Erik Hemingway traveled the world with his family for years. They’ve lived in Costa Rica, sailed through the Mediterranean, and sailed across the Atlantic Ocean. All of their travels were made possible because of Erik’s passive income from self-storage. In this episode, Erik shares his strategy for locating self-storage deals, assessing the market, and analyzing the risk on these deals.
Erik Hemingway | Real Estate Background
- Founder of Nomad Capital which focuses on heavy value-add properties, bringing an in-house general contractor component to projects such as self-storage conversions, ground up development, boutique hospitality, and commercial retail asset classes.
- Portfolio: $35M in CRE, primarily in self-storage properties.
- Erik used passive investing to leave the ‘9-5’ life and take his family on adventures, including living in Costa Rica for 1.5 years and sailing through the Mediterranean and across the Atlantic Ocean.
- Based in: Wilmington, NC
- Say hi to him at: www.nomadcapital.us | erik@nomadcapital.us
- Best Ever Book: Traction: Get a Grip on Your Business by Gino Wickman
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TRANSCRIPTION
Slocomb Reed: Best Ever listeners, welcome to The Best Real Estate Investing Advice Ever Show. I’m Slocomb Reed. This is the world’s longest-running daily real estate investing podcast. Today, we have Erik Hemingway with us. How are you doing Erik?
Erik Hemingway: Great. How are you doing, Slocomb?
Slocomb Reed: I’m doing fantastic, excited to be interviewing you. Erik is the founder of Nomad Capital, which focuses on heavy value-add properties, bringing in-house GC components to their projects, a self-storage conversion, ground-up development, boutique hospitality, and commercial retail asset classes. His current portfolio is 35 million in commercial real estate, primarily in self-storage. Erik used passive investing to leave the nine to five life, and take his family on adventures, including Costa Rica for a year and a half, sail through the Mediterranean and across the Atlantic Ocean. Now he’s more active though as a GP. He is based in Wilmington, North Carolina. Erik, preparing for this session, the thing that stuck out to me was that you focus on heavy value-add properties. What do you consider heavy value-add?
Erik Hemingway: So for us, a heavy value-add would be… We’ve got a couple of Kmart conversions to storage right now; we’ve done ground-up development… We really like to think out of the box and think creatively; I think that’s one of our biggest strengths. When I say “our”, my son and I are partners. We like to kind of look at stuff that everybody else has overlooked, and see what we can rethink how it’s being done, and maybe pivot into something else.
Slocomb Reed: How long have you been doing these kinds of projects?
Erik Hemingway: I’ve been in construction for over 25 years on my own, with my own license since 2001, so just past 20 years on that. And as you mentioned, we traveled abroad for a total of about five years. After coming back to the states in North Carolina, it was time to get back to work, so we started with rehabbing old houses. Wilmington has a huge historic area, so we were crawling under houses, reframing, all that. After a few years of that, I said, “Something’s got to change.” So we pivoted into commercial and kind of been focused on that since about 2016 or so.
Slocomb Reed: Nice. It’s great that you bring that construction component to your deals. It’s especially vital right now with how difficult it is to find good quality contractors and good quality labor. Now, with a Kmart conversion, turning an old big box store into self-storage, something like that – that would definitely be considered heavy value-add. In fact, you’re changing asset classes with a property like that; as opposed to a typical self-storage or a typical self-storage value-add, how do you calculate the difference in risk? When you’re taking something like a big box store and converting it into a completely different asset class, how do you assess the risk involved in that differently?
Erik Hemingway: Great question. We kind of broke it down into four buckets, if you will. The highest risk would be ground-up development. You’re going to buy land, hire an architect, get it designed, engineering, permitting, build the thing… If you’re not a general contractor, you’re hiring a general contractor, going through risks… Materials cost is through the roof, as we’ve seen. So that’s the highest risk.
