40,000 Square Foot Self-Storage Deal as First Facility with Christian Mercado

Neil Henderson: 00:00

Christian Marcato is a full time real estate investor and army captain. He got his start in real estate in 2017 with the purchase of his first house utilizing a VA loan. Six months later, he rented a room out and discovered the power of house hacking. After a year he purchased another home to live in using his VA loan and rented out the first hand he was off to the races. Since that time, he has flipped at least eight houses, opened up several short term rentals and purchased a self storage facility. In this episode, we talked to Christian about the purchase of his first piece of real estate using a VA loan, how a light bulb went off after he started renting one of his rooms out how he purchased his first self storage facility for zero money down. And the key to negotiating with self storage owners. I'm Neil Henderson, and this is the road to family freedom. Before we get to this week's show, we'd like to make you aware of something we are self storage investors. We buy existing self storage facilities and vacant buildings that can be converted to self storage in the Sunbelt. We buy them with cash and some with loans. And we use private lenders who become Equity Partners in our deals, these Equity Partners share in the cash flow in the profits when we sell when we find a deal that we're considering we call the Equity Partners offer them to share the ownership secured by the property. So if you've ever driven by a self storage facility and thought, I wonder who owns those things, and you have any interest in learning more about the storage business, we'd love to chat with you head on over to road to family freedom comm slash storage. That's road to family freedom, comm slash s t o r h g GP and set up a time to chat. We look forward to speaking with you.

Brittany Henderson: 01:35

All right. And that thought of us Let's hit the road to family freedom.

Neil Henderson: 01:44

Christian Mercado, welcome to the road to family freedom. Thank you for having me. Absolutely. So before we get into talking about self storage, I want our listeners to learn a little bit more about what your background in real estate is. You bought your first property using a VA VA loan, correct?

Christian Mercado: 02:03

Yes, that's correct.

Neil Henderson: 02:04

And what can you tell us a little bit about that? What was it? Did you buy it as an investment property? Or did you have real estate in mind when you bought it? What's the story there?

Christian Mercado: 02:14

Yes, so actually, I didn't have real estate in mind. I didn't really know too much about investing. At the time that I bought it. I was it was 2017. And I had a friend that had just purchased their house, her and her husband, and she was telling me all about it. And I was like, Oh, that sounds pretty cool. And I just started thinking about it. And then the next day I woke up and I was like I I think I want to buy a house. And so I started going through the process I had been in long enough to where I was able to use my VA loan. And 30 days later, I was moving into my first house and I didn't really think of it as an investment. It was more so just I bought a house kind of thing. But later on down the road, it would be the catalyst to to my investing.

Neil Henderson: 03:00

Gotcha. And so for our listeners who maybe aren't aren't all that familiar with how the VA loan process works, what was how much money were you required to bring to the table? Like what are what did it take to close the property?

Christian Mercado: 03:14

Yes, so with the VA loan, you either have to have four years of total of four years active service or a total of six years reserve service, all good years, basically, you know, having not having missed things. And it's it's a zero down and you're only paying closing costs, there are a lot more strict on the appraisal side and you know, the actual loan side than conventional. But it was it was a good strategy and route for me to take. So I used to twice and on the comment of using it twice, you can use it twice. You just have to, I believe they have to be in different counties. And certain mileage is a way and you have to wait, I think a minimum of a year. So I rented I rented the first one out completely, and then use it again, because it's a total of protects is like $480,000 you can use you could split it up and buy two properties or you know, however you want to do it. So that was the route I took

Neil Henderson: 04:13

on that first one you you rent it out one of your rooms correct and sort of turned in fell into a house hack in a way? Yeah,

Christian Mercado: 04:20

yeah. So I rented it about six months after I purchased it, I rented a room out. It wasn't really until I saw the power of my mortgage being paid down that I was like, Oh, this is kind of cool, you know, and then and then at that time that at that same time I discovered the bigger pockets podcast. And at the time I was commuting about an hour a day to work. So instead of putting on the radio or music, I was listening to podcasts every day, so I just started really soaking all the all the information that I could. And at the time I was also getting my MBA, so that kind of introduced me to to business as well. Gotcha.

Neil Henderson: 04:59

Would you say You would say sort of that that first tenant sort of was where the lightbulb went off for you.

Christian Mercado: 05:06

Yeah. I mean, when I had when I only had to pay half of my mortgage, I was like, Oh, this is awesome, you know, and then I would have tried I tried to buy the second property I tried to buy the duplex triplex and the quad but in DFW, it's a it's a hard market because you're competing with investors that are paying cash, but I ended up buying the second property. So

Neil Henderson: 05:28

we interviewed a guy named Eric Upchurch back on, let me see what episode it was got. I just had it, Episode 78. And he talks a lot about teaching veterans how to house hack using their VA loan, and anybody who's former military that's got access to a VA loan, I highly recommend you you go back and listen to him. Look, Eric up, look you up when we're done with this because it's such a powerful tool for veterans to do. And you know, there I know, I work with veterans, a lot. And a lot of them have bought homes in almost every permanent station that they've been in, and they've just kept the home and turned them into rentals, and they just kind of like became a landlord along the way. And it's such a great, it's a really powerful tool.

