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Real Estate Investing School Podcast
251. Why Self-Storage Wins in Any Market
00:54:52
Welcome to the Real Estate Investing School Podcast! Hosted by Joe Jensen, each episode of this podcast dives into the journey of real estate professionals, like Jacob Vanderslice, who has navigated the ups and downs of the market to achieve financial...
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- [00:00]
Jacob Vander Slice
The only way to learn is to go out and do it. You got to go out and take a risk. You've got to take the next step. The greatest lessons you learn are by owning and operating assets or investing in assets.
- [00:13]
Joe Jensen
Welcome to the Real Estate Investing School podcast. I'm your host, Joe Jensen. Today we've got Jacob Vander Slice. He's a co founder and principal at Van West Partners, a Denver based real estate investment company specializing in acquisition, development and management of self storage facilities. Under his fundraising leadership, Van west has strategically deployed, deployed over 375 million in capital in value adds self storage facilities across the United States. And that, Jacob, is a pretty awesome bio. But that I feel like only scratches the surface of the past 20 years of what you've been doing.
- [00:55]
Jacob Vander Slice
Yeah, it's been, it's been a heck of a ride in real estate. I got, I got in about 2005, 2006 and I, I had a firefighter job so I only worked 10 days a month. So a lot of time on my hands and started dabbling in residential. Got busy doing that. I quit my W2 and for, for many years we did a lot of residential deals all over the country, but mainly in Denver. We did some adaptive reuse retail, some townhome development, some multifamily, some land deals. We did our first storage deal in 2015 and at the time it wasn't really a strategic pivot to a new asset class. It was more just kind of try a new initiative out, see how it goes. And then over time we shifted to being pretty much exclusively a self storage owner operator. So it's been, it's been a fun ride, Lots of fun to come.
- [01:43]
Joe Jensen
Yeah, that's interesting. I mean you've done so many deals. Like I said, flip single family, you've done like over a thousand deals you said in the past 20 years. Which, you know, you know, 20 years is a long time, but a thousand deals is still. That's like 50 a year if you, you know, if it was only a thousand, which is still a lot of deals, you know, especially for that many years in a row, which is wild. And it's interesting that through all of that you've settled on self storage. Explain that a little bit for us.
- [02:14]
Jacob Vander Slice
Yeah, we, we were looking at our. And by the way, as we know, the rear view mirror is always crystal clear. Right. What should a know. Should have bought that, shouldn't have bought that, should have held onto that and you know, one big mistake we made and part, part of it was the Environment, I think is we didn't have the discipline to hold on to these houses. We held on to some, but you know, we sold probably, I don't know, 95% of the deals that we did and yeah, all the rest. And little did we know what the future held as far as home price appreciation, lack of inventory and you know, see what 2025 looks like. But what we didn't like about our business in retrospect is it was overly transactional and we wanted to shift. We didn't really know this very clearly at the time, but we wanted to shift to something that had more durable recurring revenue streams versus kind of eating what you kill. You know, you buy a fix and flip at the auction. You fix it up, you sell it, you make money, you pay taxes and you have to do it again. Yeah, we didn't really do it as kind of a, it was a cash production business, but it wasn't necessarily, at least the way that we ran it, not necessarily a wealth producing business. And we thought that self storage could kind of check that box. So we shifted into that thesis really kind of starting in 15 with our first deal. Wasn't really clear at the time. But generally what we like to do is find deals that are under managed below market rents, above market expense loads, buy them. We self manage our entire portfolio and we're very cash flow driven and you know, we'll certainly sell when it makes sense to sell. But we're not a shop that's trying to buy a deal, make it better and sell it in two or three years. We like to hold for a while, enjoy the depreciation benefits, the recurring revenue benefits and then eventually monetize. But yeah, we look back and we were overly transactional and this strategy, and our strategy now is much less transactional, more cash flow, wealth creating based.
- [04:10]
Joe Jensen
I love that, you know, and everybody has their own, I don't know, interest in real estate. There's a thousand ways to do real estate. It's super customizable. But ever you want, you know what, what excites me in the heart of real estate to a lot of people is the wealth building and the freedom that it can provide. Yet I see so many people that it's really just another job, you know, like yeah, I left my nine to five and now I work here, you know, six to six, you know what I mean? I'm like okay, and they're making money, but there's lots of commission jobs. You make money but you're just stuck on this hamster wheel like you said it's so transactional that, you know, as soon as that deal's gone, you gotta do the next one. I'm like, how's that different than when I was doing commission to sales, you know?
- [04:53]
Jacob Vander Slice
Yeah, being transactional on being an investor, right? Yeah. And being a real estate investor, whether you're buying your own deal or you're investing in a fund or syndication, it takes a long time to create wealth in real estate. A long time. And, you know, one of the more simple questions I've ever gotten from an investor, that was really kind of profound for me, this guy, very sharp, but definitely old, probably like early 80s, and made a lot of money in real estate. And we're talking on the phone, on an intro call, and the guy's like, when you boys planning on selling these? And we're like, oh, well, sir, we've got, you know, this whole period underwritten and this multiple in this irr. And he's like, you know the problem with selling? I'm like, no, what's that? You know, he's like, you don't own it anymore. And I thought that was pretty succinct and simple, but also profound. It's like, that's a good point. If you sell it, you don't own it anymore. And I think wealth creation, and I'm still figuring out wealth, believe me, and so are my partners, and I will let you know when we get it figured out. But I think wealth creation is holding assets, responsing them, responsibly, financing them, holding them, and growing their value by efficiently operating them. So that's what we're trying to do.
- [06:06]
Joe Jensen
You know, it's funny a lot. It's cool to hear that because that's. Like I said, that's my passion about. Is the long hold. Like, really build it. And. And it's funny, though, you know, when you're doing the long hold, you see the guys doing the exits, you're like, that's a lot of money. That would be a lot more. That could provide a lot of opportunities, you know, and. But then the guys, you know, you know, that burn through enough of it, they look back and they're like, man, I wish I had held. You know what I mean? And so it's an interesting balance. You said you're like, hey, we're not afraid to sell if.