The next one in our mind is a conversion, where a lot of the heavy lifting is already done. We’ve got the footprint, the building is there, it’s really repurposing it. You’re not designing parking, drainage, sewer, water connections, and all of that. The next step in my mind would be a mismanaged property that’s already storage, but just neglected, rents are way below market, there’s a lot of value still to add there… And then, of course, the least risky project would be to buy something –if we’re just talking about storage– at a cap rate, stabilized, maybe there are some little dials you can turn, you can lower expenses a little bit, raise rents, but basically all the juice is squeezed out of it. So for our appetite, we are doing a little bit of the first and second bucket, and just for the value we want to bring our investors, we don’t find a lot of projects that makes sense at the third and fourth bucket. It seems like all of the heavy lifting and the value-add has already been done. That’s why we like that, and that second bucket is kind of where we’re focusing right now, if that makes sense.
Slocomb Reed: How many of these Kmart conversion style deals have you done now?
Erik Hemingway: We converted a printing company in Wilmington in 2016. Not a huge project, it was about 30,000 gross square footage, and we have 24 to 25,000 net rentable. That was our first conversion. And then we’ve got two Kmart’s right now that we’re working on, one under construction and one under contract.
Slocomb Reed: Gotcha. Tell me about the one under construction. What did the big picture numbers look like?
Erik Hemingway: It was a 1.5 million purchase, it was 87,000 square feet, so – what is that? I should know it. $14 to $15 a foot, which is way below replacement costs. We’re going to have about $22 to $24 in converting it to storage, so we’re going to be all in for 35 range, 36, and we’re seeing storage trading at 70 to 100 and up. So we feel like that’s a great day, and that’s something we should be able to pass on to investors, and everybody has a great day at that. It’s going to cash-flow, stabilized fairly quickly, and that’s our target.
Slocomb Reed: Gotcha. How long is the hold period on a deal like that?
Erik Hemingway: We’re targeting five years. We’ve just closed on this first one on December 1, 2021. We’re in the demo mode and we hope to have units to rent in early summer. It’s not as daunting a task as a ground-up project… So yeah, we’re shooting for six to seven months build-out, and then our target is to hold it for five to seven years. Of course, as we approach that threshold, we’ll see what the markets… At four years, if it makes sense to get out early, we see the horizon, we see interest rates are going to spike up, and now’s the time to get out, or we decided to hold until the full seven, or kind of play it by ear at that point.
Slocomb Reed: You said six months to deliver. Are the entire 87 square feet rentable and available to the open market?
Erik Hemingway: Yeah. We debated doing it in phases, and just decided, for the ease of simplicity and mobilization, our crew is there, our guys are there, let’s just knock it out. So that’s kind of what we’re targeting for that. So we should be open, hopefully, July.
Slocomb Reed: That’s awesome. $34 million worth of renovation in six months seems exciting and fast. I know that if someone didn’t have your construction background, numbers like that sound like a pipe dream. But when you look at the experience and the value that you bring, that’s exciting, and it’s exciting that you’d be able to deliver on that quickly. I would be surprised if you didn’t find a really good opportunity to sell before that five-year mark.
Erik Hemingway: Could be.
Slocomb Reed: So you were mentioning to me before we started recording, Erik, that you and your son are partners in Nomad Capital, and that you’re syndicating deals like this, which means you’re bringing on limited partners. And you said just now that you’re underwriting to the five-year hold, which gives a great point of comparison for those light value-add or mismanaged asset deals when it comes to the kinds of returns that you can project and what it is that you’re offering to LPs. So when you were putting together your proposal for this one that you’ve just closed on in December, that you’re currently demoing, what is it that you are offering to investors, what kind of return?
Erik Hemingway: We’re targeting 18% to 21% IRR on the five-year. And then of course, as the scale slides, if you’re taking on less risky deals, then there’s less meat on the bone if you will, and I think that’s when you get into the 10%, 12%, 13% IRR, because there’s just not enough there. That’s kind of why we like those. It’s in our skill sets and our wheelhouse, we’re comfortable with it, so we can bring the GC side, we can bring the sponsor side, and we also do in-house property management as well, so we have that going for it. So this will be our fifth site, and then the sixth one is under contract.
Slocomb Reed: Nice. So you said an 18% IRR, and this is for one of those — not the highest tier of risk, that would be your ground-up construction deals. That makes sense across the board; an 18% IRR for these kinds of conversions of an existing structure into a new asset class to self-storage. Have you syndicated a ground-up construction deal yet?
