Welcome to our latest episode! Today, we are thrilled to welcome Fernando Angelucci, a seasoned expert in real estate investment and social stewardship. Fernando’s journey from the corporate world to real estate success is nothing short of inspiring.
From his early days in residential real estate to building a thriving multi-family rental portfolio across the Midwest, Fernando’s path is filled with valuable insights and lessons learned.
In this captivating episode, Fernando delves into the intricacies of real estate investment, particularly focusing on the self-storage sector. He shares his expertise on navigating the challenges of purchasing and financing properties, drawing from his experiences both in Brazil and the US.
Discover Fernando’s unique approach to investment, emphasizing downside mitigation and social stewardship. Learn about the current state of the economy and its potential impact on the real estate market, as well as the resilience of the self-storage industry in uncertain times.
Don’t miss out on this exclusive opportunity to gain invaluable knowledge from Fernando Angelucci. Tune in now and uncover the secrets to tax-advantaged self-storage investments with a focus on social responsibility!
HIGHLIGHTS OF THE EPISODE
00:23 – Guest Intro: Fernando Angelucci
00:42 – The challenges of purchasing and financing in Brazil
06:50 – Exploring financing and investment opportunities in the US self-storage market
11:12 – The current state of the economy and its potential for recession
15:49 – The impact of the economy on the self storage industry
20:32 – Opportunities and communication methods
If you found this episode substantial and want to dig deeper into real estate, or maybe you want to discover better investment opportunities, be sure to check out www.tempofunding.com.
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#SelfStorageInvestments #RealEstateInvesting #EconomicOutlook
Intro/Outro: Welcome to the BigMike Fund Podcast, where you’ll learn about advanced wealth building strategies from real estate investing to creating massive ROI and secure retirement profits. So pour yourself a cup of coffee, grab a notepad, and lean in. Because Big Mike has got the mic, starting now.
Mike Zlotnik: Welcome to the BigMike Fund podcast.
I’m the Big Mike, Mike Zlotnik, and today it is my pleasure and a privilege to welcome back my good friend Fernando Angelucci, if I pronounce it correctly. Hey, Fernando.
Fernando Angelucci: How you doing, Mike?
Mike Zlotnik: How’s Brazil? You’ve been in Brazil for a while. Kind of interesting. You’ve been living and running a business in Brazil.
Fernando Angelucci: Yeah, not only Brazil, but this year I’ve been to nine countries. So I’ve been living out of a backpack and had my, my computer and my microphone with me and because of my, my teams, I’ve been able to run the business that way. So it’s been pretty good, especially because of the The income arbitrage or earning in dollars and then spending in less powerful currency has been great
Mike Zlotnik: That’s a fascinating experience people still don’t really well people realize this but they it’s kind of Difficult to say when you see inflation in us dollars and dollar weakening it feels not great, but The rest of the world is in worse shape.
I think inflation outside of the United States is often worse than the U. S. inflation. So local currency weakens relative to the dollar.
Fernando Angelucci: Yeah, I mean, here in Brazil you’re looking at, if you put your money in the bank right now, they’ll pay you 13 percent a year. So inflation is probably around that number, maybe slightly higher.
Argentina you know, they’re at about a hundred, 180, depending on what studies you look at, Venezuela is about 300 percent Mexico city. I was just there a while ago. Mexico’s inflation has been, been roaring as well. So it’s, you know, people are worried about the inflation back home, but really, if you look at the, the greater macroeconomic landscape, the United States is coming out ahead.
I think they did the right moves. Some of those moves might have been controversial, but that, that soft landing that everyone was looking for, it’s starting to, I think, appear here. Maybe not in its perfect form, but it’s a lot better than what we’re seeing in other countries around the world.
I’ve this year alone, I’ve been in Most of Western Europe Central and South America. And I can tell you just from my personal experiences, anecdotally, these countries are much worse off than what we’re seeing in the United States. It’s nice. It’s actually pretty stable compared to what I’ve been seeing over the last nine months.
Mike Zlotnik: That’s very interesting. I appreciate your view of the world. You’re the world traveler, and obviously you’re an experienced real estate investor, and getting your perspective is very, very helpful. That even though the U. S. has its struggles, the rest of the world has bigger struggles, and especially inflation.
