The S.A.F.E. Investment Method: Maximizing Returns in Self-Storage With Tom Dunkel

In this episode of The Same Day Podcast, host Mat Zalk sits down with Tom Dunkel, Chief Investment Officer at Belrose Storage Group, to discuss how the S.A.F.E. investment method can maximize returns in the self-storage space. They explore the importance of conservative underwriting practices, the benefits of diversification, and the potential of niche markets like boat and RV storage.

The S.A.F.E. Investment Method: Maximizing Returns in Self-Storage

Tom Dunkel is the Chief Investment Officer at Belrose Storage Group, a company that acquires, converts, and builds self-storage facilities across the United States. With over 28 years of experience in real estate, finance, and investing, Tom plays a key role in underwriting and structuring deals that align with investors’ wealth-building goals. Since transitioning to real estate investing in 2006, he has raised over $65 million in private capital across various asset classes.

Here’s a glimpse of what you’ll learn:

• [2:58] Tom Dunkel shares how he transitioned from business school to working in high-stakes mergers and acquisitions
• [6:30] The impact of financial modeling and projections on business decisions and deal-making
• [9:14] How repositioning an asset can significantly increase its value over time
• [12:39] The changing landscape of self-storage and how technology plays a pivotal role
• [18:06] The importance of strategic market selection in real estate investments
• [24:09] How customer behavior in the self-storage space reflects broader economic trends
• [25:54] Tom explains the S.A.F.E. approach and how it can alleviate investment risks
• [34:46] How to determine whether underwriting decisions are conservative enough

In this episode…

Building wealth in the self-storage industry requires more than just finding suitable properties; it demands a strategic approach to investing that minimizes risk while maximizing returns. But what’s the best method to consistently succeed in this competitive market? Is there a proven formula to guide investors toward making smarter, more profitable decisions?

According to Tom Dunkel, a seasoned real estate investor, the key lies in the S.A.F.E. investment method. He explains that understanding the sponsor’s strengths, the specifics of the asset, the financial projections, and the exit strategy is crucial for making wise investment choices. Tom highlights how applying this approach in the self-storage sector allows investors to protect their capital and capitalize on underappreciated opportunities in a growing market. By focusing on conservative underwriting and diversification, investors can navigate market uncertainties and secure solid returns.

Resources mentioned in this episode:

• Mat Zalk on LinkedIn
• Yonatan Schmidt on LinkedIn
• Walter Bowser on LinkedIn
• Keyrenter Property Management
• Keyrenter Property Management in Tulsa | Oklahoma City | Arkansas
• Keyrenter Property Management email address: [email protected]
• Tom Dunkel on LinkedIn
• Belrose Storage Group
• Download The S.A.F.E. Checklist

Special Mentions

• The Self Storage Mastermind
• RaiseMasters
• Marquis Who’s Who
• Defense Advanced Research Projects Agency (DARPA)
• Joe Downs on LinkedIn
• Charles Schwab

Related Episodes

• “Paving the Way for Affordable Housing in Urban Communities” with Devin Howland on The Same Day Podcast
• “Revitalizing Communities Through Multi-Concept Restaurant Development” with Elliot Nelson on The Same Day Podcast

Quotable Moments

• “I always had this burning desire to do something on my own.”
• “Value-add means there’s an underperforming asset. There’s meat on the bone.”
• “If a hotel is full, they know they’re not charging enough.”
• “Americans love holding onto our stuff, and we hate getting rid of it.”
• “You have these units rented out, but on day one, all your customers could move out, and now you have no cash flow.”

Action Steps

1. Research potential real estate niches: Explore areas like boat and RV storage or contractor storage to find less competitive markets with a demand-supply gap to tap into growing market segments where traditional big players haven’t established dominance.
2. Look beyond initial numbers: When reviewing investment opportunities, ensure that the revenue projections and exit valuations are realistic. Ensuring financial projections align with market trends enables investors to make more informed decisions and avoid overvalued deals.
3. Apply the S.A.F.E. investment method: Before deciding, consider the sponsor’s credibility, asset specifics, market context, financial projections, and exit strategies. This method minimizes risk by providing a holistic view of the investment opportunity and its potential pitfalls.
4. Diversify your investment portfolio: Spread your funds across various deals rather than concentrating them on a single investment. This diversification strategy acts as a safety net, spreading risk and increasing the likelihood of steady returns across fluctuating market conditions.
5. Leverage property management technology: Use modern tools to manage properties more efficiently and increase profitability. By utilizing technology, property managers can optimize operations, reduce costs, and respond faster to market changes.

Sponsor for this episode…

Keyrenter Property Management:

This episode is brought to you by Keyrenter Property Management.

Keyrenter Property Management is a full-service property management company that helps clients buy, renovate, and operate real estate assets.

The team helps clients build wealth while taking the headache out of property management.

That’s why, no er what rental you have — single-family homes, condos, townhomes, or apartments — they can give you the management solutions you need.

To learn more about their services, go to https://keyrenterpmc.com/ or send them an email at [email protected].

Episode Transcript

Intro 0:05

Welcome to The Same Day Podcast where we discuss driving incremental business growth and other topics related to real estate, property management and entrepreneurship. Now to the show at hand.

