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From Wholesaling to Purchasing Value-Add Self-Storage with Fernando Angelucci

SHOW SUMMARY:

Fernando Angelucci is a real estate investor and the founder and president of Titan Wealth Group. He also leads the firm’s finance and acquisitions departments. He has built a massive portfolio of rental properties and self-storage units. Titan Wealth Group provides access to highly-vetted real estate secured investments and off-market acquisition opportunities primarily in the Greater Chicago MSA.

SHOW HIGHLIGHTS:

  • How he got introduced to real estate
  • On his first deal
  • What his wholesaling business looks like
  • On generating leads
  • Having an abundance mentality
  • Where they get their list
  • What list stacking is
  • His team
  • On running the leads
  • Switching into value-add self-storage
  • What value-add means
  • A deal they purchased
  • Diving into self-storage
  • Very low downside risk, very high ceiling for returns
  • Locating the land, developing it and putting the facility on it
  • Find the land and start building up
  • Adaptive reuse
  • Tax benefits of self-storage and how to maximize that

Quotes:

  • "If we give, give, give, essentially it starts coming back 10 folds."
  • "Partnering is one of the best things you can do because you spread the liability over multiple parties.”

RESOURCES AND LINKS FROM THIS SHOW:

SHOW TRANSCRIPT:

Larry: Welcome to the Brain Pick-A-Pro show live from Lake Wylie, South Carolina, I’m Larry Goins. Thank you guys so much for watching. I really, really appreciate it. As you know, this is the show that we bring you the best of the rest, right? We bring you movers, shakers, people who are doing it, who are in the trenches, having fun and making money and willing to share some of their successes with you. So, please like this. Please share this. Please tell your friends about it. Download it. And if you really, really enjoy it, please leave us some feedback. We really appreciate it. Whether you are watching the video or listening to the audio, please share some feedback, let us know how we are doing. We really appreciate that. We love it. We also have another show called BRAG (Be Rich and Generous). You can find it on Facebook live so you can visit LarryGoins.com, BRAGRadio.com and you can find out more about that but this is the show, Brain Pick-A-Pro.com where we interview the best of the rest and today is no exception. It’s a fellow Mastermind member and I interviewed a lot of people that I’m in Masterminds with because when you get to that level, you’re only dealing with people who know what they are doing, they got a track record and they have some valuable, valuable information to share. Like I said today is no different, good friend of mine, he knows what he is doing. He understands the business. He has even made the switch, right? The switch from residential over to self-storage. So, please give a good warm welcome to Fernando Angelucci. What’s going on buddy?

Fernando: Hey, Larry how you doing?

Larry: Man, I’m doing good. How about you?

Fernando: I’m doing real well. It’s finally starting to warmup here in Chicago a little bit so I can’t help but smile a little bit, you know.

Larry: I know. See, we can’t see you you’re hidden behind the microphone.

Fernando: Yeah.

Larry: That’s good. So, guys Fernando, he started out doing real estate-- you’re an engineer by trade, right?

Fernando: Correct, yeah. I graduated from University of Illinois with a Bioengineering Degree.

Larry: Wow. That’s amazing. And you’re working for a Fortune 50 company and then when you got to real estate bug, you read a book that got you into the real estate bug, right?

Fernando: Right. Yeah. When I was 16 years old, I read Rich Dad Poor Dad and at that point I realized that I was gonna become an entrepreneur and you know, the book uses real estate as an example of being an entrepreneur but I didn’t really know I was gonna go into real estate until I was about 19 or 20 years old.

Larry: Okay. That’s awesome, man. So, tell us about that. How did that transpire?

Fernando: Yeah. So, I read Rich Dad Poor Dad, it was always in the back of my mind. I started going throughout his entire series, he has you know, a lot of the basic level series and then he has his Rich Dad Advisor’s Series that it kinda gets a little bit more granular.

Larry: Right.

Fernando: When I was 19, I ran my first business in college. It was called College Works Painter, so they bring a mentor on, they’ll show you how to run a painting business and on the weekends, you take a bus back from your college to your hometown, start knocking on doors and booking paint works. So, it’s my first entry into managing people, employees.

Larry: Right.

Fernando: Getting sales together and from there on, I made good money but you know, I started reading a lot of books and doing a lot of research on very wealthy individuals and I noticed that they either made their money in real estate or they preserved their wealth in real estate and that’s what kinda got me to start looking at it very seriously. So, I started devouring books going to REIA meeting and going to trainings all throughout college and then by the time I graduated, I was in my 9-5 within that first year, I did my first wholesale transaction and then I kinda just kept going from there.

