October 14, 2019

JF1868: The Value of Cash Flow with Ryan Smith


Ryan had grown up around the real estate industry with his family being investors. He had a financial analyst role with his dad’s company when he realized the business needed a better way to keep track of everything. He built software to solve the issue, he grew that to 140,000 users. Ryan also purchases real estate with his wife, having more than 175 different assets across 30 states. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

Best Ever Tweet:

“Focus on the value of income more than income as value” – Ryan Smith

Ryan Smith Real Estate Background:                                                       

  • Co-founder of Elevation Capital Group, focusing on Manufactured Housing Communities and Self-Storage
  • They have more than $500 million of combined acquisition value, 175 assets across more than 30 states
  • Based in Orlando, FL
  • Say hi to him at http://elevationcapitalgroup.com/
  • Best Ever Book: Right Away & All At Once by Greg Breneman


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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff.

With us today, Ryan Smith. How are you doing, Ryan?

Ryan Smith: I’m doing well.

Joe Fairless: I’m glad to hear that. A little bit about Ryan – he’s the co-founder of Elevation Capital Group, focusing on manufactured housing communities and self-storage. They have more than 500 million dollars of combined acquisition value, and 175 assets across more than 30 states. Based in Orlando, Florida. With that being said, Ryan, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Ryan Smith: Sure, happy to. Real quick, I started in kind of a technology background. My dad is in real estate, growing up in a real estate family [unintelligible [00:02:00].03] so needed some tools and some help, and so my role within the family was to help with financial analysis, and basically financially underwriting some of these investments, starting as early as my teenage years.

I ended up seeing that my dad needed a better way to do things, so I built a software application for his business that other investors found to be useful, and ended up building that software company up to an install base of about 140,000-some-odd investors globally that used it.

Joe Fairless: Wow.

Ryan Smith: I went to college, played baseball, got drafted a couple of times, but wanted to pursue business, so… Coming out of college, I had – thankfully, due to my programming background and my software company – capital, I had knowledge that real estate was a great place to endeavor, I had a tool (my software program), and my wife, who is also a co-founder in the business, she had a prolific management background in property management… So we came together and started purchasing real estate.

We started with single-family residential in our early twenties, built a portfolio of about 20-some-odd properties, found it wasn’t overly scalable at 25, and we wondered when it would become scalable… So we looked for a better path forward, and long story short, we spent in our early twenties probably about six months to a year researching billboards, storage, apartments, mobile home park storage, and the things we were looking for is we wanted consistent cashflow in a variety of economic conditions. We wanted cashflow, obviously, we wanted tax benefits, and then we wanted capital appreciation opportunities, so the opportunity to grow our capital base. So really the two things we settled on were mobile home parks and storage. We liked those two.

Mobile home parks really stood out, and one of the things that I saw pretty much right off the bat that was interesting was what I thought was a moat hiding in plain sight. Simply put, mobile home parks are needed everywhere, they’re hated everywhere, so they’re not allowed anywhere. So there’s a real constraint on supply… And I thought that was intriguing, because I saw a moat lying in plain sight, that I didn’t have to spend a dollar to create. I didn’t have to spend my way to its creation. So we started building a portfolio well over 15 years ago or so, and here we are today.

Joe Fairless: You and your wife have been partnering up on the business for how many years?

Ryan Smith: We started the company together. The inception, in its original, was about 17 years ago. It’s when that kind of spark was lit.

Joe Fairless: What are some tips for partnering up with your spouse on a business?

Ryan Smith: Hah! It’s a good question. It’s one of the best things to me, because this doesn’t mean if you don’t work with  your spouse you don’t love your spouse, but to me the opposite is also interesting, where if you really do love your spouse, then spending as much time with them is great. It’s definitely stimulating to work with them in an intellectual capacity on a daily basis, so there’s definitely been some learning lessons in terms of roles and responsibilities and boundaries at times, but I will tell  you, it’s one of the best things… And partially because I’m spoiled, because I [unintelligible [00:05:02].10] She’s fantastic.

Joe Fairless: So what are some specific tips that you have? You mentioned the benefits, but what are maybe a tip or two that you have for someone?

Ryan Smith: I would clearly articulate roles and responsibilities according to strengths and weaknesses… And sometimes when you’re in a relationship lines get blurred, but in business it’s helpful to have a clear delineation. So I think it’s a simple, basic tip, but I think to understand strengths and weaknesses and identify roles and responsibilities based on those, and clearly articulate those going in.

Joe Fairless: So your focus now is on manufactured housing communities and self-storage, yes?

Ryan Smith: Yes, correct.

Joe Fairless: What’s the latest transaction that you closed on?

Ryan Smith: In December we closed three. Two self-storage deals in Houston, Texas, and then a mobile home park just outside of Columbus, Ohio. About a 300-space deal.