Mat Zalk 0:20

Mat Zalk here I’m the host of The Same Day Podcast where I connect with top business experts and real estate leaders. Past guests include Devin Howland talking about economic development in Fayetteville, Arkansas. We also had Elliot Nelson on the show from McNellie Group discussing community development through restaurants and bars in Oklahoma City and Tulsa. Today’s episode is brought to you by Keyrenter Property Management. At Keyrenter Property Management, we are a full service property management company helping our clients buy, renovate and operate real estate assets. We help our clients build wealth while taking the headache out of property management. Tom, you know how hard it is to line up contractors to get make ready he’s done in a reasonable amount of time after any occupant, whether it’s a single family resident or potentially even a self storage client, moves out of a property, the work seems to drag on forever. Contractors are busy and hard to line up, and all that leads to lost rental income. At Keyrenter, we line up our dedicated vendors so that turns can happen super quickly, and we get more money. Get more money back into the pockets of our owners. And that is why, no matter what rental you have, a single family, home, condo, townhome, apartment, we have the management solutions you need. Go to keyrenterpmc.com or email us at [email protected]. Today’s guest is Tom Dunkel, who brings over 28 years of real estate finance and investing experience to his position as Chief Investment Officer. Tom makes it his mission to find great investment opportunities for his clients, while helping them meet their wealth building goals. Since launching a full time career as a real estate investor in 2006, Tom has raised over 65 million in private money across three asset classes, self storage, short term rentals and distressed mortgage debt. Prior to investing in real estate, he worked in mergers and acquisitions, closing over $1.2 billion of deals in aerospace. IT services, software and logistics. Tom lives in Wayne, Pennsylvania, enjoys golfing, hiking and playing guitar. We want to hear him whale on the show today. Let’s see if we can make that happen. As an avid investor and lifelong learner, Tom is actively involved in organizations including Self Storage Mastermind, is a RaiseMasters coach, and was recently named a Marquis Who’s Who honored listee. Tom Dunkel, welcome to the show. How are you?

Tom Dunkel 2:39

Hey, Mat. I’m great buddy. It’s great to be with you and all the listeners. I’m looking forward to our chat today.

Mat Zalk 2:44

So I want to talk. I want to start with your previous experience, before you dive into your current experience, doing M&A for a bunch of interesting industries. How did you get into that? And let’s talk, maybe. Let’s talk about your most exciting deal. That’d be a good place to start.

Tom Dunkel 2:58

Oh, wow, jeez, yeah. So how I got into it was, you know, I got out of business school, and I was, you know, kind of a finance and accounting guy coming out of there. And so interestingly, I probably, you know, I learned plenty. Had some great professors at William and Mary, but where I learned a lot was in an internship. I worked for one of the professors who was on the board of a local charity, and he gave he said, hey, here are the financial statements. Tell me when we’re going to run out of money. I’m like, what? So the project forced me to learn, like the nuts and bolts and the nitty gritty flow of financial statements. So the income statement flowing into the balance sheet, flowing into the cash flow statement. So I’m building so I go to back to my apartment, I’m building this model. I’m like, wow, this is actually really cool. And so I’m building this model. I’m like, Hey, Professor Meisner, we’re going to be running out of cash, you know about October, yeah, whatever it was. And he’s like, okay, great. And then, you know, he’s like, so change this assumption and change that assumption, and then tell me, like, when do we run out of cash? So basically, that that that internship outside of the normal classroom setting, really set me up beautifully to build financial models, build these projections and work in an M&A kind of environment where we’re working with high caliber private equity firms and big, you know, big lenders. And just gave me that, that basis to say, Yeah, you know, this is how these deals are going to flow. And based on these assumptions, these are going to be the projections and the returns and all that. And so I still use the skills today, you know, writing deals, yeah, going on 30 years later. So that was super, super valuable. And so when I got out of business school and I went out in the marketplace, I wanted to do deals. It was just, I don’t know, I just. Kind of like the idea of doing transactions. And so when I interviewed with this company, they had just been a management team had just come in and acquired this sleepy government contracting firm. But this the CEO is like this 40 year old dude, Harvard, MBA, Harvard undergrad, First Boston investment banking. He surrounded himself with some pretty amazing people, and they bought this company, and they were going to use it as a platform to then grow and sure reposition the company. Because back then, it was the very beginning of the internet, very beginning of all this new technology push in. It was a government contractor. So a lot of lot of those really cutting edge technologies came out of the government, and government funded research organizations like DARPA and that sort of thing. So anyway, what an amazing environment to to come out of business school and just go in as a young as a young person, to, like, learn all this cool stuff, and being surrounded by ex fighter pilots, astronauts just really, really amazing. And so it gave me that really solid foundation to, you know, continue building on my my finance career. But I always had this kind of burning desire mat to go do something on my own. So, you know, we can jump into that if you want. I can pause. But you know that that was really kind of the beginning of where I, you know, the skill set that I am still, you know, building on to this day.

Mat Zalk 6:30

So tell me, tell me about your most either the most exciting, the most profitable or just the most fun acquisition that you did. And then we can talk through underwriting and how it cascades into your current in your.

Tom Dunkel 6:41

Yeah, you’re, you’re, you’re testing my memory here. So I’m sure I’ll get the numbers wrong, but you’ll get the idea. So so this company, like I said, it was this aerospace company, was really the the platform for building it into and that really a cutting edge internet and asset management kind of company. And so we were growing aggressively through acquisition. And, you know, we picked up, like a $20 million acquisition here, $50 million acquisition there. Well, at this one point, we had three deals that were closing on the same day. So in one day, we acquired $120 million company, and then, like a $20 million company, and then like a $50 million so we had hundreds of millions of dollars transacting that day and conveying from here to there. And at the same time we were recapitalizing the company. So we brought in this new private equity company, we brought in this whole new debt facility that was multi layered, right? So we had like a revolving piece, and then we had like a term piece. And it was actually really crazy. Here’s, so, here’s, you know, they keep, we keep these tombstones, you know, we do deals out of the world. You get what’s called tombs. So this is a part of the tombstone. It’s awesome that day. So this says 100 and $40 million revolving credit and turn loan facility. So it’s, it was quite an amazing day. And I how young were you when you got that tombstone? Yeah, so I was, I guess I must have been 20. I must have been about 30. Wow, it was about 30. And I’m working like with these Wall Street, you know, private equity firms and these big, you know, banking institutions. And I was, you know, doing all the modeling, and I was in charge too, of, like, the, you know, the sources and uses, right? So we’ve got, we’ve got all, you know, we’re buying these companies, and we’ve got these fees for these attorneys, and these fees for these other attorneys, and all these closing costs. And, you know, this much goes to that company, etc, and then we have, and then the use the sources, right? That’s where, you know, the private equity coming in and taking out this other private equity, and layering in all this debt. And, I mean, it was nuts. It was it was really nuts, but that was very exciting. And what ended up happening was the management team I mentioned, bought the company, the sleepy research and development company. I think they paid about five times earnings for that company, and then less than 10 years later, they sold it to General Dynamics for 15 times earnings

Mat Zalk 9:39

Which had grown significantly.