Larry: That’s awesome man. Tell us about that first wholesale transaction. You were how old at that time?

Fernando: Yeah. I was 22 going on 23. I think I got under the contract when I was 22 and then by the time I was 23, we sold it. It was actually with a fellow CG member. So, I was in the Des Moines, Iowa market at that time, you know, went through a bunch of deals that I just didn’t do right. I was just kinda trial by fire. Finally, locked up a deal at the right price but I didn’t have a buyer’s list really built up yet. So, I called Mark Lane who was kinda that prominent wholesaler in the Des Moines, Iowa market and he found the buyer for me. That was my very first deal.

Larry: That’s awesome. You did kind of a joint venture or co-wholesale deal with him?

Fernando: Yeah, exactly.

Larry: That’s awesome, man. How much did you make on that deal?

Fernando: I made 2500 bucks on that deal.

Larry: Even though it was only 2500 bucks, you were hooked were you?

Fernando: Yeah, because it was the proof of concept, you know, I was hustling for, I probably didn’t get my first wholesale deal until after about 6 months of trying. So, that was the deal that said, okay, you find tune to everything. This is the real way to make money and I knew it wasn’t gonna be the end to all deal, I knew wholesaling was kinda the transition to build up capital to get into the real wealth creation which is passive income.

Larry: Right. Right. Now, what is your wholesale business look like today?

Fernando: Yeah, so it grew kinda too quickly for us. We are in a lot of different markets. We decided to focus down. So, now we are only in the Chicago market. That’s where I live now. We are doing 35 to 50 transactions a year. The average wholesale is gonna be between 16 and $40,000. So, we only focus on the deals that have a larger spread just for the sake of time because we are using that wholesaling business as a way to build capital into other passive income vehicles.

Larry: Sweet. Sweet. So, your average deal is 16 to 40,000, you’re doing about 35 to 50 of them a year and how do you generate the leads for those deals?

Fernando: So, about 30% of our deal just come from referrals. So, we’ve been in this market for about 4 plus years now and if anybody has ever heard maybe talking to any other podcast or maybe met me in person, I subscribed to the abundance mentality style of doing business and that has turned out to be, you know, one of the greatest things that has happened to us where we found as if we give, give, give, give, eventually it starts coming back 10 folds. So, 30% of our deal is coming from the attorneys we work with, title agents, other wholesalers that, you know, they called me and said, hey, Fernando can I buy you a beer, teach me how to do your business and you know, 6 months later they find the deal that they can’t move, they call me to help them sell it. Our cash buyers, you know, sometimes they have deals where they make 5 offers thinking 1 is gonna get accepted and then 3 get accepted and they don’t know what to do with the other 2 contracts. I say, hey, let’s make money off those deals. Don’t just cancel contract because you don’t have the rehab funds. So, we move deals like that and then the other 60-ish percent, it comes from direct mail. That’s our only form of marketing right now.

Larry: Okay, cool. How many postcards do you send out in a month?

Fernando: Yeah, we actually we moved away from the postcards because conversion rates were a lot lower. We do full-sized letters and we will send it anywhere when we are doing very hyper targeted campaigns that are, you know, very small but high impact, you’re looking at about 2500 letters a week. The highest we’ve ever gone on last drill down campaign was close to 6,000 letters a week. But we found that doing list stackingmaking sure that there is multiple triggers of motivation and maybe they are on probate list and it’s a vacant house and they’re out of state owner. Those deals have a much higher conversion rate as well as the higher profitability per deal.

Larry: Now, where do you get your list from?

Fernando: Yeah. So, there’s a few different areas. One of the list that we get is from a website called Public-Record.com. They have an API that pulls from all of the northern counties in Illinois directly from the County Court House. So, we get you know, all of the probate, anything that has to go through the court system, we get that from that list and then the rest are leads we get through a local list provider here in Chicago called Exact Data.

Larry: Publish-Record.com?

Fernando: Public-Record, correct.

Larry: That’s cool. That is good. That is good.

Fernando: Yeah.

Larry: So, would you mind explaining and we’re gonna get really into the self-storage in a minute, but would you mind explaining what list stacking is to people that may not have heard that term before?

