March 24, 2023

JF3123: 2 Strategies to Get Started in Self-Storage ft. Karl Graham



Karl Graham is Managing Partner at Luminus Capital, which identifies, acquires, and operates self-storage facilities. After a career in the oil and gas industry, Karl turned to real estate investing in 2020 when the market changed. He evaluated several asset classes, and settled on self-storage facilities, acquiring 13 properties in 18 months.

In this episode, Karl breaks down the numbers behind his first deals, shares his methods for creative financing, and recommends several paths for investors looking to follow in his footsteps.

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Karl Graham | Real Estate Background

  • Managing Partner at Luminus Capital
  • Portfolio:
    • 12 self-storage facilities
  • Based in: Tulsa, OK
  • Say hi to him at:
  • Best Ever Book: Barren Lands by Kevin Krajick
  • Greatest Lesson: Remain diligent in how you think about and evaluate investments.


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Ash Patel: Hello, Best Ever listeners. Welcome to the best real estate investing advice ever show. I'm Ash Patel and I'm with today's guest, Karl Graham. Karl is joining us from Tulsa, Oklahoma. He is the managing partner of Luminous Capital. They identify, acquire and operate self-storage facilities that offer added value. Karl's portfolio consists of 12 self storage facilities. Karl, thank you for joining us, and how are you today?

Karl Graham: Great. Thanks for having me. It's a pleasure being here.

Ash Patel: Karl, it's our pleasure. If you would, give the Best Ever listeners a little bit more about your background, and what you're focused on now.

Karl Graham: Yes, sure; maybe a little bit of an interesting background, but most of my career, my professional career has actually been spent in the oil and gas space. My formal education was in actually geology and engineering, and I spent about 12 years tasked, trying to find and de-risk oil and gas reserves actually, all around the middle of the US, Texas, Wyoming, Oklahoma. And anyways, in 2020 there was a bit of a downturn in that space related to COVID, and I found myself with some spare time, and I had a business partner who had always been interested in real estate, and that creative discussion, and free time led us to look more into commercial real estate investing... And ultimately, that led us to our firm now; we syndicate -- our first strategy was focused on self-storage, and we were able to acquire 12 facilities that we own now; actually, we sold one. We acquired 13 facilities in about 18 months, and continue to look for those types of opportunities. And we also do direct investment in oil and gas projects as well, which is where most of our experience is from.

Ash Patel: 2020, the day that oil went negative.

Karl Graham: Yeah.

Ash Patel: I would imagine that that prompted you to look for other opportunities in the industry. What does it mean to de-risk oil and gas?

Karl Graham: Well, it's really similar to real estate. I have found at least a lot of analogy and similarity; like when you're doing due diligence, and when you're underwriting or evaluating a real estate investment, you have two goals. One is to understand what could this be, how much revenue could I generate if I make some changes or if I added some value one way or another?

And then the other goal is to understand "Well, what could go wrong? What do I need to know to ensure that I get the result that I want?" And that might be demographics, that might be looking at competitive supply, or looking at comps... And then of course, actual technical due diligence, making sure there's no hidden issues or problems. And it's basically the same in oil and gas. We're trying to understand how much oil is a couple of miles underground, but we don't ever get to look directly at it. There's mostly indirect measures. And so my job then was to take all the data that we could find, every single bit we could get our hands on, to try to reduce the risk, the uncertainty of how much oil is under the ground, and how much it will cost us to get it. We're trying to take that risk from 80% to 50%. And in real estate, in my experience anyways, you're doing the same thing except for the spread and the risk; the uncertainty is much lower, because you can see, feel, touch a lot of things that we need to understand in real estate.

Ash Patel: Understood. Karl, I don't want to go down a rabbit hole, but I hear a lot of people say they have oil and gas investments. Is there a real estate play to that?

Karl Graham: I'll try to keep us out of a rabbit hole. At the end of the day, there's several real estates, in the US especially; there's the surface estate, which is where most of us own real property. You own the land and structures on it. There's also a mineral estate, which is everything subsurface, to the core of the earth. So fundamentally, a company or a business who owns and produces oil and gas - they own real estate. But they have rights to the mineral estate though, and they're producing resources from that estate.