Erik Hemingway: We have not. The ones we’ve got on the plate right now are conversions, and we do have one that’s under contract; it’s a CFO, we’re buying it as soon as it’s complete. And there is a fifth building that we’re going to add immediately on that. So that’s a small component of a ground-up, but… We do have a couple of ground up projects going, but we didn’t syndicate those; they’re just in-house.
Slocomb Reed: And all of these will be self-storage properties when you’re done with them?
Erik Hemingway: Yup.
Slocomb Reed: Gotcha. Erik, I’ve had the opportunity to speak with a few people in the self-storage area, which I’m not personally in myself. Driving to some of my properties, I see little mom-and-pop self-storage places and I see the phone number, and I keep thinking to myself, “Man, I need to call them.” But I haven’t yet I do need to call them.
Erik Hemingway: It’s worth a call.
Slocomb Reed: Of course. ANd I’m already in the car, driving by, and I already own assets in the area. These conversion deals – how is it that you analyze the demand for self-storage in a given market?
Erik Hemingway: Initially, when we find a property, we just do our own due diligence. Start basically with Google Maps, find out what other storages are nearby, the kind of population. We are on Costar, so we see some demographics, and then of course we order a feasibility study right away after the property is under contract. That really gives us a good gauge of how aggressive the market is and what the appetite is for more storage there. So we definitely check those boxes while we’re under contract, to make sure it’s the right move.
One of the reasons we started leaning towards the conversions was there’s a lot of storage hitting the market right now. A lot of longtime operators are getting out, because the time is right for them to get out and make a change. But the market is so hot for storage that I can’t remember the last time I saw an offer of a new property that came with a price. It’s just “Call for offers. Call for offers” So it’s like I just don’t want to get in that frenzy and up bid, this one won a million and five over ask… I just don’t want to play that game. We really liked the conversions, because it’s under the radar, it’s kind of stealthy, which we like. So there’s a building that’s ugly and we turn it into storage, painted it, dressed it up, signage, and all of a sudden – boom, there’s a storage, when everybody was fighting over this market, and here we come, half price or 40% under the market, and boom, there’s another competitor.
Slocomb Reed: Do you have any particular market research that you do, analytics or metrics that you track for the changes in demand for self-storage? I’m imagining as an outsider to the self-storage space who’s familiar with real estate investing that there’s got to be some sort of number – for every X households, you’re going to have a demand for Y self-storage units or Y square feet of self-storage in a given market, or within a given radius. Does something like that exist?
Erik Hemingway: Sure, square foot per capita is the number that a lot of storage guys have used historically.
Slocomb Reed: What numbers do you use?
Erik Hemingway: Historically, it’s been seven to nine square feet per person in a given market. You can kind of gauge what storage is there and what… Yardi Matrix has a lot of data on that, CoStar will have some data… But you can back out where it’s at. The interesting thing is that number has grown pretty significantly over the past three years or so, specifically since COVID, since everyone’s moving around, and with the national trend of affordable housing, of course, multifamily, as you well know, is just going up everywhere, and people are able to afford less square footage. So that’s pushing storage. Now the number is probably closer to 12 or 13, and a market is not considered saturated until it’s at 14, 15, 16, depending on the MSA. So that’s definitely changing, and storage as a general asset class has just been on fire the past couple of years. I think last year nationwide saw 20% to 22% increase in rental rates. That’s a lot in one year.
Break: [00:16:33] – [00:18:43]
Slocomb Reed: Erik, I know that everything that you do cannot be summarized quickly in 15 or 30 seconds. But what’s stirring in my head, based on what you’re saying, Erik, is that if I understand a market well enough, I can draw a circle around a fairly homogenous area within a market, and then I can figure out how many square feet of storage there are per person within that circle that I drew or that squiggle that I drew. A balanced market would be 12, saturated would be 14 to 16 square feet per person in that area. But if I found a space where there were only six to nine square feet of self-storage per person within that squiggle, it seems like that would be an exciting place to find a Kmart. Is that what you’re saying?