Tom Dunkel 9:41

Grown significantly, grown and repositioned. So it was, it was kind of a sleepy Research Development, Test and Evaluation company, and RDT&E Company, they call it Yeah, and through these acquisitions, we are going to reposition it into this higher multiple, higher value kind of sector. And. Able to sell it to General Dynamics for, you know, for a huge number. So what?

Mat Zalk 10:04

What drives that? So, company does a million you pay five times earnings, and it’s $5 million what? What allows you to charge 15 or to sell? What allows the the buyer to see value at 15 times earnings? What is the repositioning that happens?

Tom Dunkel 10:19

Yeah, so it’s, it’s because of the the new capabilities that the company basically acquired, acquired and developed during that time. So, you know, at the lower level, you know, it’s, it’s not that exciting, it’s not that profitable, it’s, there’s not a lot of growth potential. So you get paid this multiple but if you re, if you’re able to bring in, acquire or develop or otherwise get these cutting edge technologies in these high growth areas that are high margin with amazing future potential, then you’re going to reposition from a 5x company to a 15x company.

Mat Zalk 10:56

So let’s switch now. You’re super involved in the acquisition of self storage deals with a couple of different niches that I want to touch on. But how do you take those principles from your days in M A and understand where, whether you should be paying five times earnings equivalent? I mean, now we’re talking NOI and some different or 15.

Tom Dunkel 11:18

Yeah, it’s such a great question, because it there, it really does transfer over, because at Belrose Storage Group, we’re acquiring what we call value add self, self storage facility. So what does value add means? Well, it means there’s an asset that’s underperforming, right? So, so there’s there’s meat on the bone, there’s value left on the table, and a lot of times it’s because it’s a mom and pop owned facility. They’re not cutting edge operators. They’re not they’re not implementing the latest technologies. They’re not going to the conferences and the seminars and the mastermind groups to learn about best practices in self storage. They just have this business that they have owned for whatever, 20 years, and they know all their customers, and the units are full, so they’re happy, and they like the amount of money that’s coming in each month, so that, you know, they they live their lives and, you know, go to the beach or play golf or whatever and that, and that’s fine, and that’s wonderful. But what? When we come along, we see that there’s that there’s value to be added to this facility by implementing the latest technology, by, you know, cutting expenses, by using technology, by pushing rates. Because a lot of these moms and pops, the other kind of asleep at the wheel.

Mat Zalk 12:39

They’re just happy with occupancy. Yeah, it’s fine.

Tom Dunkel 12:41

Yeah, exactly their key performance indicator, their KPI, is, are we full? Yeah, hey, if we’re full, we’re good. But that’s not how you run a self storage facilities. The best way. It’s kind of like in the hotel and the airline industry, right? If a hotel is full, they know they’re not charging enough. I have a buddy of mine used to be in the hotel business, he said, if we’re over 90% full, we’re not charging enough, right, right? And the same with the airlines, you know, they have, you have a fixed cost to fly that plane, right? So you’ve got to fill those seats, but, you know, you’ve got to, but you also have to play the supply and demand game, right? So we’ve all logged in looking at flights, you know, and then you go to book it a few days later, and the price is higher, like, for sure, but that’s what they’re doing, and so that’s what we do through our sophisticated technology and management platforms, is we are able to do what’s called dynamic pricing. We’re able to scan the competitors and see like, in more or less real time, like, how should we be charging for a 10 by 10, as compared to what’s going on in the market? And then similarly, we do what’s called premium pricing, so units that are more conveniently located, like, if they’re sort of the front of the facility, near the entrance, we can charge a higher price for that because of the convenience factor, as opposed to having to drive back to the back of the facility. We we charge less for that. So these are just a couple of examples of the kinds of things that dollar storage group does to take a sleepy, you know, 5x kind of asset and turn it and reposition it into a more valuable asset and generate great returns for our investors.

Mat Zalk 14:23

How many markets are you in with self storage?

Tom Dunkel 14:27

So we’re across eight states. So and even within the states where we have multiple we’re in different markets in those states. So we’re, it’s one of the big things we look at, Mat, when we’re when we’re looking at an acquisition, for sure.

Mat Zalk 14:39

Recognizing that not all eight states are going to have the same macroeconomic characteristics. What are you seeing in terms of your ability to push rates on self storage? Is it the same as it was in 2022 is it lower? How are your occupancy rates like? What are you seeing, trend wise? That could that could help some of our listeners understand what’s going on in the. Economy today because the Fed recently, and we’re filming this at the first week of August or the second week of August, 8. But ultimately, the jobs numbers came in lower than expected. We had a small correction in the stock market, but the numbers have been telling us for a while that we’re kind of okay with the soft landing where inflation is coming down. But it seems to me, from, you know, we manage 2700 houses. We have a lot of data from from rentals, what our owner what our tenants are able to pay. It seems like the average person is really hurting. And it seems to me also that self storage is a good barometer, because it tracks movement. Who’s moving from house to house, who needs more space but can’t afford it, etc. A bunch of metrics. What are you seeing in the market, in terms of the economy?

Tom Dunkel 15:42

Yeah, you’re spot on. You know? We we for a while there, we had those covid wins at our backs, right? And still, self storage was in huge demand, right? Because people were having to take their their spare bedroom and turn it into a home office and and there were still a lot of transactions going on with homes, because that’s a big driver of self storage demand, and because interest rates were still low, etc. So, you know, we had a few years there where things were really rocking and rolling nicely. We’re back to reality now, though, because, you know, the covid winds are gone, we’re back to kind of the seasonality of self storage. And of course, we’ve had a huge run up in interest rates people which, which cut off the residential real estate transactions, right? Because people didn’t want to, you know, sell their 3% mortgage house and buy their 8% mortgage house, right? So that put a put the brakes on the real estate market. So self storage across the country definitely felt the impact of that. Yeah, and so last year, you know, our occupancies were down. Our rates were down, for sure, across the portfolio and everyone’s portfolio across the country. And so, you know, we had to manage our way through that. And that’s, that’s a couple of things came out of that. Number one is, man, were we glad that we were very conservative underwriters and deals and that we’re very selective, like I mentioned, you know, we, we’re acquiring, you know, a handful of facilities for every few 100 that we look at. So we make sure that we, you know, protect our investors capital by by, you know, being conservative and good stewards, and that’s also driven us, Mat, into a couple of niches, which I’ll get more into later, but we are, like you were just saying, we are definitely seeing our consumers are not absorbing rate increases. It’s starting to come back. Yeah, and it is, it is Market to Market. So we have some markets that are more depressed. We have other markets where, you know this, they’re still pretty robust. So this is again, where our active and very sophisticated management team can go in and do that analysis and make sure we’re running the property most efficient way.