Fernando: Yeah. So, we found that when you add multiple levels of motivation, the list that we are getting were much more qualified. So, we were getting a lower number of calls but the response rate was higher and the call to appointment and appointment to contract ratios were much higher as well. So, for example, one list that we always do is we always start with absentee owners. Those were usually the easiest ones to close just because they are not around. It’s a lot harder for them. Sometimes the property comes a burden for them. From that point on then we start looking at other additional factors. Is the property vacant? Maybe that’s an additional, you know, it’s not income producing at this point. Did the property show up on a probate list? So, maybe the reason they are an absentee owner is because someone in their family passed away and left this property for them, they just found out about it and now they have to try to either dispose it or get it up and running while not being local and that’s very difficult for people that have not perfected a system of out of state investing. So, you know, those 3 criteria on top, we are stacking those 3 list and only sending to the people that hit all those criteria.

Larry: Right. Right. And that’s really good. There’s some websites out there, there’s a guy in CG (Collective Genius) our Mastermind that does that.

Fernando: Right.

Larry: Yeah. I’m sure that’s probably who you use.

Fernando: Yeah. So, there’s a few guys. Chris Richter, he is the Audantic list. We actually have a call with him this week to start using his list and then we also just using, you know, basic Excel functions. We will just pull the Excel list and then stack them ourselves. I know there’s some softwares for the people out there that are not as tech savvy. There’s a property list manager that you can use to stack list for you as well and I think it’s super affordable.

Larry: Yeah, Property List Manager. That was the one I was thinking of.

Fernando: Yeah, mm-hmm.

Larry: Yeah. But we actually use the Audantic list and just so everybody knows, you got to buy a minimum of 25,000, right? And it’s a very expensive list. We actually we love the list. I added some of my own special criteria. We personally mail out 25,000 and we recently increased that to 37,500. So, that first drop hits next week.

Fernando: Nice.

Larry: Yeah. So, we’re really happy with the list and we’re averaging 15 to $30,000 wholesale fees on it.

Fernando: That’s awesome. Now, you’re sending out 30,000 a week or per month?

Larry: No. We’re sending out 25,000 a month. 25,000 a month, we break it into 4 weeks, but we just increased it to 37,500 another half again as much, added another 12,500 and then that will be divided by 4 and we will mail that out.

Fernando: Got you.

Larry: And the cool thing about Audantic, those of you listening and watching, is they’ll send you an updated list every quarter. It’s been updated and they have their own list stacking criteria that they do for you.

Fernando: Yeah.

Larry: So, what is your team look like?

Fernando: Yeah. We have a very lean team. So, it’s acquisitions. So underneath the visionary integrator which is me and my partner, we have acquisitions. We have lead manager and then we have a transaction coordinator. That’s it.

Larry: That’s good. Do you run all the leads in-houseor do you do it over the phone?

Fernando: We do everything in-house. So, we used to use one of this third party call answering services. We found that the conversions were not as high. It allowed us to do a higher volume but it’s hard when so much is not in the local market to build that rapport. So, now we have guys that answer the phone and so much is, hey, you know, I’m in this school district and they can say, oh, you know I know that school district. I go to the so-and-soshop, you know, I get the dinner at X place right around the corner. It automatically builds rapport. It’s very hard for people to do that when you’re outside of the market.

Larry: That’s so true. That is so true. Do you guys run the appointments in-house? Do you go see the seller or go see the property, meet the seller or do you buy then over the phone?

Fernando: Yeah. So, we have done both to test them out and what we found is the best thing to do is first qualify the lead and rate it on a scale of 1 to 4. You know, 1 being hot super urgent motivation where whatever the acquisition manager is doing, they have to drop everything they are doing and go to the house immediately. That is somebody that shows you know multiple signs of motivation. They don’t have any money. They need to sell immediately. Maybe they have 2 payments, this house and another house and they are calling every letter that’s on their desk all the way down to someone that is extremely cold lead where they want something like 200% the market value of their property. They say they don’t care when they sell, it’s not urgent for them. They are more of a tire kicker. So, the tire kickers it doesn’t make sense to really meet with them unless we have the time. So, those people are the ones that they get put you know, we will send out a range of an offer over the phone to see if something that works and if it doesn’t work then we kinda just put them on a followup campaign until maybe we can meet to them. But the ones that are rated 1 and 2 value leads, those guys we need to get in front of them, build rapport, put a face to the name so they’ll know who we are, live behind our sell credibility packagesand we try to get them to sign the contract at the kitchen table.

Larry: There you go. That’s awesome. That’s really good.

Fernando: Yeah.

