There is so much volatility in the market right now, leaving investors scrambling for the next move. How will you fund and purchase your deals if the interest rates keep going up? How can we continue to do that while still achieving double digits on cash return and even higher if possible? Stacy Rossetti believes in creative deal structures. And in this episode, she shares how we can utilize this when purchasing storage facilities. Over the course of the next couple of years, banks are going to be more and more conservative. That is why it is necessary to start learning to structure your deals creatively. Stacy dives deep into its many advantages and shares how you can convince the owner to sell you the property while also being the bank. She tells us what they call “The Four Offer System,” breaking down owner financing and calculating your offers. Brace yourself for what’s ahead. Join Stacy as she shares insights to help you get better deals.
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Purchasing Storage Facilities With Creative Deal Structures
How is everybody doing? I’ve been teaching people how to invest in self-storage for a couple of years. I’m an open book. I’m going to teach you something that will help you over the next couple of years. I talked about this in my mastermind with all my students. Essentially, times are changing and the market is all over the place.
Investing In Self-Storage In A Volatile Market
The question of the year is, “Can you still invest in real estate even if the market is so volatile?” I think about that all the time and I get asked that all the time too. I always think a lot of people are questioning this right now because the market is so crazy. Interest rates are going up. I love talking about the market. It’s one of my most favorite things. I love learning about the real estate market. I’ve been one of those people over the past years that have been studying it.
We got out of a residential investing. We haven’t invested in residential real estate since 2019. The reason why is because I got in 2010 and 2011 when all those properties were so cheap. Now, I can’t fathom spending so much on a property. Residential real estate is so expensive, so I’m not into it. I’m blessed to have been put into the self-storage investing world and it fits my personality. Residential real estate is about people that like to grind. They are challenging and pushing themselves. Back in the day, when I was getting started, I was okay with pushing myself but my personality is slow and steady wins the race. I’m sure a lot of you all relate to this. That’s what it is. That’s why I love storage because slow and steady wins the race.
I had a coaching call with one of my students and he’s starting and learning. What I told him was, “If you buy a $1 million property in the storage world, you’re going to make about $100,000 a year on average. You’re going to net $10,000. Your cash-on-cash return is 10%.” You guys can tell me if you think anything different. He was like, “I thought $100,000 is what you’re going to make.” I said, “It is. It’s your gross income. It’s not your net income. Your net income is a percentage of your gross income. Typically, it’s around 10%.”
A lot of people say, “I want to replace my income or my W2 job.” If you’re making $120,000 a year, you’re going to have to have a lot of storage facilities in order to replace that or have bigger facilities. On average, calculate 10% for your cash-on-cash return, but you could make more. We have a facility right now that’s making a 17% cash-on-cash return. If you refi out, you can make even more. You can make a lot of money. You want to keep that in mind.
Typically, you guys tell me if anybody is in multifamily. He had rental properties. He said, “I bought a property for $100,000 and I’m making $2,000 a month on it.” I said, “Good. What is your mortgage?” He said, “$900 a month.” “What are your expenses?” He said, “My property taxes are about $400 a year.” We’re in Georgia. We got low properties. “My insurance is around $400 and then I’m spending a couple of hundred dollars a month on this facility.” Add up all your expenses. Essentially, you have to minus your income, your mortgage, and your expenses, including your vacancy discount because sometimes you’re not full and that’s your net. That’s how much you’re making.
You can get better deals as long as you find a deal where you can afford the terms you know you will be using.
He said he nets about $7,200 a year. Think about that. If you have a $100,000 house and you’re netting $7,200, your cash-on-cash return is less than 10%. For rental properties, you make maybe 6% to 8% on average or maybe a little bit more, 9% or 10% on some of them. When you say you get a 10% cash-on-cash return for a rental property, a lot of people are excited about that. The multifamily industry’s net is super low right now. It’s maybe 4% to 6%. I know some funds that are offering 6% interest. You got to keep that in mind.
I feel like you can make good money in storage. Not only if you pay cash for it, but also if you can leverage other people’s money or the bank’s money. You have to start thinking about over the next couple of years as the market changes how you are going to be funding or purchasing your deals, especially if the interest rates keep going up. I’m seeing it happening in the marketplace right now. Savvy owners are asking for a higher interest rate even on a private loan.