Mat Zalk 18:00

Yeah, do you guys manage your own assets, or do you use third party management?

Tom Dunkel 18:06

We do. We we manage our own assets. We have, we have a internal operations team that oversees all of our facilities. Each facility has a human assigned to it, but that same human might be assigned to three or four or five facilities, because, again, I’ve said it a million times so far, but we really leverage technology to help us manage our facilities more efficiently. So instead of having one, I mean, let’s face it, anyone out there runs a business knows your personnel expense is one of your biggest expenses, right? So we’re able to take, you know, the old model was, he had one manager at one facility, and that manager is expensive. Well, with using technology, we’re able to have that same manager, manage 3, 4, 5, 6, facilities, and a lot of it can be done, you know, right from their from their smartphone.

Mat Zalk 18:58

Yeah, yeah. Interesting. I want to ask one, one question that kind of goes back a little bit. Mama Betty was managing her self storage for the last 20 years. What has changed in the industry that brought in more sophisticated operators? Was there not the equivalent of you 20 years ago when Mama Betty happened into this potential good deal, and just did it herself and was a self operator for so long, like, what? What’s changed?

Tom Dunkel 19:27

He kind of freaked me out there, because my mom’s name is Betty. I was like, Wait, searching like my family

Mat Zalk 19:35

Mama Sarah. Mama Sarah.

Tom Dunkel 19:38

He does a good job preparing for these interviews. But no, so, yeah, no, my mom’s awesome, and she’s a smart entrepreneur. So she probably would have, you know, however many years ago she, if she had seen the opportunity, she would have jumped at self storage. But, you know, back then, in, you know, what we’ll call, kind of the first generation of self storage in the in the 60s and 70s, you know, you could. Get financing. And it was just kind of a a rusty, dusty, you know, little parcel in the back of a industrial area. And, you know, some smart people were like, hey, people need to store their stuff. And so they just, they build it with their own money, their own equity, their own cash. And then as they started proving out the concept and growing it out. And then along, you know, in the 80s and 90s come along, you know, the big REITs, you know, public storage, extra space, etc, they start to develop, um, now they’re starting. Now Wall Street’s starting to take notice, because they’re like, Wow, look at the numbers coming out of these self storage properties in these up and down, you know, economies, it’s like, wow, this is a cash flowing business sitting on real estate. You get the tax benefits, but it’s a highly leverageable model. So, so that’s what got, uh, Wall Street’s attention, initially, you know? And well, I wouldn’t even say Wall Street initially, initially, it was the banks that said, hey, you know what? This actually is a legitimate asset class. And they started lending, and that started the building, and that started the expansion, got it of the self storage industry. And then during covid, that’s when Wall Street really started to take notice. And so there’s been tons of money raised in these private equity funds, you know, looking to to acquire self storage, and now it’s starting to spread internationally. A friend of mine, our mastermind group, he’s doing, he’s looking at stuff in Dubai, wow, over in the UK. So like, but I think it’s at least right now, it’s more of a unique American problem, like, we love buying stuff. We love we don’t like to throw it away, yeah, we and we hate throwing it away, right? It’s like, oh, you know, my kids are going to want that, you know, that old oak, you know, bedroom set I’m going to hold. It’s like, you know, I just want, speaking of my mom, we just went through this with her recently, because she moved from Pennsylvania down to Florida, and she moved out of a big house into a smaller house. She’s, like, trying to give me stuff like, oh, you know, this was a wedding gift for I’m like, Mom, I love you, but I don’t want that. My brother and sister were all like, we’re, you know, we’re all grown adults. We don’t want that stuff, right? Yeah, so, but, but for whatever it is, you know, Americans, you know, we love holding on to our stuff, and we hate getting rid of it, and so we’ll pay hundreds, if not 1000s and 1000s of dollars to store hundreds of dollars worth of stuff that nobody wants. It’s crazy.

Mat Zalk 22:36

Yeah. And demand fairly, demand in elastic because you raise prices 10 or $15 and the hassle of getting a truck to go down to the storage unit find the key wherever that is for a lock that you haven’t seen in two years. It’s like, thanks. But add on. What’s interesting is that banks didn’t initially view this as a bankable as a lendable product. Did they not understand what they were collateralizing like, why would they not getting that opportunity?

Tom Dunkel 23:03

They they thought their their argument was, well, okay, that’s great. You have these units rented out, and their cash, the cash is coming in, but we could make this loan to you, and on day one, all your customers could move out, and now you have no cash flow. Like, all right, really? You know, is that real? Is that? How realistic is that? And so one of the things we’ve been tracking, and one of the things we talked to our investors about, is the the adoption of self storage, so the market penetration, to use the fancy term for it, right? So, you know, a few years back, there’s about 8% of households in the country we’re using storage. Now it’s inching up closer to 12% I know that might not sound like a lot, but let’s consider one 20 million households across the country. Every 1% move is 1.2 million new self storage customers, and they’re just not being built fast enough. Municipalities do not like self storage. They’re not approving these self storage projects because, you know, they’re not super sexy. There’s not a lot of employees there, so it doesn’t generate a lot of tax income for the municipality. And so they just these municipalities kind of want, like, maybe a sexier asset to go in there. But meanwhile, the demand is growing and growing and but the facility, there’s the facilities are just not keeping up. And you’re seeing that in housing too, right? I mean, it’s like the, you know, we have these, the this growth going on, but the can’t build the houses fast enough. Can’t build the apartments. Fast enough. Can’t build the self storage facilities. Fast enough, can’t build the boat and RV facilities. Fast enough. Can’t build a pro storage fast enough. So, you know, it’s, it’s all of these factors are just lagging, and it’s so we’re happy to play that supply, demand and balance game and make great returns for our investors.

