Today’s guest is Tom Dunkel.
Having spent his early career as an accomplished corporate finance leader with over $1.2B of middle-market M&A and financing transaction experience, and possessing a proven track record as a trusted decision-making partner to C-level executives, Tom turned his entrepreneurial energy and enthusiasm toward building a self-storage investment business.
Show Summary:
Tom shares his journey from corporate America to entrepreneurship, discussing his experiences in self-storage, short-term rentals, and distressed mortgage debt. He emphasizes the importance of utilizing technology and marketing strategies in the self-storage industry, and shares insights on market dynamics and competition.
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Intro [00:00:00]
Tom Dunkel’s background and journey [00:01:27]
Reasons for pivoting businesses [00:04:24]
The importance of KPIs for mom and pop operators [00:11:13]
The advantages of raising rates in self-storage [00:12:08]
Factors influencing being a price leader or follower [00:13:11]
Closing [00:22:36]
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Connect with Tom:
Facebook: https://www.facebook.com/tom.dunkel.1
https://www.facebook.com/belrosestoragegroup
Linkedin: https://www.linkedin.com/in/tomdunkel/ https://www.linkedin.com/company/belrose-storage-group/
Web: https://belrosestoragegroup.com/
Connect with Sam:
I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns.
Facebook: https://www.facebook.com/HowtoscaleCRE/
LinkedIn: https://www.linkedin.com/in/samwilsonhowtoscalecre/
Email me → sam@brickeninvestmentgroup.com
SUBSCRIBE and LEAVE A RATING. Listen to How To Scale Commercial Real Estate Investing with Sam Wilson
Apple Podcasts: https://podcasts.apple.com/us/podcast/how-to-scale-commercial-real-estate/id1539979234
Spotify: https://open.spotify.com/show/4m0NWYzSvznEIjRBFtCgEL?si=e10d8e039b99475f
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Want to read the full show notes of the episode? Check it out below:
Tom Dunkel ([00:00:00]) – Over the past 40 years, the US economy has been bouncing around like a really wicked roller coaster. Right? Good times, bad times, everything in between. But storage, it’s like. It’s like that lazy river. Sam, when you got your little cocktail, you’re floating around at your resort on your little inner tube there. I mean, it’s just gently meandered between about 80 and 90% for that same time period, 40 years. So we really like that, that steady predictability and the increasing demand, and that’s high cash flowing business. So we’re really enjoying it. Welcome to the How to scale.
Sam Wilson ([00:00:33]) – Commercial real estate show. Whether you are an active or passive investor, we’ll teach you how to scale your real estate investing business into something big. Tom Dunkel is a former aerospace M&A guy. He’s got 17 years as a full time real estate investor. If you don’t know, Tom actually came back on the show September 18th of 2022, which if I’m not mistaken, that was episode number 658. If you want to go back and hear a little bit more of Tom’s story, you can go back there again.
Sam Wilson ([00:01:04]) – Check that eight. Check that out on September 18th of 2022, Episode 658. Otherwise, Tom, welcome to the show. There are three questions that I always ask every guest who comes on. I know you got this question last time, but maybe you’ll answer it differently this time. And if our listeners haven’t heard that, they want to hear it again anyway. So where did you start? Where are you now and how did you get there? In 90s or less?
Tom Dunkel ([00:01:27]) – Got it. Thanks, Sam. It’s great to be with you and the listeners once again. Great show. Yeah. So as you mentioned, I started out in corporate America after business school was I was kind of the number crunching, you know, Excel spreadsheet nerd. I was putting together the projections and the pro formas for our aerospace acquisitions, doing the valuations, doing the the, the market work to see like, who are the competitors out there, What were they doing, You know, how could we position ourselves and all those kinds of things.