Christian Mercado: 06:16

Yeah, it's an awesome tool. And I see ask a lot of my junior soldiers, or you know about the product, and it surprises me that a lot of them are eligible for it, but just don't take the steps to do it. Because you're only paying closing costs. Luckily, it worked out for me because the first house cash rose like 500 bucks a month. But Had I known like I should be looking for a property that would make sense as a rental and you know, stuff like that, I would have, you know, been a little more prepared. But luckily, it worked out for me.

Neil Henderson: 06:46

Gotcha. Alright, so from there, and I want to dig into this a little bit. But I don't want to spend a lot of time on this. You once you started getting you got into real estate, you started flipping houses, you started doing some short term rentals. Walk us through kind of that process and tell us a little bit about that story.

Christian Mercado: 07:05

So 2017 at the first house 2018 made it a first rental got that second property in 2018. And then probably like, mid 2018 into 2019. I was really just soaking in all the podcasts I could, all the books I could obviously Rich Dad, Poor Dad, one of the most famous ones for getting people started in real estate. And summer of 19 is when I flipped my first house with a partner, I had a business partner who had already been doing it and keep brought me the deal. He used to work for a wholesale company. So they made a little little Commission on it. And he brought me the deal. And he said, Hey, how about we partner on this one? And you know, kind of show you the ropes, and you know, split profit 5050. And so I was like okay, sure. And so that was the first step that we did, that one pretty much utilize the money partner as well. And so, and most of the deals we've done, haven't utilized like, own personal money outside of the rehab, but for the downpayment portion. So yeah, so that was summer, summer of 2019. And then pretty much did the next few on my own, and would come back now and again to partner flipping houses my business partner. So

Neil Henderson: 08:20

how many houses did you end up flipping?

Christian Mercado: 08:22

From that point, it was a total of eight. And for the first one, really just learned all the systems and you know, just really took off from there it is a little more hands on. But once you really get that system going, it becomes a lot easier. And we would we would we would we wouldn't buy like forgot rehabs you would just buy, you know, cosmetic only take two three to four weeks, because we felt that less is more.

Neil Henderson: 08:48

So and were you swinging the hammer yourself? Are you hiring contractors?

Christian Mercado: 08:52

No way. Not at all. I have a strong belief that time is money. So definitely hiring contractors. And we've been able to do that we could take on, you know, two at a time, essentially, as long as they're all staggered correctly. That's kind of the route we took.

Neil Henderson: 09:09

And from there, how did you find yourself doing short term rentals?

Christian Mercado: 09:13

So I think I had stumbled across a YouTube individual who was well known for teaching about Airbnb, and I brought it to my business partner and I was like, Hey, what do you think about this arbitrage? And we decided that the cost of furnishings was was relatively low, and the risk was on the lower side. So we decided to open up. We started with two at the end of 2019. And then I launched another two, first quarter of 2020. And so those have done actually relatively well. I spend very little time I still have them. We just ended one lease as we've decided that that's not our focus. At think at that point we were discussing, you know, between Bought purchased houses and arbitrage a total of 20 units. But as time went on, really got to learning the you because you're in the hospitality business and no longer it's no longer real estate asset. So it was not that it was a lot of work because we systematize everything to where we were spending only an hour a week, and we still only spent about an hour a week on him. But it's just the amount of transaction or the amount of talking to guests that you do. So often, he might be little times like, you know, 510 minutes here and there. But it powers up to the hour a week. So that can be a little exhausting. But anyways, so that that we, we did the Airbnb thing for a little bit. And I, I really have started to transition out of it.

Neil Henderson: 10:47

So let's talk about focus, because this is something I've struggled with. It's a lot. It's something that a lot of real estate investors struggle with, especially when you're starting out, there's a lot of shiny object syndrome, it's like, you know, oh, lease options. Oh, my God, you know, that sounds so cool. I want to learn how to do that. And my first question is, did you have a full time job when you started out doing this? Or were you pretty much full time in real estate?

Christian Mercado: 11:12

No, I did have a full time job. So pretty much when I, when I got my undergrad and MBA, ever since then I've always had a full time job. So it wasn't until February of 2020, when I became a full time real estate investor and not by choice because I was terminated or let go. But I was blessed to have close to properties right before that happened, like literally the week before. And so I was gonna be okay, you know, for the if for the remainder of the year if I if I did nothing, but it was basically an open door. And it was something that I had always wanted and was thinking about, you know, while I was in the WTO. I was like, Alright, I'm gonna plan on leaving, maybe maybe summer of 2020 or maybe, you know, early, early spring or whatever. And but I'll Sylar nervous, you know, because it's a big, it's a big jump. And then of course, it happened on its own. And I was at that point I was forced.

Neil Henderson: 12:09

make hay while the sun shines.

Christian Mercado: 12:11

Yeah, yeah. But and then I just continued for lawn, you know, flipping the rest of the year, and keeping up with the Airbnb units. And then at that point is when I really started to dig into learning as much as I could about commercial real estate.

