#453 Nick Huber on Profitable Real Estate Investing

Nick Huber is an entrepreneur and investor. He owns a number of self-storage facilities and also previously built a large student storage business. Nick is documenting all of his work at Sweaty Startup in both audio and written form. In this conversation, we discuss the advantages to real estate, how cash out refinancing works, why bonus depreciation is your friend, and the logic behind Nick’s focus on self-storage facilities. ======================= OKCoin.com is the leading crypto exchange for both beginners and experienced users. You can fund your account in under 2 minutes, and get access to the most advanced trading engine, all while paying the lowest trading fees in the industry (0.1%). Visit www.okcoin.com/pomp and open your account today. ======================= Coinbase Wallets are adding support for .crypto and .zil domains through their partnership with Unstoppable Domains. Unstoppable Domains provides an all-in-one solution for blockchain domains. You can send money using these new domains instead of long Bitcoin wallet addresses, while also storing your domain in Coinbase's collectibles section. Go to unstoppabledomains.com in the dapp browser to register and manage your domains. ======================= Digital art is here, and it's real. NFTs are selling for hundreds and thousands of dollars. The only platform I buy on is Nifty Gateway, which is an official sponsor of the Pomp Podcast. They release content from the best NFT artists in the world twice weekly, and have featured many world famous artists including Kenny Scharf, Trevor Jones and WhIsBe. NFTs on Nifty Gateway are in extremely high demand, so if you really want one, make sure to be on the website as soon as it is released. Go to http://www.niftygateway.com/pomp and sign up for an account today. =======================

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:02Anthony Pompliano?

  What's up everyone, this is Anthony Pompliano. Most of you know me as Pomp. You're listening to the Pomp Podcast, simply the best podcast out there. Let's kick this thing off. Nick Huber is an entrepreneur and investor. He owns a number of self-storage facilities and also previously built a large student storage business. Nick is documenting all of his work at Sweaty Startup in both audio and written form. In this conversation, we discuss the advantages to real estate, how cash-out refinancing works, why bonus depreciation is your friend, and the logic behind Nick's focus on self-storage facilities. I really enjoyed this conversation with Nick, and I hope you do as well. Before we get into this episode, though, I want to quickly talk about our sponsors. First up

• 0:45Anthony Pompliano?

  is OKCoin. OKCoin.com is the leading crypto exchange for both beginners and experienced users. You can fund your account in under two minutes and get access to the most advanced trading engine, all while paying the lowest trading fees in the industry, 0.1%. You can visit them at OKCoin.com/Pomp and open your account today. I love them. They're a US-based, regulated exchange. They do things right, and they've been funding Bitcoin developers. It's really hard to not want to use a company that spends money to help build the Bitcoin ecosystem. OKCoin.com is doing things the way that you would expect a leading crypto exchange for both beginners and experienced users to do it. Again, they've got fast funding times to get your money in your account so that you can buy Bitcoin, and you can get

• 1:30Anthony Pompliano?

  access to the most advanced trading engine. Head on over to OKCoin.com/Pomp. They support Bitcoin, so you should support them. OKCoin.com/Pomp. Next up is Unstoppable Domains. Unstoppable Domains has partnered with Coinbase Wallets to add support for .crypto domains through that partnership. Unstoppable Domains provides an all-in-one solution for blockchain domains. You can send money using these new domains instead of long Bitcoin wallet addresses, while also storing your domain in Coinbase's collectibles section. Go to unstoppabledomains.com in a DApp browser to register and manage your domains. Again, you no longer have to send money to a long string of letters Numbers in a Bitcoin wallet address. You now can use just pomp dot crypto like I have,

• 2:14Anthony Pompliano?

  and you put that into that Coinbase wallet and somebody can send you Bitcoin immediately. No longer will it be hard to send Bitcoin. Go get your dot crypto domain today. Head on over to unstoppabledomains.com. Lastly, Nifty Gateway. Digital art is here and it is real. NFTs are selling for hundreds, thousands, and even hundreds of thousands of dollars. This past weekend, there was an auction where a single NFT collection sold for $700 plus thousand. The only platform I use is Nifty Gateway and they're our official sponsor of this podcast. They release content from the best NFT artists in the world twice weekly and they featured many world famous artists, including Kenny Scharf, Trevor Jones, and Who's Be. NFTs on Nifty Gateway are in extremely high demand. So if you really want one, make sure to be on

• 2:59Anthony Pompliano?

  the website as soon as it is released. Go to niftygateway.com/pomp. Again, niftygateway.com/pomp and sign up for an account today. All right, let's get into this episode with Nick. I hope you guys enjoy this one.

• 3:13Speaker 01

  Anthony Pompliano is a partner at Morgan Creek Digital. All opinions expressed by Pomp or his guests on this podcast are solely their opinions and do not reflect the opinions of Morgan Creek Digital or Morgan Creek Capital Management. You should not treat any opinion expressed by Pomp as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. This podcast is for informational purposes only.

• 3:44Anthony Pompliano?

  All right, guys. Bang, bang. I've got Nick here with me. Super excited to do this. We're going to do a quick overview of real estate and I couldn't think of anyone better to bring on. So thank you so much for doing this, sir.

• 3:55Speaker 02

  Thanks for having me, Paul. Appreciate it.

• 3:57Anthony Pompliano?

  Let's get started just with your background. Kind of where'd you grow up and how did you get into real estate investing?

