Nate Beck - 1031 Exchange

Real estate is arguably the best investment class for 2 reasons: 1) Investor’s ability to add value (try doing that with a publicly traded company!) 2) Tax advantages. I’m going to talk about one of the biggest tax advantages…the 1031 exchange. 🧵👇🏼

@jonsengland @Storage_Venture I am using marketing.storage as well and have had great results since switching over to them.

@Storage_Venture Thanks!

Purchased this facility almost empty, and spent $1,000 a month in Google ads from July - October. Turned off ads in October at 98% full, and we are now siting at 88% after rent raises that took effect today. Focusing on organic traffic, but if we need to turn ads on after the first of the year we can. With only $7500 of monthly rev right now our expenses are running around 43% (without ads), so we the goal is to keep ads off.

@1031Specialists @Storage_Venture Yes! I work with my father, who has been a 1031 exchange accommodator since the 90s and is in the office everyday. I’m also involved with him and spend some of my time hunting for self storage deals.

@1031ExchangeRE @Storage_Venture You focused on 1031 exchanges still?

Converting our 10x30s with double doors to 10x20 / 10x10s Higher price per foot and more demand for 10x10s, 10x15s, and 10x20s

@Storage_Venture Thanks for asking! I bought the property in December 2023 and occupancy was 63%. Today we are 90% and super excited about it. Haven’t done any rate increases and planning to start after the holidays. Now I’m looking for my next acquisition.

@1031ExchangeRE How are things going for you?

@Storage_Venture I’m just starting to do my first round of rate increases on my facility. All my larger unit types are at 100% and smaller unit types are 60-80%. I’m leaving the smaller units alone and starting increases on the larger units.

Rent raises on a 1/3rd of customers took place this month. Rent raises on the remaining 2/3rds will take place Dec 1 Anyone renting at least 120 days will receive an increase. Currently sitting at 97% occupancy so we need to start pushing rates to see what the market is willing to pay. Our goal is 87% occupancy for each unit type. Currently we are charging too little with majority of units 100% occupied.

@Storage_Venture I’m going through this same process with my facility. What do you think about charging for individual unit alarms? Seems like it could be another source of revenue.

A quick snapshot of revenue after taking ownership of this facility in July 2023. Keys to increased revenue: - online rentals - marketing - answering the phones - new paint (goes a long way) - customer service - mandatory tenant protection

@roblabonne @bairdk Anyway I can slide into this group chat? I bought a facility in December and looking to learn any tips smarter operator than myself are using.

@bairdk Love it!

Wow, Facebook is driving nearly 20x the value... Google cost per click = $7.48 Facebook cost per click = $0.38 People assume Google search users have more intent to justify the CPC but my customers answering the question "how did you hear about us?" are saying either "drove by" or "facebook". No reports of "google". These ads are promoting a new self storage building that I just opened on an existing property. For now I'm putting google ads on pause and redirecting that spend to FB.

@bairdk @roblabonne Thank you @bairdk and @roblabonne ! I bought a small facility with 60% occupancy in December and haven’t been able to increase occupancy with Google PPC ads. I’m looking forward to trying out Facebook ads. I’ll let you know how it goes. Thanks again!

An example of the power of this platform. Earlier this month, my friend @roblabonne posted in a storage owners message group about the results he was getting with FB ads and walked us through how he did it. I asked my Ops Mgr to give it a shot on one property and the results have been incredible. 17 move-ins last month up to 38 so far this month (and we're not done). Still working on lead attribution, but I don't think this is a coincidence.

@recostseg I just finished a cost seg with @recostseg and it was a great experience! Thanks for the recommendation @NNNIncome .

