Why Smart Investors Are Quitting Rental Properties for Self Storage (No Tenants, No Headaches)

Fernando Angelucci – SSSE (00:00)
Yeah, so was having a heartache. I went into real estate because I wanted not only passive income, but time freedom. And then I found very quickly that being a landlord is not passive, and you have no time freedom, especially when you’re a landlord in areas that have extreme weather, like I was in Chicago. So when somebody’s heater goes out 2 in the morning when it’s negative 20 degrees out,

That is an emergency. That’s an all hands on deck and ⁓ You know that people’s lives can be at risk.

Michelle Kesil (02:07)
Hey everybody, welcome to the Real Estate Pros podcast. I’m your host, Michelle Kesil. Today I’m joined by someone I’m looking forward to chatting with, Fernando Angelucci, who is the co-founder and CEO of SSSE. Fernando has scaled his firm to 250 million plus in self-storage assets across the United States in seven years.

Really excited to have you here today, Fernando.

Fernando Angelucci – SSSE (02:37)
Thanks for having me on.

Michelle Kesil (02:38)
course. Let’s dive in. First off, those not familiar with you and your work, can you share what your main focus is?

Fernando Angelucci – SSSE (02:45)
Yeah, so we are only self-storage. That’s all that we do. We pivoted. So we first started off in the single-family home, multi-family home, both on the fix and flip and buy and hold side. But very quickly got fed up with the three T’s, tenants, toilets, trash, and pivoted into self-storage in 2016. Since then, we’ve done over 56 facilities across 24 states.

We have a little over 1,000 investors that come along for the ride with us. So it’s been a great journey. We have kind of three main strategies. The first is building portfolios from mom and pop operators. So kind of a roll up strategy, if you will, by existing mom and pops that may not be maximizing revenue or carrying too high of an expense load. Maybe they’re not utilizing technology.

We stabilize those assets and put them into portfolios of 10 to 15 assets at a time. And that allows us to not only from the increased NOI, the stabilization process, get a good profitability, but then also there is a premium that comes along with those portfolios. Because now you have these larger buyers that have ⁓ more cash than they know what to do with. And if they’re in a REIT structure, they have to outlay a lot of that cash on a per year basis.

They’re willing to pay for a premium on that portfolio versus the component parts. So anywhere between 50 to 200 basis points is what we’ve seen on these portfolio structures. The other side of the spectrum, our second strategy is to build ground up development. These are going to be your AAA self-storage facilities, state-of-the-art technology security, usually three to four stories.

Those are usually sold off one at a time to the larger buyers. And then we also have a smaller section that we do, which is the adaptive reuse conversion. So buying big box retail stores like Sears Buildings, Kmart, Walmart, Circuit Cities, and then turning those into self-storage facilities. Because typically, they’re already situated in areas that we want to be in, major consumer corridors, high traffic counts, high

median incomes and dense residential. then usually if it has been dormant for quite some time, we can get a pretty good deal on the envelope itself ⁓ to then convert it to self-storage.

Michelle Kesil (05:17)
Yeah, awesome. And how did you get into self-storage?

Fernando Angelucci – SSSE (06:09)
Yeah, so was having a heartache. I went into real estate because I wanted not only passive income, but time freedom. And then I found very quickly that being a landlord is not passive, and you have no time freedom, especially when you’re a landlord in areas that have extreme weather, like I was in Chicago. So when somebody’s heater goes out 2 in the morning when it’s negative 20 degrees out,

That is an emergency. That’s an all hands on deck and ⁓ You know that people’s lives can be at risk.

So that’s number one You kind of have to be on call at all times Even if you have third-party managers, you know, they call you when there’s problems like these the second thing is the way that Habitation law has been Changing over the last say 10 to 20 years, you know, obviously it always starts out in

San Francisco and New York City and it makes its way into the country. Those are kind of the more tenant protected areas. But we’re starting to see this all over the place, including Minneapolis, St. Paul, I think is now the city that has the most strict landlord tenant law out there. And that’s because the government views housing as almost like a basic right. And because of that, they are getting more and more involved in private

business. a perfect example was during the pandemic. When the pandemic happened, ⁓ the government, which controls the eviction courts, said we are no longer processing any evictions. So if you have someone that’s not paying, they have to stay until we open up the courts. And when they open up the courts, there’s going to be this massive backlog. So even though they didn’t tell tenants that they didn’t have to pay rent anymore, that is what tenants heard because they said, hey, you can’t kick me out. We’re going out through a pandemic. But

At the same time, those landlords, had to continue paying property taxes. They had to continue paying their mortgage. So there was no relief for those business owners when there was relief for the revenue streamer or the tenants that were renting from them. And so I see this happening more and more. And I think it’s only going to get worse as the affordability crisis worsens in the United States. And I just don’t want to be, I don’t want to subject my investors to that governmental interference.

in these types of investments. So I decided to get out of habitation-based real estate and then go into self-storage, which, like I said before, doesn’t have the three T’s. There’s no tenants, there’s no trash, there’s no toilets. That’s typically where 80 % of your problems are going to come from when you’re a landlord.