• 4:03Speaker 02

  Yeah, I'm 31 years old, grew up in Southern Indiana, went to, was lucky enough to go to Cornell in Ithaca, New York to run track and field where I met a business partner and we started a small business that did pickup and delivery student storage called Storage Squad. And we grew that from our dorm rooms up, you know, to 12 cities, 23 major colleges and a couple million a year in sales. 2015, we realized that the service business wasn't necessarily where we wanted to spend our 40s and 50s because, you know, the world's on fire, people running trucks into things, a lot of problems, people were expecting Uber type service. I learned a lot about logistics and how to run a business. But, um, you know, as, as you know, when you're at the top of the chain, you get a lot of the calls that are not necessarily the fun ones. So, um, in 2015, we had some money set aside. In

• 4:47Speaker 02

  2016, we started construction, um, new development of a self-storage facility in upstate New York, um, 2.4 million dollar project. And, um, it was, uh, it was great. And we, we learned a lot. It was stressful. We went a little bit over budget. We ended up buying out a neighboring self-storage facility in 2019. When we got it stabilized, we, we did a cash out refi and, and kind of loaded up our war chest. And now we're kind of on a buying spree. In the last, uh, 16 months, we've bought eight more properties and we have seven more under contract. So, real soon here, we're going to have about a $25 million portfolio of self-storage. That's the two-minute overview.

• 5:27Anthony Pompliano?

  Yeah, no, it's fantastic. And obviously, um, it sounds like you've gotten kind of a crash course in all the good parts and bad parts of building these types of businesses. Let's start maybe just with a high level. Like, what are the advantages of investing in real estate? And why does it seem like every rich person owns real estate?

• 5:43Speaker 02

  Yeah, real estate is an asset class that slowly appreciates over time. I mean, you, you, two, three percent a year adds up, but the, the beautiful thing about it is that you can amplify it with leverage. Um, not very many people trade stock or Bitcoin on margin. Um, I don't recommend that, but a real estate asset, you can touch it, you can feel it. Um, you can sign leases that are longer term, so it's more secure. And therefore, banks are willing to loan 60, 70, 80% of the value. So, you know, if your asset's appreciating at 5% a year, but you only put in 25% of the money, your 25% is really appreciated. Appreciating at 20% a year, right? Because you're getting appreciation even on that part that the bank bought. So over time, if you can operate real estate and you can find a way to make money on it, it's a beautiful thing because commercial real estate, that's what I'm in.

• 6:27Speaker 02

  It's a little different in a single family rental where they kind of look at what the guy down the street bought a house for with a similar dimensions. But in commercial real estate, it's valued based on how much money it makes, which is something great for somebody who loves operating business and finding a way to make a piece of real estate make more money. And then when it gets more valuable, that's when the magic starts to happen with real estate and you can really compound and grow.

• 6:49Anthony Pompliano?

  Absolutely. And then when you think of kind of the lay of the land in real estate, I think most people just think of commercial and residential. Is that an accurate kind of framework or are there other components that you would add in there?

• 7:00Speaker 02

  Yeah, so the money is made in niche real estate. And when I say that, I mean, all these other small asset classes that people can get involved in that you wouldn't even think of. I have a list here, you know, when you think about short term rentals, that's a niche within single family homes. But you got executive rentals, tiny homes, multifamily, mobile homes, section eight housing, RV parks, cemeteries, medical office, office, hospitals, professional office, dental offices, large scale retail, small scale retail, niche retail. I mean, you got data centers, cell towers, hotels, hostels, gas stations, factories, amusement parks, vet clinics, pet crematoriums, wind farms, you know, solar farms, all these different things where if you specialize in some of those things,

• 7:42Speaker 02

  instead of competing against the bigger pockets crowd of everybody who has 20 grand in their pocket wants to go buy a single family rental or duplex. You know, if you're a guy who can buy marinas, you know, in a town and operate a marina, you can make really good money. If you're a person who can buy and manage golf courses the right way, solar farms, wind farms, and just for me, I happen to get into self-storage, which I like. I love it as a business model. I'm sure we're going to talk more about that. But basically, yeah, there's hundreds of ways that you can go with commercial real estate and it's all valued based on how much money it makes.

• 8:14Anthony Pompliano?

  Why do you like self-storage? Like, why is that your focus?

• 8:17Speaker 02

  I like self-storage because it is recurring revenue and if you buy a $1 million property, you're going to have 100-plus tenants in it. There's no other business where you can have an average tenant paying $80 a month and have a property that's worth more than $1 million. So what you have is your risk is hedged. You know, if you buy a shopping center and it's got a Kmart and a Best Buy in it, and it's worth 5 or 10 million bucks, but Best Buy announces that they're going to go bankrupt and stop paying your rent, your property is instantly worth half as much in a day as soon as that news breaks. Whereas in self-storage, you know, if a couple tenants move out and a couple tenants move in, it's just the normal business cycle. So your risk is kind of hedged, that's why I love it.

• 9:00Anthony Pompliano?

  Got it. And so when you think through kind of the way that self-storage businesses work, you basically go in, you buy the property, and then what do you do to it to kind of improve the actual financials and the overall value of the property?