Tom Dunkel ([00:01:59]) – So I got to work with some amazing people Harvard MBAs, Wharton MBAs, Naval Academy graduates, Chicago MBAs, retired Air Force colonels, and even some astronauts. And if you catch up with me after the show, if you visit with me on my website, I’ll be happy to share with you the two astronauts that I’ve actually had lunch with. But yeah, so from there, Sam went into a couple other jobs corporate wise, and I just knew all along that, you know, scraping and clawing up that corporate ladder just, just just wasn’t for me. I knew there would be a better way. So 2006, I got my opportunity when I was fired for my corporate job. Finally gave me the kick in the pants that I needed to go out and do my own thing. So of course, 2006 was a rough time to get started in real estate. But, you know, I went in full bore and got my butt whooped pretty good those next few years. But, you know, learned a lot, got some battle scars and but persisted.
Tom Dunkel ([00:03:01]) – And now here, 17 years later, I’ve built multiple seven and one eight figure business and now we’re in the self storage space, which is a ton of fun. And I’m sure we’ll get more into the details there later. But in the 90s, that’s the story.
Sam Wilson ([00:03:19]) – That’s the summary. I love it. I love it. Have you always done just self storage or do you have other real estate holdings as well?
Tom Dunkel ([00:03:28]) – Yeah. So right now self storage is our primary business, but we do through the years, of course, being entrepreneurs, we try out different things. So we also do have a short term rental portfolio in the there’s a, there’s a mountain in Lake Region here north of Philadelphia called the Poconos. And so we picked up some Airbnb rentals up there, which were really hot during Covid. And then we also have a distressed mortgage debt business. And that was the business that I started after getting my butt whooped in the residential world in 2009, I started buying notes and then 2010 and etcetera.
Tom Dunkel ([00:04:05]) – And that business has done real well for us over the years.
Sam Wilson ([00:04:08]) – Considering the various businesses that you’re involved in. What were some of the hallmark or hallmarks, rather, of why you pivoted from one to the next? And was there any expense in not staying with just one?
Tom Dunkel ([00:04:24]) – Yeah, that’s a great question, Sam. So distressed mortgage debt has been great. I mean, we’ve generated over $53 million of revenue in that business and we’re not a big company. So that’s that’s done real well for us. Problem is, it’s extremely unpredictable and it’s not like we can go up to Big Bank USA, knock on the door and say, hey, sell us some loans. So we were strictly at their behest, you know, their whim as to what loans they were going to sell, how many and when. And so for like an MBA guy like me, you know, taught how to put business plans together and KPIs and whatnot, I mean, it just became impossible to really predict the future in any way, shape or form for distressed debt.
Tom Dunkel ([00:05:04]) – So even though that business is still rolling today, it’s strictly, you know, when when a deal comes up, we kind of shift and we jump at it. We have a team that’s able to do that and then we got to shift back. But so along the way, we had been looking for an asset class where there was some predictability. You know, there was some staleness there was, you know, a way to put a plan together and put a team together and really, you know, build a business. So we actually started out looking at private lending, hard money lending, and we really liked that business. And we still do a little bit of it sort of on the side. But but we were just not able to get the traction to get that business up and running. And one of the big reasons is its super duper competitive. So that’s a big takeaway I would give the folks out there is, you know, be careful about what asset class you choose because if it’s super competitive, you know, you’re going to have a hard time making hay.
Tom Dunkel ([00:06:02]) – So when that business didn’t work out the first time, we thought, Hey, let’s try this again. We did this so good the first time. So we failed at that business twice. And we start we got involved with the title company and because again, we thought that was going to be a lot of a lot of small transactions and predictable, but again, couldn’t find really the right relationships and team to put to bear there. And then about 2017, 2018, we started hearing more and more about self storage. We were like, Hmm, okay, this is checking a lot of boxes, very fragmented industry. So it’s, you know, there’s a lot of moms and pops. The big names that you’ve heard of out there, they only control about 30% of the market, the public storage, extra space, cube, smart, etcetera, those big guys. So the vast majority of the market is just small ones, two mom and pop owners, which was very attractive. The second thing we found super attractive was just the adopt, the adaptability, the market penetration of self storage.
