- Hey everybody, how's it goin', this is Seth Williams,
from the REtipster podcast, and I'm here with my
co-host, Jaren Barnes, and Jaren and I are really fortunate. We had a chance to, or
we're having a chance to sit down and talk with Scott Meyers, and Scott is somebody that I've heard about for a long time, and he's sort of a leading expert in the world of investing in self-storage units,
and this is something I've just had a ton of
interest in for a lot of years. Back when I used to work
as a commercial banker I used to look at a lot
of self-storage deals and just think like,
man, it would be so cool to get into one of these
deals as an investor. There's a lot of stuff I
learned through that process but a lot of unanswered questions too so, I'm pretty excited just to talk to Scott and get his insights on
how the business works. So Scott is based in
Indianapolis, Indiana, and he's worked on a
lot of super-successful storage unit deals, and along the way he's done a few, I think, I guess we'll probably hear more about it, that almost cost him
everything, apparently? So, in today's show
we're going to dive deep into all things self-storage,
the good, the bad, the dangerous, and the ugly. With that, Scott, welcome to
the show, how you doin' man? - Hey, fantastic, thanks
Seth for having me, it's good to chat with you and Jaren. - Yeah absolutely. - Yeah I'm really pumped, because, as I've mentioned here
on the podcast before, I actually have a personal goal within the next six months to a year, to get my first storage
unit deal under my belt, - And that's good.
- So I am going to be picking your brain, quite extensively, during the show today. - You know I thought it was crazy that you're from Indianapolis, man, 'cause like, I've been connected with the local CIREIA there
and like heavily involved in the investor world for
almost the last three years until I moved here in March,
and I didn't hear about you until I moved to Chicago,
it's like super weird. - You know how that works Jaren, and you can't be a
prophet in your own town, and so you don't hear
about something or somebody until after you move away, at
least that's the way I see it. - Yeah man, for sure, so well to kick this thing off the ground, tell us a little bit
about your background, you know take us back to, you know when I was just two years old back in the year 1993, when
you got started in real estate. - Yeah sure. So in '93 I was working
for a Fortune 500 company and decided I wanted to have
something to hedge against just a standard 401(K) for my retirement, I didn't wanna bet on
the casino on Wall Street to take care of my retirement, and so I started looking into many other investment
books on how to invest and other alternative investments, and then I got into real estate. And so yeah that's when I got plugged in, started buying everything
I could get my hands on books about investing in real estate, and then two years after
that joined the local REIA, Central Indiana Real Estate
Investors Association, and again listening to a lot of the gurus coming through and started investing in single-family houses. And so buying them to follow
in the Carleton Sheets method, and the Ron LeGrands of the world, and buying them to rent, putting in a fair amount
of work into them, refinancing, pulling cash out,
and then buying more of them. The idea was to grow a rental portfolio. And that was going well
until it didn't go well, and I didn't want to
get out of real estate, I still liked the idea and I thought there was money that
could be made in this, I just needed to ramp things up and get some economies of scale. And so I started buying
apartment complexes as well, and so we had a whole bunch of houses and a whole bunch of apartments. And then the recession of '99 hit, and what that did is it put a pinch on everybody, but well at that time, we had a lot of rentals, you
know we had about 500 units, and the Community Reinvestment Act, was put out into the marketplace, where, as we all know, which was the cause of
the Great Recession, you know anybody that could
fog a mirror could get a loan. And so our tenants were
leaving to get houses, because they could and
who could blame 'em, and so we were trying to turn that ship around
and that's when we almost lost it all, I mean, for three years we struggled to turn that ship around, and finally get ourselves out of that, sold all of our houses and virtually all of our apartment complexes, we had one left and that's when I started looking into self-storage and I thought, you know I don't wanna be
susceptible to tenants, and toilets, and trash, and houses, apartments, you know take a dive during every recession, they just you know the values go up and down, and it's just this crazy cycle. So what can I invest in in real estate that doesn't have tenants,
toilets, and trash, and isn't affected by a recession. And so that leaves parking lots, but you can't create a
lot of value in those, and self-storage, because when tenants don't pay you, you lock them out and you sell their stuff. And during a recession,
there's an increase in demand for storage because
people are down-sizing and business are down-sizing. So during a good economy
things are chugging along up and to the right and
then during a recession the whole self-storage
industry takes a spike because there's lack of development
because the banks tighten up and there's an increase in demand. So it's that inflation-proof,
recession-proof sector. So the more I got looking
into it, I realized that yeah, if I'm going to stay
in real estate, weather the storm and not only lose
a business but have one that thrives during every
economic cycle, I better learn about this and so I did. So I started learning
about it, investing in it, and lo and behold, I don't
know how far you want to go with this, we have grown
our education business and our investment business
and blended the two together. And that's where we find ourselves now. We have an education
business that was doing very, very well for awhile and
I had to really kind of draw a line in the sand
and say hey, I'm either going to spend a lot of
time teaching people how to do it or I'm going to do
deals and make more money. And so we kind of backed
away from the education side of the business but still
kept it open, but only working with people that
we know are going to go out and do it and we could
potentially partner with. So now, we have some
high-level mentoring programs and masterminds where we're
just working with eight players so that we can go
out and partner with deals and tap into private equity. So that's where we find
ourselves today, is doing deals all over the country
with our partners and developing projects here
in Indianapolis as well as all throughout the