So in the sense that there's a scarce -- there's only so much supply of land, and there's only so much supply of minerals and natural resources... So it has a lot of similarities in that regard, but from an actual real estate play, it is a very different universe. The uncertainty, the risks, and have the technical skill and knowledge you really need to have to be successful is a pretty big barrier, I would say, compared to --

Ash Patel: Self-storage.

Karl Graham: The way I'll explain it is what I've found in real estate and what I really liked about it - and I'm sure you have listeners that can relate to this - is you can start in real estate from anywhere. With a little bit of hard work and a little bit of capital or some good relationships, you can go start and make your first real estate investment. And single family homes, very typical, flipping, and then maybe holding for cash flow, and then maybe you buy that first duplex or quadplex, and then all of a sudden get a bigger building... That's a very natural career path or storyline that I hear in real estate. And [unintelligible 00:05:41.04] oil and gas like that really is not a thing; the barrier of knowledge and of experience, and then the risk capital that you have to have to really get anything done is so tremendous that most of the people in the industry who end up working for themselves or really being an entrepreneur have a pedigree past or have a huge amount of capital at their disposal to be able to play the game. So I really like that about real estate.

Ash Patel: Yeah, thank you for explaining that. Did you look at other asset classes before you decided on self storage?

Karl Graham: Yeah, we did, actually. So I mentioned my partner - he was the one that really was interested in real estate. I on the other hand actually had been searching to acquire a small business. I like operations, I like having a lot of levers to pull, and those kinds of things suits me. Operational leverage is a way for me to further better myself, and on buying my team's abilities, rather than just assets, merits.

So real estate, as I understood it kind of naively, was not very exciting to me. I had in my head, "Oh, we buy a building, we get a five-year lease, and then collect checks for five years." That doesn't sound exciting to me. And anyways, our dialogue led us to realizing that there are some asset classes which actually have more operational leverage, they have more of a business kind of layered on top of the asset. And so obviously, storage, I think, is one of those; it's a very operational intensive business. Other ones we looked at were marinas, and RV parks. The thing that all these have in common is a high churn, short leases, lots of customers per dollar of capital, is kind of how I think about it. So ultimately, we landed on storage for a number of reasons, but we still like the other asset classes, they just didn't seem like a great place to start.

Ash Patel: When you say exciting, it sounds like you want a job... Where most of us are shying away from those things, because we're afraid of getting back into a job. But you want to be able to create efficiencies with the operations.

Karl Graham: To me, my job is to build a machine that can do all the work, and allow us to extract all that operational value out of the asset, and create value for the investment. And that's the fun part for me. It's not doing the work itself, but I'm trying to build a team, and build processes, and make that job easy, essentially.

Ash Patel: When did you take down your first storage deal?

Karl Graham: I closed January 4th of 2021.

Ash Patel: Can we dive into the numbers on that?

Karl Graham: Yeah.

Ash Patel: What was the purchase price?

Karl Graham: We bought that for $390,000, and it was -- I don't want to distract myself; I'll look up the specific numbers, but... It was basically an abandoned facility. We found it on LoopNet, and I had been negotiating with the seller for several months when we first came across it probably about five months earlier than that, honestly. Yes, during the summer. And he was an out of state owner, hadn't been to the property in two years, and we had to mail in the contract. We actually mailed it to a FedEx facility where he could pick it up. Then we upgraded to fax, so that was a little bit faster... But it was a really interesting negotiation and transaction, but... Like I said, it was mostly abandoned, so it was a lease-up play. There's different risks in storage you can take; you can take lease-up risk, you can take expansion risk, or revenue management risk... But this was a lease-up play, and we actually sold it; it was a small property. We got it least up in about 14 months, and then sold it September of '22.

Ash Patel: For how much?

Karl Graham: For 925,000.

Ash Patel: What did you have to do to get this facility operational?

Karl Graham: There was a really long weekend where we got our hands dirty, and - it needed to be cleaned up, basically. There's overgrown trees and brush. We installed cameras, we upgraded the lighting... It did not have an electric gate; it had a manual gate with a padlock on it... So that's a very important operational piece of equipment and managerial piece of equipment for storage facilities. So we thought electronic gate; it has keypads, and so that can integrate with our management software, so that's another -- behind the scenes work of getting it operational is mostly getting your management software set up, getting a website set up, getting on Google My Business. Most storage is found online, so creating and having a good online presence is really important. But that takes some work.