Mat Zalk 24:52

I mean, it’s, we see this. I sit on the planning commission here in town, and we see it all the time, where a developer wants to come in and satisfy. The demand by adding additional supply. And there’s a huge nimbyism problem. Nobody wants, I’m sure, self storage. But people also don’t want, in a in an established single family, third of an acre to half an acre lot neighborhood. Nobody wants quarter acre lots. And they all come in and fight it. It’s like, well, we’re in a really tough position here. I own a ton of real estate, so I’m also, I’m also happy to maintain the status quo and keep pushing up rent prices and housing prices. But ultimately, the city needs more self storage. It needs more housing. It has to go somewhere, and nobody wants it in their backyard, but ultimately, has to go somewhere. But in your position where you own a lot of self storage, it’s also great when the municipality turns it turns it down, and prices can continue to climb.

Tom Dunkel 25:42

It’s a barrier, yeah, yeah, it’s a barrier to entry.

Mat Zalk 25:45

But yeah, let’s talk for a second about the S.A.F.E. method for passive investing. I mean, what? What is your S.A.F.E. method? How do you explain it to people? Why is it interesting?

Tom Dunkel 25:54

Yeah, sure. So I’ve been a full time investor since 2006 so over 18 years, and over the years, you know, I made some good investments and I made some bad investments, right? So, you know, even though I had this great background with aerospace company and MBA and all that cool stuff like, you know, it’s, you know, you can still make bad decisions. And so what I did is my partner, Joe Downs and I we, we created, we kind of compiled all of these stories together, and we kind of boiled it down into a series of questions that investors need to be asking to make wise investments. Yeah. So we came up with what we call the S.A.F.E. method. The Safe Investing method. Investing is not safe, but if you follow the S.A.F.E. method, you can at least de risk your investment choices and hopefully make some good, good decisions. So it’s safe as an acronym, it’s S.A.F.E.. S, stands for sponsor, Mat. I cannot tell you, it drives me nuts. How many investors skip over the sponsor and they just start looking at the deal. What are the returns, you know, what’s the asset class? Oh, I want to get into multifamily. Oh, I want to get into short term. So they have to stop and start with the sponsor, who’s running this deal. I mean, you’re going to be wiring your 50, 100, 2 0 grand somewhere, who, who are you sending it to? What’s their background? What’s their team like? What’s their track record, you know, I mean, Google their names.

Mat Zalk 27:27

He might be, he might be. How many SEC investigations, right?

Tom Dunkel 27:31

Exactly. Had I done that? Mat? Uh, jeez, going back, uh, maybe 15 years ago. Um, I invested with a guy because I liked him. I thought he was funny, I thought and I liked his business model. Well, it turns out he was just a scam artist, and he ended up stealing 50,000 bucks for me. Had I Googled his name, I would have seen a ton of SEC investigations and all this other stuff. Now, in my own defense, 15 years ago, Google was not what it is today. It was, it was very early, yeah, kind of search engine, but, but even so, I had, I had, I had, I just Googled his name, I would have saved myself 50 grand and a lot of heartache. So you got so the S.A.F.E. method ebook, which is available on our website. belrosestoragegroup.com gives you a list of questions to ask your sponsor. And I know some people are like, well, I don’t know. I don’t want to ask him about, like, what his net worth is, or, you know, if he’s a criminal. Or can I do a background check, in my opinion, if you’re handing because I invest in as an LP too. I invest in other people’s deals, and if I’m investing in someone else’s deal, I feel like that gives me the ability authority to ask those hard questions. And it’s it can be uncomfortable, especially if you’ve known this person for a while, like socially or whatever, but it’s like, Hey, this is business. This is real money.

Mat Zalk 28:57

Is there a net worth threshold that you would say makes sense or doesn’t make sense. I mean, I would think that successful exits and a bunch of other questions, but net worth is a really interesting one that I’m not considered. You definitely want to there’s a higher propensity for somebody that’s worth nothing to steal your money. I would, I would kind of see that correlation. But what would you say is a reasonable net worth before you start handing somebody?

Tom Dunkel 29:20

I mean, I would want them to have a net worth, hopefully, you know, hopefully they’re at least an accredited investor, right? That’s, I would say that’s the minimum, yeah, and which is a million dollars, with not including your primary residence, for those who don’t know what an accredited investor is. So I would want that as an absolute floor, right? And then, you know, and I also want to hear like, Hey, what did you fail at? Because nobody’s gotten here today. Like, I’ve failed plenty of times, and I’ve learned and I’ve applied, you know, what I’ve learned? And, you know, helped me to grow my business and grow our investor base because of that level of transparency. So I. Um, so anyway, so sponsor, it’s huge, huge, huge, huge plus to get to know your sponsor. A is for asset. What is it that you’re investing in? Right? So, if you invest in a Belrose Storage Group deal, you’re buying membership interest in an LLC that owns a property, right? I, you know, I if you can’t explain what the asset is to your mom, if I can’t explain it to Betty, yeah, or explain it to my, you know, 20 year old kid, then you know it, it might not be a good investment for you, because it’s like

Mat Zalk 30:32

Can you, can you? Can you pronounce the ingredient that’s the.

Tom Dunkel 30:35

Can pronounce the ingredient that’s right, yeah. So, so people, you know, and God bless them. People are investing in crypto like, good for you. You know, I hope, I hope you make a bunch of money. But can you explain to me exactly what it is that you’re investing in?

Mat Zalk 30:48

That’s why I never have, and I feel foolish when it goes up to $70,000 I just still can’t. I can’t. There’s no way.