country and in a pretty good spot right now. It's been a good ride. - Yeah that's awesome. Thanks so much for sharing that. So I actually have the
privilege of moonlighting Scott's course on storage units. So in the next couple
of weeks as I go through that I'm going to be
doing a completely honest, non-biased review of my
thoughts of everything he went through and I'm
going to be using the material that I find in
there to actually go and get a storage unit. So I'll be tracking,
very much case in point, I'm going to get in the
trenches and go get one and bring you guys along with me. So definitely check out the blog. There'll be a link in the
show notes eventually. Once I actually have the
review out we'll backlog and I'll put a link to my
review in the show notes. And that'll be at www.retipster.com/28. - I'm looking forward to that Jaren. I'd love to get your
thoughts on how that works and what you're able to learn from it. Well Scott I'm just
curious, there's a lot of fundamental questions that
immediately come to mind when I think about the
self-storage business. And one of those questions
is, in your experience personally, have you gone
after facilities that already exist, that were
sort of dilapidated and then you bought them
and turned them around, or have you been building
them from the ground up. Like buying land and just
building it from scratch. - Yeah, a little bit of
both and in the beginning, of course the quickest way
to get into any business is to obviously buy one
that's already up and going and cash flowing. And that's obviously
the safest way as well because you've got a
historical track record of performance that the
bankers can track and they can say, well, if
we're going to buy this facility and we're
gonna loan you the money so that you can buy this
facility, we can look back on the past 12, 24,
36, 48 months and see and predict, see where
it went and now predict where's it's going to head from there. So that's, from that
standpoint, that's where we had to start because
we couldn't walk into a bank and say, hey,
I'm going to develop a facility with zero experience. But also, I'm a Value Ed
guy, I started out with houses and apartments and
always buying something distressed, turning it
around, putting money into it, creating value that way. Apartments are income
producing so you raise the income and lower the
expenses and that's how you create value in apartments,
because it's an income stream versus just the real estate. Self-storage is the same
thing, it's real estate. So you can improve it and
make it look better but it's all a function of
bringing in more income, reducing the expenses. It's all about the net
operating income and making those changes and that effect. So buying those existing
distressed from the mom and pop owners who
didn't add any technology from even a website to a kiosk. We can run our facilities with a kiosk. Putting in standardized
collection procedures. Taking advantage of the
technology that's out there today and running it better. And marketing for crying out loud. They weren't doing any marketing. Or, I love it when I can go to a facility, it might not even be
distressed but we go to a facility and these
owners say, well we've been full for five years now, we're 100% full, we have been for five years. I know exactly what that
means, it means they haven't raised rates in ten. So we can go and increase
the value that way. So that' how we started,
first several years but then we lined our
pockets and got a kitty to go out and then
develop because that's how you truly add value in
real estate is you buy a piece of dirt and then
you put an income stream on it. Or you buy an old K-Mart
or an old bowling alley and you convert it and put
an income stream on it. That's when you really
create value in real estate. So doing a healthy
mixture of both right now. We're doing a lot of development because through the Great Recession
there was a huge demand for storage but the development
dollars by the banks weren't out there. So we're still in catch-up
mode and so for the past several years we've
been embarking on a lot of development projects and launching more all the time. So I think it's a healthy mix. For the folks that are
listening and looking at getting into this for
the first time, clearly an existing facility,
a turn-around project, the Class C facilities
you take up to a Class B. There's always a market for that. As long as you're hitting
your marks and doing your homework right on
the front end, you should be in good shape. - Yeah. I wonder if you're
looking at an existing facility and ways that you can improve it, make the income higher
and lower the expenses, I heard you say things like
technology, advertising, things like that. But I wonder, does it ever
happen where, the reason the facility is doing so
poorly is because it just never should have been
built in the first place. There just isn't a market for it. Does that ever happen? Or is there always
something that can be done to make it better? - Well never say never, never say always. It's pretty rare that we'll
find a facility that's underperforming and it's
purely because they never should have built it in the first place. First of all, any facility
that's going to be developed today, it's a
little more serious business. Back in the old days,
in the early stages of self-storage in the
'70s and early '80s when there was a big self-storage
boom, the mantra you hear in our industry
is build it and they will come and that was the case. You could plunk one of
these things down in the middle of a farm field
as long as it was a small enough one that would feed that community if you will, the demand
there that it would be fine. But as self-storage is
coming to mainstream now most developers are building
multi-story, temperature control, they're not out in
the middle of a farm field or in an industrial part of
town because that's where the zoning is. Now it's more of a retail
store and a location and has that type of zoning. So you'll see them, my
developer buddy says, who lives down in the Southeast
says, "I wouldn't develop a facility unless I can see
Walmart and smell McDonald's." And those are the sites
that we're seeing, the intersections and the
places where we're seeing facilities being built. So they're becoming a
little more expensive but it's a more expensive
asset and so for that reason developers aren't
going to spend millions of dollars to develop
this thing in hopes that they will come anymore. So, long-worded answer to
your question, Seth, but there's a set of numbers
we can hang our hat on for the most part and that
is when our market for a storage facility, if we're
going to buy an existing one or develop one, I'm
going to draw a three-mile ring around that site, that
existing facility or this piece of ground that I
want to buy and develop and I'm going to look into