Those are the main things. And then it's a matter of being ready when someone calls you, or having the processes in place to do that efficiently.

Ash Patel: Was there a human involved in that process, or was it all automated?

Karl Graham: There's a human, but not on site. On site we have what we call a caretaker, and they are non-customer-facing; their primary responsibility is to ensure that units are ready and available to rent. And trash is cleaned up, the facility is secure, that sort of thing, minor repairs, and just an oversight of larger repairs... But the customer rental experience happens -- it can happen purely online. A lot of customers will end up calling anyways, and they would talk to our customer service team who answers questions, provides clarity on the process, and that sort of thing. I don't know the specific numbers, but I would bet that in our markets probably about 25% to 30% of the rentals happen purely online. The rest are on a phone call, or there's a phone call involved at least.

Ash Patel: The difference between sale price and purchase price on this was about $500,000. How much money did you actually put into this property?

Karl Graham: The CapEx budget I wanna say was around $35,000.

Ash Patel: So a very profitable deal. What was your next storage facility that you bought?

Karl Graham: January 26th, actually, we closed on another facility, and we purchased that one for $650,000. It's going to be the high watermark deal for us. I would love to beat it, but I don't know that we will. We still own it. We refied about 14 months later at a valuation of 1.5 million.

The difference in these two deals from a profitability standpoint is the first one I mentioned - that was an all-equity transaction. We didn't use any debt, because it wasn't cash-flowing. We purchased it. We could have used debt, but we chose not to.

The second one, we used debt pretty aggressively, because it was cash-flowing and the debt coverage was really strong. So that property we had around $175,000 of equity into the property. So we refied out about two and a half times our money in a year, and we still own it.

Ash Patel: What did you have to do to improve that property?

Karl Graham: That one - a lot of the same capital items. It actually was already running on software, and so that was nice. And it was full. We installed new lighting, automated gate, security cameras, some new signs to make sure that customer instructions are clear... And then ultimately, we added a lot of value by increasing the rents up to the market rent.

Break: [00:13:09.05]

Ash Patel: Karl, the secret's out on self-storage. Everybody knows that it produces great numbers, there's a turnaround play... Cap rates are very low because of that. How are you finding deals today?

Karl Graham: That's hard. It's gotten harder. We started just early enough to be able to see what it used to be like, I guess... And it's been quite the transformation. And from my background in oil and gas, it's an extremely cyclic industry; real estate is historically cyclic. However, until recently, the real estate industry was in the up leg of the cycle for 10 years or more. So we were very attuned and recognized that this was a good time, and that it wasn't going to last, so we acted as aggressively and as quickly as we could, to secure as many opportunities as we could. And we still missed a lot, because we weren't as aggressive as we could have been, I suppose, in hindsight.

Ash Patel: Aggressive meaning offer more money...

Karl Graham: Yeah, offer more money, but justify that offer. Basically, we were extremely conservative in a lot of our early underwriting. Those first two deals, for example, we didn't forecast any rent growth at all, zero, for five years. And we underwrote a cap rate that was 50 basis points higher than the prevailing market at the time, which was kind of before things were really compressing. So that was kind of our benchmark, and we were playing catch-up with the market all through 2021. Each time we did one of these deals and we saw how quickly we could add value. We got more comfortable and more confident in underwriting rent growth in year one, and different cap rates, because we were quickly educating ourselves and experimenting. But we were still learning as we were going, so we had to keep a healthy dose of caution.

Ash Patel: We're in March of 2023. What are you seeing for cap rates today?

Karl Graham: That's a tricky question, in my opinion, because like you just said, people throw around and you see cap rate numbers advertised, marketed, even talked about... But in storage, because the value-add is so immediate, people will look at an in-place cap rate for a purchase, and it's really low, but that's not really the metric that the buyers are looking at. They're looking at what's that yield on cost gonna be when I'm done with my initial turnaround and my initial mark to market rents. And oftentimes, that number in reality is much higher than the advertised 4%, 5%, 6% cap rate that you might see or hear about. I honestly don't know the answer to your question, because it's not something I spend a lot of time focusing on for that reason.

Ash Patel: You're looking at ARV, or after improved value.

Karl Graham: I'm looking at what the yield on our capital is going to be when I'm done with my value-add.

Ash Patel: Alright, so cash on cash returns upon improving the property.