One of our clients recently deferred $95,563 in taxes. Here’s how: Last year they acquired a 15,000 square foot warehouse used as a storage facility rental for $879,000. The law doesn’t allow them to deduct the full $879K against their taxes in year 1, so my team had to figure out the useful lifespan of each component of their property in order to maximize their tax deduction via bonus depreciation. For example, a countertop has a 5 year lifespan, HVAC has a 39 year lifespan and various land improvements like sidewalks, fencing, and parking lots have a 15 year lifespan. After virtually touring the property and itemizing all of the components, our engineers were able to assign a value of $258,278 into either 5, 7 or 15 year assets. The 3 biggest levers for depreciation for this specific property were: 1. Concrete paving 2. Crushed rock paving 3. Chain link fencing Under a 37% tax rate scenario, performing this cost seg allowed our client to defer $95,563 in taxes. The study took us just 4 weeks to complete after the initial site visit occurred. If you are a real estate owner or investor and you are interested in learning more about how cost segregation can help you defer more in taxes, just click the link below, fill out the form and we'll send you a free proposal for your property soon. recostseg.com

@Storage_Venture Anytime I take my 3 kids to Costco, I get a bunch of comments as well. I think most of the comments come from women who raised kids during a different era, when husbands didn’t help as much with the kids.

Dad's help me out here... "Are you on your own today? Wow you're brave" - 3 separate mom's at the zoo today I often give my wife (stay-at-home mom) a break and take the kids out. Without fail, mom's come up to me as I run around with my toddlers with little comments like .. "you're brave" , All by yourself today? Wow" , "Just you and your kids today, you must be ready for nap time!" What's up with this? My wife doesn't get these comments from other moms or dads. Are dads not just as capable to take out kids on our own? Why the comments.. Other dad's out there get this too?

@bairdk Awesome post! Thanks so much for sharing this. An idea for a future post that I would love to learn about is your rate management strategy. Is it as simple as once occupancy for a particular unit type hits 90% everybody’s rates go up? I’d love to learn your strategy.