The question is over the course of the next few years, what is the market going to look like and how are we going to be purchasing our facilities? How can we do that so we can still achieve that double-digit cash-on-cash return and even higher if possible? We want a 15% to 20% cash-on-cash return or if we’re going to a bank, we want even more money than that. That’s the question of the day. That’s what I want to be talking about. I hope I opened your mind to how you can fund your deals over the next couple of years and buy even more deals.
When you go to a bank and get financing, you are going to get over-leveraged very quickly. Banks do not want you to have a lot of loans, especially from other banks because they want to make sure that you have cash flow and that you can manage your businesses properly and you can pay them back. If a bank is going to tell you no after 1, 2 or 3 facilities, how can you still buy so many facilities? Especially, over the course of the next couple of years, when interest rates get higher and all types of lenders and owners are more conservative or savvier with their numbers, which is what we’re seeing.
I’ve noticed it over the last couple of weeks since the interest rates went up. My private lenders are also saying, “Rates are going up.” A private lender does not want to have the same interest rate as a bank. They want to have a higher interest rate. You’ll find some private lenders that are like, “I’ll accept whatever the bank is accepting.” We shoot for that on all of our deals. I’ve noticed over the last few months or so that some owners that are open to creative deal structures are asking for higher rates. They’re saying or mentioning it like, “The rates are going up. I want to make sure whatever I get out of this deal is going to be compared to or even better than what the banks are going to get. I’m offering my money. I should get a little bit more for that.”
Creative Deal Structures
To anybody that’s new and has not done a deal, what I’m talking about is creative deal structuring. I discussed this in my mastermind and a couple of times over the last couple of weeks. I’ve been 100% privately funded for many years. I’ve done $20 million in transactions all with private money and private funding. I don’t go to banks and get loans because I feel like banks are too much work. Sometimes you can get better deals. It’s as long as you find the deal where you can afford the terms that you know you’re going to be using.
When I’m going out and looking for deals, I have to look for a deal where I have a lot more spread because I know I’m going to have to pay a higher interest rate. As long as you keep that in mind when you go out and look for deals, then you can use private funding and private money. I’ve been doing that now for many years and I’ve worked with every type of lender out there. I get a lot of deals owner financed to me or we do creative deal structures on the buy side and the sales side. I’m telling you that over the course of the next couple of years, you have to learn how to structure deals creatively.
Banks are going to be more and more conservative. A lot of banks are going to fall off the planet. You’re not going to hear about them again. You don’t want to get yourself into all these loans like bridge loans and ARMs and stuff like this. It’s too dangerous and risky. If you can get the owner to be the bank, then you have so much less risk in the game because you’re going to get a fixed rate for X number of years. What you’re doing is you are borrowing the owner’s equity in the deal. They’re going to make money off of their equity.
You can go to a bank and get a HELOC or get the equity from a bank loan, or borrow directly from the owner. I go directly to the owner. I don’t go to banks. I convince the owners that they will make more money if they are the bank than if they just sold me the property in cash. We’re going to get into that. We’re going to get into how you convince the owner to sell you the property and be the bank as well.
Ask People For Money
I have one student, Paul, who already has three deals. He has put in quite a few offers for the last couple of weeks that he started. He already has three owners that want to owner finance with him. He just started a couple of weeks ago and learning how to do all this. All he did was ask the owner if they would be interested in being the bank.
I’m going to show you how we do this. It works because you never get anything unless you ask for it. I learned that a long time. I had a coach and his name was Paul, which is very ironic. He told me, “Stacy, the way that you become wealthy is you ask people for money. You ask them if you could borrow their money.” That’s what I do. I ask people if I could borrow their money. I do it on the private side, but I do it on the owner and the seller side too.
The Four Offer System
I want to share a couple of things that we’ve been doing internally to ask owners if they would be interested in being the bank in the deal. I learned this from another guy. He wasn’t a coach of mine, but it was another guy that was teaching because I went to one of his conferences or something. He was teaching the three-offer system. I can’t remember what his name was. It was on the residential side. When he taught the three-offer system to me, I took it to heart. Instead of giving one offer, why not give 3, 4 or 5 offers? I learned on the residential side how to make offers to sellers when I was out looking for properties. I would give them 3, 4 or 5 different offers.