• 9:18Speaker 02

  Yeah, so there's two types of self-storage. One is these big multi-story facilities that you see popping up all over the place in major cities. That's Class A storage. There's multi-stories, it's climate-controlled, it's a little bit more complicated. I buy, I found a little niche within a niche, right? Self-storage is a niche. I found a little bitty part of that, which is mom-and-pop self-storage facilities in smaller towns that we call row facilities, where there's, you know, just doors facing outside and you can drive up to every single storage unit. We found a niche where we can operate these things remotely with software. So while a competitor down the street, I'll give you an example, our first facility in Ithaca, which I think we'll talk about the deal. We have 51,000 square feet, so it's a big facility, but we operate it on three grand

• 10:01Speaker 02

  a year in payroll, because somebody pulls up to our facility and there's a sign on the front of the gate that says, hey, go to this website and you can rent a unit, you can sign up for a unit, you can put in your credit card. And then when they do that stuff, they get an instant text message, they get let in the gate, they can go right to their unit, there's a lock waiting for them, it's all automated. And then when they move out, they send us a picture of their unit, and over 50% of the times, they send us a good enough picture that we can re-rent that unit without even touching it. So it's just incredibly low-touch business, whereas our competitor, right down the street in Ithaca, has a 50,000-square-foot facility and they spend 80 grand a year on payroll to pay for retail hours for somebody to sit in there, answer phones, sweep floors, and basically do a lot of what our software does, which is collect the rent and rent the units.

• 10:44Anthony Pompliano?

  Yeah. And when you are thinking through like, uh, let's just call it kind of ground maintenance, for example, uh, at what point is it, hey, it's worth spending the money versus, uh, maybe I shouldn't actually spend the money and we can do something with software or, uh, you know, tenants are only going to go in and out and they really don't care if the floors are swept or, or whatever. Like, like, how do you think through that, uh, trade off?

• 11:04Speaker 02

  Yeah, we definitely keep the place clean and safe. I mean, that's the easy part. Once a week, a customer, one of our employees drives by and makes sure there's nothing there and we can look at security cameras, make sure that nobody left a couch in the hallway and things like that. But, um, yeah, every, every dollar we put into these things, we're thinking, you know, how and when is this going to pay us back? What do we have to do to make this money back? So sometimes you want to operate a business in a really affordable way, right? And, and, uh, cut costs because net operating income, if you, if you're not familiar with commercial real estate, net operating income is what's left after your, your revenue comes in and your expenses go out. What's left? That's net operating income. That's how much you're, you know, that's how they value this stuff, uh, based on cap rates and, and multiples of that net operating income. So if you can increase that, everything you can do, um,

• 11:47Speaker 02

  makes your facility way more valuable. So when we can cut out 80 grand in payroll at a self-storage facility, you know, we can create sometimes 500,000 or a million bucks worth of value out of thin air.

• 11:58Anthony Pompliano?

  Got it. So let's just start with maybe kind of a traditional real estate deal. We can pick a sector or we can just kind of do overall. I want to walk through kind of the financial engineering that happens with real estate that ends up being, uh, part of the advantage, right? And so the first is, let's just, hey, we see a piece of property, we want to buy it. Uh, and the ultimate, uh, first goal is we're going to do a cash out refi. Walk me through the process that an investor goes through in terms of evaluating the deal, negotiating the deal, closing it, and then getting us to that first cash out refi.

• 12:29Speaker 02

  Yeah, let's do it. Um, let's talk self-storage because that's my book, right? So let's say we have a $1 million self-storage facility that is for sale. And I look at it and I see some upside. I see the fact that they're paying a manager. I see the fact that they have, um, sub-market rents. Maybe they're charging $70 for a 10 by 10 when I know the market rent is a hundred dollars for a 10 by 10. That's a deal that I'm looking at right now, for example. And let's say that the net operating income on this facility is 80 grand, meaning a million dollar facility, you're making 80 grand a year in profit. Now, we might have to help each other out with a calculator here, but, um, you know, I come in and my goal is to buy that thing. What I'm going to do is I'm going to put a short term, uh, Adjustable rate mortgage on it so that I don't have to pay a prepayment penalty when I refi

• 13:13Speaker 02

  out because I know there's value here. I'm going to create this value and then I'm going to put new debt on it. So I go to my bank and I get 75% of it bank financed. So I'm going to find it 750 grand of it and I'm going to put in 250 grand of my own money on this $1 million facility. It makes 80 grand in revenue right now.

• 13:28Anthony Pompliano?

  Real quick, let's just pause there for a second. So basically what you're doing is you're going to buy a million dollar piece of property. You're going to put 250K up of your own money. You're going to borrow $750,000, but the terms at which you're borrowing that $750,000 are not as advantageous as you could get, but you're specifically optimizing for flexibility because you have the plan to pay it back early, correct?

• 13:51Speaker 02

  Yeah, there's something called a prepayment penalty, which can be 5% or 6% of the loan amount. And if you pay it in the second year, which is what we're going to do, Pom, because we know that this facility's got some upside, 6% of 750 grand, you know, that can, 50 grand is not cheap to refi. That's going to suck up some of our equity. So what we're going to do, yes, we're going to put flexible terms on it. Whereas we might be able to secure a 3.5% interest rate. We're going to secure a 4.25 because that little difference in interest is going to be five or six grand over this time, but the real money is going to be saved when we refi. So it does 80 grand a year, which if I can briefly explain cap rates here. A cap rate is a percent return on the overall spend. If you're buying at an eight cap, you're getting