Tom Dunkel 30:54

Well, yeah, anyway, so you know, you got to understand the asset. What’s the market? You know, like we were talking about markets earlier, you know, what market is that, if you’re looking at a real estate deal, multifamily, you know, rentals, you know, self storage, whatever, what’s going on in that market? Um, is it like a one factory town, and if that factory goes out of business the city, you know that town goes out of business. So you need to dig into the the asset, and you know what? What is it exactly? Um, and then financials is, you know, what are the financial projections? What are the tax implications? Has the sponsor hit these kind of financial projections in the past? Have they generated these kinds of returns? Yeah, what? And then, in your own personal portfolio, you know, how much of my own personal net worth Am I putting into this investment? And how do I feel about that? Is my putting too many eggs in one basket kind of thing, right?

Mat Zalk 31:45

And then on the financials, my question was around returns. Now I forgot it. I should have written it down, returns you were saying when you ask about returns, I forgot it.

Tom Dunkel 32:00

Never mind. Go ahead. All good. So then E right is for exit. How do you get out of this thing? Right? It’s not like you can go to schwab.com and click, click, click and sell your position in, you know, in a short term rental deal, or in a, you know, in a self storage deal or whatever. It just doesn’t work that way. So as an investor, you need to understand, how long is my capital going to be tied up? What needs to happen for me to get my capital back? And, you know, who’s in charge of that, and can I get out early if I need to, or what are the mechanisms for me to, you know, maybe push for an earlier exit. Or, you know, you need to understand, like all of those things. So S.A.F.E., the S.A.F.E. Investment Method ebook is on our website. It’s free, so pick that up. Hopefully make what I’m hoping, Mat actually is because it’s very it’s pretty elementary, but it’s also very important stuff that’s in there. But what I’m hoping is that if there’s an investor out there who, you know, they’re wanting to get into alternative investments, they’ve seen the volatility in the stock market, and then recently, I’ve had enough of that, yeah, but they just don’t know how to take that first step. I think the S.A.F.E. Investing method is a great way to just get comfortable, like, what are those questions you need to be asking? Because that, you know someone who’s a, you know, they’re maybe they’re an engineer, they’re a tech guy, or they’re a sales guy, you know, they see the opportunity, but just not sure how to take that step. And I think the E, the our ebook is a, is a great map to just help them take that first step and reach out to guys like you reach out to guys like me. You know, we, we’re a small, you know, boutique organization, right? It’s not, you know, speaking of Schwab, right? You can’t call up Schwab and, you know, talk to Charles Schwab and, hey, how’s the market, you know, going, you know, but you know, you can pick up the phone and call Mat. You can pick up the phone call Tom, and, you know, we’re we’ll spend whatever time we want. You know, you want to get your questions answered so that you’re comfortable. And if, and if you don’t like me, you don’t like self sort you know, great. There are so many. You learn something for sure. You learn something for sure. And one of the things, yeah, one of the webinars we put out there before is how to build a predictable portfolio. And so we have a four step program to do that. I’m happy to go over that if anyone wants to set up a call.

Mat Zalk 34:25

Yeah, let me I remember my question a lot of people, a lot of people may say, and you have mentioned before, conservative underwriting assumptions, how would, how would a a an accredited, but fairly unsophisticated, potentially fairly unsophisticated, to self storage investor, understand whether underwriting assumptions are actually conservative.

Tom Dunkel 34:46

That’s a really good question. I would say I would look at two two things, if I had to really boil it down. I mean, look, anybody who’s become an accredited investor, I would think they have. Some level of, you know, maybe some business savvy or something like that. So my suggestion would be, look at the revenue projections for the for the Self Storage, they don’t have to stick right, or the or the multifamily or whatever. Yeah, if it, if, if, if they’re going up 20% a year. I mean, you know, this isn’t technology, right? I used to be in tech after I did my aerospace and all that, so I was in technology investment banking for a while, and then I saw so many like crazy hockey stick projections. I was like, Huh? Anyway, if, if, if the numbers just don’t make sense. Like, if the if the revenue is increasing 20% a year. But you look in that market, and, you know, the rental rate trend history has been, those rates have only been going up 5% you know, how, how is that going to work? Yeah, so I would look simply at the revenue projections. And, I mean, you can get more sophisticated and look at the, you know, the other expenses and but I would start simply at the revenue, and then the other thing I would look like, look at, and this might be a little in the weeds, but hopefully you guys will track with me here. There’s a terminal value when you’re sorry to sound like a finance nerd, but that’s what I say, like the sale value at some point or Yeah, so there’s that sale value in the future that we call the terminal value, right? And that terminal value has, you know, is a huge factor in the in the return equation, right? So does that? You know, if they’re buying a facility this year for 3 million bucks, and they’re saying, we’re going to sell it in five years for 15 million. I mean, does that really pass the sniff test, you know? And, and so if you’re seeing big projections like that, and specifically, you know, there’s something called a cap rate, they’re buying their nine and selling it a three, yeah, they’re, if you’re buying a giant cap and selling a three cap, it’s like, huh, yeah, you know what we’ve done over the past couple years. Because, I mean, it was no surprise that cap rates were going to be going up, right? Because, you know, it track. Cap rates typically track with inflation and interest rates. Yeah. So a couple years ago, I was telling my acquisitions team, like, Guys, look, I know this is going to make it tough for us to compete on deals, but we have to adjust our exit valuation assumptions. Yeah, because interest rates are going up, cap rates are going to go up, you know, negative leverage deals, it’s starting to throw another just, it’s just, you know, maybe this, you know, big but dumb money might come in and buy some of these facilities overpay, because the financials, you know, just started there for like, a traditional, you know, syndicator, like us, but you know, we had to do it, and that’s why we only acquire, you know, maybe one out of 75 or 100 deals, because it has to, has to work, has to project, because at the end of the day, you know, we’re, we’re here to help our investors build their wealth, and last thing we want to do is get them in a bad deal where they’re going to end up upside down and we’re going to have a really difficult conversation. I’d rather be really discriminating up front and really disciplined up front, and then, you know, and if things do go sideways, hey, maybe we only delivered a 10% return instead of a 20% return. But I think a lot of investors would be pretty happy, yeah, yeah, with that, with that low end of the range.

Mat Zalk 38:32

So let’s, let’s end it with one final question. Let’s talk, for people that are interested in investing, like, what were the numbers on the last deal that you underwrote, can recall that would be indicative of a potential future deal that somebody might get and get involved in?

