Mitch Baldridge, my good friend, and badass CPA, joined me on The Fort podcast hosted by Chris Power. We talked about the real estate market, the value of cost segregation, and how Twitter has done a ton to shape our professional careers.
Market Update
Real estate sucks right now, I gotta be honest. I called Chris a few months ago, and we had a long conversation where I spent the first ten minutes complaining about how hard acquisitions are, how we’re not finding any deals worth buying, and how we were considering putting pencils down. Chris talked some sense into me by asking if I really think anybody is having fun in the business right now, and saying that we need to suck it up and get to work. There is no pencils down, there’s no losing focus.
Chris still sees great fundamentals at the property level, just not much action in the market. There aren’t many deals trading. But that means now is the time to focus on operations and hone in on cost-cutting and revenue generation, we need to find other ways to create value. If you’re a true operator, you’re excited about being able to dial in that part of your business. Rents are still going up, vacancy is low, and supply is tight.
Chris is right, but there are some bad things going on right now. All of my facilities had a net move-out in Q4 2022, and move-ins are at 30% of what they were a year ago in some locations. We saw some positive momentum in January, but fundamentals have clearly gotten worse. A lot of the self-storage market is transitory with people parking for a few months during a remodel or a move, so the deceleration in home sales brings down that portion of our business. This really drives rents down, and we simply can’t underwrite the same year 1 revenue increases that we had been in new deals Sellers have slowly been coming down in price, but it’s clear that we’re all struggling a bit here.
We are ready and willing to buy storage though. I’m getting emails and texts daily from hungry investors, it’s just a matter of seller expectations. I wouldn’t be surprised if we bought up to $75M in storage this coming year, but we seller expectations to align with our underwriting.
Not many asset classes are seeing a lot of movement right now, but there’s also little hint of an emerging recession. People are still consuming, and GDP growth is still healthy. Buyers are getting hungry, but there are some signs that sellers are finally getting antsy too. I’ve even seen sellers okay with selling their properties for breakeven amounts.
Cost Segregation
As Chris said, when you’re sitting around not doing deals you need to hone in on operations. And Chris Baldridge is the king of the benefits of cost segregation. The 2017 Tax Cut Jobs Act was the last big explosion in cost segregation because it allowed bonus depreciation on used property. Anything people have bought after September 2017 can still be cost-segregated to account for asset depreciation.
The best way to look at cost segregation is to look at it as a deferred tax liability. Really, it’s an interest-free loan that we get to borrow from the IRS. You may end up paying recapture if you end up not holding the property for long, but there are ways to control that.
Mitch’s operation, RE Cost Seg, is simply cheaper and faster than typical cost segregation services. They perform virtual assessments rather than flying people out to see the property, and they turn things around a lot quicker too. As you can expect, business is exploding.
Self-storage and multi-family residential benefit a ton from cost segregation, while it’s less valuable for industrial. Self-storage benefits a ton from movable walls that are depreciable and make up a big part of property value, and residential buildings have appliances like the microwave, ovens, and refrigerators. The more complex the building, the better off you’ll be for taking bonus depreciation.
So what else do Mitch and I have in plans now that we’ve seen how cost segregation can e automated? Well, we’re looking at tax credits, property tax consulting, property insurance, and even front-end web development. So many giant companies are horrible at doing what they do, people are operating poorly and inefficiently. A lot of getting rid of friction is just establishing operating procedures and technology where you can.
The Value of Twitter
Businesses are being stood up overnight and spreading through Twitter, RE Cost Seg is proof. If not for Twitter, my own portfolio would be a lot smaller, with maybe a handful of self-storage companies while I still own Storage Squad. I found Chris on Twitter, and he was a huge help in establishing my foundation, my fee structure, my operations, etc. all because he saw something in me. Same with a ton of real estate badass that I follow.
As you consume other people’s content, you get to know how they think and what they think about business, and what aligns with you. You get real impressions of how they view the world. Chris has sat on company boards that he’s connected with through Twitter, found investors on Twitter, and raised a ton of money on Twitter. It’s a modern-day business tool to form connections and establish a network.
Most importantly, it allows for permissionless action. You have the people, you have the platform, and you can set out to grow and achieve through it. You don’t need a private equity job or to work at Goldman Sachs to be able to earn connections and launch your career. Properly utilizing Twitter has been a boom to all of our businesses.
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