• 14:33Speaker 02

  an 8% return on your overall spend. And 8% of 1 million is 80 grand. So it's going to be valued at an eight cap. So let's just use the value of an eight cap as a basis for how these properties are valued right now. It changes, right? A low risk property has a higher cap rate because you need a higher return. I'm sorry, a high risk property has a higher cap rate. A low risk property, let's say you have a piece of property in downtown Austin, that's going to be valued at a five cap because it's, you know, less risk, more valuable for investors. So we're going to go in and we're going to raise rents and we're going to cut costs. That's what we're going to do. That's what I do best. I go into a self-storage facility and I optimize that net operating income. And let's say at the 18-month mark, our net operating income is now $120,000. So we went from 80 grand in profit, we went from 80 grand in profit to

• 15:16Speaker 02

  $120,000 in profit. That's not uncommon with the people that we buy self-storage facilities that have kept the rent the same for five years and, you know, keep handwritten ledgers, handwritten paper ledgers every time somebody pays rent. It's kind of crazy. So I'm going to take 120,000 using my calculator and I'm going to divide it by 0.08 to get my cap rate. Now the building's worth 1.5 million. Because it's valued based on how much money it makes. So I go back to my banker and say, hey, Mr. Banker, we succeeded. Me and Pom took this self-storage facility. Now it's, now it does $120,000 a year in that operating income. It can support more debt. And this is the difference between single-family rentals and commercial real estate. The bank looks at the value. So we send an appraiser in, go to my banker, he sends an appraiser in, the appraiser agrees with

• 16:00Speaker 02

  me, he looks at all my books and says, you're right, Nick, this facility is worth 1.5 million now. Now the magic happens. They loan, the bank can loan, and they can put debt on assets based on what it's worth right now, not what you paid for it. So if it's worth 1.5 million, we can put 75% debt on that property. We can get a 1.125 million dollar loan and still cash flow, and we still own that thing. We didn't have to sell it or anything. So what we do is we have now a new 1.1 million dollar loan, and we have old loan, remember, of $750,000. So 1.2, 1.125 minus $750,000 is 375,000 left over after we paid off our original debt. So literally on the day you do

• 16:45Speaker 02

  this, what's called a cash out refinance, you get $375,000 put in your checking account. Remember how much money we put in the deal, though? How much money did we put in this deal?

• 16:53Anthony Pompliano?

  250 grand.

• 16:55Speaker 02

  So we just created 150 grand out of thin air. We still own an asset that is appreciating and cash flowing and operating and giving us money every single month, and we have 150 grand left to go buy more storage. 375 now. We've taken out all of our original investment. And the beautiful thing about this is that it's tax-free. It's not real income. We haven't realized a taxable event yet.

• 17:18Anthony Pompliano?

  Okay, so there's a couple of key pieces here. You basically, you bought the property for a million dollars. You go and you make improvements. Now it's worth 1.5 million, right? An outside third party says, yes, it's worth 1.5 million. You go back to the bank, say, hey, I want a loan. You pay off the original loan. All that, I think, is straightforward. Where people, I think, get lost is when you pay off that loan, you still have the loan that you just took out, the new loan, right? And you're still able to pay that through the cash flows, and you still own the asset. That asset is not only one worth more money, it's actually cash flowing more money as well, right?

• 17:49Speaker 02

  It can still be cash flowing 10 or 12% on the money you didn't spend anymore. You got that money back.

• 17:54Anthony Pompliano?

  Yep. And so when you take that money back, right, that delta, which ends up being, I think, in this case, you said $350,000, give or take. The tax-free component, I think, gets lost in all of this, right? You put $250,000 into a deal and 18 months later, you're taking out $350,000 and you pay no tax on it. Explain why that's tax-free.

• 18:14Speaker 02

  Well, it's got to be a certain, you know, a certain type of debt, qualified non-recourse debt. But if you have a good attorney and you have a good accountant, you can do those things. This is, it's not a taxable event. You haven't sold an asset. So your basis in the asset, Uncle Sam looks at the basis, how much money did you have in? And if you sell, what's your new basis? If you're in stocks, anything, you understand that. There's no taxable event. So this is, this is debt now and you can write off the interest on this new debt against your profits. So the snowball, I mean, you can see if you conceptualize this, doing three, four or five deals like this a year over 10 or 20 years, the snowball can become absolutely massive because now you've got 375,000. You can go buy a bigger property. And if you're good at what you do, you know, we do need to talk about the risks here.

• 18:56Speaker 02

  We can't get everybody all fired up about levering up with debt and not understanding that this is how people lost everything in 2009, 2010, when the values, because real estate is not liquid, you can't just sell it. So when the values go up and the values go down, you have to be able to ride out the storm and pay your debt service because the facility is valued at an eight cap right now. But if interest rates go up, it's going to be valued at a 10 cap, which can drop my value. And before long, you're underwater because you only own that top 25% that the bank doesn't own. So if it drops 25% in value, your equity is gone and you own, you own nothing. The bank can take the property. That's what happened to a ton of real estate investors who got a bunch of debt on their, on their assets in 2009, you know, when, when that happened.

• 19:36Anthony Pompliano?

  And how do you think about the right debt levels, right? Cause I, there's some people who say, hey, I only buy things in cash. And obviously that's very hard for many people to do. There's other people who say, hey, you know, the beauty of real estate is I'm going to go and I'm going to put 5% down, 10% down and really lever all the way up. How do you just think about like, what's the healthy, you know, debt levels to start with? And then do you aggressively try to pay that debt down? Or do you kind of just stick with what I would consider a more traditional kind of, you know, pay it off as you go, based on the plan type approach?