- [06:37]
Jacob Vander Slice
Then.
- [06:37]
Joe Jensen
If it makes sense. You know, even still now, what. How do you decide now? Do you have a metric on that? Do you have like a. Like a system? Like, hey, if we're getting this Multiple then you know, we'll sell versus hold. Like how do you decide now, not in the past, but you know, your current situation, what to hold and what to sell. At what point does it make enough money to let go of it?
- [07:00]
Jacob Vander Slice
Yeah, it's kind of, it's kind of one of these. And for those of us on audio only, I'm holding out my thumb and closing one eye. But it's, we've got metrics, but there's also some, some subjectivity to it as well. We sold, I'll start off with a bad deal. We bought a deal in Florida a couple years ago on the Panhandle and we underwrote, you know, whatever, 17 IRR, like a 2 multiple. And we just were not seeing, we were not seeing the revenue growth that we thought we were going to see. It just kind of, it kind of hit like a tipping point, wasn't getting better, there was some new supply coming online. So we sold the deal and we made it the equivalent of a, of a 7% IRR. So we made money but we were just like, let's just cut, let's just cut this one off. Let's get out of it. It's going to take too long to stabilize. Sometimes we'll sell a deal that's underperforming because we want to trim some of the fat. Other deals that we've sold that were performing, you know, six, six deals were sold about in the last year since May of 2023, so a little bit longer. And of those six, five of them exceeded our underwritten targets. And one of them missed, which is what I just mentioned. But the other deals we sold, I guess one example was we, we had a deal in suburban Illinois and Illinois is great, but it's not the number one state that people are looking to invest in real estate in for all the reasons we know, God bless Illinois. But we, we had perceived right or wrong that we had kind of reached a, a value creation peak. There wasn't a lot of juice left to squeeze on the deal. We had underwritten it for a seven year hold and a 2x multiple during that hold period, just over a 2. And we could get about the same multiple by selling after a two year hold. And it was one of our fund portfolios. We wanted to return some capital to investors. So we sold those and we're happy we did. We might, and we might regret that, you know, in some years if it's substantially increased in value. But you can't predict the market, you can't time the market and sometimes it just makes sense to monetize. So we'll do that occasionally.
- [09:03]
Joe Jensen
That would triple your IRR selling it for the same multiple in two years versus seven. Right.
- [09:10]
Jacob Vander Slice
So, but before we, before we started recording, you gave me permission to go in the weeds. So I'm gonna go on the weeds for a quick moment here. IRR or internal rate of return, I think a lot of us listening have heard of that metric before and it's, it's purely, it's a return metric based on a time weighted series of cash flows. So IRR accounts for time. However, IRR is the most misleading return metric I think out there in the finance world. If you give me money today and I give your money back tomorrow, plus a tiny bit of profit, your IRR is going to be through the roof. But your multiple, meaning how much total dollar profit did you make as a percentage of your original invested capital is not going to be attractive. So we try to balance multiple and IRR together. And we don't look at deals just through the lens of IRR or just through the lens of multiple. We try to look at both. To your point, after that long winded weed comment and coming back out, the IRR on that was like a 32 or 34 or something like that, which that's, you know, it's a great return. But yeah, okay, two year hold and you know, that's the reason it was so high. So we're much more driven by multiple in our investment decisions than we are in irr. But we contemplate and underwrite and speak to both, obviously. But a two multiple over four, five, six years is a good return over a rational amount of time. But your IRR in the four year scenario is going to be materially higher than obviously in the six year scenario. Now if you do a two multiple over 20 years, that's not a good time horizon. So you got to balance kind of that hold period with the multiple and the IRR target and think about all those things as you're considering different investment vehicles.
- [10:51]
Joe Jensen
Jacob, I'm glad you went in those weeds because a lot of people hear these terms and I feel like, you know, the newbie investors, you know, most people have started getting a grasp on a cash on cash return, you know what I mean? Or at least some sort of ROI metric. But, but a lot of the IRR specifically I feel like is more advanced. I don't hear as many people using that the bigger companies like yourselves. And I know I have a friend that runs a private equity firm where they do angel investing and stuff like that, and they use those metrics. But a lot of people don't use the IRR and they don't fully understand it. But I'm glad you kind of dove into that. Obviously we could do a master's class just on that. But giving people a little more than just a vague what is irr? Know, I kind of look at it like it's like cash on cash return, like I say, but when you count the time frame into it as well, makes a big difference. And I love that you juxtapose it with. But what's my actual multiple? It's kind of like, oh, you could be getting a cool high cash on cash return, but your cash flow is trash. So who cares? Like if you're making 20 bucks, it's a $200 cash on cash return, you know, or 200% cash cash turn, but you're making 20 bucks, it'S like there's a missing piece, you know, you got to have the multiple and the irr. You got to have the cash flow and the cash on cash return, you know. Anyway, those are the metrics I usually think of, so I like to kind of compare those to the ones you're using on a higher level. So thanks for diving into that.
- [12:19]
Jacob Vander Slice
Would you rather put multiple in your pocket or IRR in your pocket? Right. And right. The answer, of course, should be multiple, but it's got to be over a rational amount of time to realize that Multiple.
- [12:28]
Joe Jensen
Yeah, I love that. Yeah. My dad always talked about he would call it yield when he was running his numbers. He's like, you gotta count the time. That's the big thing. A lot of people, what is the time? And people will throw out roi, Just return on investment with no time, you know, like, hey, you're gonna get a, whatever return with no time frame connected to it and with the time value of money, you know, that's obviously an ignorant way to approach things. So that, that, and if anybody listening, if that's all they got from this entire podcast was to really focus on the time of their return and how fast they can get that multiple and those things, you know, that, that, that can adjust your strategy in a really good way, certainly. That's cool, man. And so, so do you. Let me ask you again a little more on the metrics then. Like, do you have a metric where, hey, if we're going to make this high of a return in this amount of time or whatever, like, we'll let go of the asset even though we want to be long hold. You know, you're looking at the long hold wealth creation, like that's the focus now. But if we're gonna make so much like, I'll let her go, I'll let anything go for hitting that number. Is that kind of how do you approach it or how do you look at it?