Michelle Kesil (08:43)
Definitely. And so when you say like your investors, what does that mean? Are these investors that you partner with or what does that relationship look like?

Fernando Angelucci – SSSE (08:52)
Yeah, so I’m a sponsor, I’m a syndicator. through SEC regulation D, typically rule 506 B or rule 506 C, I raise capital from limited partners. So I am the managing partner or the general partner. I’m the one that signs on the debt. I do all the operations, all the management, I control the investments and they are just passive investors. It means they have no downside risk from the bank standpoint. So, you know, if something goes wrong,

which it never has, knock on wood. ⁓ Their worst that they can stand to lose is their investment. The bank won’t go after them and take their house or their car. The bank will come after me and take my house and my car. So that’s what we do. We typically pass through a majority of the passive losses, so the depreciation, the bonus depreciation. typically, one of my investors, for every dollar they invest into my assets,

They’re going to see anywhere between $0.50 to $2 back in a bonus depreciation to offset any passive income that they have. If they file as real estate professional status, obviously they can offset their active income. And then they’re looking at anywhere between, depending on the type of deal, high teens to mid-20s internal rate return over a five-year period. You’re looking at about a 2x multiple.

is what we’re typically seeing across our assets.

Michelle Kesil (10:53)
Yeah, amazing. So why is being a passive investor better than your position as a syndicator?

Fernando Angelucci – SSSE (11:01)
Yeah, think it’s a couple things. First, it’s mailbox money. You’re making money while you sleep. You don’t have to actively go to work eight hours a day to make money as a passive investor, whereas the general partner does. I have to work every day to make sure that I’m getting a solid return for my investors. The second thing is also the risk, like we just talked about. When you’re a passive investor, you’re the first one to get paid, and you’re also the last one to take on the risk, the downside.

As the GP, I’m the last one to get paid. And I’m the first one, and usually the only one, to take any downside risk less than the investment itself. So I invest alongside these guys. I’m the one that finds the deals. I operate them. We have a whole team to operate these facilities and then also do investor relations.

I myself as a GP, as I make money, I put them into investments of other GPs so that I’m starting to get some ⁓ mailbox money or some passive income coming in.

Michelle Kesil (12:05)
Yeah, amazing. What have been some of the main keys that have allowed your business to grow and run successfully?

Fernando Angelucci – SSSE (12:13)
Yeah, so I think one of the biggest things is treating a real estate operations business as kind of three separate businesses in and of itself. So you have first the marketing component of the business, you know, not only marketing for deals, but then also marketing for investors and buyers. You have the operations piece, which is actually doing the value add on the facilities and making a return for the investors. And then you have the investor relations and capital raising side. So

everything that comes along with compliance, K-1s, tax distributions, quarterly updates, everything that an investor would demand if they were making a passive investment into a real estate syndication. once we started focusing on all three of those individually and treating them as if they were their own companies, that’s when our business really started to grow. As you get more access to capital, you get more access to deals, as you get more access to deals,

You get a larger track record, which attracts more lender partners, attracts more investors. And then just making sure that you’re in the right rooms at the right time, making sure you’re learning from the best of the best, going to the trade shows, going to the US conferences, the world conferences. We like the Inside Self Storage World Expo, the SSA, the Self Storage Association, and making sure that you’re staying up on the newest trends of what customers want. ⁓

newest products, newest ways to monetize these deals, add additional revenue sources, all that has contributed to us growing to the point to where we are now.

Michelle Kesil (13:49)
Yeah, amazing. And how do you find like the best self storage deals?

Fernando Angelucci – SSSE (13:55)
I think it’s one of those things where you have to have a large enough marketing funnel and spend enough money on marketing. unlike, say, single family homes or multi-family homes, there’s a very limited amount of self-storage in the United States. There’s roughly 60,000 facilities, depending on which study you look at, plus or minus 5,000 10,000 facilities. So because of that, we need to be marketing to basically all of the facilities in the United States at any given time.

And it’s one of those things where you can’t just market to them once. You have to stay in front of them every quarter, every six months, so that once they’re ready to sell, you’re first and foremost at front of mind. In addition to that, making sure that you have a way to monetize all those leads, all those deals are not going to be the right deal for us, right? But that doesn’t mean it’s not the right deal for somebody else.

we’re able to cherry pick the best of the best deals that meet our buy box criteria to bring to our investors. But then there’s still these deals that are, say, first base or second base, third base hits that may be great for another investor’s buy box. So what we end up doing is monetizing those leads that we don’t take on ourself by putting them under contract, doing all the due diligence and underwriting, and then sending them out to our investor list or our buyer list, I should say, and then assigning that

purchase contract over to them. And we do that obviously for a fee. So it helps pay for all the marketing. It also brings a pretty good return to our investors. If I’m able to lock up a $3 million asset with 10 grand, and within six to 12 weeks, I’m able to sell that contract to somebody else and walk away with $100,000 check or a $200,000 check, that’s a good return. It also helps re-up the marketing coffers to keep staying in front of the assets that we want to keep personal.