the existing self-storage facilities that are there
and we have ways to get the square footage of all
of those, we want to know what the square footage is
and then we compare that to the population. The magic number if you
want to call it that is somewhere between six and
a half to seven square feet of self-storage per person
in that three-mile radius is considered equilibrium or thereabouts. If there's 10, 11, 12
square feet per person, maybe you're getting
towards over supply and they are compressing the prices
a little bit and they may not have high occupancy. We're in that five, four,
3 and a half square foot per person, there's some
unmet demand and we feel pretty confident, we just
know this industry, we can bet on those numbers to
go in and we can build a facility and absorb that
excess demand for self-storage. Now, in the case of an old
facility as you mentioned, if there's something that
just shouldn't have been built in the first place, maybe. But that's pretty rare
because even a small facility, you phase these things in. You got four acres you
could put 400 units on it, but we're going to put one
building up with 100 first and fill that up and then
we'll bring the construction crew back and build the next
and the next and the next. So the only times when
somebody maybe gets in trouble because it shouldn't have
been built in the first place is that maybe they
just flat out built too much or they didn't keep up with
competition and they were the mom and pop that didn't
add any technology and they hadn't raised rates
in eight and they pulled every dime out of the
property and now it looks horrible and they don't
have any money to reinvest back into it and then the
other competitors came in and just at their lunch because
they have a better product and they have a website
and they have marketing and everything else to
really just out manage them and out market them. But it's pretty rare that
we go in and see that the market is actually
broken and this facility no matter what we do it won't work. That's pretty rare. - In terms of looking at
taking that three-mile radius around the property, does
it matter at all what the occupancy rate of the other
existing storage facilities is and does the income and
demographics matter at all? Like if it's a high-income
area or a low-income? - All of the above, absolutely. So when we go into that
market, part of that market analysis is looking
at first, let's look at the supply index that I just mentioned. That's the square footage
per person, that's called the supply index. So that's number one. Then we go visit the
competition to see what their occupancy is because
even if it is a market that's above that six and
half to seven square foot per person it may be ten
square foot per person. Well there's more demand in
some areas because there's more apartments and fewer
basements and high-density housing in maybe a transitional area. Florida has no basements. I mean, there's higher
demand factors that play in those markets anyway. So we visit the competition
and if they're all full and they're supposed to create
sense of urgency anyway, well, it's the last one, do you want it? But when we go into the
facility and they say, we're full, you know they're not
lying to get you to rent something because they're full. So we do that or if we
can't determine what that is we'll rent the cheapest
unit and shh and then go walk around and count the
lots and find out exactly how many units are rented
so we can find out what the occupancy is at those levels. Now they publish the rates
so we can see if they're raising rates and if they're
in line with the market or the country and if the
rates are low then we know there's a problem with the
market from that standpoint as well. So we go in, what was the
third part of your question? There was another piece
I wanted to touch on. We talked about rates, competition and oh, just occupancy in general. If we're going in and we
see that the occupancy is low then we'll look
at the market again, look at the numbers, are they
just not marketing well? If that's the case, if there
really is an over supply and the rates are low,
all the competitors are at 60% occupancy and this
facility that you're looking to buy is at 50, well if
you think you're going to take it to 90 and
that's going to be your value-add, well, guess what? The market is already at equilibrium. You don't have much room
to go up and so in that case, if you're banking
it based on that we may back off. Again that's very rare
but those, the facility may look great and your
numbers compared to the price that's the asset,
but man if you're going to drive value in this thing
the market is so important in self-storage and an
income-producing asset because we have to look at all those
factors and where we can take it because we're always
looking at exit strategies. So you're spot-on, we need
to look at all those things. - Yeah. I know we'll
probably cover this later on but just to make sure I
don't forget the question, when you talked about
advertising when say, an existing owner is not doing any of
that, where exactly are you advertising? Is this like Craigslist or
Facebook or Yellow Pages, or what do you do? - So we'll walk into the
facility and we're talking with these owners, especially
if it's a distressed and it's not working well
and the mom and pops, one of the questions I'll
ask when we get to the place is, "So tell me about your
marketing program right now. "What's your marketing budget look like?" And they'll say, well, we
sponsor the Little League team and there's a diner
downtown and we're in the top right corner of that
paper place mat that they put on there, we got the
best corner, it's in the top right, that's where everybody looks. And we got our sign out
front and it's faded and it looks horrible and it
doesn't look like the place is even open. I say, okay, so you tell
me a little bit about where you're advertising,
but tell me what your marketing plan is. I get one of these
deer-in-the-headlight, like I got a foot coming out of my
forehead, because they have no clue what a marketing
plan is in terms of driving revenue or driving occupancy. You typically can't do
both at the same time. But what are you doing from
an advertising standpoint to light your facility up
to make sure that people can find you. By the way, 90% of all
rentals are coming through on this these days. Ninety percent of all rentals
are coming through on this. It's a commodity. When people are searching
for storage they pick up their phone and they look to
see who is closest to them. They get on that website
and then they look at rates and look at pictures to
see if it's clean and then obviously the map and then they go. We can rent to you using
that device or reserve units using that device. So the mom and pops that