- [13:40]
Jacob Vander Slice
Yeah, it's. Again, there's a lot of subjectivity here. Kind of depends on what the deal's doing. What's our debt situation on it. What's the market look like? Are we buying more deals in that market or is it a deal kind of off by itself? We can't find more product to kind of add SC scale in that submarket. But, but generally it's, it's. If we can hit our underwritten multiple sooner than we thought we could, that deal could be a candidate for a sale for sure. But I'll talk out both sides of my mouth here. We have a, we have a deal in, in fund two. It's the, it's the. I'm not just going to talk about our best deals. If we talk about deals, we'll talk about the worst ones, probably more than the best ones.
- [14:13]
Joe Jensen
Sure.
- [14:14]
Jacob Vander Slice
But this one where, you know, the, the implied value lift on the equity in the deal is probably a three. So you think to yourself, gosh, that, that is well over your targeted original. Original multiple of a two. Why wouldn't you sell that one? It's just producing so much cash flow. It's like, it's like crack cash flow. It's really tough to give up that cash flow, especially if it's in a fund portfolio because it supports other deals that aren't producing as much cash flow. So you know, it's all, it's all subjective. It's not just, hey, if we hit our multiple early, we're going to sell. That's kind of just on a deal by deal basis. But generally that's the metric, the rough guiding metric. If we can hit a two when we, in three years, when we thought we're going to hit a two in five or six years, that might be a candidate for a sale.
- [15:02]
Joe Jensen
I, I love your side notes. You know, you're like, oh, and then answer my question. But your da da da da da is really powerful. Like, is this a market we're building in? Like, are we focused on this? Is this a one off random asset we have in, you know, whosoeverville, whatever place? Do we want that? Can we really. Are we getting any benefits of scale on this? Or you know, what if we trim, you know, move that asset, you know, the, the capital for that asset into something in an area where we can have, where we do have support, you know, so it's like, I love that aspect. That's a really good point of. Are we building this area? You know, what's the rest of our business look like? How are we paying back our investors? How are we paying our debts? You know, are, you know, how liquid are we, you know, all those things that are not just side notes. That's why I just want to re mention them, because you're there. Obviously there's a reason why you're running the kind of company you're running. And it's, it's understanding all those little moving pieces. And when we listen to the stories of people getting burned or, oh, I learned a lot of lessons. It's all those little side notes. Most people can get the big picture, but it's all those little side pieces that takes a time to actually truly learn and implement into your decision making process, which you have.
- [16:15]
Jacob Vander Slice
We don't know, we don't know what to do, but we've definitely learned what not to do, right? Yeah, we like to say that we're, we're less stupid every December, it feels like, you know, and then we'll look forward to the next December and we're a little bit less stupid than we were the previous December.
- [16:30]
Joe Jensen
Seems like a good goal, you know?
- [16:32]
Jacob Vander Slice
Yeah, yeah, that's all, that's all you can hope for is just to be a little less dumb as you kind of progress through your career.
- [16:38]
Joe Jensen
So, so what excites you now? You're, you know, you've been doing this for 20 years. You've done literally thousands of deals. You know, you've done a broad range of asset classes and approaches and active to passive. But like, what excites you today with real estate? That you're like, dude, this is, this is why I keep showing up.
- [17:01]
Jacob Vander Slice
Well, I'll talk about general excitement, but then kind of excitement for the future. But what we really enjoy is the, the dream of a new acquisition, right? You've got countless hours into sourcing the deal, raising the money for it, getting the bank debt. You've got your model and you're, you're showing up to closing and you close and it's all right now. It's time to execute. It's the, it's the dream of the execution on that new acquisition. And I say this on, on probably most podcasts that I'm on, but our models are always wrong, right? The deal never goes like the spreadsheet says, a little, it always goes better or it always goes worse. It never goes exactly like you think it would. Well, and it's, it's fun to look back after year one or year three or year five on that acquisition and kind of measuring how you did against how you thought you were going to do. And there's always a variance. Right. So that, that's a, that's kind of a fun part of the business is just the, the dream that getting the troops rallied to buy the deal, you fly out there, your operations team transitions the asset to our management platform and off we go and we just try to grow revenue and control expenses. But as it relates to kind of excitement in this environment and going into next year, obviously we've got a kind of a goat rodeo election situation here. We'll see, we'll see what happens there. We won't get political on this, but we're, we're seeing all kinds of signs, which I think those of us listening probably would agree with, that we're going to be walking into a moderating interest rate environment in the coming quarter. And if we actually see that happening, we're already, we're already seeing that happening with certain debt types. Like if you're, if you're refinancing a commercial real estate loan and it's indexed against say the 10 year treasury bonds, your interest rate's a lot lower than it was a month ago just given what bonds have done. So we're already kind of seeing that happen. We're seeing the 30 year mortgage go down. Obviously that's got a correlation with the 10 year treasuries, but the federal funds rate remains where it's been at for a while. And you know, reading between the lines, it feels like there's a rate cut that's fairly imminent. And I might have said that a year ago on another podcast and probably got that one wrong, but I do feel like it's a lot more imminent now than it was before, just based on what I'm hearing. So if that happens, I think we're going to see an increase in transaction volume. I think more sellers might come back to the table because they know that they can maybe exchange into a new deal and their cost of capital and that's more attractive than it was before. I think buyer activity will pick up a little bit once there's some visibility into kind of what's happening in the capital markets, at least a direction on where we feel like things are going. So we're excited. We'll see what happens. We've only bought one deal this year, one deal through today, which is late August. We've got three or four in the pipeline that hopefully will close by year end. But it's been tough to find deals that make sense. And we're excited to hopefully see that arbitrage kind of shake loose a little bit, see some more acquisition opportunities and maybe even see some investor confidence increase. Investors have been reluctant. When I say investors, I mean our, our limited partners. Right, the folks who invest our single asset deals, our funds, they've been burned by multi family syndications that have gone bad, debt funds, a handful of Ponzi schemes. So they've gotten beat up pretty, pretty badly in the last year or so. And I think, I think some visibility into what the market's doing as it relates to interest rates will increase their confidence and kind of get them more comfortable and ready to redeploy some capital. But we'll see what happens.