Larry: So, let me ask you this question Fernando, I mean a few years ago you made the switch. Now, you still have a wholesaling business, it’s thriving, it’s getting money, generating cash I mean 16 to 40, 50,000 dollars, come on, but a few years ago you made a switch and started purchasing what you call value-added self-storage. Tell us a little bit about that.

Fernando: Yeah. So, to back up a little bit, Illinois is an extremely tenant friendly state and then even friendlier is Cook County or the City of Chicago where we primarily do maybe 50% to 60% of our business. What that translates to is extremely long eviction times, rules that almost counterintuitive where the investor is being penalized for trying to get someone out of their property that is stealing from them basically, right? So, that was a huge issue for us. So, I went through the entire set of investing kinda options. I went from wholesaling, immediately started buying apartment building for rentals, start flipping properties. And what I found with the apartment rental is we had a few really bad evictions where we had an inherited tenants from the previous seller because this is a tenant’s right state so you can’t kick them out as soon as you buy the property. You have to let them work out their lease. We found out that they weren’t paying. We had to go to the entire process that lasted 13 months just to get one of the tenants out. You know, that’s a lot and not to mention the amount of damage they cost afterwards which we couldn’t go after them for because they didn’t basically have no money anyway so it would just have been wasted legal fees after the eviction. That really changed something in me. So, it was 3 or 4 years ago I was down in Indianapolis at the REIA expo, you know, I was peaking my head through different rooms because my session had let out early and all of a sudden, I peak my head into Scott Myers’ room which is also a fellow CG member and I heard the word triple digit cash-on-cash returns. So, you know, my ears perked up and I sat down front row. He started going through the entire presentation, showing, you know, how you can get phenomenal leverage, you know, lien law supposed to tenant rights law and I was hooked. I really was hooked. And so at that point I got as much education as I could. Started joining Masterminds and mentorship programs. Wholesaled the first 2 facilities we found to just kinda prove the concept to us that we are running the numbers correctly if a buyer would buy a deal off of us with a spread on top that we are doing pretty good on the negotiations and the underwriting and then eventually started purchasing existing facilities and by value addI mean the self-storage space has a lot of opportunity because it is an extremely fragmented market. What I mean by that is of all roughly 52,000 self-storage facilities in the United States, only 18% to 19% of those facilities are owned by the major 6 publicly traded REITS then the next largest hundred operators they only control 9% of the available inventory out there. That means that there are 73% of facilities that are owned by what I call mom and pop operators. They own 2 or less facilities. They usually run it as a secondary source of income and not as a primary business. They are extremely inefficient in their management processes and they are not using technology to really maximize their ROI. So, these are the guys that we are mailing to just like we would mail to our wholesale leads, our residential leads, we are mailing to them, you know, we are trying to approach them and build rapport and then try to get them to sell us a property for a price that makes sense for them and for us. So, here’s an example of a deal that we purchased 7 or 8 months ago, we found this facility actually through a broker and it was 100% occupancy which in self-storage is a red flag. You never really want to be above 90% to 92% because it means you are not pushing rents high enough. If a facility that has 90% to 92% occupancy will have a higher NOI than a facility at 100% occupancy because of the way the number of units and how you can really push rents. So that was red flag number 1. Red flag number 2, it had basically no marketing profile. There is no online presence. It’s very difficult to find the facility. The tenants were only able to pay with check or cash. There is no way to pay online. When we started going through the rent rules, we realized that majority of the units where anywhere between 20% to 40% below market on the rents and there were tenants that have been renting for 13 to 14 years. We found out that the owner, he was the original owner, he built the facility 30 years ago and just wanted to get out. So, we saw a really great opportunity. We purchased it at just under a million dollars, so it’s 133 unit, 16,000 square feet of net rentable space and we bought it about 7.5 to 7.75 cap rate. So, regular purchase, we are super excited about, cap rates in those ranges but then once we started adding our management efficiency, creating a marketing profile, adding an online portal for them to pay with, increasing rents across boards on average of 26%, severely pushed up the NOI and now the evaluation 8 or 9 months later is close to 1.4 to 1.5 million. We added an additional half a million dollars in equity just by doing a few simple tasks to the facility.

Larry: That’s awesome man. I love it. I love it. You know, that’s the kind of deal that it’s not something where, you know, man I can rehab this, I can add more units, I can do this. I mean you found a sleeper. That’s what I call, a sleeper, you know, I mean it was 100% occupancy which was a red flag, you go in there and you beef up the marketing, increase rents and make it more efficient. You know, there are so many things you can do, get an online presence and now you are gonna steadily increase the rents every year and who knows next year you might have another $400,000 in value.