Tom Dunkel 38:50

Yeah, sure. So we’re not buying these, you know, huge monstrosity, self storage facilities, you know, Class A like the big, shiny, glassy things you see public storage, you know, in the middle of town. I mean, that’s not that’s not us. We don’t see a lot of, we’re not competitive in that space. We don’t see a lot of value add that we can bring to that kind of deal. So the deals that we’re buying are in kind of secondary and tertiary markets. So we’re not in Baltimore, we’re outside Baltimore, you know, we’re not in Atlanta, we’re outside Atlanta, right? So we find these facilities, and they’re generally, you know, call it in the $3 million range. We’re typically on a deal like that. We’re going to raise about a million and a quarter or so from our investor base. Last thing we want to do is over leverage, right? So, like, a year ago, we had a bank offering us 80% financing on a deal, and we said, You know what? No thanks. We can see what’s coming around the corner. Our numbers work for our investors really well at 75% so we’re going to stick at 75 and we’re glad we did, because, of course, you know, the market softened, and that facility, had we been at 80% you know, would be. In real trouble. Now it’s just sort of bumping along, and we’re getting ready to ramp it back up. So anyway, so on that particular deal, about half of the equity we raise, we raise in what we call our preferred equity tranche. So our preferred equity, our class A is for a cash flow oriented investor. So this an investor that is more interested in getting that monthly check, then, you know, waiting for some big bounce on the back end. So, so our class A we typically pay between eight and 9% the checks are sent out monthly when the deal sells. Call it 345, years out, that investor will get their their principal back, and then they get a small percentage off the top of the of the net profit. So it’s so it’s geared to about a, you know, 10, 11, 12% overall return, okay, and that’s a priority situation. So, so they get paid first. So a lot of our investors came to us, you know, a couple years ago, and they were like, hey, you know, mid retirement, or getting toward retirement, you know. And so listening to our investor base, we said, hey, you know, let’s create this cash flow tranche, our common our class B, common shares, those are more traditional equity investments. So it’s, it’s a, it’s a, it’s a 3,4, 5, year hold. There might be a little bit of cash flow up front, but as the value add strategies kick in, that preferred payment made again, made monthly, can actually get up above the class a preferred but it might take some time, and then at the end, when we sell facility, they get their capital back, and then we split profits with them. So So, so our interests are very much aligned with our investors. If we perform well, they get paid, and we get paid. So we, you know, we like, we like our interest to be as aligned as we can, which honestly is why we do syndications and we don’t have a fund, because this way our investors can look at our deals that come out and they say, Hey, you know what, I don’t really like that one for XYZ reason. But you know what, I like that one, so I’m going to participate in that one. You know, in a fund, you’re kind of handing your money over, and then the sponsor is kind of making those go, no go decisions for you. And we don’t think that necessarily lines up interest as well as a deal by deal syndication.

Mat Zalk 42:27

If somebody, if you presented two deals to somebody, and one had a 16% IR, and one had a 18% what do you call it? Like a expected IRR, why would somebody under do the 16 if they, if they had 50,000 to spend and they were going to put it in 220, 5000 in 220 $5,000 checks or write 150 $1,000 check, why would they ever go with a lower IRR deal and there’s a higher one on the table?

Tom Dunkel 42:48

Yeah, you know, that’s such a good question. I would say, Mat, you know, I’ve been building financial models going on 30 years, and I can tell you one thing.

Mat Zalk 42:56

They’re never going to be right.

Tom Dunkel 42:57

I never going to be right. I never got, I mean, you know, as as hard as it is for me to say, because I love my models, man, I put, you know, I put, and, I mean, now I have a team that does it, but, you know, I put a lot of heart and soul into this. And, you know, and, you know, make sure they’re tight. But yeah, at the end of the day, how am I going to pick a number, you know, five years out and have it be, yeah, yeah. So, so that’s why, you know, we put a deal out, we actually put a range of returns. So we put like, Hey, here’s our low case scenario. And so I think that helps investors, you know, understand that, you know, there’s variability here. We’re not, you know, we’re not fortune tellers. And so if there’s a 16% deal and 18% deal, I’d say, Hey, do both of them, because that’s real diversification. You know, large cap, you know, mid cap, small cap value. That’s not diversification. They all have, they all have a one correlation when the market drops, right? Yeah. But if you if there’s a facility out in Tulsa and there’s a facility in Atlanta, you know, if something bad happens at the Atlanta facility, it’s not going to impact the Tulsa facility in most cases, right? Unless there’s some big, you know, national or global catastrophic event. So that, to me, is true diversification. That’s capital preservation, but you still the opportunity for growth, tax advantages, cash flow, all that good stuff. So that’s, that’s what I would say about, you know, about picking those, picking and choosing.

Mat Zalk 44:22

Is there, is there anything that we should talk about that I didn’t ask about anything that is, is a fascinating, novel thing coming down in the industry.