aren't even doing that then, yeah, they're falling way behind. So drive-by traffic is
still important but mostly for just awareness, top of
mind so that when somebody is looking they'll say,
oh I remember that now and I remember the signs and the flags. I remember where it's
located because I've seen it. So we do put the flags out. We do have great signs. We put antique moving
trucks, we're buying antique moving trucks and doing kind
of a partial restoration and parking them out front
to draw people's eyeballs to them. But you gotta be where people are looking. When people need storage,
it's a commodity, when they need it they're gonna Google
it and we need to be able to be found. So the marketing side of
this has changed a lot. It used to be Yellow Pages
and thank God we don't have to do that anymore
because they were so expensive, and how many AAAA,
All American, All Access listings can you see
because they all want to be at the top. - Oh yeah. - That's not what drives us any longer. So it is marketing, it is
online where most of it comes from. A little bit of social
media, little bit of Facebook but people aren't really
getting to that place and again ads don't do a
whole lot, it's not like a Valpak or similar coupons
you see on Facebook or anything else where you
grab it, you know you'll need to go to the dry
cleaners or get your hair cut eventually. For storage, it's
needs-based, it's a commodity, so we just need to be
there, answer the phone, make sure there's a website
up and a presence there with call centers so that
when they do call, we answer. Otherwise, they're going
to go down the road. They're going to go somewhere else. They don't care, they just
want someone to answer the phone and mom wants
to check this thing off her list, you know, rent
a storage unit to put all of dad's stuff in. - So I want to dive in kind
of from a 30,000 foot view. When you're approaching a
market, I lived in Indiana, right, I lived in Indianapolis
and now I live in Chicago. Chicago has a ton of storage units. Is Chicago a good market? Are there pros and cons to
a Chicago vs. Indianapolis? Would you not even invest in Indianapolis? I have another friend of
mine, he actually sent me some questions to ask you
who lives in Anderson, and he's in contract right
now trying to convert a warehouse, a commercial
warehouse, to a storage unit in Anderson. Would you target markets like that. Anderson for those of
you who might not know, in terms of putting your
mind, it's like there's a small Christian college
there but there's really no super robust economic
force, it's more of a rural small town outside of Indianapolis. So are you thinking big
city, San Francisco, Chicago is good, Indianapolis which
is kind of a mid-point city, or rural that has a
chance of appreciation. What are you looking at in
terms of market and then how do you find a deal in all of that. - So, very good question
to you, Jaren, and also the person who asked it, is
we're investing outside of the major metropolitan
areas and so we'll take an Indianapolis which, just
to clarify, it's like the eleventh largest city in the country. Chicago is third or something like that. So I'm not investing in
Indianapolis, I'm not investing in Chicago,
but I'm investing in the donut cities, the suburbs,
the donut counties around that. So the second tier
cities, secondary cities, for people who are familiar
with that it's basically once you cross the line
and you get out of that major MSA. We're investing within two
hours of the major MSA's and that's about as far as we'll go. We don't like rural areas or third tier because there's just
not enough population, there's not enough going
on or population increase to make sense, create value. So when you're talking
about a market specifically and invest in this
market or this geography, Chicago doesn't show up, put it this way, Cook
County doesn't show up on the radar for any
investor's map these days. - Yeah, for sure, I know why. - The tax structure,
there just seems to be no ceiling for those folks
in terms of the percentage that they can raise taxes, nobody, well, nobody I know is
investing in Cook County right now. But there's a whole lot of people coming right across the line, in Crown Point, Merrillville, Indiana and also up into Wisconsin. Again, I'm not looking
at a market so much, I mean I would tell
anybody out there that's looking to get ready to
do this, start looking in your backyard and still draw a two-hour radius around your house. There isn't a self-storage
"Oz" where everything is paved with gold and the rates are high and occupancy is low and you can go in and create value and
develop wherever you want. You start looking
around, because remember, even in Indianapolis or
even in Anderson, Indiana, if you begin looking at
a warehouse to convert or a built facility to buy, I'm gonna then draw that still three-mile
ring around that site and that facility. That's my market. So I don't care if that
market is in Anderson, Indiana or downtown Indianapolis,
or downtown Chicago, or Miami, or Beloit, Wisconsin. It doesn't matter. I want to know what's going on in that three-mile radius around
this facility that I found, that looks to be
undervalued, or this site, or this warehouse that
I can get for pennies on the dollar and convert
it and still end up with less cost in that
than if would if I built it from the ground up. So, does that make sense? - Yeah, no that makes
perfect sense and that really helps clarify some things. How do you find these deals? Are you doing direct mail? Are these properties on LoopNet? Is there like an MLS alternative that's heavy in the storage unit world? - That's top secret,
I can't tell you that. Alright, so, no different
than any other form of real estate. It's a shotgun approach. So, yeah, there's self-storage
specific websites. There's a number of them. There's about, probably,
six or seven of them that we scour on a regular basis. SelfStorages.com and List Self Storage. If you Google self storage
for sale, you'll see those top ones. LoopNet is also one. We don't find a whole
lot on LoopNet, even with a subscription service, but
put the keyword "storage" in there, that way you
find a lot of things. Not just self-storage
because people list them as mini storage and other things. But what LoopNet is
helpful for, Jaren, is most of the people looking
for the investor pieces of property that could be
converted is sometimes land. So it's already got the
zoning in place so it's much quicker to convert
something like that. So that's the bigger benefit of that. It's making relationships
with the self-storage brokers out there in the marketplace, Marcus & Millichap,
Argus, Sperry Van Ness, some of the self-storage
brokers that are specific to that industry and even