Fernando: Yeah. So, this facility has a lot of factors on why I chose to start doing self-storage over multifamily and residential rental. So, we already talked about the eviction versus lien law. With lien law if they don’t pay the rent within 30- to 45-day timeline, I’ll auction off their materials, whatever they are storing in that facility, and I’ll have a tenant the same day. You know, my turn is just me sweeping out the concrete path. I don’t have to paint, I don’t have to clean the carpets. The next thing is that the leverage that is available to us is fantastic. So, on that facility, we got a 30-year fix fully amortized commercial loan. That means the bank was holding this loan on their own portfolio because they believed in how safe these loans are. It was a 20% down loan at 5.25% interest. I mean talk about a slam dunk deal for a commercial property, right? So, once I started looking at kinda diving deeper into why banks were chasing these types of loans, I found a lot of amazing data and statistics out there. So, just to name a few, it is an extremely recession tolerant asset. When you look between 2007 and 2009, really the heart of the recession, it affected our capital market as well as real estate values pretty substantially. So, there was the National Association of REITS study were between 2007 and 2009, the S&P 500 lost 22% in value. Residential multifamily, they lost about 6.5% to 7% which on a REIT level that’s a lot, but I know a lot of investments that lost a lot more than that, right? Self-storage only dropped 3.8%. Now, one of the reasons we think for this is when you look at a down market and people are downsizing, they have a bunch of valuables that have sentimental value to them, what are they gonna with those things? You’re not gonna throw away the paintings that your kids made for you when they are 2, 3, 4 years old. You’re gonna store those if you don’t have that space for it. So, that’s one of the things that we really like. When we start looking at defaults across bankbooks, we looked at a Wells Fargo Security study as well as InTech Solutions and we found that self-storage had the lowest default rate across all asset classes. You looked at average annual default. When you looked at self-storage, it was about 1.5% when they came to the loses that were experienced on those defaults. The average across the bank’s portfolio was about 4.8% and this is across 1998 to 2017. Residential multifamily had right around the average, around 4.3% to 4.5% then when you look at the actual loses that were experienced, it was the same thing. The second thing that I looked at as well is the average in return. Usually, people assumed rightfully so that if something has lower downside risk it usually means it also has a lower return, right? Risk versus reward. What we find with self-storage that is not true. So, between 1994 and 2017, the average annual return of the S&P 500 was 7.54%. In that same amount of time, this is the average annual return, right? So including the recession numbers. Multifamily returned about 13.3%, residential return about 13.4%, self-storage returned 17.43%. Now that 4% spread does not seem like a lot but when you look at how compounding interest and compounding investments work, so that 4% difference, if you would have it invested $100,000 in 1994 into the S&P 500, in 2017 it would be worth a little over half a million dollars. That same 100,000 invested in residential and apartment buildings would be worth 1.7 to 1.8 million dollars in 2017. That 100,000 dollars invested in self-storage, in 2017 it would be worth 4.0 to 6 million dollars. So, almost a little over double what residential and apartment’s return just because there’s an additional 4% compounding interest.

Larry: No wonder you love self-storage.

Fernando: Yeah. Exactly. So, very low downside risk, very high ceiling for returns.

Larry: That’s awesome. That’s really good man. I love that. And you can get 30-year fixed rate, no balloon, no call seriously?

Fernando: Yeah. So, we have a bank that’s based in the Midwest. It’s actually owned by a grocery store and they love self-storage on their portfolio because it spreads kind of the risk across the entire portfolio. So, they are willing to hold those loans for the entire term and they said anywhere we have grocery stores, there’s about 8 states now, it’s gonna be 9 states at the end of this year. They said, we will give you this type of loan on any existing facilities.

Larry: Good. Good. What kind of rates do they charge? Just the ballpark?

Fernando: Yeah. So, that loan for self-storage was a 5.25% loan. We closed it about 7 or 8 months ago and there was just 1-point at closing, 1.0 origination.

Larry: Wow. That’s awesome man. I love it.

Fernando: Yeah.

Larry: So, where are you going from here? What’s next? What are you working on?