• 20:07Speaker 02

  Yeah, that's a great question. And there's really two types of real estate investors. There's people who go after cash flow and there's people who go after appreciation. If you're buying, you know, think about the housing market in Austin, Texas, or in New York City before COVID, for the 10 years leading up, these houses were appreciating at 10% a year and getting more and more and more valuable. The investors who bought there realized that most of their gains through appreciation. That that is a risky kind of speculative way to do business because because if if the cycles change and all of a sudden the housing market's not going up anymore, you can be caught underwater really, really quick. But if you focus on cash flow and you have a diversified tenant base and you're confident that they're going to keep paying you rent, that the factory in the self-storage town is not going to shut down and everybody leave the town.

• 20:52Speaker 02

  You know, there's risk in all this stuff, but I kind of think if you cover your debt in a certain way, and if we went really in the weeds, we'd talk about debt constants and debt yields and debt service coverage ratios and a lot of stress tests where you can kind of see how much of a change can you really absorb if things start to go poorly. But if you focus on cash flow and you focus on yield instead of, oh, I really want to buy this up and coming neighborhood in Austin because I know that it's going to get more valuable five years from now. But yeah, what's your cash flow on that $300 a month? Okay, so what if the guy doesn't pay your rent for six months? What are you going to do then? You know, it's risky.

• 21:25Anthony Pompliano?

  Got it. And so when you think about kind of the advantages of real estate, right? One of this is this cash out refi, which basically allows you to very quickly take a relatively small investment, like 25% of a property, and make improvements. You got to do work, right? There's risk to it. But you can get basically back the principal amount plus some profit. It's done in a non-taxable way. And then you can use that capital to pretty much go do whatever you want, right? You can go buy dinner for yourself. You can go on a family vacation or you go buy more real estate. The other advantage is all around depreciation and kind of tax advantages. Let's talk about that a little bit. Like, I think people hear like real estate investors pay no tax, right? And it's kind of this overgeneralization.

• 22:10Anthony Pompliano?

  There's truth in every generalization. And so kind of how do you think about?

• 22:13Speaker 02

  There's definitely truth in that. There's truth in that. I mean, the, I mean, we don't have to get political, but the the United States government has encouraged certain activities. They realized a long time ago that, hey, if we make this certain thing really tax efficient, more investors are going to do that. And it's been a blessing for our economy because we have giant skyscrapers in New York City that kind of, you know, were encouraged by the government to do things like that. And building, building real estate assets in our physical world is really critical. We need hospitals. To go to, we need grocery stores, we need houses and so on. So basically what they've done is they've allowed this depreciation to take to, you know, when you, let's think about it two different ways. If you're running a service business and you need to pay an employee, that's an expense, but you pay them right then, that's an expense.

• 22:56Speaker 02

  When you're buying a piece of real estate, you're buying a $1 million self-storage facility. But it's not really an expense that year, it's got a lifetime. So you'd appreciate it over time is the way that you can write this off as an expense against your taxes. And usually it's 39 and a half years for commercial real estate. So you get to slowly write off that $1 million expense over 39 years. And it decreases your taxable income and makes your cash flow look a lot better because, you know, it might be only 2% of the value. But remember it's 2% of 100% and the bank paid for 75%. So you also get to write off part of what the bank bought, which is pretty awesome. And then there's this thing called bonus depreciation. And this is where it gets crazy. This is where you can say, oh, but that self-storage facility, it's also got landscaping. And that landscaping has only got a seven-year lifespan.

• 23:40Speaker 02

  And it's got this roof on it, it's only a 15-year roof. And it's got these, the security system that that's not worth 39 and a half years. So we're going to depreciate all these individual things faster. And that's called a cost segregation study. Somebody goes in, they say, they split out your entire building into different depreciation. We're going in the weeds here, different depreciation life cycles. So that you can write it off against your taxes over different times. Well, when they're really wanting to get aggressive and they really want to promote real estate, they, they put this bonus depreciation into the tax code, which allows you to, in the first year, right now, it's 100% bonus depreciation. It changes, okay? Trump did that in 2017, before that it was, you know, going to die off and slowly go away. Now it's extended to 2023. It all depends on the political environment of how much they're going to motivate this stuff.

• 24:25Speaker 02

  But anything that's under a 15-year lifespan right now, and don't quote me on this, I'm not an accountant.

• 24:32Speaker 02

  You can write it off in the first year that you put this building in service. And a self-storage facility, a hotel, anything of these things that you kind of buy, even a rental property. People who own rental properties don't know that they should get a cost segregation study done and depreciate this stuff against their assets. 25% of the value can be written off on year one sometimes of an overall purchase. You can't write off, you can't depreciate the land at all. You know, the build, the core structure, the building can't be depreciated, but the windows, the doors, the hinges, the landscaping, the improvements, all that stuff sometimes can be lumped into this bonus depreciation. So you and I, Pom, when we buy that $1 million facility, we might get $250,000 of bonus depreciation as a tax write-off in year one, the very first year.

• 25:12Anthony Pompliano?

  So Nick, maybe help us understand in terms of the bonus depreciation, what's the difference between going through the exercise of the segregation study and leveraging that bonus depreciation versus what I'll call traditional depreciation that an investor would do without the segregation study?