the larger commercial houses and even the smaller ones
depending upon what city you're in, you find the
commercial brokers that do storage in that market
and create a relationship with them. For us, and for people
that are starting out, we're still looking for
the smaller facilities, the Class C facilities
that not everybody is looking for and has a perhaps
a smaller buyers' pool. - Can you real quick, I just
want to dive into there, hold you point because I
want you to keep going, but in terms of, when you
define a small storage facility unit, how many
units are we talking? - So we've got classes,
Class A, Class B and Class C essentially in the industry. So Class A, it's the
three-story, gleaming, next to Walmart or across
from McDonald's in the downtown metro area. Most of what you're seeing
in downtown Chicago, even if it's one of those
old, industrial buildings that's six stories tall,
it's been converted, that's still considered
a Class A facility, all temperature controlled,
run by the Reeds, the professional folks,
Public Storage, Extra Storage, U-Stor-It. So that's Class A. Class A is the tight style
of facility, how it's run and managed, but also
determined by the market that it's located in. So a Class B facility, typically
single-story, very nice, paved gravel, in the
outskirts, it still could be in downtown Indianapolis
but mostly in the sandbox that we say that we operate
in as well, just outside the major metro areas. Has a management company
associated with it, manager on-site, 200
units and above or so. The Class A by the way are
usually 60,000 square foot and above or about 400,
450 units and above. Then we get into Class
C, smaller facilities and Class C, that means not
only rural because there's just not a whole lot
going on and the big guys aren't gonna go out there as well. It's gonna be single-story
and it's gonna be older generation, first
and second generation, built in the '70s, '80s, maybe early '90s. Anywhere from maybe 25,
30 units, I mean it's really small, that's not
even a facility, it's just storage buildings but then
on up to about 200 maybe even 250 units. But deferred maintenance,
mom and pop, maybe absent mom and pop, no security
systems, no technology, somebody that's not in the
office on a regular basis, not very well kept. That's Class C. So Class C is small and rural and unkept. B is larger, more
professionally managed, closer to the major cities,
single-story, some temperature controlled some not, still
have security systems, gravel and paved lots. Then A are the multistory,
real nice facilities. So, I'm contacting those
commercial brokers and saying hey, I want your
junk, I'm a Value Ed guy, so I want the Class C as
longs as it's in more of, closer to a second-tier
city, something that I can potentially take up to a B. I want something that's 150 units or more. I'll take something smaller
but it needs to be on three or four acres so that the
demand creeps up or if there's demand in the area I can add
additional buildings to it. So I want a 2X, I want
a 3X, my investment over the course of two or three years. So those are the types of
things I'm looking for. The brokers are competing with us. We're sending mailers out,
they're sending mailers out, blanketing the area. I'm saying, don't go to the
brokers, I'll give you more. They're saying, don't do
this on your own, I'll get you more than anybody else. But then they're gonna
get those small facilities that are hard to finance
because they've got, mom and pop got their
books and records in the back of their truck and
in unit 104 and all over the place. They can't put together
a loan, it's distressed, they've taken money
out of the business and it's tough to get financed. So that broker, their buyers
list that needs to make transactions quick and
close quickly, that's not going to work for that
broker and they don't have a buyer for those types of facilities. So I raise my hand and
say, I want your junk, give me your junk, send it to me. When you get those calls
back from mom and pops and you're going, you're
freaking out because now you committed to them on
your postcard that you were going to list it,
send it to me and give me 24 hours with all the
information you got, I'll go take a look at it and get back with you. If I'm gonna make an offer
I'll let you know what that is, and if not,
then obviously go on and I'll hopefully buy one
from you eventually. But it saves them all
that time and hassle of trying to figure out how
they're gonna get this financed with their buyers
list, if they're gonna sell it and then putting
together a package which would be almost impossible
for them to do because they have no numbers to
go on and then waste all that time and money to
split a couple hundred to half a million dollars
with another broker and then the house, it's just
not worth most of these commercial brokers' time. So I'm providing a solution for them. We approach them by
saying, hey, this is your lucky day. I'm one of your new buyers
for all your junk when you send those mailers
out so call me first. - I'm curious, when you're
sending out these mailers what kind of people are you mailing to? Do you find everybody who
owns stuff that's zone for a warehouse or something like that? What does that process look like? - Yeah, we start with
existing facilities first off. So we've got the SIC codes
for strictly storage, there's a list broker that we buy from and we just continue to
buy from them over and over again and we get a discount for doing so. So we'll say, I want
this zip code, and I want all these SIC codes which
kind of weeds out some of the things that we don't
want, like self-storage and convenience store or a
moving and storage business, I don't want that. Then the people that we
get the list from we send out a letter, it's a
hand-stamped, hand-addressed, looks like a letter from
mom and then obviously follow up on all of those
because that's where the fortune is is in the
follow up and following up with every mailer that
goes and saying, hey, did you get my mailer, interesting
in selling, da da da da da and going down that path with them. Sometimes they'll call
back, sometimes they don't. But then also the second
piece of that is that then we will go out to
the warehousing folks and just change that letter. It's just a basic, three-paragraph letter, hey, is it time to sell your warehouse? If so, then give me a call when you are and I'll send you some
money versus a broker, and I'm an investor like you. Some folks would rather do that and save commissions and fees,
that's appealing to them and other folks, they
would never sell anything unless they did it through a broker. We'll hit both angles,
we make a relationship with the brokers and we're
sending the mailers out, somewhat competing with
them in the marketplace. - Yeah that makes sense cool.