Tom Dunkel ([00:07:03]) – A few years back, only about 8% of households in the US, we’re using storage. Fast forward to today, it’s going on 11% and increasing and I know maybe 3% doesn’t sound like a lot, Sam, but when you consider there’s 120 million households in the country, every 1% move is 1.2 million new self storage customers. And they’re just not building them fast enough. So we’ve got increasing demand, you know, supply increasing not as much, which means there’s going to be upward pressure on rates, which is awesome. And then I guess the last thing I would throw out there is just that over over time, over the past 40 years, you know, the US economy has been bouncing around like a really wicked roller coaster, right? Good times, bad times, everything in between. But storage, it’s like it’s like that lazy river. Sam, when you got your little cocktail, you’re floating around at your resort on your little inner tube there. I mean, it’s just gently meandered between about 80 and 90% for that same time period, 40 years.
Tom Dunkel ([00:08:06]) – So we really like that, that steady predictability and the increasing demand, and that’s high cash flowing business. So we’re really enjoying it.
Sam Wilson ([00:08:15]) – No, I think that’s all of those are excellent, excellent reasons to get involved. I’m I’m shocked that 30% only 30% of the self storage market is controlled by big names. That’s a shocking statistic to me. The big one, I would not have guessed that today that that’s still. But that’s still the case. Which obviously I guess it is. I would think that that though having those big industry names behind it, like those those consolidating entities, is probably a good thing, just in the sense that it brings market awareness. It brings. I mean, it has to improve resale value of your guys facilities if you decide to resell it all, if that’s even part of your strategy. Is that not a fair, fair analysis?
Tom Dunkel ([00:09:07]) – Yeah. So so the rights are it’s kind of a double edged sword with them. So if they are in a market where we are, they I mean, they have a lot of sway, right? They’ve got big marketing budgets.
Tom Dunkel ([00:09:19]) – You know, it’s usually a big shiny building right on the corner in the middle of town, you know, that kind of thing. So when they come into town, especially if they’re building a new facility, what they will do is they’ll really drive down the rates in the entire market just to get their facility filled up. And then they’ll kind of boil the frog slowly and up, up, up the rates. And so, you know, in that situation, we have to follow them, unfortunately. So that’s part of our analysis. When we are looking at acquiring a facility, we’re looking to see who are the competitors. Is it, you know, is it Joe’s self-storage or is it, you know, public storage? And do we So we need to be cognizant of the fact that there are there is a REIT or our REIT’s in the market. And so that’s just going to just make us think a little bit more about how we’re going to address that. But yeah, the the thing though is if they are already established in the market, they’re going to be pushing rates.
Tom Dunkel ([00:10:16]) – So that’s the other edge of the sword is, you know, we can then ride that wave as well by. Either, you know, doing maybe a small discount off of what they’re doing or if all the facilities in the in the market are full, which does happen, then we know we can really kind of push that demand curve and push those rates and just kind of see where that equilibrium is and and really be more aggressive about bumping up our rates. Yeah.
Sam Wilson ([00:10:45]) – That’s interesting. I would have I mean, it makes sense, obviously what you said, but I would have guessed the other way around would be that your mom and pop owners would be the ones that are keeping prices artificially low because, well, you know, we’ve all we just had our prices here and we don’t want to upset our customers. So we’re going to keep it here. It’s like.
Tom Dunkel ([00:11:05]) – No, you’re spot on. That’s 100% correct. Sorry if I got off on a off the rails there, but no, no, you’re 100% correct.