Neil Henderson: 12:27

Gotcha. All right. Well, nice segue, let's talk about how you first became aware of self storage as an asset class.

Christian Mercado: 12:36

Yeah, so So once I got started in single family, like it was, it was great, you know, flipping you make decent amount of profit. But a lot of it was transactional. It's all transactional wealth. And even if you, you know, let's just say you have 50 single family rentals, it's still, like, there's not much economies of scale, because you have 50 rooms yet for the H fax 50 this and that's that you have and there, they might be all over the city. And, and then to it typically takes a good amount of time to get to that point where you can feel like, you know, I can, I can live all this live off of this for sure. And it to me, it was just kind of a slow, a slow game, and I wanted to I knew where I wanted to be, and I wanted to be there sooner than later. So I was looking at other options, and then I came across commercial, and you know, the power of the noi, and just net operating income, and how you can, you know, add value and increase the performance of a commercial asset and increase its value tremendously, and the cash flow tremendously. So in the beginning, it was I was really looking at multifamily. And I feel like it's a little bit harder to get into multifamily. A lot of banks want to see track record, they want to see a certain net worth. And of course, they can leverage others using their their track record or what have you. But I don't know I just I just you know, I learned I learned about that, that side of it. And then at some point I I just found myself in self storage came across. I think it might have been might have been a couple of the big guys on self storage. Maybe maybe Scott Myers and one of those guys came across their their content online and just really started digging, digging in as much as I could. I had a brief knowledge. Now this is summer 2020 had a brief knowledge on it. And I did send out an LSI on one letter of intent. And I got an executed contract. They accept the offer. I got an executed contract. And I went through the progress now. I didn't like I was confident in my knowledge of it but it wasn't nearly anywhere where Was today, I actually terminated that contract. Because after I got back, a lot of the due diligence documents, the interview, I wasn't anywhere near where they reported, and I asked for a price reduction, and they didn't want it. So I backed out. And I ended up ended up spending, you know, 1000 bucks or so on an attorney drafting contracts and stuff. But it was a good, you know, I think it was a good $1,000 lesson, just going through the process of it.

Neil Henderson: 15:33

Gotcha. I want to I want to talk a little bit about that one. So you, you were under contract, did you do any kind of a feasibility study or anything like that,

Christian Mercado: 15:44

I terminated before I got to the physical feasibility study part, I was day one, waiting for them to get back there, you know, to your tax returns, rent rolls, all that kind of stuff. And they like half of that stuff they didn't even have. So it was a little difficult trying to, and then they took, you know, the contract states that it doesn't start until 10 days, or you have a period to where they have this amount of days, or these amount of days to deliver all these documents to you, before the contract actually starts. So and they were just taking a long time. And I finally got most of what I needed to to analyze the deal. And after I got a lot of those documents, I just I found that, yeah, it wasn't, it wasn't anywhere near what I was gonna pay for it. I don't want to buy a bad deal. And that one was only it was it was tiny, it was like 5000 square feet. And if I under knew if I knew what I know. Now, as far as like economies of scale and self storage, I wouldn't even looked at it. You know, but I was a little more naive at that at that time.

Neil Henderson: 16:49

A lot of these owners, you're dealing with a lot of mom and pop owners, either they're disorganized, or sometimes they're willfully disorganized, when suddenly you're asking for the documents that are going to that you need in order to proceed. Were you planning on using bank financing to purchase the property? Or were you going to how are you going to finance it?

Christian Mercado: 17:12

Yeah, so that that one I was going to be using my bank relationship that I built when I was flipping houses because I started flipping using hard money. And and then I got to a point, you know, I went and asked the bank after a first or second deal. And they said, No, you don't have enough experience. And then did the first two or three successful they using hard money. And at that point, you know, when I would bring them deals, they started lending to me. So at that point, you know, I brought up the conversation of purchasing commercial, and they said they would be willing to look at the deals and stuff. So

Neil Henderson: 17:46

yeah. And that's often who I'll use as the bad guy. When when talking to a seller who's being sort of like, Well, you know, my noi, you know, my all my documentation, and he says I'm making this much, but you know, it's a cash business, wink wink, you know, and I just go Okay, well, you know, the lender that I'm going to have to use to buy this is going to want to see the last two years of your tax returns. And if if your tax returns to show and you're only making so much, that's what they're going to base it off of, they're not going to base it off of your you know, your fictitious trailing 12.

Christian Mercado: 18:23

Yeah, exactly as I do the same thing, you know, or I'll bring it in, and to utilize the owner financing strategy, you know, just based on their not being data or occupancy and being at a certain level where, you know, what, I'm not sure if the bank is going to, you know, want an occupancy this low. So would you consider, you know, owner financing or something along those lines? So it works both ways. Yeah. Yeah.

Neil Henderson: 18:48

All right. So let's talk about that. Your first Self Storage deal? How did you find it?