Tom Dunkel 44:30

Yeah, yeah. Well, I would say, you know, I hinted earlier about two cool niches within self storage that that we’re really excited about here at Belrose Storage Group. I mean, look, we love traditional storage. You know, the the drive up, you know, renting out 10 by 10s or 10 by fifteens with the eight foot roll up door. You know, great business, solid business. But as we’ve gotten into the business here, you know, we’re starting to see these other niches evolve that we’re really excited about. One. Is boat and RV storage. So just like any other kind of real estate, you know, you’ve got your you got your fancy stuff, and you’ve got your less fancy stuff. So there’s, there are boat and RV facilities that are, like, fully enclosed, and they’ve got all the amenities. And, you know, Class A and you know, you can just go and hang out next year RV, if you want, and, you know, smoke a cigar or whatever. They’ve got dump stations all that stuff. And then there’s others that are just, you know, canopied. And then there’s others, like the one that we just acquired in Minnesota. It’s literally a parking lot with a fence and a gate and lighting and security cameras, and that’s pretty much it. So, I mean, talk about, you know, being able to go back to the safe method, right? So the a the asset, I mean, it’s pretty easy to get your head around a parking lot, right? So we charge by the space per month, and we just find areas where there’s a there’s a population of boats and RVs. So Minnesota, some you know, anyone’s ever been up there? Tons of lakes, tons of camping, tons of fishing. It’s one of the biggest consumer states for boats and RVs in the country. I think it’s in the top five. So. And the thing is kind of like we talked about earlier, Mat, you know, there’s 400,000 RVs built every year, wow, but there’s only 20,000 new RV parking places built every year, and all these new all these new subdivisions, all these new developments for housing that are under HOAs. They don’t want their RVs parked in their fancy new neighborhood, right? So what do you have to do? We have to find someplace Off, off your property to park these things. We have customers, Mat, that drive like an hour to get pick up the RV or boat, wow, to get to our RV lot, because that’s the closest one where there was availability, wow. So it’s just nuts. And like in traditional storage, you’ve got your public storage, extra space, you know, cube smart. You got those big guys, you’ve heard of those REITs that own 1000s and 1000s of stores in the boat and RV space. There is no big player. The biggest player in boat and RV owns about, owns about 5000 No, they not even, no, they, sorry. They own about 50 stores. Wow, wow. So it’s like, wide open. It is wide open, and it’s and the customer is a little bit different too, right? Like, if somebody’s keeping a bunch of crap in a 10 by 10, you know, and they feel like stopping, you know, payments like, yeah, okay, whatever. I lose, not giving up my boat. They’re not giving up the boat, they’re not giving up the RV, right? So the customer base is very different. The other cool thing is, when they do take their RV out, guess what? They keep paying for the space because they don’t want to lose it. So they might go tool around out west in their RV for a month or two or three, but they continue to pay for their spot so that they don’t lose it. And then, you know, where are they going to go? So Bowdoin RV space is super exciting. The other one is what we call pro storage, otherwise known as contractor storage, or larger format storage. So we ran into this niche by accident, which was an amazing I love, I love when that love when that happens. We bought a facility about a year ago in Wilmington, North Carolina. It was only 96 units, but these were instead of 10 by 10 with an eight foot roll up door. These were like 18 by 25, and larger units with a 14 foot roll up door and a 20 foot ceiling. So all of the customers at this facility, there were some boat and RV people there, about 20% of the of the units, but the rest, about 80% were contractors. So these are, you know your electricians, your plumbers, your landscapers, your carpenters, you know your HVAC guys. You know that they they need a place to more or less run their business out of a lot of contractors got screwed during covid, when the supply chains kind of shut down and they’re waiting for materials and they’re getting yelled at by their Yeah, the property owner, Hey, where’s my stuff? You know, my projects way behind me. That happened to us. We had a project that took a year longer than it should have because our materials were stuck in a, you know, cargo ship off of California for a couple months or whatever. Yeah, so these guys are now, they’re stockpiling their materials and their equipment in these kinds of units so that they don’t have to go through that again. And speaking of the residential market slow down right lot, instead of people, instead of selling and moving now they’re fixing up their house. They’re like, hey, you know what? I think we will do the kitchen, we will do the bathrooms. You know we’re going to repaint. And so contractors, I don’t you’ve tried to get a contractor to your house.

Mat Zalk 50:00

Let’s talk about that.

Tom Dunkel 50:03

It’s tough, man, yeah. And so there’s huge demand for that kind of thing. Problem is for these contractors, these flex spaces that are like 15,000 30,000 square feet in these industrial areas, they’re all getting gobbled up by the Amazons and the last mile distributors of the world, right? So those guys are jacking up the rental rates and squeezing out these smaller Mom and Pop contractors, and they can’t, they don’t have a place to run their business. So at this facility in in North Carolina, we have been learning all this. A year ago we acquired the facility, we were charging 450 bucks a month for that 18 by 25 guess where we’re at here a year later, 709 Wow, $100 we’ve doubled the rent on that unit in one year. And we wish we had more units, because when one goes.

Mat Zalk 50:52

I wish I was involved in that deal.

Tom Dunkel 50:55

Our investors in that one are going to make out real well, but, but, you know, again, it’s an area where there’s no big player in that space, and there’s but there’s not a lot of them. So you know, our big challenge here at Belrose Storage Group is, you know, now we’re having to shift kind of a development model, because we need to go build these things, because the demand is there, but the supply isn’t. So then we run into a lot of the NIMBY issues that we talked about a little while ago. So we’ve got some challenges ahead of us in terms of those spaces, but we’re super excited about the boat and RV and also that that pro storage niche.

Mat Zalk 51:29

I love it. Tom Dunkel brings over 28 years of real estate finance and investing experience to his position as Chief Investment Officer at Belrose Storage Group and Belrose’s other associated businesses that we didn’t talk about today, but are also super interesting. Tom makes it his mission to find great investment opportunities for his clients, while helping them meet their wealth building goals. And he’s got a whole team of people that work with him to do that. Since launching his full time career as a real estate investor in 2006, Tom has raised over 65 million in private money across three asset classes, self storage. We’ve talked about short term rentals, which we didn’t, and distressed mortgage debt, which we also didn’t. But would make other interesting podcasts. Prior to investing in real estate, he worked in mergers and acquisitions, closing over $1.2 billion of deals in aerospace. IT services, software and logistics, which was, I thought, a great part of this show. Tom lives in Wayne, Pennsylvania, enjoys golfing, hiking and playing guitar, but we didn’t get him to play for us today, we’re gonna do it on the next show, for sure, as an avid investor and lifelong learner. Tom’s actively involved in organizing, in organizations including Self Storage Mastermind, is a RaiseMaster’s coach and was recently named Marquis Who’s Who honored listee. Tom, we appreciate you being on the show one more time. How do people reach you? If they want to reach out directly and have some of the conversations deeper version? Conversations, deeper versions of the conversations we had today.

Tom Dunkel 52:43

Mat, this is awesome, buddy. You asked some great questions. I hope everyone got a lot out of our chat today, but yeah, I’m Tom Dunkel. I’m Chief Investment Officer here at Belrose Storage Group. Just encourage folks to head to our website belrosestoragegroup.com and you can get in touch with me there and also find our ebook on the S.A.F.E. Investing method.

Mat Zalk 53:03

That’s awesome. Thank you, Tom. Appreciate you.

Outro 53:09

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