Connor Gross is the owner of Atlas Storage, which buys and sells self-storage facilities. In this episode, he shares what three aspects drew him to invest in self-storage over other asset classes that he considered, why he recommends screening local property managers aggressively, and how to set local property managers up for success.
Connor Gross | Real Estate Background
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Owner of Atlas Storage, which buys and sells self-storage facilities.
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Portfolio:
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350 units
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Based in: New York City (operates in TX)
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Say hi to him at:
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Best Ever Book: $100M Offers by Alex Hormozi
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Greatest Lesson: Try to systemize as many processes as possible.
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TRANSCRIPT
Slocomb Reed: Best Ever listeners, welcome to the best real estate investing advice ever show. I'm Slocomb Reed and I'm here with Connor Gross. Connor owns Atlas Storage. They buy and sell self-storage facilities in Texas. He's based in New York City. Current portfolio consists of 350 units. Connor, can you tell us a little bit more about your background or what you're currently focused on?
Connor Gross: Yeah, absolutely. Thanks so much for having me on the show. So in terms of my background itself, I got started in real estate probably 15 months ago, but prior to that I pretty much operated in an entire world of digital marketing and e-commerce where my partner and I built and sold a couple of different e-commerce companies while we were in college. Recently, I graduated from a university up in Boston about two years ago, and sold our last business just before COVID hit. Once COVID kind of came around and actually hit, we decided, "Hey, we want to go and do something totally different, outside of the ecommerce world. We have a little bit of cash saved up. Where should we be spending most of our time?" And both of us unanimously decided "Let's go into real estate."
So we pretty much spent a full six months straight during COVID just diving into everything we could, analyzing asset classes, talking to brokers, owners, sellers, reading books, podcasts etc, trying to figure out what's what in this world. And about 14 months ago from today, we went and purchased our first facility. It was a small, 68-unit facility, about 12,000 square feet just outside of Dallas, Texas. It was kind of a crazy transaction. It was an all-cash deal in seven days that we bought from a wholesaler, and ever since then, the past year, we've pretty much been buying different properties. We have about four facilities right now, and looking to go and scale that up pretty substantially next year.
Slocomb Reed: Nice. Connor, most people, especially people who dive into self storage, are not coming into commercial real estate fresh, with no other real estate investing experience. Most people scale or find themselves progressing into self-storage, usually from residential or apartments. Given that your experience was deciding to dive into real estate, analyzing several asset classes, what was it that drew you to self storage over the other asset classes that you considered?
Connor Gross: The two biggest reasons that we went with self storage over anything like multifamily or other residential asset classes was first, we really did not want to be responsible for where somebody lived; especially starting out, I just know for myself personally, I did not want to get the 2am phone calls about the toilet breaking, did not want to go and have to fly out somewhere in the middle of February when somebody's HVAC goes down. So that for me was just never something that I wanted to go in and do. And on top of that, I think the standard of how well you can maintain something when somebody does not live or spend a lot of time at that asset drops substantially, which is kind of great for us, because we're first-time operators; we wanted to go and figure out exactly what we could do without having to go and go above and beyond every other operator who's been in the space for a long time.
So when it comes to self storage, if the doors work, you have a light bulb in the unit, you have a little bit of curb appeal, and maybe some stripe lines in the parking lot, people are very, very happy. Whereas if you're in multifamily, and you don't have a Picasso in the lobby, people are gonna be a little upset. We want it to be as nice as humanly possible. And so that was the first criteria.
The second thing is we wanted to compete in a market where the competitors were not necessarily as institutional and had just so much more money than we did... And that's not to say that there are not institutional investors in self storage. There absolutely are, and there's more and more big guys entering that space every single day. But if you actually look at the market, of let's say multifamily compared to self-storage, in multifamily about 90% of the property in multifamily is owned by institutional investors; people who want to go and buy multiple properties and build up their portfolio that way. In self storage, it's 92% of all the self storage assets out there are owned and operated by mom and pop operators. For the bulk of people, it is the John who retired at 65 and took his savings and bought a self-storage facility, keeps it 100% full year-round, and just lives off the cash flow and takes most of the payments in cash, and it's an easy business for him. I would rather compete against that guy every single day of the week, than have to go and compete against some of these big funds that are buying up as much multifamily as humanly possible. So when it came time to actually buying them and competing against other operators, that's one of the big criteria that we used to decide to get into self storage.
Slocomb Reed: Those two criteria - an asset class that is simple to operate, and an owner base that is not as professional, meaning you'll likely have better opportunities to buy, but also that you're competing against other not as professional owners - what other things led you to self storage?
