Confessions of a Multifamily Deal Sponsor

I have to admit… this is not an easy article to write.

(After all, I wrote a book called The Perfect Investment, where I extolled the virtues of investing in multifamily real estate.)

This isn’t easy. But it’s necessary. 

My company, Wellings Capital, was formed a few years ago to take advantage of the wonderful demographic shifts underlying the growth in multifamily housing. Apartments have been booming since the middle of the recession, and my partner and I dedicated our lives to making the most of this opportunity and sharing it with others.

Our last multifamily project was oversubscribed with $3.8 million from investors in a matter of days. We love multifamily, and our investors do, too.

But overall, we have failed our investors.

I love talking with investors. I continue to talk with many of them weekly, and one of the questions that I haven’t been able to answer is,

“When will you have another deal for us to invest in?”

I have had to say, “I don’t know” more times than I can count.

When my partners and I started Wellings Capital, we made a commitment to ourselves, our families, and our investors that we would never knowingly overpay for an apartment asset just to get a deal.

We are all in our mid-50’s and we’ve made a lot of money in our careers. But we’ve lost money, too. We know what it’s like to be on both sides of the table, as a sponsor and an investor.

Thankfully we’ve made a lot more than we’ve lost. But we never want to be in a position of apologizing… to our investors… our families… and ourselves… for up to a decade… for a deal we overpaid for.

The multifamily sector is overheated and sponsors are overpaying for deals on a regular basis.

Wait…why would anyone overpay for a multifamily deal? Why are other people buying deals that we are passing up?

We don’t know most of them, but here are some potential reasons:

  • They have tax deferred 1031 exchange funds and they would rather overpay than pay Uncle Sam.
  • They have international investors who will accept a very low return just for the perceived benefit of being in the US dollar rather than their currency.
  • Institutional investors are looking at smaller deals and smaller markets and they are willing to live with much lower steady returns.
  • Operators are ignoring low cash flow and counting on appreciation to fix everything. (Didn’t we all learn how well that didn’t work in the Great Recession?)
  • Less experienced syndicators with access to funds are mistakenly overpaying.
  • Less than scrupulous operators are doing deals to make the acquisition fees.

However, I want to be clear that not everyone who is buying apartments is overpaying… or inexperienced… or unscrupulous!  

I’m not saying that at all. (Some of them just have better access to off-market deals than us. But I will say that we are looking at off-market deals, too, and most of them are just as overpriced as the marketed deals.)

I am saying that we have looked at over 180 deals since January and though we’ve made offers, we’ve come up short every time. Some of these deals sell for a few million above what we think is prudent.

So where is my company going from here?

Like I said, it’s hard for me, as a multifamily syndicator, to say this…

I’ve been studying Warren Buffett and I’m writing a book on applying his wisdom to the real estate arena. One of Buffett’s keys to success is investing in great teams. He invests in top teams with a proven product in a growing market.

By fueling them with more equity, Buffett gives them wings to fly.

We still believe in multifamily. But only at the right price.

And I still believe everything I wrote in my book. But multifamily opportunities are few and far between at this time.

So Wellings Capital has spent the past quarter researching opportunities outside multifamily. Like Buffett, we are looking for great teams with proven track records.

We’ve located a profitable, risk-averse asset class. And we’ve vetted a team that has been operating in this asset class for decades. Now we want to share it with you, our registered investors, before we tell the world.

We have decided to invest with a leading self-storage operator.

Why Self-Storage?

  • There are over 53,000 self-storage facilities in the US (about the number of Subways, McDonalds, and Starbucks combined), and about 40,000 are owned by independent operators. These mom & pop owners rarely have the knowledge or team to maximize income and value. So there are a significant number of profitable deals available for the right operator.
  • Self-storage is somewhat price resistant. If we raise the rent 6% on an $1,000 apartment, a tenant may leave for the $60 increase. But raise the rent 6% on a $100 storage unit, and most tenants will not rent a truck, gather friends, and waste a Saturday to move down the street… to save $6.
  • Self-storage did surprisingly well (like apartments) during the recession. When people downsized or lost their homes, many of them rented self-storage units. The relatively small cost to store stuff played a role here as well. Many who planned to store for a few months are still storing their stuff today. The monthly ding on their credit cards is often forgotten.

How did we choose an operator?

There are literally thousands of small operators, and only one operator in the nation (Public Storage) has over 2% of the market (they have 7%). Like I said, very fragmented.

I’ve concluded that it is not that hard to operate a mediocre self-storage facility. But it is very hard, and somewhat complex, to run a world class one.

We have teamed up with someone who does just that. Here’s what was important to us as we made this decision…

  • We were looking for someone with decades of experience and a strong track record.
  • We wanted an operator whose team has a lot of depth. A full accounting department, automated processes, great operations, etc.
  • The profitability of storage units is very high on average. We wanted a firm with profitability that exceeds industry norms. Using smart leverage, value-add strategies, and online marketing.
  • I wanted the opportunity to talk with several investors who have invested with the company for a number of full cycles (buy – operate – refinance – sell).
  • I was looking for someone who has an inside track on acquisitions. With the difficulties my company has experienced in this arena, I am looking for someone with a consistent stream of deal flow. Someone who knows how to buy right.
  • I wanted an operator with a program that takes advantage of the various upsides available in this business. Adding U-Haul, point-of-sale opportunities (like boxes and locks), selling insurance, and more.
  • I was hoping to locate a company with great debt available, who is in need of equity to grow their portfolio.
  • I wanted someone who shares the same values, mindset, and conservative underwriting philosophies that we hold dear.

So what’s next for us?

I’ve made two visits to the CEO of a great company, and I’m going to visit another one this week. As I write this, I’m on the way to check out a new self-storage acquisition that one of them is doing in a nearby state. (Don’t worry – my wife is driving.)

My firm is going to invest about $2 million in this upcoming project, and we are inviting our accredited investors to join us.

Wait…what about our multifamily investors…and my book…my reputation?

I know that many of our investors are focused specifically on multifamily, and that’s okay. We are still looking for multifamily deals every week. We’re looking at a multifamily asset now in fact.

I feel that self-storage is the next step for our firm, and is an intelligent response to the current state of the tight multifamily market. If you’ve been “storing up cash” for your next investment, you may want to consider doing this, too.

If you’re an accredited investor and you want to discuss future self-storage opportunities, please schedule a time we can talk. Here is a link to my calendar.

The Wellings Capital Team is excited about our next steps, and I think many of you will be as well. Please send along any questions via email or schedule a call to catch up.


Paul Moore, Managing Principal

Comments 4

  1. Very true. MFH has very defined lending paths and property management companies that will do a good job.

    HOWEVER this makes the barrier too low for operators to get into. Too many get rich quick operators who have a couple rentals starting in 2014-2016 think they can go run a 60+ unit is making the Cap rate go lower than historical averages and less than other asset classes that have been traditionally lower than MFH.

    1. Post

      That is absolutely correct, Lane and very insightful. I see 7 or 8 reasons MF is over-heated, and that is one of the major ones. Thanks for the helpful comment!

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