The way you become wealthy is you just ask people for money.
I’m now taking and applying this system to every property out there. You don’t just give one offer. You give four offers. That’s what we’re going to do. I’m going to go over the four-offer system and hopefully, it will keep you aware of how you can make offers to owners, and start making them think about how much money they could possibly make if they were the bank.
I want to share with you something that we’re doing internally with our virtual assistants and how we’re training our virtual assistants. For everybody that’s here or anybody new, I have almost fifteen virtual assistants. We have a company called Storage Nerds Acquisitions. What we do is find storage facilities for our students to purchase. We’re teaching all these VAs how to find properties and they’re doing a great job. We’re finding facilities right and left of owners that want offers. We’re giving offers every single week.
We are using what I call my magic letter, which is the offer letter that we use. I’m not going to show you the offer letter because this is something that’s only for students. I do want to share with you the concept of owner financing and how we are getting all these owners to want owner finance. It will help everybody in the next couple of years. If you want to make it in the next couple of years, you’ve got to be more creative in your deal structures.
This is an offer that we put in on a property. I wanted to share it with you and give you an idea of how we look at our numbers. The property was a storage facility and I’m not 100% sure which property it was or anything like that. I can’t remember because we have too many properties. I can’t keep anything in my mind anymore. The purchase price was around $1 million. We ran the numbers and we came up with a cash offer of $1 million.
We created a little table here, and all my students are doing this. We have a cash offer and then we have three owner finance offers. You can come up with any numbers for this. There are a million different ways that you can run these numbers. Just know that in owner financing, you’re going to need your purchase price, monthly payment, interest rate, terms of the loan, down payment, total interest to the owner, and then the net amount to the owner.
We have $1 million, $1,050,000 and $1.1 million for this property. We offered an interest rate of 3%, 3.2%, and 3.5%. On this one, we did a ten-year loan amortized over twenty years. We have a down payment of $200,000, $210, 000 and $220,000. Notice that the larger down payment goes with the lower interest rate. You don’t want to put a higher interest rate with a higher down payment. It’s exactly like a bank. The more money that you put down, the lower your interest rate is going to be. You want to keep that in mind.
From $1 million, the total interest is $225,000. This interest is going to go to the owner over the course of ten years. This is a ten-year loan amortized over twenty years. When I say amortized over twenty years, all that does is it makes your mortgage payment smaller. The owner is going to get $225,000 more by owner financing the deal. He can get cash if he wants or if he owner finances it for ten years, he can make around $1.2 million.
We try to work out the numbers where we don’t have to put that much money down. We try to stick to around 20% or less. Sometimes owners want more. We’re working with one now where he wants $1.5 million with $500,000 down. What we’re doing is we’re going to owe him $1.5 million with the interest included. We’re going to offer him $1.3 million and then figure it out so that over ten years he makes $1.5 million.
When you start thinking about owner financing and putting numbers together, first of all, you always have to think about these seven things, the purchase price, monthly payment, interest rate, terms of the loan, down payment, interest and net amount to the owner. You want to consider those. A lot of times they don’t give you the purchase price. We’re running the numbers to come up with the purchase price. That’s why we have three different purchase prices here. If we pay less on the purchase price, we typically give a higher interest rate and we give a lower down payment. We pay more then we’re shooting for a lower interest rate and a little bit more down payment.
You can run the numbers any way that you want and come up with any numbers. The key is to make sure this monthly payment is affordable. Can you afford this monthly payment every single month? What if an owner has an existing loan on the property in the bank? They will do this if there’s a mortgage on the property. It’s called a wrap. It’s basically a mortgage wrapped around a mortgage.
We found a property and we talked to the owner. It’s a strip mall with a storage facility behind it. On the phone, when we asked the owner, “Would you be open to owner financing?” He said, “Yes, I’ll be open. Send me an offer and I’ll take a look at it.” He was open from the beginning. We didn’t have to convince him. When we look at this facility, he told us that he owes $300,000.