Yeah, I didn’t realize some of these countries have hundreds 80, 200 percent, even high inflation which is, I guess, is absolutely crazy relative to the U. S. But at least you’re not seeing the Zimbabwe where you have to pay for lunch before you order your lunch because after the lunch it’s going to be 50 percent more. Not that bad, right?
Fernando Angelucci: Yeah, I mean, when we were in when we were looking through Argentina, they are experiencing something like that. You know, people, as soon as they get their paycheck, they go spend everything they can on groceries and the expenses that household expenses. And then if there’s anything left over, they go on to the parallel market or what they call the dollar blue.
And they’ll trade any of their access that they have into dollars and they’ll actually save in dollars as opposed to local currency just because of its holding power compared to their, their local currency. So it’s been very interesting. At the same time, you know, when I’m exploring these new markets you know, we’re self storage investors.
90 percent of the self storage facilities in the world are located in the United States, and some of these larger cities outside of the U. S. are really great emerging markets Mexico City Sao Paolo, Rio de Janeiro. Buenos Aires, these areas are, there are people that need storage. Their use is maybe about one tenth of what the United States uses.
But the issue is that in these countries, debt is extremely difficult to get. And if you can secure it, the rate is astronomical. Just for an example you know, I’m constantly on calls and going to conferences in the U. S. and people are complaining about, oh, now I have to pay. You know, 8% 8 percent a year for my, my debt and they’re only giving me 65 to 75 percent leverage down here in Brazil.
I went to the largest national bank here and I showed them, Hey, there’s a company here. It’s the third largest company in Brazil. I’d like to make a purchase. What is financing look like? And they said, well, number one, you’re going to have to put up all of the purchase price in cash into one of our bank accounts for us to lend you the money.
But number one, right there, leverage is out the door. Second of all, you’re paying 3%. And I said, 3 percent is pretty good. And they said, no, it’s, it’s 3 percent a month. It’s not 3 percent a year, 3 percent a month. So leverage for commercial. operations here in Brazil, you’re paying close to 30, 36 percent a year on cash flowing, highly cash flowing, low expense ratio product, especially here in, in, in, you know, South America and Central America, where the cost of labor labor is maybe one past the cost.
As far as earning power goes. So really the only thing you’re paying for is material Because you can basically run your properties for free based on the on the the cost of labor
Mike Zlotnik: Wow, that’s fascinating So they want you to put all the cash then they loan you your own money back and then they charge you three percent a year That sounds a little bit crazy.
We’ve seen in the u. s. Sometimes banks require you to have the banking relationship, but they don’t require you to have everything in cash relative to what you’re being loaned, but it sounds like in Brazil, it’s, it’s a very different environment. And then just a quick comment that we switched back to the U S and talk about U S storage in countries like Brazil, which are, I guess it’s still, I’m not sure if you’d call it free.
Third world or sort of emerging markets. Whatever you want to call the emerging markets, non third world’s merger markets. And you think storage is not really a significant asset class even though there’s demand there, but for some reason it’s not something people invest in, not something people use that much. I’m just curious why, well, if there’s demand for it.
Fernando Angelucci: Correct. So for example, the United States, the average demand across all 50 states, about one in every nine people use self storage. Here in Brazil, for example, it’s about one in every 110 people and that is not very average across the entire country.
You see a lot of the demand in the international cities. So, Sao Paulo, Rio de Janeiro, these are going to be the cities where you have expats and foreign nationals that are living in those cities and they’re living in a very gated part of the community, right? Gated part of the city. So those are gonna be your primary users.
Another issue is that mobility here is very difficult. So properties, houses, for example, do not switch hands very often. Typically, the property is built and then it’s passed down three, four, five, six generations before it finally leaves the family. So there is no growing into a new space. It’s, you’re there, you’re in a multi generational household, and because of that, you have constrained space.
But in addition to that constrained space. You do not buy things that will not fit or that you do not need and are not immediately using in the house. So, you know, it’s funny, everyone I talked to, especially here, the business owners, they say, what do you mean? You know, you, you put. Extra furniture that you’re not using in your house in storage and pay for that.
Why don’t you just get rid of it or sell it? And that, you know, so for other countries that are not primarily consumer driven, the U. S. is over 70 percent of our GDP is, is consumer driven. That it’s a foreign concept for those types of people. But we have seen usage increasing in a lot of these foreign markets.