Connor Gross: It was really those two things to start off. We definitely met a handful of other people who were able to go and have success in this space that definitely caught our attention. I think the one other thing that I would add, that maybe isn't as applicable to some other forms of real estate, like maybe multifamily, is because it's also kind of a small business, there are a lot more levers that you can pull, besides just renovating the unit, to go and demand higher prices. If you can market the facility better online and lease it up better, that's a huge competitive advantage. If you're able to go and expand and open up more portable units on the actual site itself - that's a competitive advantage. So there's just more levers to pull from a value-add standpoint, that made self storage a little bit more interesting.
Slocomb Reed: Connor, what other asset classes did you consider? What were you comparing self storage against?
Connor Gross: So we also have a land wholesaling business. So we also work with a lot of land. But the ones when it came to an actual investment standpoint, it was probably going to be self storage or multifamily. That's kind of the two that it came down to. Office - I didn't feel confident at all about, especially as we were doing all of our research during COVID; I was very scared to get into that. When it came to any kind of retail spots, my entire background is e-commerce, so any kind of physical retailer is -- I know a lot of it's not going away, I know people like it, but I literally do the opposite, or have done the opposite for most of my career prior to this, so I didn't want to get into that either. There was a handful of other ones we got out there, but it just seemed like this one was going to be the best highest value-add.
Slocomb Reed: This may not seem like a direct question, but why not look at warehouse or other triple net, more commercial style asset classes? I would think that, operationally speaking, they would be much simpler, and if you are willing to buy smaller properties - like you said, you started with a 68-unit self-storage facility - you probably would have found a lot more mom and pop ownership there as well; why not something like triple net?
Connor Gross: I would love to, personally. I just didn't understand the playbook on how to even get into that in the first place. I've found that there are a handful of books and podcasts that specifically walk you through from A to B, how to go and get started in self-storage and how to go and execute on that strategy.
I'll be honest, if you look up warehouse real estate investing or industrial commercial real estate investing, there's no literature on the subject. There's very, very little books that actually walk you through how to go through this process. And the only other thing that I would say, comparatively, for the two asset classes, is all of these larger warehouse types of assets, you are very often dealing with one or two single tenants, or sometimes just a couple of tenants per facility that will go and occupy it.
The one nice part about storage is we have 350 and 260 units at the facilities. If one person moves out, it does very little impact to our bottom line. Good and bad; like, one person moves in - it does very little to impact our bottom line. So we have to kind of keep things operationally efficient.
When it comes to these warehouses, we have record high inflation right now, so if you lock somebody in on a four to five-year lease - this isn't an actual real concern for me, but you kind of could be missing out on a ton of upside on that... Whereas with self storage, every single lease is month to month, so you can constantly go in and adjust pricing over a nine-month time period.
So yeah, I think I would love to do it personally. I think there's a lot of opportunity in warehousing and [unintelligible 00:09:35.07] something that I know is getting a lot more attention these days, and that gets me excited. I just haven't personally seen the playbook laid out in ways that I have for self storage today.
Slocomb Reed: Connor, that makes sense. And even thinking within my own residential portfolio - I'm an apartment owner-operator in Cincinnati, Ohio, and I have a single family right now and three or four-family properties, and my largest part property has 26 units. So to your point, when my four-family has a vacancy, and that vacancy is 1/3 of the rental income for the property, I feel it a lot more.
On that same token, when you have 68 doors, or 26 doors, and you recognize the market shifts, or you recognize rent growth inflation in the area, and you increase your rents by $25, or $50, that does a whole lot to your bottom line. Whereas at my four-family, or at a warehouse, that kind of nominal increase just doesn't do as much for you.
On a previous episode I went through some specific numbers here, and showed how a $50 a month increase in a 24-unit led to a quarter of a million dollars in value for the property, because I raised rents on C class one-bedroom apartments by $50 bucks a month. So the scale there... You're preaching to the choir here, Connor. I know the vast majority of Best Ever listeners are involved in apartment investing to some degree, so they understand what you're saying there as well.
With regards to returns, the properties that you purchase - first, let me ask... It doesn't sound from your intro like you all raised capital for these deals from other investors. Did you, or do you own these guys outright?
Connor Gross: Nope. All of our own capital.
Slocomb Reed: Awesome. So that being the case, what is your targeted cash on cash? And is there a defined hold period, or do you have a targeted sale and IRR?