The reason he’s open to it is because he’s already getting the property owner financed to him. The previous owner owner-financed it to him. He’s almost paid off $200,000 or $300,000. I can’t remember how much it is. He said, “Either you have to give me a down payment to pay off the rest of the mortgage,” whatever he owes the $200,000 or $300,000, “or we have to work out some a scenario where you’re going to be paying the owner for the rest of the mortgage,” which is called a wrap.
Like a bank, the more money you put down, the lower your interest rate will be.
You can do wrap even on storage facilities. You can do a wrap on any property as long as you learn how to do that. Those were called wraps. There are a lot of different ways that you can creatively do that. That property is worth $2.5 million, but he only wants $1 million. That’s it. It’s crazy. That’s why I like talking to owners directly.
The reason we know it’s worth $2.5 million is because there’s another one that’s for sale right now for $2.5 million, which is too high, but at least we know. That gives us the ball ground for what it could be worth. The realtor probably put the price on it or whatever for the one that’s listed. We went directly to the owner. He’s going to sell to us for $1 million and he’s going to owner finance it to us.
What we decided was the down payment was going to pay off his mortgage. He’s going to owe $200,000 or $220,000. We’re going to pay that off and then over the course of ten years, he’ll get a payment every single month from my student that’s going to be picking up that thing. She’s going to have to come up with $200,000 down and then she’ll have a ten-year loan paid to the owner. He bought that thing for $400,000 a couple of years ago. He’s going to make $600,000, plus the interest of the loan, which is a very good deal. He’s very happy and so is the student.
You can do wraps. You don’t hear a lot about it but it’s doable. Glen asked me if we could pay off the balance of the loan in ten years. Yes, that’s what you do. This is a ten-year balloon amortized over twenty years. In ten years, you have to refi it out and pay it off to the owner. Whatever you have left is what you’re going to pay. We don’t put the amortization schedule into the letter or anything like that. When you work with an owner and they do owner financing, the attorney or the title company will put an amortization schedule into the closing documents. They’ll have you sign it like, “In ten years you’re going to owe this much money.” Just so everybody knows, but in ten years, we would have to refi this out.
If you go and get a loan from a bank, it’s the same thing. Typically, they’re going to have 5, 10 or 15-year balloons for commercial loans. If you go to a small local bank, you could probably get a twenty-year loan on a commercial property. Most commercial lenders are going to be 5, 10 or 15 years. On average, I see loans that are ten-year balloons.
The reason they do that is because they want you to refi back with them and pay all the money that it costs to refi. It’s a way for them to make more money. Your job is to pay it off in ten years, refi it with the same bank in ten years, go and find somebody else to refi it out or sell it. That’s what you do. It’s the same concept with owner financing. In ten years, you’re going to sell it or refi out.
A lot of times, I’m calculating exit strategy. It’s my personal opinion, but you make a lot more money flipping properties than you do holding onto properties. We show this in our deal analyzer for our students. If you buy something for $1 million and you pay 5% interest over 10 years or 20 years, you’re paying X amount of dollars. If you’re buying it, value-adding it, and then selling it in five years, you can make more money by flipping those properties.
Your exit strategy in ten years is to refi out. You’re not going to be able to refi out with the owner, but I have one right now that I had a five-year balloon on. My lender came to me and he’s like, “Your five years are up. What are you going to do?” I was like, “We’re going to sell it.” He’s like, “You don’t have to sell it if you don’t want to. If you want me to hold onto it, I’ll keep holding onto it.” I was like, “Yes.” We’re in the process of adding another three years to the loan.
For private lenders and owners, once they start getting that monthly payment every single month, they like getting that monthly payment so they’re open to even having a longer time. First of all, when you offer owner financing the first time, they’re going to be like, “Ten years, that’s a long time. Who knows what’s going to happen in ten years?” When you hit that ten-year mark, they’re like, “If you want to, we’ll go on to the next twenty years and do it again for the next ten years,” because they’re getting a monthly check every single month. I’ve noticed that too in a lot of the owners and lenders. They don’t want you to give their money back.
