nomad Capital focuses primarily on conversions because, in their experience, this strategy offers the best risk-reward profile and a shorter timeline to profitability than ground-up development.

The key is sourcing vacant former retail, industrial, or other commercial buildings in high-visibility locations at extremely discounted prices. Nomad then renovates and converts these empty buildings into climate-controlled self-storage facilities for a fraction of the cost of new construction.

After completing the conversion, the asset’s value and rental income potential increase dramatically. The property goes from being an obsolete, vacant building to a thriving, cash-flowing self-storage business almost overnight.

Step-by-Step Self-Storage Conversion Process

Here are the key steps Nomad Capital takes to convert old buildings into lucrative self-storage facilities:

  • Sourcing deals: Massa searches for vacant commercial buildings in desirable locations near retail corridors and neighborhoods. He evaluates hundreds of deals before finding one that meets Nomad’s criteria.
  • Underwriting: Nomad analyzes potential storage demand, rental rate potential, expected operating costs, conversion costs, and financing terms to model the project’s feasibility and returns for investors.
  • Negotiating contract: Massa negotiates purchase terms with the seller, often achieving significant discounts off the asking price since the building has sat vacant for extended periods.
  • Due diligence: Over a 60-90 day period, the team conducts environmental assessments, zoning analysis, title review, third-party feasibility studies, and other due diligence to ensure the conversion is viable.
  • Financing: Nomad secures financing for the purchase of the building as well as construction from banks to fund the conversion. This is secured by the underlying real estate value and only Nomad and its principles need to sign on the debt. 
  • Capital Raising: Nomad raises capital from a group of small investors to purchase the buildings and fund part of the construction.
  • Conversion construction: Nomad’s in-house construction company has plans drawn up, does the demolition and prep work, renovates the building, handles all aspects of the construction management, and transforms it into climate-controlled storage units.
  • Opening and Operations: Nomad gets the facility up and running and open for business with their in-house management company, or in some cases hands the management off to a third-party management company in rare cases.
  • Stabilization: Once the property reaches 90%+ occupancy after 12-18 months, it is considered stabilized. The asset now produces a steady cash flow.
  • Refinancing: In years 3-5, if market conditions allow, Nomad refinances the stabilized property to return investors’ initial capital plus any profits.
  • Hold/Sale: Nomad continues holding the cash-flowing asset or sells to realize big gains if the market dictates. Investors receive passive income either way.

Requirements for Truly Passive Investors

Converting and operating self-storage facilities clearly requires tremendous time, experience, and effort from the sponsor group. For passive investors, however, the only real requirements are:

  • Capital: Investors must contribute sufficient equity capital to the syndication to fund acquisitions and conversions.
  • Due diligence: Investors should review the investment memorandum detailing the deal terms, underwriting assumptions, risks, and other relevant information.

By leveraging an experienced operator like Nomad Capital, passive investors can gain exposure to a proven real estate strategy that would normally require hands-on involvement well beyond their expertise or capacity. This demonstrates how syndications can facilitate truly passive commercial real estate investing.

If you’re interested in passively investing in commercial real estate syndications, be sure to download our FREE Passive Investor Toolkit.

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

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