Connor Gross: So we haven't sold any properties yet. We don't necessarily go in with a targeted IRR today. I think that's something because we're probably going to be looking into some kind of future capital raising in the future, just thinking into next year, as we want to go and really expand that portfolio. But I think for us right now, the main criteria is what can we get that cash on cash to look like. And thankfully, we've had some pretty awesome numbers, or at least awesome to us, for the last four deals we've done. So everything that we target is at least in the 17% to 20% range on a cash on cash basis. And honestly, this is my whole point when it comes to the self-storage space - there's a lot of opportunity to actually go and get numbers like that, if not much, much higher.
For example, the first deal that we did, just to kind of throw out some numbers there... It was a weird story of how we found the deal; I found it through a wholesaler, and they had the contract left for another six or seven days; one of the previous buyers backed out, and we found it in a Facebook group... And basically, I was in Rhode Island with my partner at the time, and we decided, "Let's go and let's fly down to Dallas tomorrow and let's go and check out this property. This might be an opportunity to go and actually get our first deal done."
So we flew down, the guy wanted $400,000 for it; no time, obviously, to get any financing, but we had the cash in the bank... So we ended up closing on it. And I can get more into the psychology around the first deal and the closing of it, if you're interested, later on. But we basically closed on this property, $400,000 cash, and --
Slocomb Reed: How many units?
Connor Gross: This is the 68 unit facility, our first deal. So quite literally, we went in and looked at the market rent, looked at what was happening... Out of the 68 units, about 15 of them were unusable, because either they were owner-occupied, or they had deferred maintenance and busted up doors, etc. You have another 5 to 10 units that the owner is like "This is my buddy, I'm just gonna let them rent from me for free." And then the rest of them, if you look at all the market rents, the rent had not been touched for 15+ years. So we're looking at this thing - and this kind of goes back to the psychology of closing, where like "It's our first deal... We don't know, should we go into this?" And in hindsight, we should have done it on the spot, not even a question. But we ended up finally getting the confidence to close on it, and we basically grew the NOI of that property from doing about $3,500 a month to now where it's doing about $9,500 a month.
So it was everything from doubling to market rents, making more units available, marketing the facility better... Really just doing the hard, annoying work that the previous owner didn't want to do in order to go and fill that facility up at actual appropriate market pricing. And now, the nice part is we closed at 400k cash; this was in September of 2021. It was three months ago, in September of 2022, so it's been exactly a year... We got the bank to reappraise it, it appraised for 1.25 million, and we pulled out - I want to say it was a little over $500,000 on actual debt. So we got all of our money back, all of the CapEx back, and some, and we still have less than a 50% LTV on the property, while having the facility basically run itself.
Slocomb Reed: Those are fabulous numbers.
Break: [00:14:51.04]
Slocomb Reed: Connor, that property is outside of Dallas. It's 68 doors, grossing under 10k a month. You're in New York City. Are you operating that location remotely? What kind of boots on the ground do you have to have to operate a facility of that size remotely?
Connor Gross: Yeah, we just have someone that goes by and commits eight hours a week to us, and we pay them $15 an hour. So they basically go by and they're able to go and check on the units, do any of the tenant turnovers... So basically, let me take a step back... There's three stakeholders in the operations of the business. There's the call center, who handles pretty much all tenant-related inquiries, new tenant questions, things like that, and actually does the bookings themselves, too. There's our team, there's operations manager team, who basically facilitates things between the call center and our local property manager. And there's the local property manager, who once a week gets a report from us that says, "Hey, these [unintelligible 00:16:40.13] units we needed to have turned over. We need to go and do lock checks on these six units. And by the way, just go and sweep up the facility, check on these three or four things, and you're good to go." That's how we manage each of them so far, remotely. And I might be oversimplifying it in terms of how it might sound easy... It is a lot of work, but it allows us to not have to necessarily be in Dallas Fort Worth to manage some of these facilities.
Slocomb Reed: It sounds like it's a lot of work to get all of that set up, but it's fairly self sustaining as soon as you have all the pieces in place. You and your partner who own it together - how much of your time is involved in the operation of that property now?
Connor Gross: As of recent, virtually zero, because we just hired an operations manager on our core team to go and run at all. So very, very little. However, we do still just across the team do daily stand-ups to check in on different projects, and we also do weekly calls in terms of CapEx projects, budget approvals, things like that. So I'm still involved, but on like that specific property, it's not too much.
Slocomb Reed: Gotcha. Well, Connor, are you ready for the Best Ever lightning round?
Connor Gross: Let's do it.
Slocomb Reed: Awesome. What is the Best Ever book you've recently read?