At 38, I was debt-free, saving maniacally, grinding my way to early retirement. At (almost) 42, I'm now $17.5m in debt, have loosened spending, and give no thought to retirement. 3 yrs ago, I found the power of leverage. How I've Financed $21.5m in Self-Storage Acquisitions*: *First, some disclaimers: - I spent 16 yrs grinding in a corp career, saving any penny I could, building a pile of cash to do what I do now. - I don't have outside investors - only capital at risk is my own and my lenders'. - I keep a large liquid cushion so I don't become an over-leveraged case study if sh_t hits the fan. - This is not financial advice and I don't recommend most take the risks I've taken. - I'm the recipient of the benefits of good timing, good luck, and hard work. Wouldn't be here without all 3. Let's dive in! I've used 4 types of debt structure: - Conventional Bank Loan - SBA 7a Loan - Seller-Carried Loan - Conventional Bank Loan + Seller-Carried Loan I've bought 10, sold 1. Here's the breakdown of each buy: Property 1: Conventional Bank Loan Purchase Price: $1.1m Down Payment: $275k (25%) Interest Rate: 3.95% Amortization: 20 yrs Adjust: 7 yrs 2023 numbers: Revenue: $221k Net Operating Income: $172k Debt Service: $60k DSCR: 2.9x Closed on this first deal in Feb '21. Had no idea what I was doing at the time, but got lucky with connections. Friend intro'd me to an attorney, attorney was on board of local bank and he intro'd me to the commercial lender at bank. Convinced bank to lend me $825k despite zero prior experience. Presented my biz plan, sold hard, got them on board. Long story, but I refinanced this one in '22 and cashed out $350k at 4% for 10 yrs, thinking it'd be a long hold. Last year I had the opportunity to trade it up for a $12m buy and I did (see #10 below). Sold it for nearly a $1m gain in December '23 and 1031 exchanged into deal #10 for $12m. Property 2: Conventional Bank Loan Purchase Price: $660k Down Payment: $164k (25%) Interest Rate: 3.95% Amortization: 20 yrs Adjust: 7 yrs 2023 numbers: Revenue: $107k Net Operating Income: $75k Debt Service: $36k DSCR: 2.1x Closed on this one in April '21. Went back to the same bank that financed #1 and they were game. Not sure why. I hadn't had time to show them what I would do with #1. But they gave me their money and I took it. Property 3: SBA 7a Loan Purchase Price: $700k Down Payment: $105k (15%) Interest Rate: 3.9% Amortization: 20 yrs Adjust: 5 yrs 2023 numbers: Revenue: $112k Net Operating Income: $82k Debt Service: $43k DSCR: 1.9x This one was bought in Aug '21. At that time, the SBA was offering an incentive to waive their guarantee fee (a percent of loan amount paid at closing) and cover the first three loan payments. Got an intro to a local bank who is a "Preferred Lender" for the SBA, which means they can underwrite SBA 7a loans in-house. An advantage of SBA loans is they allow you to lever up to 90%. My bank wanted 15% down, so that's what I did. Property 4: SBA 7a Loan Purchase Price: $625k Down Payment: $94k (15%) Interest Rate: 3.9% Amortization: 20 yrs Adjust: 5 yrs 2023 numbers: Revenue: $91k Net Operating Income: $61k Debt Service: $38k DSCR (Debt Service Coverage Ratio): 1.6x Bought this one in December '21. Decided to go with the SBA bank again even though the incentives mentioned above had expired. This one is the dog in my portfolio and the only one that has missed targets, but is still doing okay. Property 5: Seller-Carried Loan Purchase Price: $1.85m Down Payment: $450k (24%) Interest Rate: 4.5% Amortization: 26 yrs Balloon: 10 yrs 2023 numbers: Revenue: $277k Net Operating Income: $197k Debt Service: $91k DSCR: 2.2x Bought this one 2 yrs ago this month. Someone else's loss was my gain. I picked this deal up with a well-timed cold call to the owner, just as his contract to sell to another buyer was terminated because they didn't want to agree to the seller's carry terms. The seller was only selling if he could carry the note - no idea why the other buyer didn't like the very nice terms he was offering. This was my first experience with seller-financing, and man, it was smooth. No appraisal, no underwriting, no bank fees. Shared my Personal Financial Statement, gave proof of assets, and that was that. Property 6: SBA 7a Loan Purchase Price: $1.55m Down Payment: $155k (10%) Interest Rate: 4.55% Amortization: 25 yrs Adjust: 10 yrs 2023 numbers: Revenue: $273k Net Operating Income: $205k Debt Service: $94k DSCR: 2.2x Bought this one in June '22, right as rates started to move, and it's prob the best deal I've done. For it, I shopped my two local banks against each other. The one that did the two prior SBA deals came in hot and offered the terms above if I refinanced #1 and #2 with them, so I did. We're besties now. Property 7: SBA 7a Loan Purchase Price: $1m Down Payment: $150k (15%) Interest Rate: 5.75% Amortization: 20 yrs Adjust: 5 yrs 2023 numbers: Revenue: $175k Net Operating Income: $121k Debt Service: $72k DSCR: 1.7x Bought this one in Aug '22. At the time thought 5.75% was an insanely high interest rate. Now it looks great. Went back to my SBA bestie and got it done. At this point, I had a great track record with them. I did what I told them I'd do on previous deals and they trusted me. Numbers on this one are lower in part because of the higher interest rate and in part because my revenue mgmt efforts aren't fully baked into '23 numbers. It did $17k rev last month. Take that across 12 months and it gets to $204k. At 70% NOI margin, it should do $143k NOI, increasing DSCR to 2x. Property 8: Seller-Carried Loan Purchase Price: $590k Down Payment: $100k (17%) Interest Rate: 5% Amortization: 20 yrs Adjust: Never 2023 numbers: Revenue: $97k Net Operating Income: $73k Debt Service: $39k DSCR: 1.9x Bought this one in Jan '23. Educating the seller on the option to carry the loan was key to winning the deal. Seller was getting old, wasn't happy with his property manager, had considered selling, but didn't want to pay a giant tax bill. Seller-carry was the solution. He named the purchase price, I named the loan terms, we agreed. This one's just barely a year held. Numbers are on track and will get better as rev mgmnt continues. Property 9: Conventional Bank Loan Purchase Price: $1.4m Down Payment: $350k (25%) (proceeds from refi of #1) Interest Rate: 7% Amortization: 20 yrs Adjust: 5 yrs 2024 Projections*: Revenue: $216k Net Operating Income: $151k Debt Service: $98k DSCR: 1.5x For this one, I initially went to my SBA bestie, but their offer was crap. Went back to the bank that did #1 and #2 and their offer was slightly less crappy for a conventional loan. Money I had refi'd out of #1 was burning a hole in my pocket, so I threw it into this deal. Numbers don't look as good on this one do they? If it weren't in the same town as #7, I wouldn't have done it. *Bought it in April '23, so I don't have a full year financials, and if even if I did, they're not seasoned enough to be relevant. So I used last few months avg revenue of $18k/mo and applied a standard 70% NOI margin to get the numbers above. Property 10: Conventional Bank Loan + Seller-Carried Loan Purchase Price: $12m Down Payment: $1m (8%) Seller Note: $5m @ 4%, 25 yr amortization, 12mo of I/O, 5 yr balloon Bank Note: $6m at 7.75%, 25 yr amortization, 5 yr balloon Stabilized Projections*: Revenue: $1.68m Net Operating Income: $1.26m Debt Service: $860k DSCR: 1.5x Bought this one in Oct '23, sold #1 in Dec '23, and reverse 1031 exchanged proceeds into this one. Seller was fixated on $12m number and was open to carrying a big note. Went to my bestie bank (the SBA one), got them on board with seller taking second position, then negotiated with seller on his terms. *This one still has a long way to go before it's stabilized. If you've been following me for the last 4 months, you know how much effort has gone into cleaning it up. Currently at $106k/mo revenue at 73% occupied (after cleaning out 100+ abandoned units). New rentals are strong. Should be on the stabilized run-rate above within 6 months or less. Based on the market it's in, there's a lot of upside from there. Pros & Cons of Loan Types: Conventional Bank Loan: Pros: - Bank underwrites in-house, no sending off to a third party for approval like some SBA loans. Also helps with speed of close. - Often lower interest rates than SBA loans. - Fewer extra requirements and restrictions of SBA loans. - Fewer upfront costs as compared to SBA loans. Cons: - Banks typically require 25-35%+ down, requiring less leverage. SBA 7a Loan*: *Note that there are other types of SBA loans including a 504. I only speak to my experience with 7a. Pros: - Enables higher leverage (up to 90%). Cons: - Higher upfront cost for loans greater than $1m. For loans of $1-2m, the SBA charges an upfront guaranty fee of 1.45% of the 75% portion of the loan that they guarantee. (Example: $2m loan. 75% ($1.5m) is guaranteed. $22k fee.) For $2m+ loans, the fee is 3.5% for first $1m + 3.75% for amount above $1m. (Example: $4m loan. 75% ($3m) is guaranteed. $35k fee for first $1m, $75k for additional $2m, total of $110k guaranty fee.) - Typically higher interest rate on $1m+ loans. The SBA charges the lending bank an annual guarantee fee of .55% for loans of $1m-$5m. - Longer underwriting and approval timeline, especially if bank doesn't have in-house SBA underwriting. - More paperwork and restrictions than a conventional loan. Seller-Carried Loan: Pros: - No appraisal, survey, environmental, etc that banks will often require (although usually good practice to do some of these anyway). - No formal underwriting. I've always just shared personal financial statement, business P&Ls, and proof of assets. - Can be as quick as you and seller agree. - Complete flexibility of loan terms. Cons: - None that I can think of. Comment if you know any. What I've Learned: A couple of points of wisdom from my brief experience convincing people to lend me money: - Get Intros to Banks - If you need to find a bank, use your network to get a warm intro to a commercial lender. I was introduced to both banks I've worked with by credible individuals. Not sure they would have taken me seriously if I were a rando off the street. - Sell The Story - Early on, I had to sell myself as a credible borrower and future operator. A strong balance sheet helps, but they also want to know that your past professional experience is relevant. You also need to tell the story of the potential of the asset. Concise, well-though-out business plans help, but how you present them also matters. My bankers make fun of me for how enthusiastic I am about the deals I bring them. It helps. - Know Your Numbers - By the time I've presented a deal to the bank, I've stared at the numbers for hours on hours. I've run countless scenarios. I'm ready for any questions before they're asked. - Be An Amazing Customer - Early on, one of my bankers complained about how hard it is to get other borrowers to provide updated financials. That's prompted me to proactively provide updates before asked. My lenders get updated P&Ls, Balance Sheets, and PFSs every quarter without asking. I send them insurance renewals before asked. Anticipate what they want and give it to them proactively. There's a lot more to this and I've missed a lot, but I'm tired of writing. Comment with your questions (and corrections) and I'll do my best to answer!