Karl Graham: Yeah. I'm assuming no debt, just to get that out of the --

Ash Patel: Why do you assume no debt?

Karl Graham: Just because different deals can be financed differently, and interest rates are changing, and that confuses the metric. That's basically why.

Ash Patel: Well, when you go to sell, the next buyer I'm assuming is going to evaluate the deal based on applying debt at whatever the prevailing interest rate is. Do you ever look at the disposition prospect?

Karl Graham: Yeah, on our exit we definitely look at that. And if you apply what some people are touting as a market cap rate on that terminal net operating income, what we have to be careful about is that the exit price per foot can get really, really high. The reality is storage is a simple product to build. It's not always a simple product to get entitled, but I think there's some risk in a lot of people who have acquired in the last year or two that they're really going to be challenged to get the exit valuation that they underwrote, because people are just going to scoff at it. I know I'm doing that. I've done that myself. I've seen deals where it's like, yeah, the NOI is really strong, but this isn't New York City or Los Angeles, and I'm not going to pay you $125 a square foot for a metal building. There's just kind of a fundamental value discrepancy there, I think.

Ash Patel: Is that the quick and dirty metric that you use, price per square foot, just to evaluate at a high level?

Karl Graham: Yeah, that's a common back of the envelope. It's a relevant metric, particularly in a given market where you know the rent. It's difficult to compare different markets, but yeah... I know in other asset classes it's common to look at rent per unit, or OpEx per unit, or valuation per unit, or per door/key... We look at things on a per-square-foot basis, because at the end of the day we are renting square feet. And the unit size varies quite a bit, so you can't really look at things on a per unit basis very easily.

Ash Patel: Good to know. Now, Karl, what does it cost to build new? It's $60, $70 per square foot?

Karl Graham: If you asked ten people that are in the know, they would probably throw numbers between 55 and 75, but it obviously depends on the product. You have single story, multi story, climate control or not climate control... You can be out in the country, and have gravel driveways, or you can be in town and have concrete driveways... All those things obviously impact with the cost to build quite a bit.

Ash Patel: When you purchase a property, are you always buying it at a higher price than the cost to build?

Karl Graham: We try to do the opposite. I would say almost exclusively all of our acquisitions have been probably at or below replacement cost. We have a couple of newer facilities that were probably closer replacement cost, but they're full and secured assets.

Ash Patel: Good. I think that was a turning point with multifamily, where in certain markets it was cheaper to build than it was to buy one or two-year-old apartment buildings. And that to me is a problem. It tells you that prices have escalated far beyond where they should have.

Karl Graham: Yeah.

Ash Patel: Somebody that wants to get into self storage, what's your recommendation to them?

Karl Graham: Right now, I would say there's two ways. It's a turbulent and difficult time to honestly get into the space. We've seen lenders just across the board, terms are more challenging, pricing is obviously very challenging, and a lot of lenders, if you don't have a pre-existing relationship, it's going to be an uphill battle. But that's one thing. But also, like you mentioned, we don't talk to many storage owners who haven't already talked to a half a dozen brokers or syndicators, or cold callers. That's not to say there's not prospects out there; there's 38,000 institutional quality facilities in the country that are not owned by a REIT yet, so plenty to go after. But my advice would be - it just depends on your goals. If you have a little bit of your own capital, and you want to take down a storage facility and make a little bit of money, one approach would be to buy a small facility that's near your home, and understand that it's going to be a lifestyle type business. You can run it at a very low operating cost, and learn the ropes so that when things change, you have a little bit of a track record and a resume you can take to a lender or to potential investors and say, "I know what I'm doing. Here's the proof", and it'll be a more approachable asset.

And those smaller assets, there's just fewer people like me that you're not going to be competing with to acquire those. When I say small, you can say under 15,000 rentable square feet; you're just gonna have a different group of competitors to acquire those types of facilities.

Ash Patel: Do you raise capital for these deals?

Karl Graham: Yeah. And the other way to get into it, depending on your goals, again, is to find qualified and experienced sponsor that you could be a limited partner and invest with. And honestly, I think that's a great strategy. I didn't use to understand the power of investing in direct investments and private placements, and I had some friends when I worked in oil and gas who were allocating capital to those people in multifamily, 8-10 years ago. They've done extremely well, some of them invest with us now, and it's a powerful strategy for the right person who has capital and is not interested in actively managing real estate.