- That's awesome. So, I'm just curious, how
do you fund this stuff? Because I know that
coming from more of the residential world of
working and wholesaling, especially in Indiana,
people are buying properties, their marketing budget,
they're all in budget might be like 50 grand, 70 grand right? With storage units that's
a lot bigger number. So how do you, one, from
the acquisition side but really where I'm curious
is, how do you get funding for extensions and add ons and value adds. - So many of our investors
that are, and student partners that are getting
into these deals also only have $50,000 into them. So, let's take a step back. If you're looking at a
traditional, I guess if you want to call it a traditional model, where somebody, they want to find
a self-storage facility they're gonna buy one
as an investment as the hedge to the stock market. They don't want to put
their money up there anymore so they'll take whatever
cash they have or a self-directed IRA, retirement
dollars and they find a million dollar property. They're going to get a 75
percent LTD loan and they gotta put $250,000 down,
so lots of commas and zeros like you mentioned. So then they're done,
one and done after that. If they even have the
ability to do that and then either live off that
cash flow eventually or increase the value and sell it. But that's not most people. Most of the rest of us, we
have to keep bridging that gap, getting in to commercial real estate, there are more commas and zeros, it means more without payment, and more equity that you have to have to be able to play with. So, first of all, it's not
as difficult as people think in terms of the financing itself because banks are lending more on the strength of the property than they are on the strength
of you as a borrower. In other words, they're thinking
of an exit strategy as well Jaren, if this property goes south, Jeren doesn't make payments on this thing, we exit Jaren, and then
we get this facility back, well good, let's make sure
that this is a solid facility, and 'cause if we put a property
management company in place, lease it up and then sell it off. So they're concerned more with the asset than they are with you. So they just, the
standard stuff, you know, underwrite you, and personal guarantees, and they'll get some of
their money back from you, but they want the facility, but then when it comes to
the down payment on these, you know, we're layering
equity partners on top of this and we're going out to
the private equity folks. I'm not talking about card money, I mean private equity
partners where we give up a percentage of the deal. They are passive investors, and the returns that they get in our deals are higher than what they
would see in the stock market, and it's safer, you can
see it, touch it, feel it, they know the industry is such
a growth and inflation proof so yeah, we don't have
a whole lot of issue in raising the down payment,
over the equity portion of our deals because
we have equity partners that are coming in that are, they're not throwing
money at this industry, but darn close to it right now, I mean it's one of the
better bets out there, and you knows what 12,
18, whatever, 24 months in to the next correctional recession, and yeah people are pulling
cash off the table now and you know, we're gonna
have a hay day at that point because we are the best game in town, and we'll continue to
move on without a beat because we'll have a whole bunch
of private equity investors we're building the war chest right now, we got a lot of folks that are investing in our current deals, and want more, you know be it round,
and get even more of 'em in time for the recession,
and we will absolutely, we're just gonna kick butt. It'll be our Superbowl,
we're looking forward to it, so private equity is, again, the long answer to your question, is how we're able to do this, continue to do more, and more, and more, and if most of them have a 25
to $50,000 minimum investment, and so that's what I as a
syndicator, the promoter, you know, I'm matching that, so whatever that minimum is, I'm matching, that's my skin in the game. And so a million, five million,
$25 million you know, deal, I'm still 25,000 or 50,000 in, and it allows me to
continue to double down and do more, and more, and more. - So let's dive in to
that a little bit more, in terms of detail, what are we lookin' at in terms of like, how do
you find these, you know private equity investors, you know, obviously you can't go around saying, "I guarantee you're going
to make X return," right? - That's illegal. - It's illegal, right? So how do you, you know,
what's the approach, like how do you even
start that conversation, what does it look like to
put a syndication together, kind of dive in to what that looks like, and what are, and then from there, let's talk about what are typical returns. Like what are these investors looking at, and what are you looking at as a ROI? - So, you know, in the beginning, it's, it truly is networking. They call it friends and family money, because that's what it
is in the beginning, it's friends and family. You're putting together a deal, you're gonna put together
a private placement, it's gonna be a private equity type deal, and they're investing in this, you know, you set this up,
it's 506(b) Regulation D, 506(b) is registered with the Securities and Exchange Commissions, it's an SEC private placement, so these folks are investing
in shares of that deal. So every deal, I mean there's
a hundred ways from Sunday doing any type of deal out there, so, including a self-storage
private placement, so once we look at the numbers, let's say it's a conversion,
we're buying a warehouse, we're gonna convert it to self-storage, here's what it's gonna
cost for the building, here's what it's gonna cost
to fix the roof and the HVAC, and build out the office,
the shell, paint it, and put a lobby in, and then we add on to
that, the conversion costs, so putting in the self
storage doors and walls. On top of that, security
systems, and you know, kiosk, and anything else,
here's our total cost. Now, via our feasibility study, we have to consult that work with us, they state that it's gonna
take us three and a half years, and it's gonna take
two years to cash flow, and it's gonna be
stabilized in four years, we're gonna be at 85%
occupancy in four years, and at that time, given the market rates where they at right now, and
giving a modest, you know, 3% increase, in four years from now, at 85% occupancy, here's
what the net operating income should be. And then at that point, the
market we say should be, we'd be able to sell it at
a 8% capitalization rate, or cap rate, here's the value. So now we take that projected value, work that all the way backwards, and say if an investor puts in $50,000, you know they get cash
flow after year two, and then they get the big moon fall when we sell it out here at year four. Here's our cut of money,
divide it by four years, gives them their internal rate of return, how much they made on that
money over four years. And so there's a time
frame associated with calculating internal
rate of return or IRR, and so that's how we attract folks, and the way we attract them
is by offering a higher IRR than say a realty mogul,
or Crosstreak, Fundrise, you know any of those other platforms that are raising capitol for people to just
invest small amounts in. So we offer a little bit higher, and that's how we raise money, and collect a lot of folks, and then they tell other folks as well, and it grows from there. So now one more piece to add to that. Well we got this number out here, and we're trying to get to an IRR, you know what does that mean,