Connor Gross: The top book - at least for me, I really liked it - was "100 million dollar offers" by Alex Hormozi. It's really just changed the way I kind of think about sales and marketing and how you want to go and position things. I'll be honest, not incredibly real estate-driven and real estate focused, but I think you can certainly take a lot of the principles there and apply it to how maybe you're making offers to owners, especially in this market, given that it seems like cash itself might not necessarily be an option for a lot of people who are buying properties; I think you get pretty persuasive with how likely it is that you can close, how creative you can get in terms of financing, all that stuff.
Slocomb Reed: What is your Best Ever way to get back?
Connor Gross: I think for me right now, where I find the most enjoyment of giving back, is with people who are two to three years beneath me in their journey. And I've only been doing this for a little over a year at this point... So even like somebody who's just getting started in their career, whether that's real estate ecommerce, or they just wanted to get involved in entrepreneurship in general, I'm always around to answer questions. Typically, I will say I don't get on many calls to answer a lot of questions, but an email is a guaranteed response to me, for sure; or text. So I definitely like to go in at least try to provide any information that I can to people who are earlier than me in their career.
Slocomb Reed: Nice. Connor, thus far in your self-storage investing, what's the biggest mistake you've made and the Best Ever lesson that resulted from it?
Connor Gross: I think part of this is managing local property managers as well. I think part of the biggest mistake that I've made is maybe hiring people, especially from a local property manager standpoint, who didn't exactly go and work out for the job, because I was too quick to screen them, and I didn't go and set them up for success based on the key performance indicators that I could have set for them.
So going forward, I know the big thing that we do now is we screen pretty aggressively on day one, especially for really anyone that we have be a part of our team. And on top of that, we tell them exactly what success looks like; for the property managers, success every single week looks like getting an email response that they received their boots on the ground checklist, that they've gone and completed each of those checklists, and done every single item on it. And for anyone else on the team, we'll have certain metrics that we want to go and set in place to let them know that they're doing a good job, which helps me understand if my employees are performing, and it helps them know if they're doing a good job in the grand scheme of the company.
Slocomb Reed: Yeah. And to add to that, Connor, literally everyone has a smartphone in their pocket, which means they have a high-definition camera. Just taking pictures of everything goes so far. I was dealing with contractors earlier this morning where I sent them the scope of work for a project with pictures of everything they needed to touch... And that way I can hold them accountable when I go back and I can say "I sent you all these photos. Have you touched all of these things? Have you picked up all of this trash?" And even little things, like I send someone into an apartment to do a quick apartment turn, add new GFIs in the kitchen... Not that you deal with GFIs or kitchens, but they can send me a picture of the old one and a picture of the new one, and show me, remotely -- I could be in New York City and my apartments could be in Texas... And just using before and after photos for everything that gets done; every walkthrough, every grass cut makes... It so much easier to manage those things. I'm not remote, but it means I don't have to be on site to see it. Connor, what is your Best Ever advice?
Connor Gross: I'm going to steal this from Gary Vaynerchuk, honestly, who I know people have made me strong opinions on... But his biggest advice is just "You will die." Three words, "You will die." That, for some reason, just always fires me up. Anytime I hear that -- I will have friends in my life or people that I surround myself with, who just aren't happy with what they're doing. Maybe they're upset because they're getting judged by someone, or they're not doing enough, and they think that they have to go in and be in a certain position in their life, because that's what's expected from them, from their friends, from their co-workers, from their parents or whoever. I just take so much comfort in the fact that knowing that 100 years from now nothing that any of us does matters. This might sound a little depressing to some people, but maybe motivational to others. So take it how you want. But just knowing that you have one life, you want to live it and do the stuff that brings you the most fulfillment and most energy; you should absolutely take advantage of everything you want to do, because at the end of the day, we're all gonna die. None of it matters. So have fun and do really cool stuff when you're here on Earth.
Slocomb Reed: Awesome. Last question, where can people get in touch with you?
Connor Gross: The two best spots, at least where I post the most content personally - one is on Twitter, it's just @c_gro. And then the other one is I have my own podcast. It's called "The next generation." We really just kind of interview people who are under the age of 40, sharing their journey as they kind of go and get involved in software, real estate, ecommerce, agency life, anything like that. And then also just brainstorm a bunch of ideas, where if I had all the unlimited free time in the world, I would go and start other businesses. So that's where you can reach me.
Slocomb Reed: Nice. Those links are in the show notes. Connor, thank you. Best Ever listeners, thank you as well for tuning in. If you've gained value from this conversation, please do subscribe to our show. Leave us a five-star review and share this episode with a friend who you know is interested in self-storage. Thank you, and have a Best Ever day.
Connor Gross: Thanks for having me on.
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