@Storage_Venture Awesome! What is your strategy for advertising online? Google ads? Anything else?

Since taking over in July we have 3x’d revenue on our storage facility. How? 1) Created a Google My Business page 2) Created a website for customers to rent and pay online 4) Advertised online 5) Made the facility look prettier (new sign, new paint, no roof, cleaned grounds) 3) Hired a call center that answers the phone and is customer service centric. 4) Increased rates for new customers 5) Implemented mandatory Tenant Protection (insurance of belongings) for both existing and new customers 6) Implemented fees for breaking our lease agreement and terms This month (January) we bring 1/3rd of existing customers to just about market rate. Their rate has not changed since we purchased facility, (currently 40-50% below market rate). Based on the data of how that goes, we will raise rates on remaining 2/3rds of existing customers. 2024 goal is to increase revenue another 25% from where it is today. TL;DR: buy an underperforming mom and pop business, make simple and cost effective changes to bring to the 21st century, watch revenue grow accordingly.

@bairdk Great explanation! And congratulations on successfully pulling off a reverse exchange! The tax savings can be life changing.

You’ve heard of a 1031 Exchange, but have you heard of a Reverse 1031 Exchange? I hadn’t until a few months ago and just completed my first yesterday. Here’s how it works: With any 1031 Exchange, there’s a relinquished property (or properties) and a replacement property. A Reverse 1031 Exchange allows you to first buy the replacement property before you sell the relinquished property. In my case, I found a property that I wanted to buy, decided to fund that acquisition through the sale of another property, but couldn’t sell that property fast enough to occur before the replacement acquisition. There are two things that make a Reverse 1031 difficult: 1) you have to float the capital to close on the replacement acquisition, and 2) getting a lender on board with the structure. Luckily, I found both. First, I found a 1031 Exchange Specialist to act as Qualified Intermediary and guide the process. They charge $4k if the transactions close and the exchange is completed. If, for some reason, the exchange doesn’t happen, they collect a $500 fee for the trouble. I found someone local who came recommended by others. Before acquiring the replacement property, a few things happen: - A couple agreements are signed with the 1031 Exchange Specialist, designating them as Qualified Intermediary and governing their arrangement to “park” the acquired property during the exchange period. - The purchase agreement is assigned to a special purpose LLC created by the 1031 specialist. At close of the acquisition, the borrower guarantees the loan and the property is secured as collateral, but the special purpose LLC executes the Deed of Trust. You then have 45 days from the close of the replacement purchase to identify property to be relinquished (up to 3 properties) and another 135 days to complete the sale of the relinquished property. (This is the Safe Harbor period, but my 1031 Specialist claims he’s had many clients go past that period to complete the sale without issue.) In my case, I identified 3 properties that I was most likely to sell. The 1031 Intermediary holds the Deed of Trust until the sale half of the exchange is completed. The exact mechanics at the sale of the relinquished property aren’t as clear to me. Seemed similar to what happened at replacement acquisition. Sale proceeds go to 1031 intermediary. I completed this yesterday and now have to decide: keep the 1031 open in case I sell one or both of the other identified properties, or close out the exchange and get my money? Once the exchange is closed, I get back any amount up to what I put into the new acquisition. In this case, I put $1m into the new acquisition and will get $830k in proceeds from the sale, so I’ll get all of the $830k back. If I sold additional property and total proceeds exceeded the $1m I put in, any additional proceeds would have to go towards paying down debt on the replacement property. I mentioned before that getting a lender on board with this structure is a challenge. My bank had never been part of a Reverse 1031 and was uncomfortable with it at first. I arranged a conference call between my bank and 1031 Specialist. After the call, my banker sent this summary of his understanding which was confirmed by 1031 Specialist: - Our borrower will be Chainring Capital LLC (Baird’s LLC) - Baird will personally guarantee the loan - The collateral will be the property owned by the EAT (Special Purpose LLC) - The EAT will execute the deed of trust to secure the loan - When the other property sells the EAT will transfer ownership to Chainring Capital LLC via special warranty deed and the EAT will unwind.  - Chainring Capital LLC will execute a deed of trust to secure our loan.  Bank got on board, charged me some minor fees for the hassle, and are now prepared to do it again in the future. I’m sure there are details I missed and some I got wrong. Corrections welcome in the comments. Consult your own CPA!