how much does Jaren get, versus how much we give
to the equity investors, so it could be Jaren, as
the syndicated promoter gets 50% of the deal,
and your equity investors get 50% of the deal, so
maybe it's one person that scorched the cheque
for the entire amount of the down payment, or it's 15 people all putting in $50,000, whatever that is, it's 50/50, and they get paid
first and then you get paid. But we're always backing in to
that internal rate of return and so maybe you have
to give up another 20% and so now you're only at
30% over and they get 70%. Whatever it takes to get
that internal rate of return that is say in the mid
20s, or right about 20% internal rate of return, you
need to manage to that number to get enough people that are interested to invest in that deal. And so at that point, you know if you know you need to use private equity, and you're at say, 70, 30,
and you're only getting 30, well how much money are
you gonna make on this? You're putting in 50,000 how much money are you willing to split? Well, unless it's a big pot,
it may not be worth your while. But if you're splittin' $3 million, you're gonna make a million and a half, or well no I take that back, 30% you're gonna make a
little bit less than that, but you only put 50 grand in, and you were the driver behind it. - Yeah, it's--
- Might be worth your while. 100% of nothin' is nothin'
so once people start thinking about partnerships and that realm, you're the syndicated promoter,
you're the general partner, and everybody else is silent, and limited, they're just putting in their money and collecting cheques, and they don't have a say in the business, those are for us have been
the keys to the Kingdom, and we do this very, very well. Our properties do extremely well, our returns are very high, and right now we have more
money than we have deals to do, so the growth side for us right now is finding more deals to partner up with that private equity
so it doesn't go away. - So have you explored
purchasing through land contract or through owner financing at all? Like if you're talking
to these Mom and Pops, is that even really an option, does that spook them out? - We do, I still like
to have control of it. I mean I'd rather do seller financing, you know I get the
deed, I get the contract through the bank. I don't like to buy
online contract so much 'cause they still, I don't
like anything that's, I don't wanna put a
dime in to any property that I don't have control over. I want the deed to cross the table, and so I'm familiar with all the tactics and creative ways, and land contracts, and deed lou, or not deed
lou but contract for deed, and you know all the double
gaters with a half twist, and that stuff, but I don't, I think all of it's risky buying, somebody else's LLC, yeah. I know people do it, and
people make money at it, but first of all I'm an educator, and I can't in good faith
go out and tell anybody to go out and do that,
you know that's just, all of that is too risky, and I certainly don't do it myself. It's not even one of those cases where hey do as I say and not as I do, 'cause I won't even do that. - So but you, but what about
like owner financing specific? If deed does transfer?
- All day long, love it. - All day long?
- Yep, mh-hmm. Yep, 'cause the deed
comes across the table, if they're the bank, yep absolutely. - How do you start that
conversation with the seller, because they probably never heard of that. - Early on (laughs), early
on, and multiple times throughout the negotiations. I mean it starts with that
the last thing that we say, usually on the first conversation is oh you know, after they say
how much they're asking for, I say, oh and by the way, most of these facilities that we buy, and the people that are in your position, are offering either some or
all of this owner financing, so that they can still get an
income stream for the property and reduced their capitol gains taxes, have you thought about how
much you want to put out there, or keep back as owner financing, so something like that, some
kind of assumptive approach, or have you thought about that? No I haven't, what does that look like. Well most of the folks that do this, that are at your age, or at
this stage of their career, to avoid capitol gains taxes, it allows you to reduce to
that, defer that as well, and still get an income
stream from the property, and just like a bank, 'cause
you're acting as the bank. And so if they say no, or if they say well let me check with my CPA, every single conversation up to closing, I'm asking them if they are
interested in doing that, and stressing there benefits to them, but in some cases, you
know health won't allow it, 1041 exchange, they need
to take all that money in to the next project, they're just cashing out and retiring, so it just depends, but I
will certainly bring that up, and stress the benefits to them of why they should be doing it. - That's awesome. - Now when you're doing your due diligence and your homework on these properties, like running your numbers,
just even the condition of the property, all that stuff, what would you say are
the most important things to be lookin' at, and are
there any particular things that stand out as like a bigger red flag when it doesn't look
the way you want it to? - Yeah, so there's the physical
aspects of the property. Fortunately we're talking about concrete, or metal buildings on concrete slabs, and it is self storage, so
which means that the owners of the facilities, including
ourselves when we own it, we don't have a key, we don't
get in to all these units, and so we can't see in all of them when we're doing our due diligence, but on the flip side of that again, the good news is when
you open up the door, what you're gonna see is a
metal box on a concrete slab. So there's not much that
we're ever surprised with. We hire inspectors to come out that understand how the
contractors have built these things and they know what a well
constructed facility looks like. Most of these roofs are steel roofs. Some of the older generation buildings have shingles on and so we
have them take a look at that, but how they installed the
standing seen metal roof correctly, if not that's an issue. Checking HVAC and the
temperature controlled units. So those are the main
things that you have seen that it drains properly,
that they didn't just scrape a farm field flat and
put these things on it so it doesn't drain at all when it rains, so those are some of the
things to keep an eye on, and the age of HVAC,
and the gate software, and things that the
major capitol expenses. Beyond that, and we're
looking at the numbers. I mean, we're buying in ample stream. Yes we hope that the asset
itself is in good shape, but we have to account for that, but I'm lookin' at all the leases. I'm lookin' at all of the utility bills, you know, by month, you know. I'm looking at every dime
that comes in to this facility and every diem that goes out of it. So I wanna see their general ledger, I wanna see their tax returns, and all this is included
in the due diligence, and part of the purchase agreement, and it's just acceptable,
that's just part of it. So they have to give us
all of our financials on this facility so we can audit it and then determine, you know, hey what you told the