Michelle Kesil (16:29)
And what are you most focused on solving or scaling to next?

Fernando Angelucci – SSSE (16:33)
Yeah, I think there’s an interesting trend in the self storage industry right now where, you know, we had this, this rapid increase of users and rent rates because of the pandemic. Then very quickly after the pandemic, when everything opened up, people were able to take the things out of storage, you know, go back to work, go back to school. So they weren’t using parts of their home for that activity or for those activities.

And then we started to see kind of this reversion of going back to these older style units that are drive up facilities, larger sized units, as opposed to kind of the smaller climate controlled units in these three or four story buildings. And then also focusing on not only the residential base, but also the commercial base. So during the pandemic, a lot of these

Contractors HVAC plumbing carpenter, etc. They were priced out of these, you know Small warehouse areas or rents that they wanted to use because of these last mile shipping You know Amazons of the world UPS DHL coming up to get you your product same day when you buy it right or at the worst tomorrow morning and so that displaced a lot of these contractors and now they’re looking for places to run their business that

doesn’t require the financial commitment of buying a warehouse or renting a large warehouse that they don’t need the space. They only really need 1,200 to maybe 2,000 square feet. So instead of us focusing on the higher end of the residential base, which is maybe like a 10 by 20 or a 10 by 30, we have these extremely sticky customers, these contractors, that if we build 30 by 50 units with a larger

door for a work truck to get into maybe with a boom of some kind. Those tenants end up staying for long amounts of time. know, they’re going to stay in that unit until either their business fails or the business does so well that they’re able to buy or rent their own larger warehouse. So we’ve been watching that trend and now we’re actually going to start building those. I would call them like super small bay industrial sites, but treating them almost like self storage. So month to month.

Tenancy makes it easy for them to say yes, because they don’t have to sign a five or a 10-year commitment. It also helps us in times of high inflation, because instead of being locked into a 10-year contract where it’s a 1 and 1 or a 2 % rent escalator per year, if we had years like we did during the pandemic where there was a lot of money printing, and what I think is going to happen pretty soon right now with the amount of money printing that’s going on in the United States,

we’re gonna see higher levels of inflation. So if we’re able to stay on a month-to-month contract for these industrial tenants, I can raise the rents to accommodate that increase in inflation so that I’m not taking the brunt of that inflation and I’m sharing it equally with my customers.

Michelle Kesil (19:37)
Yeah, absolutely. That’s a unique and interesting perspective. So love that. How do you see the self storage industry shifting in the next years?

Fernando Angelucci – SSSE (19:50)
Yeah, so, you know, demand in self-storage is interesting thing because it comes from multiple locations. So you have people that are going through life events that has historically been the largest demand driver of self-storage. know, death, divorce, relocation, job change, moving in with, you know, downsizing to move in with family, and then placing their possessions in storage. These are typically…

more temporary uses of self storage. Now what we’re seeing because of the affordability crisis in the United States, which I think is only going to get worse, the only way it could really get better is if all of a sudden you open up all zoning. you just unrestricted zoning, which I don’t think is going to happen in most areas because of kind of the NIMBY movement, if you will. So because of that, it is getting harder and harder to buy or rent the amount of space that you need to live in. So what you end up doing is you opt for something with one less bedroom or two less bedrooms or

less storage space because it’s cheaper to rent a self-storage unit that is maybe 10 by 10 and use that as an external closet or an external bedroom where you can instead of using it as an event-based ⁓ rental that is short-term it’s almost permanent it’s it’s an extension of your dwelling of your home. So that is a trend that we’ve been watching and then again kind of the same thing with seeing

What are the groups out there that are getting marginalized, if you will, just like these contractors that no longer have space because they got priced out of these typical warehouse spaces that now are being used for last mile shipping? ⁓ those are kind of the two main trends that we’re looking at. And then obviously, the buzzword around the world right now is AI. So making sure that

we’re keeping our tech stack up and upgraded to compete and to allow us to save man hours and research time and allow us to be a lot more efficient with the time that we do use. So these products have been great. We use one technology that allows us to not only dynamically price our units, but it also scores our customers to see who can afford a rent increase, who cannot, how much can they afford.

So these have been some really great progressions in the business that we’ve been following just to make it more profitable over time.

Michelle Kesil (22:17)
Yeah, definitely can see those trends. Well, before we begin to wrap up here, if someone wants to reach out, connect, learn more, where can people find you?

Fernando Angelucci – SSSE (22:26)
So if you’re more of a passive outreach person, what I would say is you could go to our website. It’s ssse.com or samsamsamedward.com. If you’re more active outreach, feel free to reach out to me specifically. Here’s my cell phone. My number is 630-408-8090.

Michelle Kesil (22:52)
Perfect, we’ll appreciate your time and your story. Thank you for being here.

Fernando Angelucci – SSSE (22:56)
Yeah, thanks for having me, Michelle.

Michelle Kesil (22:57)
And for those tuning in, you got value, make sure you’ve subscribed. We’ve got more conversations with operators like Fernando who are building real businesses. And we will see you all on our next episode.