• 25:27Speaker 02

  It's massive. Yeah. So it's, you know, a little over 2% of the overall purchase price per year. If you do it on a straight line, 39 and a half year depreciation schedule. If you do a bonus, you know, cost segregation study and get it done, you can get 25% of your overall purchase price allocated to these quicker life cycle timelines. And, um, you know, it goes from $25,000 write-off to $250,000 write-off. And if we do some math here on that original example we had, you know, our net operating income is 80 grand, but out of that comes interest expense. So our cash flows, you know, our taxable, our taxable part of it is going to be around, you know, 50 grand or 40 grand. And when you're only making 40 grand a year in profit on that, you know, $250,000 investment on that $1 million property and you get a $200,000 first year

• 26:12Speaker 02

  write-off, um, you know, not only does it wipe away your tax liability on this asset, it can wipe away your tax liability on, on a lot of other real estate assets. So basically what people do who start making a lot of money from older projects is they'll just put one or two new storage facilities in service every year. So if you and I go out and buy a million dollar self storage facility every single year, we're going to get $200,000 in bonus depreciation every time we do that. So if we buy two next year and two the year after that, two the year after that, we get 400, 500 grand of tax write-offs every single year. And before you know it, you're building a giant snowball of wealth and paying absolutely no taxes.

• 26:51Anthony Pompliano?

  Yeah. And basically when you do that, um, kind of adding to the portfolio every year, you're basically taking the depreciation and you're leveraging it for income from the earlier properties, right? And that's how you're basically shielding all of the income, uh, from paying tax.

• 27:05Speaker 02

  Exactly right. And I'm not a, I'm not a tax attorney and I'm not a CPA. I gotta say that's what people need to talk to these people. But if you have a CPA that says, oh, you know, you don't really want to do a cost segregation and you don't really want to do accelerated depreciation because you'll have recapture later when you sell it. You need to get a new accountant.

• 27:23Anthony Pompliano?

  I love it. So when you think about this, the average investor, as they're coming in, looking at real estate investing, it sounds like there's really kind of three advantages, right? One is you get the appreciation. Two is you've got the potential for the cash out refi. And then three is there's all these tax advantages that you can deploy. How hard is this? Like, do you have a massive team? Is it just you and your partner? Like, walk through just the complexity of the work that you're doing. So I don't want it to sound like it's the easiest thing in the world, but also not that it's, you know, complete rocket science either.

• 27:56Speaker 02

  It's not rocket science, but I'll say it's hard. Finding an operational advantage where you can increase net operating income is very hard. You know, there's a lot of people who want to be in real estate. It's a very competitive game. Self-storage is a competitive industry. It's not easy to find deals and it's, and you know, you have to know how to operate. Operating is the risk factor. Everybody thinks that real estate is passive and you sit back and wait and collect checks. It's, it's active and we are running a business inside of a business. Like we are collecting rent from customers. We are calling customers. We are marketing to customers. We are presenting a product that customers want to buy. And it's a, it's a, it's a huge risk factor, but I will say for an average self-storage facility, if somebody out there had, you know, was well capitalized and wanted to go buy a $500,000 self-storage

• 28:40Speaker 02

  facility, I have a video on YouTube that kind of breaks down a $473,000 one that we bought. And we get three calls a week from that thing popping. Our software collects all the rent and we don't, we don't stress.

• 28:53Anthony Pompliano?

  Yeah. And so I guess that is a piece of, if you're doing self-storage and kind of, we're dealing with quote unquote retail type, you know, customers, how much customer service infrastructure did you have to build and kind of what are those calls? Like, are they the more nightmare type stuff? Or is it just simple stuff like, hey, you know, are you going to be open certain hours?

• 29:11Speaker 02

  Yeah. If you're, if you're a landlord and you have multifamily, you know, housing complexes, you're going to deal with some emergencies. If the heat's not on and there's people in there, that's a problem. You know, if, if, if the water isn't working or there's a flood or the boiler's out, you have a problem. There's emergencies. You've got to be able to answer your phone in the middle of the night. Self-storage is not really that way, right? People's got, people have their stuff there. The average customer comes to the storage unit once every three months. Some of them rent for years and never visit the storage facility. So we have what's, you know, in my opinion, is a, is a low-touch, sticky client. And that's, those are more things that I love about self-storage where we don't have HVAC. We don't have boilers. We don't have heat. We don't have appliances. We have a steel box. So it's a, it's a little bit less risk.

• 29:55Anthony Pompliano?

  Yep. And how do you think about, I'll call it kind of technology competitors, right? There was a point in time, maybe two or three years ago, where there's all these people who were starting companies where I could press a button on an app. Somebody would come to my apartment or house, they'd pick up my stuff and they'd go put it in storage themselves. Is that something where, sure, you're going to have technology type enablement in super urban areas, but you just pick the right location and you're kind of insulated from that? Or how do you view those types of competitors?

• 30:23Speaker 02

  Yeah, it's clutter, neighbor, MakeSpace. These companies that are really trying out a different model and, and I do think it's different. I, I, I'm following it. I'm paying attention. I'm gonna, you know, I'm not gonna just sit back and say that those are, those guys are never gonna have a chance. But I'm buying, I'm buying self-storage facilities in Shippenville, Pennsylvania, and Erie, Pennsylvania, and Elmira, New York. And, and you know, if I owned a massive self-storage facility in Manhattan, I'd be paying a lot closer attention to clutter and neighbor and MakeSpace than I am. But, but as always, there's early adapters and there's people who want to pay extra for that service to come and pick up. One, one thing I really hate about that business is that it's easy to get your stuff. All you gotta do is click a button to get your stuff out of storage. So I think they're gonna have a lot of problems with customer retention over the long run.