Christian Mercado: 18:55

I actually did a direct mail for that one. And at this point of during the direct mail, I had joined a group called the storage rebellion with Mike Wagner. Fantastic group. It's just all it's purely all Self Storage operators. It's almost like a little network, like a little LinkedIn for self storage. And you can go and ask whatever question you need to ask and people will chime in. And they really help you. I think, I think that was a big catalyst to being able to feel competent in purchasing the deal that I did. So at that after, you know, the remainder of the year focusing on self storage and learning. Yeah, I found this deal doing direct now I decided I was gonna do a direct mail campaign and sent out about 100 miles away from me and out of I think I got maybe, like a two or 3% response rate. And most most of the time, I think, because I think they get a lot of letters. And so my perspective on on direct mail has changed a little bit. I think I think the best way to approach sellers is As you know, the relationship approach, but it happened that one of them responded back to me, because they had some some, some things come up and weren't sure what what they were going to do with the facility. And they replied back to me. So pretty much took the next few months trying to, you know, getting to know the seller, he was living in California, and he flew down here a couple times when he was in town, working with his other investments. And so I drive out to meet him about an hour and a half. And, you know, discuss not necessarily the numbers yet, but just trying to get to build that relationship. And then I think maybe it was like three months later, we finally got to a purchase price number.

Neil Henderson: 20:41

So there's a couple of things I want to couple of great points you bring up there, which is, so much of this business and real estate, it's an all real estate, is, is timing, is being top of mind when someone is in a position of needing to sell. That's why people get so many letters, you know, and I talked to a lot of self storage owners who get frustrated by you know, I get tired of getting all these letters, I'm like, well, you're not gonna be tired of getting it when you suddenly decide it's time to sell. Right. You know, and and that's really where that's where it does make a big difference. And the other part you you bring up and I want you to expand on a little bit is is you think it's more of a relationship business than necessarily the the letter that worked?

Christian Mercado: 21:32

Yes, I definitely do. I mean, because funny thing, a colleague, also in one of the groups, the groups I'm in, also sent the same letter to the owner, but I think he, he said that he upset. He upset the owner somehow I don't know what what he said or what his message was. And so he didn't sell it to him, but he's ended up selling it to me. And I think that just goes to show like, how the, you know, I think that relationship really came into play. Because, you know, I spent, it was the first thing I wasn't doing was trying to like, just get it all knocked out, get the number. Now actually, when it comes into town, we'll meet up and we'll talk and I think we spent the last some couple of weeks ago, three hours at a coffee shop, just talking and chatting. And now he wants to sell me a duplex in Germany. Yeah, same structure of owner financing and stuff. So you never know the what comes with these relationships?

Neil Henderson: 22:33

Yeah, well, and again, you know, this is I guess the the best analogy that I've ever heard for it is it's like dating, you're not going to ask, if you start asking about money on the first date, it's sort of like asking, asking to sleep with the person on the first date is almost what it's like. And so you really want to get to know the person and find out what they're about and what they want. Before you start talking about the deal, and that's really hard. When you're eager for a deal. You don't want to deal and you know, you're like, I want to make this happen. And and so I don't know what it was that your colleague, you know, did to piss him off. But my guess is probably, you know, tried to close quickly.

Christian Mercado: 23:20

Yeah, yeah, I think a lot of people try to take the single family approach, which is, you know, we buy houses, and that might work a lot better in that in that realm. But you're, you're dealing with people who are, you know, somewhat of a business owner or business owners might not be like, super savvy if their mom and pop owners but but I think the mom and pop owner thrives on the relationship versus that the people of today just want to get it done, you know, investors just wants to close stuff like that. And so you know, that the Self Storage industry where I think now it's like 60%, or somewhere around there is mom and pop owners, you got to change your approach to how you you come across to them because they have the stack of letters. But if you took the time to maybe make maybe make a stop at the facility to meet them in person or something along those lines, they're going to choose you when they come to sale instead of the other 10 letters that they got.

Neil Henderson: 24:18

You can't use the single family approach. You know, I mean, I know people who buy single family houses, a lot of times they'll send up they'll send an offer sight unseen. I mean, you know, who's the offer pad, you know, where they basically send you an offer right out the bat for your house and then once they get it, then they go well, you know, your house has got this wrong with it this wrong with it this wrong with this one. Do not do that to a self storage owner. That will not turn out well. You really this is a much longer process and like you said, you know, you spent months building a relationship with this owner and we've interviewed Fernando angelucci a couple of times. And Fernando is really adamant about that. And he says, I get to know, I get to know the names of their kids, where they go to school, whether or not the plan and go to college, you know, is I get to know a lot about these owners before we ever start talking about buying their deal. I mean, they know why I'm there. It's not, you know, I'm not, but it's a dance, it really is a dance. Alright, so the seller finally decides to sell. and talk to us about that negotiation, because I part of me is, is really excited for you in that department where he wants to punch you. And I know, there's a lot of other Self Storage investors when they hear about this deal, we're gonna feel the same way. So first of all, let's talk a little bit about the specifics of the facility, how big is it, and what kind of areas it in.