- [20:40]
Joe Jensen
Yeah, so that's interesting. You've done one, one deal this year, hopefully a couple more coming. How does that compare to the previous year or two?
- [20:49]
Jacob Vander Slice
Yeah, we did about eight deals in 2023 totaling roughly 55 million in gross capitalization. This year we've done one deal totaling about 8 million in gross capitalization. So it's a lot lighter. And that's really been a function of just not seeing risk adjusted returns that meet our requirements. We have five full time guys on our acquisition team. All they do is underwrite deals and talk to brokers. And I think as of like a few weeks ago, we looked at 882 potential acquisition opportunities. We financially modeled probably a quarter of those and so far we closed on one. So it's a very wide funnel at the top and very, very narrow at the bottom.
- [21:34]
Joe Jensen
That's interesting because I feel like maybe I'm, I'm off. I feel like market conditions aren't. I don't know if market conditions were so much better last year than they are today. Is it, is it the deals available that affected it? Is it the market conditions or is it something of your guys's approach shifting?
- [21:55]
Jacob Vander Slice
I think it's not only just us. I mean it's us, it's the macro market. I think generally in all asset classes you've got still at least through, call it Q2, you still have a pretty wide bid ask spread. So buyers are looking at their model and saying, hey seller, I can't pay you the price you want because I get to finance this thing at a 7.5% or 8% interest rate based on the debt they're getting. And the seller says well it's worth a lot more than that, I'm not going to take your offer. So what happens? The buyer doesn't buy it, the seller doesn't sell. And that transcends asset classes to a degree. It's multifamily, single family, self storage, retail, just kind of a wide bed ass spread. And we're seeing that narrow kind of subjectively but certainly a lot of our lack of deal flows on us. Maybe we're not trying hard enough. We got to talk to more sellers, got to talk to more brokers.
- [22:47]
Joe Jensen
Well, I mean last year do you feel like the interest rates were that much better last year? Was the market conditions that much better and you last year than it has been this year for you?
- [22:56]
Jacob Vander Slice
No, I mean when you talk, when you talk about markets, when we talk about market conditions, I guess we've got kind of two sides of the coin. We've got our, got our investment business and within that's like buying deals, selling deals, raising capital, sourcing bank loans and you've got our operations business which when you talk about the condition of the market in our operations business we're talking about our self storage consumer. So the, the investment business might have been better in 2023, but the consumer side of our business was pretty anemic. We saw very light occupancy growth, we saw a lot more move outs than we saw the prior year. And we still eked out positive same store noi growth and revenue growth compared to the prior year. But it wasn't as much as we wanted it to be. But this year really year to date through, you know, Q1 and Q2 and we'll see how Q3 turns out. We saw record occupancy growth and revenue growth really starting in February through June. And that's on our, on the consumer side. But on the, on the flip side is we only bought one deal. So our investment business, buying and selling, transacting, raising capital was pretty light. But our operations business and our self storage consumer kind of came back to the table and started storing again. So it's a, it's a dichotomy of both I guess when we talk about what's happening in the market.
- [24:14]
Joe Jensen
Yeah, I love that. So I want to go back a little bit you mentioned. I just want to you know, point out this best practice for everybody listening because again you're just, you have so much extensive knowledge, you know, so many people nowadays, you've been in real estate a couple years, you know what I mean? And it shows the depth of your answers. I love it. So I just want to pull stuff out of it. But one best practice that people can. You mentioned looking back and running those numbers again to see how they aligned up with your original projection. And sometimes I hate doing that. I'm like, well, it doesn't matter. I can't change it, right? I'm like, but it gives such a light of like, how close were you? How accurate were you and where can you improve? I was just got off a call with one of my students and he was talking about how he's like, man, this partner deal that he, he put together isn't giving the returns that they were hoping. He's kind of disappointed himself. It was like his first one, right? And he's like, oh, man. And, you know, we talked about just, you know, learning from that and moving on from it. And if people can do that, look back, you know, two years later, three years later, run the numbers and see where they were, right, where they were off, you know, hopefully they can, they can be more accurate in the future. But I think that easily gets pushed aside. They're just focused on the next still. They don't want to run the numbers. For me, it was like, I can't change it anyway, so what do I care? But I think a lot of learning can come from taking that time to see how close you were to your projection originally. Anyway, you mentioned that I wanted to kind of dive in and point that out to the listeners to do that.
- [25:50]
Jacob Vander Slice
In my experience, you don't learn much when you win. Sometimes those wins are luck, right? You time the sale, right? You sold your multi family syndication in January of 22, right. You bought it in 2018, right. Knocked it out of the park. So much of the wins, I mean, you got to have operational excellence and you have to be conservative with your debt. But sometimes you hit a home run. It's just you just timed it well. And nobody can predict the future or time to market. But what you learn the most from are your failure, right? Where, where did you misstep on this deal? What assumption were you wrong on? You know, did you get a bridge loan in, in 2021 with no, with no ceiling on it? And your interest rate tripled, you know, over the next couple years or early 2022. The, the, the failures remember like they were yesterday. And the home runs are fun to talk about, but they're, they're forgotten a lot more quickly than the Failures. I can remember bad deals going back 15 years ago. The address, the location, the why, what happened, why it failed. And the good ones are great to talk about, but I think people are more judged by, by the failures and they are the ones.