@philiphartz Seriously. I just got a bid to replace a 60’ x 24’ section of asphalt. I was quoted $42K for asphalt and $52K for cement. 😬

Can't wait for AI to master pouring concrete... Construction will be a cakewalk!

@bairdk Love it. Your story inspired me to purchase a small 12K SF storage facility with the same owner (and operations!) since 1977. All of these tips have reduced the learning curve by a lot! Thank you!

@1031ExchangeRE For ready to rent units we put a new key disc lock inside unit and secure with Davinci. Customer gets Davinci code at rental and instructions to secure unit with key lock and return Davinci to drop box. It’s smooth and customers like that they don’t have to get their own lock.

Another 38 locks cut. The results from Day 2 of Operation WTFIIATSU (who the eff is in all these storage units): - 3 units are full of valuable stuff but we could find zero evidence of owner. Kayaks, drum set, art, some sort of giant water filtration contraption. Someone is going to want this stuff back. For all we know, they paid the former owner for a year in advance. We’ll prob overlock indefinitely until they surface. - 9 units were empty but had a lock on them. Two-sided stupidity. Who leaves a lock without a key on a storage unit they’ve moved out of? Why would any decent manager of a storage facility not ask questions about why there’s a lock on a unit no one is paying for? Anywho, they are now ready to rent. - 5 units with identifying info for occupants matching customers already confirmed on our rent roll. Added to their tabs. Did they forget they had more units or think we wouldn’t find out? - 11 units with identifying info for someone not on our rent roll. Some were easy to identify. Others took a lot of (literal) digging. Easy: shipping labels on boxes all same name, stack of mail all addressed to same person, business paperwork. Hard: digging through bins and boxes to find things like - Epi-Pen with name on prescription, ultrasound photo with patient name, powering up laptop hoping login screen would have name (it did and matched name on a shipping label in same unit). In one unit all we have is a pilot’s log book from 1969 found in a box labeled “Dad’s stuff”. With his name and address, we’ll find his kid(s) for sure. Feels strange digging through other people’s stuff. It would feel stranger to dispose of it. It would feel strangest to get sued. Another 150 or so to go.

@NNNIncome You’re speaking my language!

HOT / Contrary Take for Retwit I friggin love 1031’s. I have completed hundreds of them for clients. I have done over 50 personally. They are the 2nd best part of the tax code in relation to CRE behind only accelerated depreciation.

@Storage_Venture Awesome. I literally got their offer for TPP yesterday. So glad I didn’t sign up for anything yet. I’m learning a ton from you. Thanks!

@1031ExchangeRE Hey Nate - we use ESS for this facility so went with them and their TP for easy integration. They stared at 40/60 split but we got them up

We “created” 120k of equity in one day. This is why I enjoy self storage. Pulled one of many levers and created value. How? On November 1st, we required all tenants (who have not yet already) to enroll in Tenant Protection. $12/ month for $2,000 worth of coverage. Here’s the numbers.. I keep $9 of the $12. The remaining $3 goes to insurance company. 89 customers x $9/mo = $801 $801 x 12 months = $9,612 $9,612 of additional revenue (at a 8 cap exit) is: $120,150 of value. We did not underwrtite this revenue in our projections, so a nice little added bonus. I also believe in providing value to justify any increase to the customer. We gave them protection on their belongings. We get additional revenue + less liability.

@Storage_Venture Love this! I’m under contract on my first self storage deal and realizing all that I need to learn.

1 is halfway to 10. You have to get in the game. Start small and jump with both feet. All the books, podcasts, posts, videos, etc are not a sliver as valuable as negotiating and operating your first deal. After that first property, you’re truly halfway to 10 properties.