Joe Fairless: Let’s talk about those three. Two self-storage in Houston. Can you give us the details on those?

Ryan Smith: Yeah, I’ll just pick one, just to have at least one of those to talk about…

Joe Fairless: Yeah, sure.

Ryan Smith: It’s in Katy, Texas, which is a suburb of Houston. It’s a newly-constructed self-storage facility, in a good location. We think for the long run it will be great. There’s some upside in it, in that the current management was, I would say, okay, but not great, in our opinion, and we think we could do things better. And then the structure of it, the physical layout of the facility was kind of odd. It was this approach or attempt to on the third floor of it climatize it without the traditional climatization process. Basically, they put two giant fans in the roof and tried to circulate that way. What it ended up doing is not working very well, so the top floor was incredibly hot, 100 degrees plus on most days, and it sounded like a jet engine in your ear. So occupancy on the third floor was a challenge. We are fixing that design flaw, in our opinion, and we’re managing it better.

Joe Fairless: How?

Ryan Smith: Actually, the guy who built it – we know him quite well; I believe he brought the deal to us. He just said “Listen, they’re asking me to do it this way. It doesn’t make sense to me, but I’m gonna do it, because that’s what they’re asking…” So we’re taking out the fans and we’re actually sealing the roof and putting in your standard climate system.

Joe Fairless: And why would a reasonable businessperson decide to do it the way that it’s currently done? Just putting ourselves in their shoes.

Ryan Smith: I wish I knew the answer, and I’ve relegated myself as a goal to never understand crazy, for fear of what that says about me.

Joe Fairless: So there’s no rational explanation? If you had to come up with a rational explanation for why they did it that way?

Ryan Smith: Cheaper. It’s lower cost.

Joe Fairless: There we go. Okay. Got it. Approximately what would be the cost differences?

Ryan Smith: I don’t know off the top of my head. If I were to guess, it was a couple hundred thousand dollars most likely.

Joe Fairless: That’s significant. Okay. Alright, and the upside there is changing the existing cap-ex — or I don’t even know if it’s cap-ex…

Ryan Smith: Correct.

Joe Fairless: …changing some of the structure, and then you’ll get better rents and get higher occupancy.

Ryan Smith: Correct, correct. I believe the first month after we bought it, I think we rented something like 25 to 30 units the first month or two.

Joe Fairless: How many total units?

Ryan Smith: It’s about 700 units. Just shy of 700 units.

Joe Fairless: Okay. Is that type of value-add play typical for self-storage?

Ryan Smith: Yes and no. Every deal is a different puzzle, and really no two are alike. But there’s no shortage of value-added plays within the space, it’s just every one is a different puzzle you’re putting together. I can give you another example…

Joe Fairless: Yeah, please.

Ryan Smith: One of the first properties we bought in our current fund, called Fund 7… But one of the first properties was a self-storage facility in Melbourne, Florida. The short story is it was built about 17-some-odd years ago; great location, in the heart, on the main drive… A pretty moated property, we believe. In short, it was about 750 units. They had RV spaces in the back; kind of adult toys, boats, RVs, and the like… And we find that to be a pretty inefficient use of land. So when we put it under contract, part of the agreement was that they would build, based on our design, a new building in place of the storage, and we would close basically upon completion. So that was done, we closed, and it went from 750 units to approximately 1,050 units at closing. So when we closed, the occupancy on the property was roughly 75% occupied. So we created the  vacancy issue.

Now, the risk is we think we can fill that and absorb that vacancy, and we couldn’t, so the risk was borne but us, in our underwriting… But in short, I wanna say — gosh, I think it was Q3 of last year that property had (I wanna say) 93% occupancy, and that was in just about six quarters from acquisition. So we created the vacancy problem and then filled that, and obviously more NOI, which is always a good thing.

Joe Fairless: What are some other ways to add value in self-storage?

Ryan Smith: I’ll give you an example of a property we bought about two years ago in Melbourne, Florida… When we first saw it – the asset was in a great location, major market, good density, good barriers to entry… But the specific asset – one of the problems that we created intentionally so we can solve it on the other side of ownership was we found that it was built in 2001, good bones, had about 750 units, about 75,000 feet, but they did RV, boat — basically, adult toy storage in the back, which is not as effective on a per-square-foot basis for the purpose of generating income.

So we put in the contract that we wanted them to build 300 units to our specification. The long and short of it is when we closed, there were about 1,050 units on more than 100,000 feet, and because of that, the project was around (off of memory) 74% or 75% occupancy. So we created our own vacancy problem, which we then solved through leasing it up and pushing rents over time.

Off of memory, I think 4-5 quarters later after acquisition it hit 93% occupancy, so from 74% to 90% plus within a year, a year-and-a-half. So that’s been another example of a way we’ve added value on that type of asset.