Christian Mercado: 25:53

It's a 40,000 square feet. And actually, what I found out, as I was working the deal, and you know, came came to when I got the survey and stuff, the seller had had had been basically marketing, it will, or just letting me know that it was 30,000 square feet. And then once I got the survey, and of course, I did my Google Earth measurements, and the two numbers were off. And I was like, No, when I finally got the survey done, it came back to confirm that it was was bigger than than the seller thought it was in the beginning. So you know, right off the bat, you get you get 10,000 extra square feet, their same purchase price, and I bought it for $19 a square foot. So that was $775,000. And the biggest thing for the seller was was taxes paid on the facility for 15 years or you know, somewhere along there and had utilized his or wrote off that appreciation against it. So he was going to be faced with depreciation recapture if he were sell it outright, and so he decided to owner finance to me. And so we set up, you know, 25 year and this one was 6% interest. And he wasn't asking for downpayment so which I wasn't complaining about, I was already ready to utilize it because he had a he had a he actually had underlying debt on it. So he had been had a relationship with the bank that he had out here and have proof we got the we got the bank sign off to say that we could wrap the loan. So he wrapped it. And he didn't want to I guess he didn't want to pay any any type of capital gains or anything. So he just said, Here you go. So no downpayment and no monthly monthly payments. Okay,

Neil Henderson: 27:47

so on your first mailing, you bought a 40,000 square foot Self Storage Facility using seller finance 00 money down 25 here am at 6% interest, you know, is there a really bad term that's gonna, what's the terms? When does it went down?

Christian Mercado: 28:07

So a five year balloon, five year balloon, okay. When I purchased it, it was 80% physical, probably like maybe 79% economic occupancy. It's been about a month and a half. And we're already spending about 84% occupancy and haven't haven't even started my marketing campaign just yet. So. But before before, before I decided on this deal, I, I went to all the competitors, I want to get a feel of their occupancy how they were operating, a lot of them didn't even answer the phone, which is pretty common. in smaller towns, it's in a smaller town, it's about an hour east of Dallas, DFW. A lot of them didn't answer their phones, a lot of them said, we're full with wait lists. And I of course, confirm the square foot per capita, which wasn't the number itself isn't isn't the biggest contributing factor. But that's why I went ahead and did my competitor analysis. And basically, with all the data that I had, I felt pretty confident and purchasing the deal.

Neil Henderson: 29:12

Is there any room to expand?

Christian Mercado: 29:15

There's a so it came with two parcels. So the majority of the facilities on one parcel and then another small facility on another, and it's got some room to expand and maybe like you know, three quarters of a mile, nothing, nothing too crazy. But it's got some room there. So yeah, so

Neil Henderson: 29:33

$19 a square foot is less than replacement cost.

Christian Mercado: 29:37

It is in the insurance companies when I was getting new insurance was like well, the minimum we can do is like $30 a square foot for insurance. And I was like why I bought it for 90 and they're like, well, then you just got a good deal or something. I don't know.

Neil Henderson: 29:50

Yeah, no, that's right. That's what you know, that's 20 you know, the average replacement cost is about $25 a square foot that may have gone up a little bit, you know, given where Steel prices are but what was wrong with it? Why was that? Why was the seller? I mean, he's got 80% occupancy, and 79% economic occupancy? What was wrong with it?

Christian Mercado: 30:13

So you might think, man, there must be something going on. So yeah, and actually, there was nothing, nothing out of the ordinary, I think. So the the seller, his main business was multifamily. He has 100 units, and, you know, a couple different complexes. And he had this one facility. And he had a manager, a site manager here, who pretty much he said, Here, figure it out. And I'll let you run it like so wasn't really active in it didn't understand the the Self Storage industry, or how to bring value to it. And the expense, the expenses were pretty much where to where the manager had an extra an assistant manager course you don't need definitely don't need two managers on the facility, the size, and just expenses were pretty much what what she felt they should be. And so the owner wasn't, wasn't actively managing it. And so that's where I came in and saw the opportunity to not only cut expenses, but Oh, and then there's there's rents that had not been increased in 10 years, there was some tenants that were paying like $30, for a 10 by 20, when it should be 75. And you know, so maybe 10 to 20% of those of the tenants were in that situation. So really just after I had learned where to where to record, increase the value, I just don't know, I just went and did it. So yeah.

Neil Henderson: 31:43

Well, I think any Self Storage investor who'd heard you tell the story and heard you pass on it would have wanted to punch you as well. So I'm so I'm in a violent mood today. I'm sorry? Is it was there much deferred maintenance?

Christian Mercado: 31:58

No, it was they actually, I think last year, painted all the, or a majority of the facility. And the other facility does still need to be painted. But other than that I came in I rehabbed the exterior a little bit, I added a new gate operator so that we can, you know, each tenant gets their own access code, and they can be remotely overlocked. Adding adding new lighting, cameras, stuff that was missing here, and stuff that people buy, you know, they say that maybe 70 or 80% of the of the Self Storage. Customer client is a woman and that so you're selling security to them. And so that's who you're marketing to. So my focus coming in was security. So I, the front, the front row of buildings, didn't have a fence around it. So my I brought the fence out, move the gate, put a new gate operator, lighting and cameras. Yeah, I mean, even even since then it's been on, I've gotten more traction, and people were just wanting to move in. The previous owner said he's never able to get more than 200 200 tenants. It's 250 units. And in the month and a half, we were already up to like 214.