Calculating Your Offer
I wanted to point out that when you start running the numbers, this is how you’re going to calculate your offer. The key to calculating the offer is not coming up with an offer. It’s making sure that you can afford the numbers that you offer. That’s why I wanted to share this sheet with you. One of my VAs came up with this and I love this so much because I didn’t ask for her to do it. She just came up with this. What I was telling them was that we need to make sure that the monthly payment plus the expenses are less than the income that they’re making and has some cashflow. That’s what we’re looking at.
You can have the whole calculator to look at this. For all my students, we’re in the process of adding a tab to our deal analyzer that’s going to calculate this. Up until now, we’re doing it separately, but my financial model person is adding the owner financing calculator plus this cashflow calculation to the tab. We should have this in a few weeks because we’re working on it. I’m excited to offer that to all the students.
For now and for everybody else, we just take a look at this. If you know our deal analyzer that we offer to the students, we’re looking at the current numbers as is and then we’re looking at value-add. When we increase the rates to where they should be and do all the things that we want to do or what we call after updates, what’s the difference in the cashflow? That’s what we’re looking at.
You make a lot more money flipping properties than you do holding onto properties.
I tell everybody and all my virtual assistant, “$1 million or less, they should be netting $1,000 to $2,000 a month and $1 million to $2 million, they should be netting $2,000 to $3,000. That’s what we’re looking at. That’s how we look at it in ourselves. We’re just like 10% cash-on-cash return or something like that. A 10% to 15% cash-on-cash return would be great. If you could do better, you could do better.
We have three offers, owner financing 1, 2 and 3. We have the gross monthly income minus the operating expenses equals this number. This is on a monthly basis. You minus the mortgage, which is the number that we came up with on our table. After that is the cashflow number. The monthly income minus the expenses and NOI, minus the mortgage is your cashflow. Make sure that there is a net or cashflow.
On mismanaged facilities, you might have to come out of pocket. I was talking with Paul about this. The question is, how much are you going to be coming out of pocket? The number here is your decision on what you want to be cashflowing. For me personally, we buy mismanaged facilities that are typically not cashflowing. We’ll buy a couple of those at a time and then my husband will be like, “You need to go find something that’s cashflowing because I need some money because I’m coming out of pocket every single month, and I hate that,” because he’s the manager. He wants money every single month for his operating expenses.
Mismanaged facilities can make triple the value of what you put the money and what you pay for it. That’s why I like mismanaged facilities so much. What we’ll do is we’ll go out and buy an income-producing property to offset it. We’ll make sure that we at least have some income coming in. You’ll look at the current and you’ll say, “As is right now, if I do nothing but buy this thing, I’m netting at $1,100 or $1,000 a month, or in this offer, $924 a month. Once I buy the thing and I increased and do all the value-add that I want to do to it, I’m going to be netting this and this.”
If you look at it, that’s a fantastic deal because in this deal, all you have to do is increase the rates and then you’re netting this. That’s cashflow. This owner was losing a lot of money on the table. I wanted to make sure that you know this. This is the purpose of owner financing. It’s to get the owner to be the bank. At the same time, make sure that you’re cashflowing on the back end. There’s a lot of spread here in this deal from doing nothing to the deal and holding onto it by value-adding the property. Even if we value added it 50% and not all the way up to what this was, we will still be netting several thousand dollars a month on the deal.
This is the key to trying to decide whether or not your numbers on the other page are good. This is the number that it came from. This is the mortgage plus expenses. You then calculate what your cashflow is from that. What you’ll do is you’ll run the numbers and you’re like, “I need to make more money than that.” You have to say, “Here’s where I’m going to decrease my down payment and my interest,” or “I need to do a twenty-year loan,” or “My purchase price is too high,” or “What can I do in these terms to make sure that I can do this and net this, or whatever it is that I want to net for cashflow?”
Audience Questions
That’s how it works. Any questions on that? “What’s that property cashflowing a month?” That’s the one I showed you. This is current as is and this is going to be after updates once we increase the mortgage. I think this is in Wisconsin, but I’m not 100% sure. We put an offer in and now we’re waiting back on it. What else? “When you say cash, is that actual cash or private money?” This is our cash offer. We can go and pay this now, whatever it is. This could be going to a bank.