Tom Dunkel ([00:11:13]) – And that’s one of the things we look for when we’re acquiring a facility is a mom and pop, you know, their big KPI. And we’re talking about KPIs, key performance indicators before we hit record. And that’s their like only KPIs seems like is are all my units full, right? That’s what the mom and pop operator does. The last thing they want to do is have to have to have a fancy website or implement technology or a marketing program or, you know, God forbid, throw out some Google ads, you know, something like that. It’s just not how they run their business. Right. They’re just looking for that mailbox money and they know their rates are low. They know that their delinquencies are high, but they just don’t want to upset the apple cart because they know they know all their customers a lot of the time. Right.
Sam Wilson ([00:12:02]) – That makes that makes a lot of sense. But, I mean, that’s where the that’s where the meat on the bone lies, right? It’s like, okay.
Tom Dunkel ([00:12:07]) – 100%.
Sam Wilson ([00:12:08]) – 100%. I’m thinking about a which we’re we’re long in the laundry business. And I was thinking about a store we just bought and we literally raised rates 53%.
Tom Dunkel ([00:12:19]) – Oh, yeah, right.
Sam Wilson ([00:12:21]) – Because it’s who knows how long it’s been since they’ve raised rates. I mean, of course that’s right. It’s all the little sophisticated. I’m not going to call it sophisticated little things that you can do that drive a business in a meaningful way that you just mentioned. Like. Yeah. Oh, hello. Google ads. Okay. Pay per click campaigns. Okay, we’re marketing. Okay. We have a phone line.
Tom Dunkel ([00:12:40]) – Right?
Sam Wilson ([00:12:42]) – I mean, how many of these facilities you’re buying where you’re like, you guys don’t have a site and a phone number that there’s a.
Tom Dunkel ([00:12:47]) – Person and we’re actively surveying the market to see like who’s charging what and how busy are they, Right?
Sam Wilson ([00:12:54]) – Yeah. And those are those are where your competitive edges lie. What’s your thought? Maybe you answered this, but I’m going to ask it again anyway just to see if there’s more more to this than not.
Sam Wilson ([00:13:05]) – What’s your thought on being a price leader or a price follower?
Tom Dunkel ([00:13:11]) – Yeah, good question. You know, and I hate to I hate to say this, but it’s going to depend on the market. So, for example, we acquired a facility in Mount Airy, North Carolina, a couple of years ago. And the entire market in our analysis, we discovered that the entire market was full. And so we knew when we acquired our facility there, Granite City Storage, we knew that if there’s a customer in that market that wants a storage unit, they’re going to have to pay more because if we bump up the rates even on our existing customers, where are they going to go? So we we were able to successfully play that game in that market and we increased our rates about 21% in the in the first few months. And then we were just able to bump it up kind of incrementally from there. But yeah, I mean, that’s that’s a big factor is what’s going on at the other stores.
Tom Dunkel ([00:14:06]) – But like we talked about a minute ago, you know, if there’s a big new development going in and there’s a REIT coming in, you know, we’re going to be more of a price follower in that situation. Oh, and what I meant to add on to for my first example in North Carolina, all the other competitors in that market, they followed us after they saw that we were bumping up our rates. They all, you know, bump, bump, bump, bump, bump up their rates. Right. And then, you know, we I don’t remember getting like a holiday card or like a commission check that year from those guys, but we should have for sure. But yeah, on the other side with the with the big rates coming in or big developments coming in you know you’re going to end up most times being a price follower in that situation.
Sam Wilson ([00:14:55]) – Right Yeah it’s it’s a it’s a temporary race to the bottom.
Tom Dunkel ([00:15:00]) – That’s right. But but honestly, which is why I’m sorry to interrupt, but which is why like, you know, people look at these really hot markets, you know, like down in Florida and, you know, millions and millions of people moving there, or at least hundreds and hundreds of thousands.
Tom Dunkel ([00:15:16]) – But we don’t like to see that the market being too hot because we know that’s going to attract the REIT’s. You know, so we’re looking for that Goldilocks situation where it’s growing but enough to increase demand but not enough to increase, to increase or attract a lot of competition.