Neil Henderson: 33:16

Wow. So rolling back just a minute. What do you recall what the expense ratio was when you bought it?

Christian Mercado: 33:25

Probably like 60%. Oh, wow. Okay, that's

Unknown Speaker: 33:27

Yeah.

Christian Mercado: 33:29

So if you know, national, I believe it's 35%. On gross. And you know, I've talked to many operators who are 30% pretty easily. So, yeah, as soon as, as soon as, as soon as I saw the expenses, I knew immediately that they could be cut in half, and the income could be increased.

Neil Henderson: 33:52

Such a screaming deal, Christian. So have a website.

Christian Mercado: 33:58

Now? Well, I had a Google site. So it was like, it was like, you know the name of the facility dot Google dot site. That was the extent of it. Yep. No active marketing in place at all. I mean, the majority of the tenants were paying by cheque and cash. So I knew I knew right away those into those were great indicators of a facility that wasn't operating to its fullest extent. The manager was making trips to the bank every day. And so it was just everything was extremely manual. And I just knew I could streamline it a little bit better.

Neil Henderson: 34:37

Yeah. Well, so let me sort of recap sort of the opportunity that you saw here one, you were buying for less than replacement cost at $19 a square foot. You're buying zero down using seller finance with 25 year AM, you had an expense ratio at 60% when you know that the You know, national average is about 35%. You had security, you could see security issues, you know, they had fencing, they didn't have a website. So what? You obviously you've only owned it for how many three months? Yep. Alright, so aside from adding the fence, how are you? What are the what's, what are the next steps? What are you doing to, to turn the facility around,

Christian Mercado: 35:26

I just got my website launched. And now I know a lot of people probably would have done it prior to closing. And for me, since being the first one I was a little more nervous to go spend money on on something I wasn't I, you know, I didn't see why wouldn't close but you know, you never know. So you know, a website, a decent websites, not super cheap. So I, I spent some a good amount on a decent website. And the website, you know, integrates like a integrates to my software, and has like a storage calculator, we can calculate the, you know, how much stuff or the size of it unit you need. So all the bells and whistles so that that actually just launched today or tomorrow. And then I'll start focusing the same company that built that built the website, does some SEO type stuff and Google ads, so they'll start doing that, and and really get it to you know, 87 90% occupancy, and then really just start focusing on the rent increases and getting the tenants that because I'm trying to I'm trying to focus in on a certain tip in it. One that, you know, of course, one okay with paying the street rates? Because it's justified at this point, you know, yeah, that new updated security and lighting. And so the one that might might get like a one to 2% decrease once I do increase these rates, which will be happening in the next week. But it'll make room for the people that want to want to be here. And, and pay that rate. So gotcha.

Neil Henderson: 37:05

So, how, who's managing it right now? Who's your boots on the ground?

Christian Mercado: 37:09

So right now, I do have a site manager still here. So been working with her to, to kind of help these these processes out? And, and and really just see over time? If If how, I mean, because it's still cash flows with with a full time manager. But at some point, I probably I don't know if it will be, you know, we'll see how that goes, basically.

Neil Henderson: 37:34

And then on the on the website, are you able to do online rentals now?

Christian Mercado: 37:41

Yes, so I do have an online online rental. And but it's still as a as a right now, it'll still be where they can, they can pretty much do the reservation online. And, and come come to the office to, to finish everything out. But eventually I'm putting all these all these things in place, like where I can overlock the gate from from anywhere. And, and different, different audit, not automated, but obviously Self Storage is not automated. Completely. So just different things that can streamline everything with.

Neil Henderson: 38:16

Okay, so you can lock them. Now when you say overlock you mean? Lock them out of the facility? Correct? Not their unit.

Christian Mercado: 38:24

Right? So like, let's just say they go into a non payment status. You know, you can you can instead of a lot of people what they do is they have they have their boots on ground go and overlock the the unit physically if they don't have a gate or something like that, but if you have the gate operator that, you know, you can you can overlock from a computer, just but by locking their access code, gotcha. That'll be like the first level of overlock.

Neil Henderson: 38:51

Gotcha. And then are you doing it in a kind of a call center? Have you changed your your the way the facility was accepting phone calls?

Christian Mercado: 38:59

For right now I have not implemented a call center on it's something that I'm definitely thinking about doing. Here's a couple couple guys out there. I know. I know. He SS offers a call center and like I think the other one is XPS or something along those lines. And it's relatively inexpensive. So I think it's something I'll be adding in the future.