- [27:03]
Joe Jensen
Yeah. See if I'm going to botch this, there's this classic novel, I think it was like Tolstoy or something. And it starts out with saying like, all happy people are all happy, families are happy in the same way, but all miserable people are miserable in their own special way. And I think it correlates with this where it's like. But in inversely where it's like all the wins are unique and special. It's like, oh, this happened so we won. This happened, so we won. This how we won. But if you can see where you're messing up, it's like, but all the messing up can be avoided. Dupe, you know, you can carry that over all, oh, we didn't do the new due diligence, we didn't do this, we didn't do that. Like, if you can learn what to not do wrong, you can avoid a lot of mistakes and you never know what's going to actually bring you the win. That's going to be special and unique. But, but all the mistakes are the same. So learn to avoid those mistakes. Like I said, just be less dumb every December and you're going to be. That's right.
- [27:56]
Jacob Vander Slice
That's the most we can hope for.
- [27:59]
Joe Jensen
So I think I asked this, but I'm going to go back to it. Why self storage? Out of all the things you've done it all, you've experienced it all, what made you specifically settle on self storage is like, okay, this is where we're going to hang our hat.
- [28:15]
Jacob Vander Slice
Well, let me, let me first tell you why. Why, why it's a hard business and tell you about the risks and I'll tell you why we like it.
- [28:22]
Joe Jensen
Awesome.
- [28:23]
Jacob Vander Slice
So the, the risk mainly in self storage, among, among many things outside of your normal real estate risks like rents, cap rates, your interest rate and your debt, your main risk in self storage is supply. Self storage is very local supply sensitive. So if you buy a deal somewhere and a bunch of folks build new deals nearby you, in a couple years your rents and your occupancies are probably going to suffer. So it's very local supply sensitive. It's also, you might hear some people talk about, oh, self storage is great. It's, you know, low overhead, it's not operationally intensive. You're not dealing with you know apartment communities and eviction laws. And that could not be further from the truth. It's very operationally intensive. We have about 19,000 units and I guarantee you right now somebody is cooking meth in one of them or stealing or doing something nefarious. We probably get served with like DEA search warrants somewhere like once a month because people are keeping, you know, bad money in there and drugs.
- [29:28]
Joe Jensen
So thank you so much for pointing that out because I hear this all the time. People think, oh, I'm gonna do self storage. It's like passive real estate. I'm like, it's a business, dude. You're running a business. You need to understand that the ins and outs of that business. Anyway, I love that you pointed that out because I think so much people are looking for an easy out, easy real estate. Oh, self storage. There's no sinks or toilets. It'll be easy. And it's like, it's not that simple. You still need to be a really good operator. And I thank you.
- [29:59]
Jacob Vander Slice
U Hauls backing into your $30,000 gate and taking your motor out. You know, all kinds of stuff happens at these facilities.
- [30:07]
Joe Jensen
Yeah.
- [30:09]
Jacob Vander Slice
And so it's very operationally intensive. We have 90 employees just out there solving problems, making our customers happy. So it's definitely not a fire and forget business by any means. If you go out and buy a REIT stock and self storage or you invest in a private real estate fund that does self storage. Yeah. Okay, you're passive, sure. But the operator is not passive at all. If you want passive income, go buy an industrial building and lease it to Amazon, right? Yeah.
- [30:34]
Joe Jensen
Do a triple net lease to Amazon.
- [30:36]
Jacob Vander Slice
And you're set, you're good to go. The chances are they're probably going to pay their rent. You can predict what that income stream looks like pretty accurately, I think. But shifting gears, the reason we like it, you know, we've been through cycles. I was, I was a, you know, early mid-20s, had a bunch of rentals when 0708 hit and had no idea what I was doing. So what we like about this business is historically it's pretty resistant to downturns. So if there's kind of a big economic softening, which supposedly we were supposed to start a recession two years ago and now we're supposed to start another one. So we'll see if that actually happens or not. But when there's a softening, self storage historically has been pretty resilient and we wanted to hang our hat on an asset class that kind of weather storms pretty well. We Also like the, the granularity of the revenue streams. So we're relying on thousands of people to pay us, you know, 50 to 300 bucks a month. So going back to the Amazon example, not that Amazon's going to roll over, but if you buy an industrial building, you lease it to Amazon, they go out of business, you got a big problem, right? It's going to take you a long time and a lot of money to find a new tenant. If one of our self storage customers roll over, you know, we try to work it out with them, but if we can't, we do an auction, we put the unit back in service and hopefully get a paying customer in there. So you're not, your, your, your revenue streams are not beholden to one single very large user. It's thousands of small users.
- [32:10]
Joe Jensen
Yeah.
- [32:11]
Jacob Vander Slice
Reason we like it is we, we like the fact the revenue management's very dynamic. So they're, they're all month to month leases. So we can respond real time to supply and demand changes at the unit level, the submarket level. If we have a unit type that's full, we can raise rents on that and probably not get any move outs. If we have a unit type that's lower than we want it to be on unit occupancy, we can drop rents below market, fill those up and start increasing rents over time. So there's a lot of levers you can pull kind of real time in this space. And without sounding too flippant to a degree, you can experiment and if the experiment doesn't work, you can course correct pretty quickly for the most part.
- [32:45]
Joe Jensen
So yeah, because I'm correlating that to a lot of people listening, probably have done, yeah. Have some single family experience. Experience, you know, that seems to be the, the entry into real estate and you know, you put someone in, you put them in a year lease and six months in rents have gone up a ton in your area. You can't adjust to that, you know, but you can because you're doing month to month. You can raise it up, you can raise it down, you can do whatever you want to do. And like you say the granulated, I like that term. You know, it's like there's so many little pieces. If you have one tenant and they don't pay, you're just burned. But if you've got 100 tenants and one doesn't pay, you still got 99% of your money. And so it's not as all or nothing, which just really puts you in a safer spot, you know, more Operational headache because now you got to get 100 payments to process, you know, but, but again, less risk with a non payer.
- [33:40]
Jacob Vander Slice
Yeah, there's a lot of little tiny dials in the business. You can kind of turn left or right and have that small incremental movement turn out to be exponent residential either declines in values or increase in values. So for, for example, a lot of the deals we buy will not have a tenant insurance policy in place, meaning none of their tenants are buying insurance from the owner. So believe it or not, in self storage, if you, if you lease a unit, it says in most leases that the owner is not responsible for the contents of the unit. There's a fire, theft or flood.