Sam Wilson ([00:15:35]) – What’s one of the things that you have done from a management perspective and you’re based in Wayne, Pennsylvania, so. That’s right. And you’re buying things in Mount Airy, North Carolina. That’s more that’s more than a five minute drive from your house.
Tom Dunkel ([00:15:50]) – That’s right.
Sam Wilson ([00:15:51]) – So how how have you established systems and got the in and established the right people to manage these at scale from a distance?
Tom Dunkel ([00:16:02]) – Yeah, I mean, that’s really, you know, the magic, you know, the secret sauce, although it’s not very secret. I mean, you hit the nail on the head. It’s. It’s getting the right team together, right with the right systems. And of course, we’re leveraging technology to the max. So those moms and pops that we buy from, a lot of times they don’t even have a website.
Tom Dunkel ([00:16:24]) – And if they do, it’s stale information. You know, it’s rates from a few years ago and the phone numbers wrong, you know, all those kinds of things. So we implement what we call a hybrid management strategy. So each of our facilities has a human that is assigned to it. But because we leverage technology, the phone number that is at the facility, you know, if they call our facility in Douglasville, Georgia, it’s going to ring on the cell phone of the human manager. But they might be out in Missouri. And so but because of technology, they’re able to answer the phone. Hi, it’s Douglasville Self Storage. And then, you know, nine times out of ten, they can handle whatever the customer inquiry is just right there on their smartphone. Right. And in the event that the manager is busy or maybe they are not able to pick up the phone, if the customer is at the facility, they’re going to they’re going to see one of these they’re going to see a QR code.
Tom Dunkel ([00:17:28]) – And if anyone out there wants to have a little fun, you can scan this on your phone and you can run a unit from us at our Baltimore facility. But the the customer can just go up, scan that QR code, it’ll take them to the website, They can fill out all their personal information load in their credit card for autopay, which is awesome. And then just sign the contract with their finger. And then once they submit all that, they get a gate code texted to them while they’re right there standing outside the gate punching the gate. Code gate opens up. They go inside, they find their unit, empty out their stuff, lock it up, and they’re on their way without having to interact with the human at all. So so we love doing that and it allows us to really drive down our operating expenses at our facilities, which is everyone out there, I’m sure knows because you’ve got a smart audience that drives up net operating income, which drives up the value of the facility, which is the whole purpose of our value add strategies that we implement.
Sam Wilson ([00:18:32]) – And it improves the customer experience. I mean, that’s the last thing is, yes, it drives up in why. But Tom, if you gave me the option to rent from you where I can do it from my phone, plug in my information and be done in five minutes versus walking inside hand it being handed, you know, 42 pieces of paper and filling out all information.
Tom Dunkel ([00:18:51]) – That’s right. That’s right. And and you got that generational difference, too, right? I mean, you know, millennials are our biggest generation right now in the US. And that’s you know, they were all born with a smartphone in their hands. Pretty much. Right. Right.
Sam Wilson ([00:19:05]) – For better and probably for worse. That’s right. Yes. That’s that’s very, very true. Tom, we’ve got a few minutes here left, and I wanted to highlight a couple of things and just get your thoughts on them. This is, again, you know, the fact that we talked about this in the beginning. You came on September 18th or the show published September 18th of last year.
Sam Wilson ([00:19:25]) – Some things have changed. It’s some things have changed in the financing side of things. On the sales side of things. Yeah. Tell me, how are you guys navigating the current lending environment? How has that affected deal flow? How has it affected pricing fast? Three questions and money as opposed to ask one at a time. So it’s up to you now.
Tom Dunkel ([00:19:45]) – Sure. Yeah. I mean, things have certainly been dynamic the past nine months since we spoke last. And, you know, rates are interest rates are up, you know, 4 or 5%. I mean, which is huge, right? I mean, we were doing deals that, you know, three and three quarters or 4% debt back then. But, you know, now it’s a different ballgame. And, you know, we’ve been able to adapt. Of course, none of this was really a surprise. I mean, we all saw, you know, all the money that had been printed and, you know, that inflation was coming and that was going to push up rates.