Neil Henderson: 39:20

But for now, your manager your onsite manager is taking the calls. Yes. Gotcha. Okay. Okay, so I want to wrap things up here a little bit and get into some of the stuff that we we try and get out of every guest which is first you mentioned that you the way you got yourself educated It was pretty much just online you just kind of you know listen to podcasts. AJ Osborne Scott Myers. Did you pay for any I'm sorry in storage rebellion. My My apologies Michael. He'd be mad at me for not mentioning him. Did you pay for any mentoring anything like that or just you just pay for some courses? No, I

Christian Mercado: 39:57

didn't pay for mentoring. I I think you know, going in when I first started real estate for me at the time I was I was kind of cheap. So I don't I didn't want to pay for something, I felt like I could, I could get online. And now now now I could definitely, you know, be part of a mastermind or something, and I feel fine paying for that. But as far as courses go, I'm a very like, learn as I do individuals. So I wanted to just get my feet wet. And so I did take part in the storage rebellion, and I paid for their course or his microspores it's great content. Honestly, it really sharpened my game in self storage. And then AJ, I stumbled across AJ Osborne's podcast, and his book, read his book a few times. And, you know, he got to two different types of operators, and it really was awesome and helpful to see both different types of operators. And, yeah, I think I think that that right, there was the catalyst for, for being able to operate this

Neil Henderson: 41:07

gotcha. You know, they, I think you've Good point, too, is that Michael Wagner, sort of has a one kind of business model when it comes to storage. And AJ has another I mean, age is much, much bigger, you know, he's, they're buying, you know, 80,000 square feet, 100,000 square feet facilities, and I think they're even building some from the ground up, is there anything that you think that you overestimated the difficulty when it came to self storage,

Christian Mercado: 41:36

I think it really just like, the the transition period of getting everything turned around, you know, I wasn't really sure what to expect, you know, because it for one, it was just me, I was the only one that bought the deal. And it was basically, I was relying on my competence of everything I've learned. And, and so, you know, just dealing with certain little things, they're very small, actually, you know, getting the gate operator move. So when I installed the fencing, they had to move the original, the original gate, I had to, like, you know, have that synced up to where people's or the guests for tenant stuff weren't going to be in danger at all. And so it was just really little small things of lining stuff up. And, and, you know, but of course, you know, I inherited a manager. So, I think there are a couple different things I would have done. From the beginning, I think, I think AJ says he interviews them again, or interviews them coming on. So, you know, I didn't, I didn't, I didn't do do some of those things. But so it's just really learning, you know, have an employee. So a lot of lot of learning comes with those things. Gotcha.

Neil Henderson: 42:54

Gotcha. So how much time would you say you're having to spend on the Self Storage right now?

Christian Mercado: 43:03

Right now, I probably I probably so in the beginning, when I first bought bought the deal, I was here for the first almost every day, the first two weeks, just just making sure everything was, you know, because I was changing pretty much everything from the way the way checks were getting deposited to, you know, just different. So I was making sure that everything was going smoothly as it could. Now, it's just maybe once at once, once a week, and then it will transition over to like once a quarter. Once I feel like everything is, is stabilized and strong.

Neil Henderson: 43:41

And when you say once a week, you mean you know, like an eight hour spending like an eight hour day there?

Christian Mercado: 43:46

and whatnot, I probably won't spend eight hours here, I probably spend maybe four or five. I mean, it's it's it's not super far for me. About an hour, 1520 minutes. So I just make the drive out here, spin, you know, for four hours out here and then head back home. Gotcha.

Neil Henderson: 44:03

And then once it's up and running, do you think it's something that how long do you think you could? How long of a cruise Do you think he could go on and feel comfortable that things wouldn't fall apart?

Christian Mercado: 44:16

I guess it really depends if we're talking in a perfect world here or not, because there's always something there, there might be something that comes up with, you know, let's just say a unit catches fire, you know, just so if it's a perfect world, and there's not nothing crazy, that doesn't need my input, or I'd say maybe six months or so. Or a few months, I think since since there is a site manager here she that's why I've been teaching her my what I want as far as practices and procedures. So most most of the day to day stuff doesn't necessarily need my my input. I think right now it's just been meeting my input because she's being bombarded with all these these new streamlines. And type upgraded software's, you know, and it's it's a bit of alert learning curve. But, uh, so yeah, but other than that, yeah, it could it could go for a little while, I think I think bringing that point back to I think AJ story he would he was in the hospital for a while and his ran without him pretty much. So. Yeah, that's definitely one of those businesses that once you have all the processes in place, it can do pretty well.

Neil Henderson: 45:27

Gotcha. Alright, last question. And this is a new one, we've been asking all of our guests, which is, if you had $50,000, that you had to invest passively, in the next 90 days, where do you think you would invest it? And what would be a return that you would be expecting to get?

Christian Mercado: 45:48

You know, I'd probably passively as like, passively as possible, as passively

Neil Henderson: 45:53

as possible, because I have asked this question some from some other people like, well, I'm an investor in one of my deals, and that I'm sort of looking for more like, you know, what you would do, you know, to the most passively,

Christian Mercado: 46:06

I would say, probably just put it into a syndication, simply because that's probably the most passive is, as it's gonna get, as a silent partner. Anything else, you know, buying your own deal or partnering with somebody else? It's going to require some of your work. So I think that's probably what I would do. And I think I'd be fine with, you know, the average average IRR return or what have you on a maybe, you know, three to five year hold.