- [34:10]
Joe Jensen
So owner being you, the owner of the facility.
- [34:14]
Jacob Vander Slice
Okay, so most of these smaller sellers we buy deals from do not have these policies in place. When we take over, we require our customers to either present proof of coverage on their homeowner's policy, which they generally don't, or they have to buy a plan from us. And I'm going too far into this, so I'll try to put a bow on.
- [34:30]
Joe Jensen
No, this is good here.
- [34:32]
Jacob Vander Slice
But for example, we'll net round numbers about $10 per month per unit on one of these tenant protection plans. Now you're probably thinking to yourself, why does that matter? Well, you take 10 bucks a month, you annualize it, and then you amortize that across thousands of units and then you put a cap rate on it. You created a lot of value in your portfolio just by slinging that $10 net income protection plan to your customer base. And it goes both directions. If you think you can get 75% penetration in insurance and you only get 50, well, your model's wrong in the wrong way versus being wrong in the right way. And this, this kind of, you know, this covers a lot of bases in real estate as far as these tiny movements in net operating income, whether it's late fees or resident utility buildbacks and multifamily or tenant insurance. In the case of self storage, tiny movements in revenue and NOI across a large portfolio can equate to really meaningful value creation.
- [35:31]
Joe Jensen
Yeah, especially like you mentioned with cap rate evaluation, you know, doing commercial evaluation versus residential. Residential. It's like the only way for your property worth more is if the market says it's worth more for whatever reason. But when you can adjust a few, you know, points of the, the noi, and now it's, you know, you created a million dollars worth of wealth just by correcting your expense flow like you can't do that with residential, you know, and it's amazing the opportunity there with commercial, you know, and obviously self storage is in that commercial world, so that's really cool.
- [36:08]
Jacob Vander Slice
Those of us listening, you might be a little bit confused on the point you just made. So generally, commercial real estate and apartment buildings for that matter, too. I think when you say residential, you're talking about single family rentals and homes, but they trade on what's called a capitalization rate, which is purely a multiple of the income stream that produces. And cap rates and values have an inverse relationship. So the lower the cap rate, the higher the value, and vice versa. So if you're, if you're doing a deal in a market where maybe the market clearing cap rate on, say, a stabilized deals is a 6% cap rate, that means that if your deal has 60,000 a year in NOI, that a buyer might pay a million dollars for that property, right? But if you can raise NOI to 80,000 a year, that buyer is going to pay a lot more than a million to get the equivalent of a 6% return. So any real estate operator, whether it's self storage, multifamily, anybody out there raising money, and whether it's development or value add acquisitions, all of us are singularly focused on growing net operating income over time. Because as you grow NOI a little bit, you see an exponential increase in value. And likewise, if you miss your NOI target, you see an exponential decrease in the overall value on that project.
- [37:24]
Joe Jensen
Yeah, I love it. And cap rate's a funny one. It's hard to wrap your mind around, especially at the beginning. But I almost look at it like this. It's like, as opposed to a single family, you raise its value by raising the intrinsic qualities of the home. You know, you can put marble countertops or whatever, you know what I mean? But with the commercial stuff, the Capri is like, you're looking at it. Is the business a more successful business? You know, all those other things matter. But is the business more successful because it's bringing in more money and losing less money, that's going to matter more than if you put a new sign out. Now, those things can affect each other, but, you know, it's like, is the business running better? Okay, now it's worth more when you could be running an awesome single family. Raise rents, make them cover the utilities and your cash flow and twice as much, but the value of the property is still exactly the same. You know, it's still worth 300,000 because that's what condos are in that area, you know, regardless of how well you operate it. So anyway, yeah, if you could, I think thanks for clarifying that because it's a tricky one. It took me a long time. I'm still not, I think I understand it as well as I could, but I don't.
- [38:37]
Jacob Vander Slice
Is a low or a high cap rate good or bad? Yeah. Hey, you got a 50 50, right? If you, if you don't, if you don't know the answer, just, you know, guess one, you might be right.
- [38:46]
Joe Jensen
There you go. And then even at the same time, they're still going to have a commercial appraisers that come through and you know, say hey, that they should be selling around this price regardless of the cap rate. So it's this funny balance of all of that. Kind of like we're saying, you know, do you want the cash flow or do you want the cash on cash return? You know, the IRR or the multiple. It's like, well, you got to have a little bit of all of it, you know, to truly understand the asset and the value of it. But this is great, Jacob. This is like a master class and in depth stuff, at least a surface level of the in depth, I guess.
- [39:21]
Jacob Vander Slice
Well, you get what you pay for.
- [39:23]
Joe Jensen
That's right. Well, so what, what advice would you give to people that are, you know, listening to this and they want to get into real estate or they want to maybe go harder in real estate. They've got a couple rental properties or maybe they, they just want to dream big from the start and they know real estate's where to go. You know, you've done it all. Where should the intermediate, you know, they've got some experience but like they want to go harder and go bigger. What should they do?
- [39:53]
Jacob Vander Slice
Well, let me, let me first say that bigger isn't always better, right? You could have, you could grow your asset base materially and work harder and make less money because you got to hire employees and your, your overhead goes up. But you know, for, for someone who's looking to kind of leapfrog and into scale, let's say you've got a, you've got a handful of single family rentals, you understand the apartment space and maybe you're thinking about doing your first syndication. The only way to learn is to go out and do it. You've got to go out and take a risk. You've got to take the next step where you're, you're not necessarily going to learn enough is reading the books and listening to the podcast and going to the classes. If you'll learn material there, you'll learn fundamentals. But again, the greatest lessons you learn are by owning and operating assets or investing in assets. So I guess my advice would be take a risk. If you've been thinking about doing something for a while and you've been thinking about doing whatever that thing is for three years and you haven't taken action yet, your greatest asset, like we talked about earlier with irr, I guess your greatest assets, your time and creating wealth and real estate creates time or takes time, I should say. Yeah. And not in the game. You're losing out on that time. So take action and take a risk and you know, quantify the downside on that risk, protect the downside on that risk, make reasonable conservative assumptions that you feel like are kind of a worst case scenario. Make the story, a hard story to see where you're going to lose money. But, but take a risk.