• 31:08Speaker 02

  Whereas for us, if we were, if we send, you know, a 10%, one of the powerful things about what I do is that we can, we can send a 10% rent increase, a 10% rent increase. And that goes straight to net operating income. So if we're collecting 300 grand a month or a year in rent on that $1 million facility I was telling you about, and we raise rent 10%, that's 30 grand. It goes right to net operating income. And it, you know, 10% of an $80 payment average tenant is only eight bucks. Whereas if I'm in a multifamily unit where my average tenant's paying $1,500, 10% is $150, which is a lot different for a family. So, you know, it's a smaller piece of the income pie, so we can raise rents a little bit faster. But when clutter and MakeSpace raise rents, somebody might just click the button to get their stuff back. And then you gotta pay to get it back to you.

• 31:52Speaker 02

  Whereas with me, they gotta rent a truck, they gotta go out there and they gotta move it.

• 31:55Anthony Pompliano?

  What's your suggestion for how people can get started? Is it go find somebody who's doing this and kind of learn alongside them? Is it start with kind of your first small deal? How do you suggest the best way to get educated and kind of in the game?

• 32:10Speaker 02

  Yeah, so I'm not going to recommend getting into real estate with no money. You hear that all the time. You hear people wholesaling. I got into real estate and I'm in a position that I'm in right now. Luckily, because I started a service business and if you know me with the sweaty startup and my big, you know, my podcast brand is, you know, start with service-based entrepreneurship and make some darn money first. Everybody wants to go from zero to hero in real estate. But guess what, Pomp? If we didn't have that 250 grand and honestly, probably another 100 grand sitting in the checking account in case things went bad, you and I are never buying that self-storage facility. And when you got to go raise money from a bunch of outside partners and it's other people's money, the people with the money call the shots and you can't own very much of it. So I'm going to say how to start is go make some money. And if you're well capitalized and you know, you have the operational chops and you want to go buy a self-storage facility in your town,

• 32:54Speaker 02

  I think it's a phenomenal way to build long-term wealth. I've been consulting people, a little package where I help them look at a deal and go buy a self-storage facility. That's been awesome for some folks who want to do it. But most of the time it's, you know, go make some money doing something else and forget about real estate for a while.

• 33:09Anthony Pompliano?

  Yeah. And then when you think about real estate investing, is this something where the people that you know that are really successful at this stuff, it's 90% of their portfolio, 20% of their portfolio? Like, how do you think of portfolio construction and kind of the investing, you know, thesis, if you will, for people who are focused on this full-time?

• 33:28Speaker 02

  Yeah, everybody should have some real estate exposure. When I say everybody, I mean people with net worths over a million. If you have a net worth over a million bucks and you don't have a real estate exposure, I'm going to suggest that you go on your computer and buy public storage and extra space storage stocks right now because they are going to pay a three and a half percent dividend and they're going to rise with inflation. It's going to be a very good hedge against your Bitcoin and your tech stocks. Yeah, I find, I find people reach out to me all the time and say, look, I'm, I'm, I'm cash. I'm asset poor and cash rich. And, you know, over time, you really want to have real estate as part of your portfolio. So I know folks, you know, me, I'm, I'm 80% in real estate. I do have our reserves and equities, but I'm 80% of my net worth is in one asset class because I'm doubling down and I'm very confident in what I can do.

• 34:13Speaker 02

  But if I was 55 and I was worth five times as much money, I would try to have, you know, 20% in storage, 20% in multifamily, 30% in industrial, you know, I, I would, I would hedge out my real estate portfolio and I would also, you know, only make up real estate, you know, 50% of my, you know, long-term holdings, probably.

• 34:30Anthony Pompliano?

  Absolutely. Uh, over the weekend, you decided to go on an absolute tear and you sat down and started writing. And I saw you tweeting about it and I was like, what is he gonna start writing? And I said, I know you're, you were tweeting updates and have like 25,000 words written. And I think hundreds of pages. What are you writing and kind of what's the thought process behind, uh, behind putting this together?

• 34:52Speaker 02

  Yeah. If you know anything about me, Pomp is that I'm, I'm a passionately curious kind of guy and I'm not afraid to put myself out there and learn in public. And I've done it with my podcast. I've done it with, I share all my storage deals on Twitter. That's where I've kind of found an audience and where you found me. But yeah, I, I get so many questions now, people who want to understand just the basic dynamics of real estate, this cash out refi, the, the bonus depreciation. And, you know, if you look at some of the other areas where just people, people have no idea how it even works. There's, there's private equity deal structures. There's investing with people who do what I do and, and, you know, you can be a passive investor and if you can write a hundred thousand dollar check, you can find somebody who's going to go,

• 35:32Speaker 02

  do the operations and they're experts at what they do and you can get passive investment through that, you know, there's huge mistakes that you can make in real estate. There's, how it's valued and there's all the terminology around it. And, um, I just started writing what would be a letter to myself at 20 years old, when I had a little bit of money, but no real estate yet. Because I've made some mistakes over the years. I, I got the wrong kind of debt on buildings. I've, I've, you know, had an environmental issue pop up. I've, I've been unsure how to raise money from private equity. I've, I've done a structure where I didn't make very much money. So I'm basically writing a pretty in-depth, you know, just a rundown of, of what you need to know in real estate. This is not a deep dive on any one aspect, but,

• 36:10Speaker 02

  I just started, you know, talking about the stuff we're talking about right now. And, and I'm a, I'm, I'm a, I'm a guy who, when, when I go in and I'm in the zone, I, I, you know, blaze a trail and try to clean it up later. So I just started writing.