Erik Hemingway: Yeah, 100%. You’ll see it in broker listings and stuff that this property is for sale, there are only three or four square feet per capita in this market, and they’re saying this has the ability to expand. Of course, that’d be very attractive to us, because the market is already under-supplied, in our opinion. So yeah, of course, if you find something like that, that would definitely be worth exploring, I would think.
Slocomb Reed: What were you investing in before self-storage?
Erik Hemingway: My background is a builder, I did some light commercial… The first storage I built is in Arizona in 2006, and we still own it today and manage it. But before that, residential home builder, spec homes, custom homes, that kind of thing, pivoted into storage in 2006, and then went traveling as we talked about… And once we came back here and started renovating houses, I said “The only thing we’ve really done in the past 10 years or so that’s worked is storage. Maybe we should look at storage again.”
Slocomb Reed: Nice. How does the development and construction of single-family homes compare to these self-storage conversions? How many of the skills are translatable from residential development to self-storage conversion? Do you have a feeling that one of them is just easier than the other?
Erik Hemingway: Well, that’s a tricky one. The construction is a lot of work in general, especially now with prices and subcontractors and all the rest of it, so neither one of them are easy. The residential stuff – it’s just a lot of details, a lot of meeting subs, meeting customers, just going through the whole process. Then you sell the home if it’s a spec, then you go look for a lot, and you start all over again, and it’s just a treadmill. With the storage, what we liked about it, of course, is we’re building a cash flow base – yes, if you put it into work, and maybe a residential home takes five months and storage takes eight months or whatever… It’s more work obviously on the front end, but then it’s not sold and you got to do it again, and again, and again. Now it’s cash-flowing for the long term and that was like, “Okay, this makes way more sense.” So we kind of hung up the residential side of things, not looking to do… Possibly multifamily development down the road, maybe, but no more single-family site build kind of stuff for us.
Slocomb Reed: Yeah, totally. And there’s also a mindset shift there. Most developers are not thinking like investors and they’re not thinking about building a portfolio for residual income the way you do when you’re building a portfolio of cash-flowing self-storage. It’s definitely a mindset shift that’s going to lead to greater profitability over time and make your efforts and renovating more valuable over time as well. An 18% IRR is going to be enticing to a lot of people. There are a lot of moving parts in what you’re doing that increase the barrier to entry for a lot of investors and a lot of operators. That’s exciting. I come from the apartment space, and one of the reasons I think that you’re able to project the returns that you’re projecting is because there are so many fewer operators who are capable of doing the kinds of deals that you’re doing. When you are offering on these Kmart’s, I keep coming back to that example, but you have multiple Kmart’s now, right, Erik?
Erik Hemingway: Just two. [laughs]
Slocomb Reed: Just two. I would like to have two Kmart’s, too. Erik, when you’re offering on these deals, do you sense that there is a lot of competition?
Erik Hemingway: No, not at all. The one we closed in December, I think was for sale for two years and it had been vacant for five. So Kmart moved out five years ago, the seller wanted to get rid of it, and it’s just in a place where “Who’s going to buy an 87,000 square foot building?”
Slocomb Reed: That’s you.
Erik Hemingway: Right. Retail’s bleak for that kind of size. I don’t even know. There’s just not a lot of those tenants right now, so that was a great opportunity for us for sure. And that led to the next one; I talked to a broker who knew we did the one Kmart, and then he said, “I know some guys that are selling a Kmart in Virginia. Would you consider that?” We said, “Yeah, we’ll certainly look at it.” So there you go, the rest is history.
Slocomb Reed: I don’t know anyone who would have wanted to be known as the Kmart guy 10 years ago, but it’s probably lucrative now.
Erik Hemingway: Yeah. We think so. It looks like it’s going to work.
Slocomb Reed: Last question on these conversion deals. What kind of debt is available to you on these? What kind of financing are you getting?
Erik Hemingway: Good point. So we’re using a community bank local to North Carolina. We feel like we got a strong term on this one. A 25-year amortization, 3.75 APR, seven-year term, and 80% loan to cost.
Slocomb Reed: Loan to cost, got you. That’s 80% of your all-in, around 35, 36.
Erik Hemingway: Yeah. 3.5 is our all-in. I’m sorry, it’s close to… What did we say earlier? 3.5, 3.6 million.