For example The late Sam Zell, for example, Sam Zell owns the largest self storage company here in Brazil, or Guardia Key from his equities company’s portfolio. But the, the strategy is very different than what you would see in the United States. Like I said you know, we were looking at a potential purchase of the third largest company in Brazil, and our portfolio, currently, you know, we’re only in the top 100 in the United States, Our portfolio currently is already larger than the top the number three operator in brazil just to show you how much of an emerging market It is but again, you know, you have those problems of you have to use it’s basically an all cash purchase You are going to be basically building there’s no real inventory to buy So everything is a new construction project which makes it very risky for financing and for investor Investment as well.
So yeah, it’s, it’s a different market, a different mentality here and across some you know, Latin America, we are seeing some, some, some demand growth in areas that are densely populated like Singapore London, as well as areas where the wealth is much higher relative to the rest of the world.
So places like Australia, you’re starting to see a lot of self storage, Canada as well. So it’s been an interesting, I think there’s a lot of opportunity, but I think the opportunity lies in being able to secure us debt at us rates. Maybe, you know, probably not from a bank, but you know, maybe if you put together a debt fund, call it eight to 11 percent return to those debt investors, and then take that money down to one of these emerging markets that, and then be able to use that leverage.
That’s where you’ll be able to make a pretty large dent in market and grab market share very quickly.
Mike Zlotnik: Yeah, I appreciate that. This is pretty interesting. So, yes, U. S. based financing, if anything, and then you have to evaluate whether a given investment makes sense in the right location for the right type of customer.
But let’s go back to the U. S. Self storage. So the fact that you’re traveling the world is wonderful, but your self storage business is running in the U. S. And I’m just curious, what are you seeing last, I don’t know, year or two, of course, rates have skyrocketed. Transaction volume has been super slow.
Are you seeing softness in the U. S. valuations? What are you seeing? I’m just curious in the U. S. Are you seeing opportunities? So, again, if you are seeing softness on the valuation side, maybe it’s a buying opportunity. Just curious, kind of buy sell, both sides of the spectrum, what are you seeing?
Fernando Angelucci: Yeah, so this is kind of, I look at this as a three part question. So as opposed to breaking things down over the last year, year and a half, two years, what I’ve noticed is there was a period where rates have finally leveled off, Fed rates, then there was kind of a hysteria in the market because you had some collapses of large You know, banks, Signature Bank SVB, all these things that were occurring, that caused banks to realize that they are in a bad position if they had to liquidate those, you know, sub 1 percent treasuries that they were holding on their book.
So because of that, not only did underwriting departments, let’s say towards Q3, Q4 of 2023, get extremely conservative, but in addition to being conservative, offering lower leverage, asking for, you know, one, two and a half, one, three, one, four debt cover, they would also stress test. Their rate that they were giving you by an additional hundred basis points.
And that’s how they would, they would run their DSCR calculation. So in some deals that I was applying for, they would come back and it would come out to like 43 percent leverage, 38 percent leverage. And then on top of that, the banks that are extremely conservative and that were very concerned about deposits.
Requested that I bring an additional 10 to 20 percent of the loan balance in deposits that are locked up in CDs For the term of the loan which then further drop the leverage down. So now, you know an effective leverage I was getting offers in 20 to the 35, 40 percent range. Unless these things were cashflow in day one.
And as you know about me, I don’t buy stabilized property. I need the fourth Valley from my investors. So we’re always buying value add deals where we’re going to have to do some work. The previous owner didn’t run it like a real business. So that going in day one, DSR is not going to look very good or even better.
Or I guess worse for the bank on a value side is buying land and putting up new construction storage in areas where population is flocking, such as Florida, parts of the Southeast and the South, correct? So that was that current phase. But then the Fed decided to renew that one year program that they had where you could pledge your sub 1 percent treasuries at face value for a one year loan to the bank to help them with their liquidity issues and any potential bank runs that they saw on the horizon, real or not real.
And that allowed for some softening going into Q1 of 2024. We actually started to see a softening on the underwriting, no longer requesting deposit relationships with the bank. I mean, obviously the operating account for the property, but not bringing, you know, an additional 10, 20 percent of the loan balance and deposits, and we actually saw some reversion on rates.
So for example, a project that I had bid out for some investors, In October of last year, I got quoted a 8. 5 percent rate 20 year amortization with a 54321 prepay. We went, we decided to hold off for a bit, buy the property in cash, and then go back out to the market about a week and a half ago. The same bank that gave me those terms, they, they updated the term sheet.