Joe Fairless: Does that negatively impact your financing, since you’re buying a property that used to be 90% and now they went down to 70%?

Ryan Smith: No, because you tell the story as to why. So it’s not a market-based — you do all the diligence and you can show that the market can support it, and we were able to… So it was not a challenge.

Joe Fairless: I don’t recall ever hearing a multifamily investor go to a seller of an apartment building and saying “I like your 750 units. I notice it’s zoned for 1,100 total, so why don’t you go build 400 units? And then I’ll close on the property.” First off, does that happen in multifamily? And then secondly, how frequently does it happen in self-storage?

Ryan Smith: Yeah, it’s a good question. On the multifamily side I wouldn’t really know, because my expertise is mobile home parks and self-storage… But I would say it happens less often than normal; it’s not overly common. But then again, we ask for things pretty regularly that we get that are not normal, so this is one. And what it did for us is it allowed us to close, and then go right into lease-up, rather than having to close and then go through permitting, construction, and more of a drag on cash.

Joe Fairless: How is that structured…? If I’m the seller, and I have 750 units, and I’m selling my self-storage, and  you are the buyer and you’re saying “You know what- I like it, but why don’t you go build me about 300 more and then we’ll talk?” I’d be like, “Screw you, buddy. You go build it yourself.” So how do you convince me to actually build them?

Ryan Smith: You’re kind, by the way. You would have said far worse than that, but I appreciate the kindness of that reply. [laughter] We include the cost of construction plus a premium for their time and energy and effort. We paid a premium over what the 750 units was. So they came out ahead in the wash, but so did we, in that they won — if we were right in our underwriting and we could lease up the facility, it’s a shorter path to profitability, rather than a longer drag on cashflow. So it was a mutual win in the way that it was presented and accepted.

Joe Fairless: And approximately how much longer does that take to close the transaction, since they’re now gonna be build 300 units?

Ryan Smith: Off of memory, I think it took roughly six months, something like that. It added roughly six months.

Joe Fairless: Six additional months?

Ryan Smith: Correct.

Joe Fairless: Got it. That’s fun to talk about. I’m glad  you mentioned that. That’s fresh stuff. And on that note, you did say you tend to ask for things that aren’t normal, but get. What’s another example of that?

Ryan Smith: That’s a good question. I would just say we’re creative, because every deal is a different puzzle. One thing that’s somewhat unique that’s pretty normal for us is I’d say it’s pretty normal for us to make more than one offer to a seller, so we usually create multiple offer scenarios. One example of a recent one is where there’s an option to assume the loan, and a whole offer based on that loan assumption, and then a whole different offer based on a cash purchase. So we like to, as much as we can, bifurcate the offers, to give the sellers a feeling of flexibility in options. That has worked out well for us.

Joe Fairless: When you do the loan assumptions versus cash purchase – first off, do you typically work with a broker on these transactions? And if so, are the brokers seeing that this is something that’s commonplace, or is that not as typical, to have two offers for one deal?

Ryan Smith: That specific one was an off market deal through a broker; no problem at all with it. So I don’t wanna say all brokers are familiar or comfortable with that, but the brokers we’ve worked with are, and it’s not abnormal.

In terms of our deal flow, we deal with both on and off market properties, and then also broker and direct seller relationships, so we pretty much deal with all types.

Joe Fairless: For someone looking to not get started in self-storage, but buy their second or more self-storage facility, but say they’re still on the small scale relatively speaking, what’s the best way for them to find off market deals?

Ryan Smith: I’d say the usual suspects of beat the payment, postcards, mailings, those things help. We do those. Attending trade shows of self storage associations in your area could be helpful… But also going door-to-door. Picking a market – if your market is specific and you say “Hey, this geographic region is where I wanna buy in”, creating a list of opportunities in that area, and either mailing/calling and/or visiting I think would pay dividends. That’s, by the way, how we started our business many years ago, specifically in the mobile home park side of things – just phone calls. My wife had more success at it than I did. You talk to her on the phone, you wanna know her; you pretty much wanna hang up on me. So she was very successful.

Joe Fairless: Based on your experience in the industry, what’s your best real estate investing advice ever?

Ryan Smith: It’s a good question. I’ve learned this over many years, and I would just say succinctly to focus on the value of income more than income as value. The value of an income stream is in my opinion more valuable than an income stream as the value of an investment, if that makes sense.

Joe Fairless: It does, but please elaborate.