Fernando: Yeah. So, finding these value-added facilities is getting more difficult. The reason why is as soon as money magazine, Forbes started picking up self-storage, it started to become sexy, right? The people that were in the industry since, you know, the big boom of self-storage in the mid to late 80s, they already knew how sexy it was. But the outside world they saw these boxes especially this first generation facilities that they don’t look really jazzy, you know, they didn’t think it was a very great asset but as soon as these larger media outlets started to cover how the level of cash flow that these things can spit out, everybody wants to get involved. And because it doesn’t take as much management as say an apartment building of similar evaluation or a single family home portfolio, a lot of people are getting in and actually having success even though they have a moderate level of experience. So, what we started doing now is actually building these self-storage facilities from the ground up. And the long-term play is we are actually gonna follow in Life Storage’s footsteps. So, we will start building up a large portfolio and then within 10 to 12 years, we’re gonna IPO and move it to Wall Street money.

Larry: Wow. That’s awesome. So, right now you’re raising some money. Is that what’s your doing right now, raising money for your deals?

Fernando: Yeah. So, right now we have the capacity to do about 5 of these ground-up developments per year. They are pretty large, so that York Self-Storage Facility I was talking was a million dollar facility only 16,000 square feet. So, it is a pretty small facility when you look at what we are doing now. The ones that we are building now are usually 800 plus units anywhere between 80,000 to 100,000 net rentable square feet. These are the assets that the REITS really love that people really like investing in because you can move a lot of capital in one deal. The cash flows are fantastic. We are building one in Aurora, Illinois right now that once it’s stabilized that net operating income on it will be just jive a million dollars a year. Now that facility I think we’re probably gonna sell it to a REIT. So, there’s 2 strategies you can use. The REITS right now are they are cash flowing so much that they literally cannot spend their cash fast enough, you know, in their quarterly meet with their investors, they’re actually getting questions like hey why are you guys sitting out so much cash. It’s been eroded to inflation and the response is also same. We can’t build or buy these facilities fast enough with the amount of cash flow that our existing portfolio is spitting out. So, what they are starting to do now is to look at these intermediary guys like us that we build these large great facilities and then we sell it to them either at fully stabilized which is 90% occupancy in the industry or a lot of them are now just to get ahead of the curve and beat out other offers. We are starting to make offers as certificate of occupancy based on 30-year projected net operating income.

Larry: Wow. That’s good. That’s good. So, what you are doing now is locating the land and developing it and putting the facility on that?

Fernando: Correct. Yes. So, there’s 2 strategies that we employ on this side of the business. One of them is to find the land and to start building up. Another one which is kinda unique because of the time in the market we are in and how different asset classes are functioning is what we call adaptive reuse. So, an adaptive reuse deal is like one of these, you know, now in the day of Amazon, a lot of these big buck stores starting to shut down and they’re leaving behind these large buildings that are already climate controlled, humidity controlled, dust controlled depending on what part of the market you are in. So, you can get a large, you know, hundred thousand square foot building let’s say a Best Buy or Circuit City or you know, one of these other large retailers we are in and half of the deals already done for you. These stores are usually located in the high traffic areas and near dense residential because it has a target that they are trying to reach just like us in self-storage and then instead of having to build an entire building from scratch, we just have to go inside and then just section it off for self-storage. Maybe even build a mezzanine level so a 2-storey facility inside one of these buildings because the clear heights of the ceilings are high enough to do so. That saves us a lot of cost off on the land and on the structure of the building itself.

Larry: That’s huge man. I love that. Now, you have your climate controlled facility which you can get more rent for.

Fernando: Right. Exactly.

Larry: So, I remember seeing one in Florida. It was that kind of and I don’t know if they even still do this or not I don’t know I haven’t seen them like this since but I saw one in Florida one time it was a huge open building and inside was nothing more than chain-link fence units.

Fernando: Yeah.

Larry: With the gate that you put a padlock on it. Anybody could look in and as you walk by you could see what’s in everybody’s unit because it is behind a chain-link fence with a roof on it, you know, which is chain-link fence and all four walls and the adjoining walls are just one fence. So, you walk in to your unit, you know, open up the gate, walk into your unit and put all your stuff, get all your stuff but you can see what’s everybody’s unit. Do you see anymore of those or is that something that was just a long time ago?

Fernando: Yeah. I still see facilities like that. We do ours kinda to the T. Ours look like a third generation facility, corrugated steel dividers. You have roll up doors. There’s no way to access or even see what other people have in their units. It’s clean. It looks more professional. I have seen those types of deals and I’ve even work with some investors where that was their plan. It’s kinda like the lower cost version of getting into the space, you know, you save a lot more money doing like that. But again it always comes down to because self-storage not only is real estate but it is also a business, right? A qualified for SBA financing. You got to treat it as such and you have to kinda look at it from the costumer’s point of view in their eyes. What do they want to see? Do they wanna have all their stuff exposed so people can kinda see what they are storing? I mean some people are fine with that. Some people are not, right?