Slocomb Reed: 3.5, 3.6. That’s my error; sorry about that, Erik. So you’re able to borrow even though more than half of your total cost is the construction component. You’re still getting 80% debt on loan to cost. That’s exciting.
Erik Hemingway: Yeah. It’s a relationship we’ve had, we’ve done other projects together, so that helps. But the appraisal came in at 5.1 when complete. As soon as we get everything built out, we’re off to the races, and stabilize goes up from there.
Slocomb Reed: Awesome. Are you ready for the Best Ever lightning round, Erik?
Erik Hemingway: Hit me. Hit me with it.
Slocomb Reed: Great. Erik, what is your Best Ever way to give back?
Erik Hemingway: My wife started a nonprofit theater group. We’ve got a lot of kids, we got six kids. A lot of my kids are into theater, great singers, and stuff so my wife started a theater group called Acting Up. It’s a community theater that teaches 50 kids twice a week, something I can’t even comprehend. So we work together on that.
Slocomb Reed: Nice. What is the Best Ever book you recently read?
Erik Hemingway: I’m almost done with Traction, Gino Wickman. We’re at the stage where we’re starting the syndication side and it’s time to build the structure of how to do this the right way. That book came from a lot of recommendations and I am making my way through it. It’s as good as advertised.
Slocomb Reed: I’m working on implementing Traction in my management company as well.
Erik Hemingway: Oh, good.
Slocomb Reed: What’s the most money you’ve ever lost on a deal, Erik?
Erik Hemingway: I was thinking about that, I saw the question… A recent one was we are dabbling in the hospitality space and we had a property under contract that we thought we had financing lined up for. They let $30,000 go hard and the lender changed the name of the tune on us after that, so we ended up walking away from that, so that was a little painful. We didn’t actually see a term sheet, but had a verbal “This looks good,” and that was a tough decision.
Slocomb Reed: With 30,000 going hard, how big was the deal? What’s the purchase price?
Erik Hemingway: Just around three million.
Slocomb Reed: Gotcha, so like 1%. What’s the most money you’ve made on a deal?
Erik Hemingway: We don’t sell a lot. We typically buy and hold, so we haven’t really exited out of stuff. We’ve done great on some spec houses.
Slocomb Reed: What’s the largest appreciation or forced appreciation you’ve seen on one of your holds?
Erik Hemingway: Well, we just finished another hospitality project at Kure Beach. We bought a boutique motel, nine rooms, and put in about a million, so we’re going to be able to do cost segregation and bonus depreciate that this year. That’ll be a big help.
Slocomb Reed: Nice. What is it worth now that you’re done?
Erik Hemingway: On a cap rate, it’s probably close to five million.
Slocomb Reed: Oh, wow.
Erik Hemingway: We’re all-in for just over two.
Slocomb Reed: Erik, what is your Best Ever advice?
Erik Hemingway: I was talking to somebody about this the other day… So I think for us, we make risky moves, or what seem like risky moves… People are like, “Well, that’s just way out of my scope.” In my logic and what my son and I talked about is risk is a muscle that needs to be used, and I think every step you take leads to the next thing. We would have never dreamed about doing the deals we’re doing now, even five years ago, forget 10 years ago when we were on a sailboat. But each little step kind of gets you ready for the next step, so we’re just super excited to see where this goes from here. We feel like there’s a lot of great opportunity left and we’re just enjoying the ride.
Slocomb Reed: Absolutely. Erik, where can people get in touch with you?
Erik Hemingway: The best way is through our website, nomadcapital.us, or they can reach out through email at erik@nomadcapital.us. My son and I are starting a podcast very soon called The Real Estate Nomads, so you can find us there. We want to try to help people achieve a nomadic lifestyle, whatever that means for them. Work how they want and where they want. We’re obviously big travelers, and real estate seems to be the best way to do it.
Slocomb Reed: Awesome. Well, Best Ever listeners, thank you for tuning in. If you enjoyed today’s episode, please do follow and subscribe to the show, leave us a five-star review, and share this with someone who could benefit from what Erik has shared with us about self-storage conversion deals. Thank you and have a Best Ever day.
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