Now they’re giving me a 8 percent rate as opposed to eight and a half. It is a 25 year term and it’s a 2 percent free pay for the entire term of the loan. So we are seeing banks starting to become a little bit more confident in the economy. I have some conflicting views on what’s coming down the pike here in the next 12 months, but we can get to that.
Mike Zlotnik: So I appreciate that. So your observation is the bank credit conditions are still very tight, but not as tight as they were. They were extremely tight. The bank, the pendulum swung all the way to the ultra tight, ultra conservative. And now they’re moving a little bit in the opposite direction. A loosening direction, but what is your view on the economy?
Are we gonna see a technical recession? To negative quarters of gdp again, that’s crystal ball question Of course people talking about soft lending whatever that means, but we’re still seeing stick inflation And, you know, people are working. Unemployment is still pretty low. And some folks are saying the economy is kind of, you know, chugging along and no real recession.
But, you know, what are you seeing? You just, you just alluded to this, so your view is a little different, you said.
Fernando Angelucci: Correct. So, I think that the way the government tracks these numbers has not been updated for the times. So, yes, when you look on the face Unemployment numbers are low, but how many of those people that are working now went from a full time job with benefits to now working two or three gig economy jobs with no benefits, driving for Uber delivering food, things of that nature, right?
That’s not really factored in, not to mention the amount of people that completely left the workforce, the participation rate, if you will, after COVID happened, after massive inflation hit over two, three years, these two income families, they realized, especially ones with, with children, for example. They realized that they couldn’t afford to pay for, for.
For childcare. So what? What happened? One of them just decided to leave the labor force and stay home because it was actually cheaper than working and then paying someone to watch their kids after school, etcetera. Right? That’s the number one thing when it comes to the job numbers. The second piece is I like to look at forward indicating.
So if you look over the last three, four years, when you look at vehicle loans and credit credit card revolving lines, the delinquency rates have almost doubled over the last three years. So we saw that artificial stimulus that hit the economy. Everyone was getting checks in the mail. They were going out and spending it.
Very little we’re saving. And if they were saving, they have already run through those savings. And now they’re in a worse position than they were before because the, the wage growth has not kept up with inflation. So I, you know, here’s the question is, you know, we have the March FOMC meeting, I predict that inflation numbers are going to come in much higher than what was expected.
I think people are really struggling and I think depending on what the Fed does. You know, if they’re going to house out the political pressure and try to do a rate cut before the election what will occur, or if they don’t, are we going to see families struggling towards the end of 2024? You know, history, I would say history doesn’t repeat itself, but it tends to rhyme.
And when we look back to, you know, the eighties and the Volcker years, you saw this ping ponging effect. With inflation the Fed now has already said, Hey, you know, we need to be patient. We’re going to see, you know, may not be higher, but it may be the same for longer. Because when you look at the Volcker days, inflation went up, they jacked up rates.
And then inflation numbers for one or two quarters would come down, and then they would drop the rate thing, and then guess what happened? The next quarter, inflation skyrocketed, and it did this for many years. I’m sure you remember this.
Yeah. So, I, I, I think that this is gonna be the new norm where we are in the rate environment. We’re historically below average if you look at over the last hundred years. The money is still relatively cheap, especially when you put it in the macroeconomic lens of the U. S. versus other first world countries. So, you know, it’s hard to, it’s hard to do, like you said, the crystal ball is very muddy, but what we’re doing is we’re, we want the, the knowns and the known unknowns, if you know what I’m saying.
So we’re not doing any type of floating rate that everything’s fixed. If we can buy down some points in the beginning. You know, with our buy down some rate with some points in the beginning. That’s something that we’re going to be looking towards, but we, I mean, even in the storage market, we’ve seen a softening, you know, we had this massive boom during COVID where we were seeing 80 percent year over year rent growth.
We were seeing occupancies skyrocketing to the highest. They’ve ever been historically, but a lot of that is starting to wear off. So we’ve already seen a, a average occupancy of 94 percent drop all the way down. Depending on the numbers you’re looking at for the mid eighties, even some low eighties some large property management firms that have a pretty large market share are reporting just from this last spring conference of the self storage association, you know, across a portfolio of over a thousand operators.
I’m sorry, a thousand properties. They were seeing an average occupancy rate at 82%, which is, that’s a huge move from that 94% figure that was reported just 12 months ago. And then we’re starting to see delinquencies go up as well in the storage space, which is typically very rare. You know, when it comes to big ticket items, typically those are the ones that, that go delinquent first.