Ash Patel: For our Best Ever listener that goes out and buys that under 15,000 square foot facility, what should their cash on cash return look like?

Karl Graham: For me, I think the appropriate yield on cost - again, to take that out of it, because you can get all sorts of different types of debt. And you can be aggressive with how you leverage it, or you can be conservative. But I think an appropriate cap rate for a small property like that really should be 10%. If you're [unintelligible 00:23:09.14] small market, small facility, for me I don't think it'd be worth it if it was much less than that, personally.

Ash Patel: Good to know. Karl, what's a lesson that you learned, a hard lesson, something that you regret in this industry, or through your real estate investing career?

Karl Graham: Most of my regrets have to do with not buying certain facilities very early on when we could have, but I don't truly regret them, because it was coming from a place of prudence. So I think that's important to distinguish. But we have been fortunate to not have made any catastrophic mistakes yet; it's relatively early in the game for us, but we also are coming from a place where mistakes are extremely expensive, and have been very cautious.

Ash Patel: What is the typical return to your investors? Is there a preferred return and a split?

Karl Graham: That's kind of changing for us right now; we're changing with the cost of capital a little bit. I would say typical in the space is 6% to 8% preferred return. There's a myriad of different structures that sponsors offer, but in my opinion, the splits are -- for storage businesses in particular, if the sponsor is operating the facility and doing a good job of it, has a real team and real infrastructure to operate the facility, the promotes are usually higher. 30%, 25%, 40% is not unreasonable, in my opinion, as long as the remaining fee burden is low.

So for us and our investors, alignment with the investors is the most important thing for us. So we have a relatively light, fixed fee burden, and then we ask for a larger split after the preferred is paid. And that's because we're doing a lot of work and a lot of our operational team is creating value, as opposed to us third-partying it. And in storage, unlike, say, multifamily, there's just not as many third party managers. There are more than there were even two years ago, and I think the quality is increasing, but there's not much. On any given market there may be none. They are already operating the market. So having the ability to operate a sponsor is truly a value-add to the investors.

Ash Patel: Thank you for sharing that. I love creative solutions, rather than just the typical 7/8, 30/70. Right? Every deal we've raised for has been drastically different, so I love hearing that.

Karl Graham: Our number one goal is to align the asset and the business plan with the investors and the partnership structures, what makes that all match. And so like you said, every deal is different, but we've been trying to find a very specific type of deal that is similar, and so that our investors are comfortable and understand "This is another one of those." And we've been successful doing that, but I think you have to be dynamic and change as you see things change around you.

Ash Patel: And Karl, what is your best real estate investing advice ever?

Karl Graham: My best advice - it depends on where you're coming from, but to remain very diligent in how you think about the risks of an investment. That could be evaluating the sponsor, that could be evaluating the asset itself... And I think that's a really important thing that people don't focus on enough, so I'll just leave it there.

Ash Patel: Karl, are you ready for the Best Ever lightning round?

Karl Graham: I'm ready.

Ash Patel: Alright, Karl, what's the Best Ever book you've recently read?

Karl Graham: There's a book called "The barren lands", which I frequently recommend. It's one of my favorite books.

Ash Patel: What was your big takeaway from that?

Karl Graham: It's a book about the discovery of diamonds in North America, and it is a story full of perseverance and grit that you just don't hear about much these days. And it's interesting and exciting. So I think my big takeaway was about what perseverance and determination looks like.

Ash Patel: It's on my list now. What is the Best Ever way you like to give back, Karl?

Karl Graham: Education is highest on my list of ways and places I like to give back. So I serve on some charitable boards, and try to leverage my experience and my expertise and to help those organizations thrive and be able to educate children.

Ash Patel: And Karl, how can the Best Ever listeners reach out to you?

Karl Graham: They can email me. We have our website, There's a Contact form there. My email address is Karl [at], feel free to email me there as well.

Ash Patel: Karl, thank you for sharing some great tips on self storage and sharing your journey from starting in the oil and gas industry, progressing now through to self storage, navigating through some of the challenges... Thank you again for your time.

Karl Graham: Thank you. It was fun.

Ash Patel: Best Ever listeners, thank you so much for joining us. If you enjoyed this episode, please leave us a five star review, share this podcast with someone you think can benefit from it. Also, follow, subscribe, and have a Best Ever day.

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