Ryan Smith: As an example, I’ll give you  as best I can by verbal… Let’s say you buy a property, and you find a way to make a dollar a month, each month. So at the end of the year you have $12, you pay tax on that, assuming no depreciation offset; let’s just say you pay tax, 40%. So you have roughly (let’s say) $8 at the end of the year. So every one dollar a month, you raised your net cash $8 at the end of the year. Assuming an asset is a 5-cap asset – and I’m just picking 5-cap for ease; you can do this at 6, or whatever cap rate you wanna apply… But let’s say a 5% capitalization rate. If you’re able to buy a property and add $1 of NOI on a monthly basis, that’s $12. Divide that by 0.5 or multiply it by 20, it’s all the same. So you have $240 of equity that you have created per $1/month of NOI.

Comparatively, the question is what excites you more – $240 which is unrealized, so it’s not taxed, or $8 after tax? And in fact, if you focus on the $240, you also have the $8. But the point in that is if you have one unit and you can raise your NOI $1/month, you have $240. If you have ten units, it’s $2,400 in equity, so on and so forth. And the reason why understanding this is so important is working backwards.

For example, if your listener who’s listening right now says “Okay, well my goal is to create ten million dollars of net worth for myself in whatever period of time.” It may be five million, it may be a million, I don’t know. But let’s just say ten million dollars. With this, at a 5% capitalization rate, you take ten million dollars 5% cap, you need $500,000 of NOI to be worth at 5-cap ten million dollars. So you need to create $500,000 of new NOI, and that sounds like a ton… But then let’s break it down. So you take $500,000 of NOI, divided by 12 months in a year – that’s roughly $42,000/month of NOI. It still seems like a lot, $42,000/month of NOI; it’s a lot of work to do.

Now, let’s say — how many units do you wanna own? Let’s say your listener says “I would like to one day own 1,000 units.” Okay, so take $42,000 and divide it by 1,000 units – you need roughly $42/month of NOI per unit to be worth ten million dollars. And you say “Okay, well $42/month – that still may take some time.” Okay, well how many years? Say five years. So you take $42, divide it by five years, so the summation of all of that is if you have 1,000 units, and for five years, each year for five years you grow your NOI by $8/year, for five years, across 1,000 units, at a 5% cap rate, you have created ten million dollars of net worth for yourself. And with that, you can then create all the income you want.

Joe Fairless: Thank you. Very helpful, and what a good example. I didn’t know you had that up your sleeve. I might have just kept going. Good thing I asked you to explain. That’s a great example.

Ryan Smith: Thanks.

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Ryan Smith: I am.

Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.

Break: [00:19:22].27] to [00:20:04].03]

Joe Fairless: Best ever book you’ve recently read?

Ryan Smith: Right Away & All at Once, by Gregory D. Brenneman.

Joe Fairless: What’s a mistake you’ve made on a transaction?

Ryan Smith: Trusting without verifying.

Joe Fairless: Will you give an example?

Ryan Smith: Yeah, I did a deal – it probably also falls under the worst ever deal –  with a family member where some of the information was misrepresented. [unintelligible [00:20:21].13]

Joe Fairless: I would imagine so…

Ryan Smith: Yeah… [laughs]

Joe Fairless: …for multiple reasons. Best ever deal you’ve done?

Ryan Smith: Mobile home park, early in our business, in Hopkinsville, Kentucky. Off of memory, it’s 60-some-odd units. We got it under contract for roughly 300k. I think we put $12,000 down. The rest was seller carry. We then improved it over many years, and I think sold it for around $800,000. So from an ROI perspective, that’s probably the best one we’ve ever done.

Joe Fairless: Best ever way you like to give back?

Ryan Smith: Focusing on bringing the heart of giving into the intention of earning, making it more of a unified — but more specifically, what we do… My wife has been really great in this, but in short – we form giving groups around towns, where  we get 12 people in a group; each person puts in $2,500, and then we, through our social fabric, bring people in need to the group that we’re connected with, and then we vote on a gift recipient twice a year, and then we follow up and follow through with the people. So it’s a direct gift, giving locally, within our social fabric, and then we’ve expanded that. There’s many giving groups now, it’s been a lot of fun.

Joe Fairless: Is that a formalized organization, or is there a website for that?

Ryan Smith: No. But if anybody wants details on how to do it, or possible details, I’m happy to share with what we’re doing. We’ve systematized the approach on how we’re doing it, but we’re not formalized as an organization, no.

Joe Fairless: And what a wonderful segue – how can the Best Ever listeners learn more about you and your company?

Ryan Smith: ElevationCapitalGroup.com, that’s the URL of our site. My direct line is 407-602-7662. Happy to help any time.

Joe Fairless: Loved listening to the stories about unique ways to add value, from the jet engine sound with the property in Katy, Texas, to the 750 units that — no, no, no, you don’t want 750; you wanted 1,050, so “Please just go build those, and I’ll wait six months.” I love hearing these stories and actual transactions, with some back-and-forth, and what made sense for both parties.

Thanks for being on the show. I hope you have a best ever day, and we’ll talk to you again soon.

Ryan Smith: Sounds great. Thanks.

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