• 36:21Anthony Pompliano?

  How long is it right now?

• 36:24Speaker 02

  I'm looking at the document. It's.

• 36:29Speaker 02

  25,000 words and 80 pages and I started it, you know, 30 hours in. So it needs a lot of editing.

• 36:37Anthony Pompliano?

  I love it. In terms of where people can go to find you, where can we send them to, to find out when you actually publish this thing? And also all of the, the other work that you're doing.

• 36:47Speaker 02

  Yeah, this is a higher level course. It's not for somebody who just wants to know a little bit about, you know, real estate. It's people with the means, with the money to kind of get involved and kind of want to figure it out. But I'm going to release this, this little course, but mostly I give away almost everything I do for free on my podcast, which is called Sweaty Startup and my website sweatystartup.com. But it's Twitter, really. I mean, Twitter, I think is a phenomenal asset. If you make it such, if you follow smart people, you get a look into their mind day to day. And when they're, when they're constrained to a character limit, you don't have to waste much time. So I've just loved Twitter. And yes, it's at Sweaty Startup on Twitter. You can also email me [email protected] if you, if you want to get in touch.

• 37:24Anthony Pompliano?

  Awesome. I asked the same two questions of everyone before I let them go and then you'll get to ask me one question to finish up. The first is, what is the most important book you've ever read?

• 37:33Speaker 02

  The most important book I've, for my business that impacted me the most was a, was a tax book. It read like a textbook. It's called J, Small Business Taxes by J K Lasseter. That thing saved me hundreds of thousands of dollars over the years. But a book that I don't think enough people, you know, give enough credit to is Never Split the Difference by Chris Voss. Everything in life is a negotiation. Everything in life is about sales. If you can talk to people and you can really understand their motives and you can, and you can find a way to click with what matters to them, you can win in life. And it's not just business. It's not just making money. It's, it's literally interacting with your friends to figure out where you guys want to go out to eat, or, or building a healthy relationship with your wife where everybody feels like they're winning and it's, and it's happy.

• 38:16Speaker 02

  You know, it's, it's, Chris really dives into the emotional side of negotiation, which I, you know, I'm a logical guy, but it, but negotiation is emotional. It's not logical. You're not dealing with logical beings. So the faster you can understand that and the ins and outs of that, that's made me a lot better leader and a lot better businessman.

• 38:34Anthony Pompliano?

  I love that. Second question is more fun. Aliens, are you a believer or a non-believer?

• 38:39Speaker 02

  Oh yeah, I'm a believer. They gotta be out there somewhere. I look at the data, right? What do you, are you a believer?

• 38:45Anthony Pompliano?

  Do, uh, yeah, I definitely think they exist somewhere. I, I don't know if I'm as far as, uh, what is it? The Israeli like former space commander or whatever now saying that he's been talking to the aliens and there's a galactic federation.

• 38:55Speaker 02

  I don't think they're anywhere near as, I don't think they're anywhere near as close as we are. And I, and I honestly think technology is not nearly as far along as people think it is. I think we're going to have a little slowdown with AI and self-driving and all this stuff. And we're going to have a 10-year clog here of trying to cash the checks that Elon's, uh, writing.

• 39:12Anthony Pompliano?

  I love it. What, uh, what question do you have for me to finish up?

• 39:16Speaker 02

  Um, what's the, if you could give one piece of advice to, uh, to your 21-year-old self and knowing your journey now, I'm sure it would be to not change anything, but, but what's this one little thing that, you know, I know you were a badass back then, but if you could just nudge yourself in one little direction, what would it be?

• 39:31Anthony Pompliano?

  Go bigger and be patient.

• 39:34Anthony Pompliano?

  I mean, I, I think it's just a thing where, uh, you know, I think a lot about, uh, batting average versus slugging percentage. And, uh, most entrepreneurs in general, uh, they optimize for batting average. They don't want to fail. They, they kind of want to make sure that every time they get up to bat, they, you know, they get a hit. Uh, I think that many of the people who I respect, um, and, uh, and many people that I know that, uh, have been very successful in life, they don't worry about the batting average. They worry much more about the slugging percentage. Um, and this idea of when they get up to bat, they want to swing for home runs. Um, you know, easy to say in hindsight, but, uh, you know, that's probably the biggest kind of mental shift that I've had. Uh, because I think that if you understand you're gonna strike out, whether you're trying to get a hit or trying to hit a home run, probably start trying to swing for home runs. And so, uh, I, I think that that's probably it.

• 40:19Speaker 02

  I love it, man. Thanks for having me on.

• 40:21Anthony Pompliano?

  Awesome. Listen, everyone, uh, Nick has been, uh, a wealth of knowledge on Twitter. Highly, highly suggest go follow him. And I'll have to just get in the future, my friend.

• 40:30Speaker 02

  Thanks for having me. I appreciate everything you do, man. We're playing in the big leagues now, so I appreciate you having me on.