Neil Henderson: 46:37

I mean, that's what I would do. What What sir, what would you consider to be than average, the average IRR?

Christian Mercado: 46:44

Um, see, I, I don't know if it's the APR, is it 8% 8% return,

Neil Henderson: 46:52

preferably, a lot of places will do a seven to 8% preferred return, and then they're, you know, the IRR is higher something, you know,

Christian Mercado: 47:01

12 to 15 or somewhere around there. Yeah, probably. That's probably that's probably where I put it where I don't have to do anything.

Neil Henderson: 47:09

Gotcha. And any particular asset? I mean, I know, obviously, you know, storage is something you know, would you you know, would you try and diversify. Would you just try and find another, another storage operator to invest in passively?

Christian Mercado: 47:23

I think it either be self storage or multifamily, especially if, if the, the sponsor is, you know, as honestly, as long as they're experienced, and have been at done many syndications and know what they're doing. I think I'd feel pretty comfortable giving giving them 50,000. So, you know, either multifamily or self storage.

Neil Henderson: 47:47

Gotcha. Gotcha. Well, Cristian, makhado. It's been a pleasure. Thank you so much for sharing with our audience. Today, you're on Instagram, and you also have a podcast with your partner called middle class to millionaires. And I encourage our guests to go and check you out. We'll put all this in the show notes. But if any of our listeners want to find you and reach out to you what would be the best way for them to do that?

Christian Mercado: 48:10

They can add me on instagram it. It's a Christian does real estate pretty simple handle there? Or Christian net at the century storage Comm.

Neil Henderson: 48:20

Gotcha. Okay. Well, thanks so much for sharing with us today. Thank you for having me. Okay, that was Christian Marcado, owner of the century storage, I highly recommend you go and check out his stuff on Instagram at Christian does real estate. It was great talking to you know, I'd love geeking out about storage. I'm sorry. For those of you who are not into it, you probably did enjoy this episode, but I always enjoy talking about storage. And what honestly, what a fantastic deal Cristian found himself in. So key lesson learned here for this episode was one that remember that this is when you're talking to storage owners, you're not. This is not residential real estate. You're talking to somebody who has built a business and you know from the ground up often and it is their baby. And it is a it's a relationship business, you're building a relationship, and is very much like dating. And you need to get to know that person. Before you really start at talking about money and it's a much longer process. We're talking months, not weeks, sometimes a year. So don't get jumpy. Just be patient and get to know get to know the owner. build rapport. That's some of the best advice I've ever gotten. All right, money. Good lord. This you know for those deals like this don't come along very often. He got in for 0% down 25 year am for $775,000 because of seller finance, and there you have just the power of asking You know, I mean asking the owner, when your negotiation, what do you plan to do with the money, you know, from the sale. And a lot of times, they're like, well, I'm just going to, you know, stick it in the stock market, and then you bring up the company, you know, the conversation of, you know, have you have you thought about what the taxes are going to be, what the capital gains taxes, and some of them haven't thought about it at all. And so if you bring that conversation up sooner than later, you might be able to point out the benefits to them of doing seller finance where they can, they can spread out the income from the sale and, and basically save themselves a lot of money in taxes, and continue to get some income from an asset, and that without having to do any of the work, knowledge, he, you know, he went to the storage rebellion, he he went to you washed a lot, I read ag Osborne's book, followed some Scott Meyer stuff. And one of the biggest challenges knowledge wise for him was just the, the transition, you know, all of a sudden, one day, he goes from not being a self storage owner to suddenly he's a self storage owner, and, you know, having to having to, you know, sort of learn how that transition happens, you know, he kept the one of the onsite managers on and, and was having to basically retrain her on processes and things like that time, he said, In the beginning was very much a full time job, it was the transition that caused that and he said, Now, it's more like four hours a week. And he said, eventually, once things are kind of up and running, he anticipates that it'll be more like four hours a quarter. As far as distance, he says that, you know, he thinks once things up are up and running, that he could probably go at least six months without having to, to have much input. And this is, you know, it is important to remember that storage is not just real estate, it's also a business. So what it would take to do that is also he's got to, you know, set up the the processes and, and procedures for his boots on the ground to follow in order for him to do that. So, okay, once again, that was Christian Marcado, from middle class to millionaires and the central and sorry, the century storage, appreciate his time, and it was great talking to him. Neil Henderson, we're doing this all again next week. Let's hit the road by date before you go. If you liked the show, we would be delighted if you'd head over to pod chaser and leave us an honest review. And do let us know why you like the show how long you've been listening, and in particular what you find really useful or entertaining. And let us know if there's anything you think we should change. Also, if you have specific questions about real estate investing, especially self storage or short term rentals, shoot us an email at info at roads to family freedom calm, and we'll be happy to answer your question on the show, and might even turned into an entire episode. Thanks for listening. We're doing this all again next week. Until then, safe travels on your road to financial freedom.