And you know, an extra a hundred bucks a month to keep the possessions that you inherited from your grandmother is usually not a big deal. So I’m seeing trouble in the economy and I always have to remind people that the stock market is not the economy. The stock market is for the privileged few that have excess cash to invest.
But that, that income gap, that, that wealth has, especially after COVID we saw a massive Well, transfer from, from the lower classes to the higher classes. And I think, you know, without that working class that is continually to be continually being diminished, you know, we’re seeing some trouble, but the problem is the numbers that we typically use to see what is the health of the economy is not what is actually being reported, what is not.
Used correct. So, you know, great stock market’s up fantastic as a self storage operator, typically the people that are using my. Facilities are not the top 1 percent in the United States. They’re typically, you know, in the middle or even slightly below the middle tranche of wealth earners. So we’re seeing a lot of, a lot of rumblings here and how this is going to shake out.
We don’t know, but I think right now is a good time to fix your debt. If you can refinance into a longterm fixed rate out of a variable, short term variable, I think that’s a smart move.
Mike Zlotnik: Yeah, thanks, Fernando. So a couple of things just to dissect what you said. So one is the working class consumer.
I don’t know, whatever you want to call it. I’ve had people talk at 60, 40, some people talk 80, 20, but 80%, I just call it the majority of working folks who don’t own majority of the stocks. They own a little bit of the stock market, maybe. Majority of the wealth is concentrated, obviously, in a few or bigger hands.
So again, without taking any political views on, on capitalism, but the self storage industry caters to more of a working class folks who do need storage when they are between jobs or between houses, et cetera, et cetera. And that is experiencing some softness as a result of consumer being tapped, higher credit card balances.
Higher again, maybe you said composition of the participation in the labor force is changing. Right. Et cetera, et cetera. So you’re seeing softness, it’s building up and it’s not obvious. And some of this stuff is not reported on the headline news, but it’s something interesting that obviously great caution is required.
If the demand is softening and a realist session may maybe around the corner. The, the one thing that I’ll, I’ll, I’ll, I’ll say this and talked about this. So Fed obviously signaled very clearly. That they’re not done fighting inflation. In fact, they have a very complicated fight. And we have, we’re recording this literally as they have meetings this week.
So, the March meeting is happening right now. This is a, you know, second half of, mid March, the second half recording. So, the likely outcome is no change. Basically, they’re not going to do anything for the March meeting. And then the dates still unclear what they’re going to do in May, what they’re going to do in June.
Some people are even moving the probability of the first rate cut going beyond June into July. But for now, it’s just do nothing. And no argument there. They’re not I’ve said this multiple times, they’re not in the preventive medicine. They are in ER doctor business. When there’s a problem, they’ll respond.
So they need, they need things breaking. They need things breaking hard, patient being sick really, they have to go to the emergency room per se. So we’ll see what happens, but my view is when they see a sick patient they usually respond a little bit faster. That’s what they generally do, but for now it’s this strange kind of environment where rates are restrictive, they’re keeping them at the elevated level, at the restrictive level for longer until they’re going to see significant concerns in the economy and then we’ll see what happens.
So, but at least we got a clear view for you. On what’s happening on the self storage and unfortunately. The time is short for this episode. We need to do episode number two. So I think we let’s do first. Let’s let’s break it right now go schedule another call from the same link. We’ll get this episode out.
I think it’s a great short 25 minutes and then we’ll do a follow up and we’ll talk a little bit more about the upcoming opportunities, which you’re seeing in light of what you mentioned. But before we do that, how would folks get a hold of you for this episode? What’s the best way to reach out with any questions, concerns, thoughts, etc?
Fernando Angelucci: Yeah, if you’re, if you’re someone that’s more on the active side, you can literally give me a call or shoot me a text. My number is area code at 630. 4 0 8 8 0 9 0. If you’re more on the kind of passive followup side feel free to go to our website, s s s e. com. That’s self taught syndicated equities, s s s e.
com. We have a lot of great information out there. We put out free content constantly, almost daily. And then you can sign up to be an investor, to be a buyer, or just if you would, my, my schedule link is on there. So if you want to. Book a 30 minute session to chat with me about what we talked about here no problem.
Mike Zlotnik: Thank you, Fernando. Until the next time I appreciate you very much.
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