Tom Dunkel ([00:20:17]) – And so we, you know, having been around, you know, the deals and projections and all that for for many, many years, jeez, you know, Wow. Going on 30. Wow. Anyway, I’m not that old. So we knew this was coming, right, Sam So we were we were already adjusting our models, adjusting our exit Capri assumptions and our future rate assumptions and all those kinds of things. And and so we’ve, we’ve been very disciplined and about the facilities that we purchased. And for that reason, we’ve, we haven’t purchased a whole heck of a lot. I mean, we’re we just closed on our 13th facility. We’ve got our 14th coming up here soon. But our acquisition pace definitely slowed down because. A lot of sellers were looking back a year saying, Oh, I want that value, you know, from back then. And we’re saying, Well, sorry, that’s off the table now because our cost of capital is up and we have return targets that we need to hit for our investors.
Tom Dunkel ([00:21:15]) – So that’s definitely slowed us down. But I guess the good news about that is because of the run up in pricing the last few years, there’s a lot of owners out there sitting on a lot of equity and that has allowed us to to take advantage of seller financing. So we have we did a seller financing deal in the fall and we have two seller financing deals lined up here that are that will be closing here in the next month or two. And the beautiful thing about that is, well, it’s really a win win, right? Because the seller, they’re not getting a big tax hit right up front because if they took the whole purchase price, net purchase price and in cash, they’d have to pay a big chunk of taxes on that. So seller financing allows them to kind of push push out their tax liability there. And then for us, there’s no big onerous underwriting process that you have to go through with an institutional lender. There’s typically no personal guarantees, which again, on smaller deals from a credit union or a small local bank, there’s going to be looking for personal guarantees, and the terms are typically pretty great.
Tom Dunkel ([00:22:25]) – So we’re seeing interest only payments, which of course means lower lower payments, higher cash flow left over for our investors. So. So we love to see that.
Sam Wilson ([00:22:36]) – Absolutely. Tom, this has been enlightening. Thank you for taking the time to come on the show today and share your thoughts. You’re kind of updated thoughts here with us on the market, how you guys are handling it, what you guys are doing there in the self storage space. It’s a pleasure, of course, to have you come on a second time. You’re an absolute wealth of knowledge. I do appreciate it. If our listeners want to get in touch with you and learn more about you, what is the best way to do that?
Tom Dunkel ([00:22:59]) – Sure, Sam. It’s been great. Love the questions. Great energy. Love it. So, yeah. I’m Tom Dunkel. I’m the chief investment officer here at Belrose Storage Group. You can find us at Belrose Storage Group. We also have a Facebook page. If you want to search Belrose storage group on there, you can find my past podcast interviews and other articles and value add that we put out there for our investor community.
Tom Dunkel ([00:23:25]) – So yeah, I’d love to love to hear from you and I’d love to schedule a call. You can do that from our website as well. But yeah, we, we’re active, we’re out there doing self storage deals and we’re, we’re doing syndications with accredited investors. So I’d love to have you come join us.
Sam Wilson ([00:23:38]) – Fantastic. Belrose Storage group. We’ll make sure we include that there in the show notes. Tom, thank you again for your time today. Do appreciate it.
Tom Dunkel ([00:23:46]) – Thank you, Sam.
Sam Wilson ([00:23:47]) – Hey, thanks for listening to the How to Scale Commercial Real Estate podcast. If you can do me a favor and subscribe and leave us a review on Apple Podcasts, Spotify, Google Podcasts, whatever platform it is, you use to listen. If you can do that for us, that would be a fantastic help to the show. It helps us both attract new listeners as well as rank higher on those directories. So appreciate you listening. Thanks so much and hope to catch you on the next episode.