Larry: Right. Right. That’s good. That’s good. So, tell us a little bit about the tax benefits of self-storage because, you know, you can depreciate, you have the right to sold all that stuff. Tell us a little bit about tax benefits of self-storage and how to maximize that.

Fernando: Man, there are some self-storages, one of the areas where it really stocks up with a lot of the tax advantages that are offered in real estate and especially now with this most recent Tax and Jobs Act. So one of the things that I love to do is I like to find land or find buildings that are already in these existing opportunity zones. These opportunity zones, these are usually areas that the local municipalities wanna spur some development but that’s not always the case. Everybody got a friend somewhere and are able to kinda you know, finagle where these opportunity zones are. The nice thing about the opportunity zone is that you can invest any type of capital gains, not just you know the thing that the opportunity zones kinda took the place of where these 1031 Exchanges where you do like kind real estate into real estate. The reason why opportunity zones are so huge for real estate investors is that you can start pulling on multiple different sources of capital. For example, somebody has a stock portfolio, it doubles in this lifetime. They decided they wanna exit now and they have a million dollars’ worth of capital gains qualified income or profit. What they can do is they can take that million dollars, put it into an opportunity zone and self-storage facility that is located one of these zones and they can delay the payment of that capital gains tax up to December 31, 2026 I believe. Now, in addition, you get a step up in basis in two separate periods. So, the very first period is after you held that asset for 5 years, that million dollar depreciable basis, it gets step up 10%. So, now you’re only paying taxes on 900,000. Then if you hold it for an additional 2 years at the 7-year mark, you are now getting an additional 5% step up in basis. Now, you’re paying tax only on that 850,000. The next crazy thing that works at these opportunity zones is if you invest that 8 million dollars and then that million dollars of capital gains profit that you invested turns into 2 million dollars, if you hold that asset in that opportunity zone for 10 years that gain of a million on top of your original million, that’s tax free. That’s huge, right? Another thing that we stack with this is the bonus depreciation. So, this is another change that was made in that Tax and Job Acts where you can come in and you can take up to 100% bonus depreciation on the facility and the materials to build it. And then you additionally get your standard deduction over the period of time depending on what timelines you scale it through. So one of the things that we do to maximize this benefit is we do a cost segregation study. Its cost segregation study, the engineer comes in, we actually have one in CG that does this, it’s [Inaudible] [34:006]. He comes in he breaks the part everything on this facility. He takes out the land cost then he starts looking at okay, you know, the roll up doors, those will depreciate faster than say the steel I-beams that are in between each of the units. The corrugated steel that’s gonna depreciated faster. The doors are gonna depreciate faster. Literally to the T every little item in that facility and then you can start increasing somebody’s depreciation schedules to 5, 7, 10 years as opposed to taking the, I believe what is it, the 29 or 37.5.

Larry: Yeah. 37.5 or 39.5%.

Fernando: Yeah. When you could take that much depreciation, all of a sudden your cash flow is going through the roof.

Larry: Man, this is huge. And I was only really talking about depreciation. I thought you might talk about cost seg or something but man you talked about the bonus depreciation and also the opportunity zone. So, I’m guessing you’re looking for big commercial buildings within opportunity zones to do the adaptive reuse model.

Fernando: Yeah. And we are even looking for land in these areas, right? So, there’s a little bit of a caveat to this opportunity zones which you have to improve the property. Now, there isn’t a lot of really finite guidance on this. So, we’ve been looking at case law and our tax attorneys have been studying this and they say, hey, you should be fine if you add 100% to the basis. So what does that mean? It is great for ground-up developments and adaptive reuse because as long as you add 100%, here’s an example, we just bought, we are doing a ground-up development in a rural Illinois, we bought the land for $300,000 and we are gonna build an 8.4-million dollar facility on top of the land. That’s well over 100% increase in the basis, right? So, that will qualify for one of these opportunity zone real caveat.

Larry: It is in the opportunity zone, right?

Fernando: Correct. We bought about 4.5 acres in an opportunity zone.

Larry: That’s awesome. That is huge. I love it. So, somebody that wants to go down this road with you, what do they do? I mean what kind of opportunities do you offer for people who like, hey, I got some gains in the stock market, you know and I’m worried it’s gonna go back down, I wanna play, I wanna do this, I wanna get the tax benefits, I wanna defer it, I want the bonus depreciation. You know, I like what I’m hearing. What do you offer to people who are, you know, interested in doing it?