- [41:23]
Joe Jensen
I love that. I, I, you know, it's always a funny balance of like, how much do I study and how fast do I jump in. And I, I say this, I'm like, learn the language, learn the lenses. Like learn the language. So you know what we're talking about when someone says IRR and what the different cap rates like learn the language and how the systems work. You know, if you don't know any of that, maybe don't act yet. Learn the language and learn the lenses. Learn how you're looking at these and what metrics are and when you should buy and sell. You know, learn the lenses of how to look at it. But once you know the language and the lenses, like, like you said now you're not, you're not going to get much more from that podcast. Like go act, get a partner maybe, but go, go through the process and all the nuances and the little paperworks and the inspiration inspections and all the things that go are involved, you'll learn so much from. And if you have the language and the lenses, you'll actually be able to like apply it somewhere and see what, what you didn't know and hopefully avoid some major issues. So there's a part where you need to learn, but there's definitely, at some point you just got to get out there and act and you'll learn way more.
- [42:30]
Jacob Vander Slice
This is an egregious oversimplification, but you know, whether you're doing $100,000 fix and flip or $100 million apartment community acquisition, very again, high level and oversimplified. But you really got to know two things and if you know those two things, you can, you can, you can learn the third thing you have to know. And those two, those two things are what's it worth once I make it better, what's it going to cost me to make it better? And if you know those two things, then you can figure out what you can pay for for it. And, and that's all you got to do. Right. And there's a few other than that, obviously. But what's it worth after you make it better? What's it cost to get there and then you can back into what you can pay for it?
- [43:14]
Joe Jensen
That's really, is like you nailed it, you know, and it's funny because I always say that I'm like these big, you know, multi unit acquisition, multi family things with a five year hold and a big exit. I'm like, they're just flipping houses. It's the same thing as when you go buy that condo down the street, put a new roof on it, repaint it and do some landscaping and sell it. The principles are the same on the basic level. You know, you're just, what's your arv? You know, what's it going to be worth after I fix it? And what's your, you know, holding costs and rehab costs? How much is going to cost me to get it there?
- [43:49]
Jacob Vander Slice
Yep. Like, I love that I sometimes will use ARV on our deals for my single family days. I love that term. And ARV simply connotes what's it worth when you make it better. Right? Yeah.
- [44:03]
Joe Jensen
That's it, guys. Leave it. They say that the ignorant person will make a simple thing complicated and the expert will make a complicated thing simple. Well, you've made some complicated things simple for us today, Jacob. I really appreciate you diving in the way you did. I felt like we could do 20 more of these and still just be scratching the surface. But this is, this has been awesome. I really appreciate your insights.
- [44:29]
Jacob Vander Slice
Well, simple minds say simple things, but thank you.
- [44:33]
Joe Jensen
I love it. I do want to ask you a couple questions we like to ask most of our guests that come on before you roll out and obviously I want to open it up. If you have anything else you want to share, particularly before we do that, what is the best way for people to follow you if they kind of want to learn from what you're doing, be inspired by it or maybe be a part of it and be limited partners, invest and what you're doing?
- [44:56]
Jacob Vander Slice
Well, we always love to talk shop about real estate. People can go to our website, which is vanwestpartners.com they can email me jacobanwestpartners.com or hit me on LinkedIn.
- [45:06]
Joe Jensen
Awesome. There we go. All right. If you had to start your whole real estate journey over in 2024, but you know what? You know now, what would be your first, second, or maybe third movement?
- [45:22]
Jacob Vander Slice
Well, if it was up to me, which it is, not at all, but it was up to me, I just wouldn't sell anything. I would just own and operate it indefinitely, refinance the equity out when interest rates moderate and just enjoy the cash flow. I also think that, let's say you start scaling and you bring in partners. I've been with my partners. One of them I've been buddies with since junior high, but we've been partners in real estate since about 2008, and our third partner joined us in 2014. And I'll tell you, partnerships are really easy to get into and they're really tough to get out of. So if you're partnering with somebody, I'm not talking about like an lpgp, passive investor, sponsor relationship, but operating partners, it's, It's. It's almost like a marriage. And to a degree, it's harder to get out of than a marriage. So I love my partners, but we fight constantly. We have major conflicts, and then we're better the next day. Again, collectively, 10 years together. Two of us together since 08. So partnerships are challenging, but make sure you're partnering with the right people. And in my case, I'm lucky enough that I am. But just be careful when you sign up with somebody on a deal.
- [46:37]
Joe Jensen
Yeah, because you said if it's up to me, and you're referencing that. There's partners, there's investors. You can't just hold it indefinitely because people need their returns and they have their own, Own opinions and agendas.
- [46:48]
Jacob Vander Slice
Yeah, I mean, if we, if we refinance all the equity out and we're still kicking out distributions, people might be okay with holding for a long time. But I'm a. I'm a great buyer. As I mentioned earlier, the thrill of the new deal, the dream of the model, the dream of the value creation. And it's not because I'm greedy, but I'm a terrible seller. I always feel like, you know, once you sell, you've drawn a line in the sand and you've monetized whatever value you thought you were going to create and it's over, it's just done. And maybe you. You sold at the right time and you create the most value you were going to create. For maybe 10 or 15 years on that deal. Maybe you sold early and there was a lot of upside still. But I'm always a remorseful seller regardless of how good the return is.
- [47:32]
Joe Jensen
Yeah. One thing I love about real estate I teach my students, when they're first trying to comprehend it all, is is this concept that I call infinite return. As long as you still own it, that return is infinite. Like I said, the moment you sell it, okay, now all the numbers are there. You got a 33% return, whatever. The numbers are solid, like you said. But as long as you don't, there's this. There's an infinite return that can just pay you indefinitely. So I'm with you there.
- [48:01]
Jacob Vander Slice
The old Burr strategy, right?