We have a facility under contract right now where we did $1 million cash and then we did $1 million owner financing offers and ran numbers where he’s going to make $1.3 million or $1.2 million. He was like, “No, I’ll just take the cash.” For cash, we’re going to have to go to a bank and get a loan. He wants his money now. He doesn’t want to be the bank. That’s what it means.
“If you’re extending a private loan, are you breaking down balloons over the extension period?” We had a five-year balloon on a property that we own right now. That balloon is up now, the money that we owe, we’re refinancing again. Whatever that number is, we’re taking that number at the end of the five-year term and we’re refinancing it. You’re not extending the balloon. You’re redoing the whole loan again. That is what you’re doing. You’re coming up with brand new terms for that entire loan. It could be totally different terms because it depends on where the interest rate is and how much money you can put down and that kind of stuff. It’s a brand-new loan. At the end of a balloon. You will need to do a brand-new loan.
“Can you purchase the online course now and still join the coaching in September?” The course is called Super Simple Self-Storage and you can go to StacyRossetti.com to check that out. The coaching program does not open until September. It opens on August 30th or something like this, but be ready then. You can always join. A lot of people have bought the course and then they join the coaching program after that.
I want to make sure that you guys understand and utilize this concept because we are putting our four offers out on every single deal. The whole purpose of it is to get the owner thinking, “If I was the bank, I could make this much money.” The second reason you want to do this is because going to a bank and getting 1, 2 or 3 loans, depending on that purchase price, over-leverages you. You don’t want to be over leverages especially over the next couple of years when the market starts to cool. It will cool. Nobody knows how or how much or whatever.
I’ve been telling my students, “Run your numbers at higher cap rates. Don’t buy it at lower cap rates because the market is going to cool. The cap rates will go back to normal pretty soon.” Luther says that he got his four storage facilities under contract with all three offers. We have a lot of students that have gotten facilities under contract. Jennifer is buying a facility right now and getting it owner financed. We have a lot of students that are buying deals and owner financing right now.
You don't want to be overleveraged, especially over the next couple of years when the market starts to cool. Click To Tweet
Using this table and showing the owners the numbers is one of the steps. The second step to owner financing is connecting and listening to the owner, hearing what they want, and negotiating with them to create a win-win situation. It’s not just put an offer in and this is it and that’s that. In our owner finance letters, we say, “These are a couple of suggestions. We’re open to any type of terms that you want. Just know that you can’t make a lot more money on this deal if you owner financed it.”
I met some students and the owner wants $1.8 million and it’s only worth $1.6 million. He can totally make $1.8 million or even more. That’s the thing about this. If you went to a bank and got a loan for $1.6 million, how much money would you pay that bank over ten years? That’s a lot of money. Why not pay that to the owner? Especially if they’re free and clear or if they have a very small mortgage that needs to be paid off.
You can come up with $200,000 or $300,000 for a down payment and then you can own or finance the rest. Over time, they don’t make $1.8 million. They make $2 million. It’s $200,000 more than what they were thinking that they could make. That’s what you want to show the owners. That’s the purpose of owner financing. I’m telling you it works because I’m seeing students left and right do it.
That’s the one thing I love about storage facility owners. I’ve talked to a lot of different types of owners. Storage facility owners are so open to creative deal structures. They do it a lot but they don’t realize that’s what they’re doing. They’re doing creative structuring and stuff. You see owners that are like, “We got a car wash and an RV park. We got a storage facility and a strip mall.” They’re open to making money in different types of ways. When you see that in an owner, especially of those types, you have to ask them because they’re open to it.
I’m going to go to my pitch now for my fund, which is the Self Storage Fund of America. It’s a 506(c) fund. If you’re interested in passive investing and you’re like, “Stacy, you do all the work and I’ll make the money,” go to StacyRossetti.com/Fund. For everybody else, please come to the Monday night sessions. I’m here every single Monday night that becomes the show, StorageNerds. If you miss it, you can check it out there. You can also buy the course which is called Super Simple Self-Storage. You can find that at StacyRossetti.com. I appreciate everything. I will see you, guys, next time. Take care.