Fernando: Yeah. So, I always tell people just to reach out to me you know, I give away my cellphone on all the podcast that I get on, 630-408-8090, shoot me a text or give me a call and the very first conversation which we will have are what are your goals? Maybe they might not align with the type of opportunities we have. Are you looking to get cash in and out quickly? Are you looking to reduce your taxable income? Are you looking for a cash flow? Are you looking for wealth preservation? That’s the very first thing we should talk about. If we have something that works that way, I usually tell people, you know, sit off on the sideline for a little bit and kind of pretend like you’re in a deal with me. When I’m sending out deals, just follow along, how is it going once we get the raise done? How’s the construction time going? Look at all the photos that were posted. Look at the numbers. Once we get you know, certificate, maybe drive by the facility if you’re in the local market and talk to my investors that I have on my deals currently. That’s usually the best way to do it. So, you can kinda learn the space without having any capital invested and then once you feel comfortable, you know, give me a call and we will see what we can do.

Larry: That sounds good man. That sounds awesome. Man, this has been just a wealth of information. I really appreciate everything you’ve been sharing. You know, I wanna reach out to you as well, you know, I mean like I have got a building, this building right here, I’ve got it for sale and I gotta do something with the money. I don’t wanna 1031, but I was thinking about maybe I’ll put it into an opportunity fund.

Fernando: Yeah.

Larry: You know, community zone fund or something like that, I don’t know. You know, I was gonna seller finance it but I’ve got a lot of equity and got a lot of gain on it.

Fernando: Yeah.

Larry: Hey, you know, I might do something else. So, you know, man I wanna talk to you about some of that stuff too because I really like what I’ve heard. Maybe I can find you one of those adaptive reuse buildings down here.

Fernando: That would be huge. Yeah. We are always, you know, looking back and we probably haven’t done any deals on our own, the way that we got so big so quickly was by partnering with people. I think partnering is one of the best things you can do because you spread the liability over multiple parties and then you know, I’m one of those people that subscribe to 2 heads are better than one and usually the sum is greater than the parts. Usually when you have 2 or 3 people together, you have the mental productivity of 4 or 5 people working.

Larry: Right.

Fernando: Everybody comes from a different background, they have different experiences, so all the deals that we’ve done almost, you know, the past 100 or so deals that we’ve done up to this point has all been done through partnering.

Larry: That’s awesome man. I love it.

Fernando: Yeah.

Larry: Well, I really appreciate you being on. It’s been a lot of good information, a very educational and I’ve learned a lot. I got a page full of notes right here too. So, thanks man. I appreciate that. It’s a good stuff.

Fernando: Yeah. And if you or any of your listeners just wanna get a little bit more in depth, I actually puts together a presentation that I built for a few of my partners that were only multifamily investors and they call me and said Fernando, I want you to put together quick PowerPoint presentation stating why you move into self-storage and why it’s a better asset than multifamily. So, I have something like that on the ready, I can send it to people to kind give the background of where the self-storage industry was, where it is today, the advantages that it offers, tax advantages and also some other things that we didn’t cover like the sticky factor and reactive pricing models and ancillary profit centers, that’s probably the easiest thing. There’s a lot of really great resources online. InSight Self-Storage, it’s a national association. They have a bunch of great materials there and then there is Self-Storage Association (SSA). Their website also has plenty of information for anybody looking just to get familiarize with the asset itself.

Larry: That’s really good man. So, if somebody wanted to get that PowerPoint from you, what would they do?

Fernando: Yeah. Just give me a call or you can shoot me an email. My email is info@titanwealthgroup.com. You can also go to our website TitanWealthGroup.com and request the information or just reach out to us, I know nowadays a lot of people like to use social media, you can reach out to us on any of the social media platforms, Facebook, Twitter, LinkedIn, BiggerPockets, you know, just type in Titan Wealth Group or Fernando Angelucci and you’ll be able to find a way to contact us.

Larry: Awesome man. Thank you so much. I really appreciate it. I wanna get a copy of that too. So, shoot me.

Fernando: Yeah. I’ll send it over.

Larry: That’s awesome. That sounds good man. Thank you so much. I really appreciate it. Everybody this has been a great, great training podcast. There’s so much content, so much information. Thank you guys so much for watching and listening. Please share, please follow us and please give us some feedback, make some comments, we really appreciate that. And with that, thank you guys so much. We will see you on the next show. Thanks a lot.

Fernando: Thanks Larry.

Larry: All right, take care.