- [48:03]
Joe Jensen
Yeah, exactly. That's great. I like that. All right, book or podcast recommendation? Jacob?
- [48:14]
Jacob Vander Slice
I regrettably am not good at real reading business books. I just have a hard time getting through them. So a lot of the books I read are either current non fiction or historic non fiction.
- [48:25]
Joe Jensen
Hey, we'll take it.
- [48:26]
Jacob Vander Slice
Most of it's historic nonfiction. So I'll give you. I'll give you two quick ones here. The current one that I'm reading right now is. It's called Midnight in Moscow, and it's a memoir that the US Ambassador to Russia wrote. I think he was an ambassador up until maybe a couple years in the Biden administration. He was appointed by Trump. He was with Biden for a bit, and I'm only about halfway through it, but it's a fascinating account of dealing with the Russian government, how Russians communicate, meeting Putin in person, his experience in Moscow, being the US Ambassador, all the spies that were tracking him. It's a. It's a good book. Definitely check it out if you. If you like that kind of thing. Another book that I often recommend is a book called in the Kingdom of Ice. And it's. It's an account of. Of a. Of a sailing expedition back in the late 1800s. They thought if they went far enough north that they could get to melted water and go over the top of the globe, and they found out they couldn't. Obviously, they got stuck in the ice. It's not unlike the Shackleton experience, except on the other side of the planet. And the story of what these guys went through, you know, walking out a thousand miles into Siberia, eating the leather off their shoes, it kind of puts your hard day at the office in perspective. Oh, we lost this deal. Or, you know, whatever. These tenants aren't paying. Well, you're. You're not, you're not Eating the leather off of your shoes and near starvation. So it just kind of reminds us of however challenging our, our daily lives might be. There's probably somebody out there who's had.
- [50:02]
Joe Jensen
A course, Midnight in Moscow and what was the name of the second one?
- [50:07]
Jacob Vander Slice
In the Kingdom of Ice.
- [50:09]
Joe Jensen
Kingdom of Ice, Yeah.
- [50:11]
Jacob Vander Slice
Midnight is John Sullivan. And in the Kingdom of Ice, I believe is Hampton size. Great, great historic non fiction writer.
- [50:22]
Joe Jensen
You know, it's funny because, you know, so many times we do just, we read the self help books or the business books and stuff, but it's kind of like they talk about musicians that if all they do is study music, there's no heart behind what they're doing. They need to go out and live life and get a broken heart and experience some things and then they have something to write about, you know, And I feel that way with sometimes the books. It's like reading these perspectives and understanding a bigger picture of the economy in the world and people and pain and suffering. It, it can kind of put a little more perspective to what you're doing and why you're doing, doing it. So I like that. Good recommendations. We don't get as many of those, so I'm glad that that's what you shared.
- [51:02]
Jacob Vander Slice
Yeah. I assume it's only real estate and entrepreneur books.
- [51:06]
Joe Jensen
Go read Rich Dad, Poor dad or Traction.
- [51:08]
Jacob Vander Slice
Yeah, I'm familiar with all the top ones, but yeah, not as much.
- [51:12]
Joe Jensen
I love it. What's one of the most expensive or just interesting mistakes that you've made in real estate investing?
- [51:23]
Jacob Vander Slice
Well, the one I often mention is, I guess I'll mention two. We, we had an idea to build a house out of shipping containers years ago. And we thought we were going to be able to knock out, you know, one of these a quarter and, you know, do it faster than stick building. And we're, you know, you're not waiting on permitting. And you build them in the factory, you ship them over, you put them together and you just do this over and over again. And this project took a lot longer than it would have taken to stick builders and it costs a lot more. And we sold it. This was at least 10 years ago. We probably lost, I don't know, 300 grand on it. And again, in the spirit of being less stupid, all we learned was don't do that again. Right. Don't build out. And I'm sure there's lots of people out there that build houses out of containers and make money. There's plenty of strategies around the country that probably work, but we couldn't figure it out. And the second one in the self storage space. Luckily, we didn't have any investors in this, but my partners and I had a. The proverbial 1031 gun to our heads. It's probably a distasteful analogy to use, but you know what I mean. Yeah. And when you have that 1031 pressure, you're. You might buy something that you otherwise would not buy organically of your own volition because you've got that, that, that tax bill staring in your face. Yeah. So we bought a deal in, in Iowa, just north of Des Moines. It was the only deal that we identified. It was just a rough, tiny storage facility and it just did not perform. And we basically sold it for a break even about a year and a half ago and got out of it and paid our tax bill that we would have had to pay earlier, but wouldn't have had to spend all the time trying to figure this deal out. So lesson there is, if you're doing a 1031, which some of us listening probably are considering doing or have done, be careful about the pressure of that exchange and having it cause you to buy something that you otherwise probably wouldn't buy.
- [53:19]
Joe Jensen
Yeah. And that could carry over to any outside pressures. You know, if you're, if you really have some other reason why you have to do it now, be very cautious. That's great advice. All right, well, we'll let you run. I got one last question. What's a one word or short phrase to encapsulate why you personally definitely love real estate investing?
- [53:45]
Jacob Vander Slice
Gosh, I couldn't really do one word or phrase, but what I often say as it relates to why I love real estate is I can simply understand it. I can understand building, I can understand land. I can't understand a stock. And if real estate, if your real estate deal is not going well, you can generally go out there and do something about it. You can spend more money on advertising, you can put some money in it to make it prettier. So for me, I like real estate investing because it's simply understandable.
- [54:16]
Joe Jensen
I love it, man. This has been one of my highlights of podcast this year. I've really enjoyed the way you approach it. You're in depth knowledge, everything backing. Your simple answers are really powerful. I think we need to have you back on and keep in touch. But thanks so much for being on the show, man.
- [54:37]
Jacob Vander Slice
I'd love to. Joe and I had a blast. Thanks for having us on.
- [54:40]
Joe Jensen
This is Joe Jensen signing off for the Real Estate Investing School podcast. Reminding you to be less stupid tomorrow.