broker, what you have here, is your net operating income. Well you got those numbers from somewhere, so now I need to see the proof, so once we're under contract, yeah those are all the
things that I need to see. One of the gotchas, or the
things to look out for, not even the gotchas, is the property tax. If the last time it was assessed,
it was assed at $250,000, because it was a vacant land, and the assessor in this part of town or this part of the
country, never came back out after they built it, and now
you're buying it for a million, well you can expect there's
gonna be a bump in taxes, depending on how they
increase property taxes, but those are the things to look out for. Maybe one of the bigger items to look at is are those property taxes gonna go up? But then during that, we're just going line at 'em, by line at 'em, questioning all the income
figures, and proof of it, and all of the expense
figures, and proof of it, and then adding back anything
that they've forgotten. You know if they haven't accounted for repairs and maintenance,
because oh I did it, or the manager does it, lawn, lawn care, snow
removal, well I did that, or the manager did it, well Mr.Seller, unless you're gonna do
that for me when I buy it, we have to apply an actual expense, an industry average expense for those because it's gonna cost money
for us to handle these things, so drilling down, we stress, what we call we stress
the net operating income, and so I'm not giving them
credit for all their late fees for running the facility improperly, and I'm not gonna give them
credit for the expenses that aren't there. I'm adding these all back
in for real expenses, and I'm beating that MI up, so that when I come across the table with my purchase agreement and offer that is considerably less
than what they had listed, there's justification or reason why, or I'm negotiating that purchase agreement if we're already under contract. We'll say, this isn't what,
these are your numbers, and the facility, it's
not producing the NOI, here's what the true NOI is, so we need to reduce
the purchase agreement, or the purchase price for this amount. And so just making sure that
we've accounted for every dime, and beating up that NOI, and then coming back to them
with the appropriate price for their asset, because
they forgot a few things. - Yeah, and in terms of figuring out an appropriate offer price, is there like some
standard equation you run, like take the NOI base
on your calculations times something, or I don't know. - That's the cap rate
that I alluded to earlier, so industrial real estate, we take an NOI, and a value as, it's a
function of many things, the age of the property and other things, but essentially we're getting our value from taking that NOI, and then applying a market
capitalization rate, so and that also varies
from Class A to B to C, so Class A facilities may be trading at a 5%, 6% capitalization
rate, it's a rate of return. Class B facilities are gonna be up to seven, eight, maybe 8.5%, and the Class C, in order to get, for people
to buy those facilities, are troubled and out there a little ways, and you have to offer a
higher rate of return, or a higher cap rate, so
8 1/2, 9, 9.5% cap rate. But we look across the
landscape to see in that market, what have all Class B facilities
sold for in this market in the past six, eight, 10 months, and if they're selling between that eight, and that 8.5% cap rate
then we'll take that NOI, and put that cap rate on or
divide it by .08, or .085, and that'll give us a
value to say you know, if everything went to heck
in a hand basket right now, we can turn around and sell it for this, you know this is what, it'll
support a loan at this price, and it's marketable at this price, and we can only go up from here unless something unforeseen happens. - Yeah, so it sounds like
it's a fairly unemotional date-driven decision then, I mean-- - It has to be, and--
- Like it just is what it is. - Yeah, it is was it is, and
so we can get in to the others, that's why there's an
art, there's a science to the underwriting evaluation, but there's also an art to it as well, and how we perform our due
diligence and put our price on it when we take it back
across the table to them, but also don't forget, I mean
what the exit strategy is, being able to see where we could take it. 'Cause I would still, I would
still buy a Class C facility, at a 4% cap rate, if it
was only 20% occupied. Does that make sense? 'Cause I'm only, it's only
bankin' on the income stream, and I know that when I take it up to, if the market will support,
85%, here's what the NOI is, and then I sell it at that point, even at 8 1/2 9% cap rate,
but you know that's gonna, the dollar amount is gonna be huge. So we don't hang our hat on that. It's kind of the leveler,
you know all things equal, you know facilities at 80, 85% occupancy, this is the cap rate that
we would apply to the NOI, but anything more that we
create is gonna be gravy, so we do the underwriting again, we have two sets of numbers. Here it is now, are we
paying a fair price, yes, here's where we can take it, well I can even afford to
pay a little lower cap rate or higher price 'cause
here's where I can take it, 'cause there's more upside on the deal. - Yeah, I know like when I was in banking, something we ran in to, not a lot, but it definitely happened
from time to time, was for example, whenever we would be analyzing a restaurant. A lot of times Mom and Pop
restaurants can be like, they get paid a cash amount, and they just kind of pocket it, and they just don't, they
don't put it in their books, and I imagine that that probably
happens more often than not with very small Mom and
Pop storage facilities, so when you encounter that kind of thing, where there is like no historical data, or just it's not all there. Just like make stuff up then, or do you just say, "Sorry, I
can't make an offer on this." - Yeah I mean that's interesting. I mean that creates an
op, it's frustrating, and also creates an opportunity for us because coming from the banking world, I've got a set of numbers
here from the broker from the seller, that they've given me as to what this thing produces, and then I'm gonna ask them
for their scanned jaleaky on their tax return for that property, to see how the income and expenses, and guess what, that scanned jaleaky is gonna look dramatically different from the numbers they give me. Th income is lower, and
the expenses are higher. So I will use that and play
that against them as well, and say well here's what
I see on your tax return, and certainly you wouldn't
lie on your tax return, because that's tax fraud, and
you'll go to jail for that, so these are the real numbers, correct? Well come on, "Scott, you know
this is a crash business." And so, well what are you saying, Bill? Well what I'm saying is
when I sell locks box and moving supplies, I'm
putting six grand a year in to my pocket, here,
here, and here, whatever. If they actually say
come out and say that, but if that's the case, I may
even use their own numbers of a 10% cap rate if they
put six grand in the pocket, you know that's $60,000 in
value that I can't account for on the NOI, and so therefore
they just took a $60,000 hit on the value that they're
gonna get at the posting table on that property, so having
that discussion with them, they don't like it when you
throw it back in their face. I say well listen, the
appraiser, since you did this, the appraiser can't see the income, the underwriters and the
bank can't see this income, so therefore that value is not there. It's certainly not there for tax purposes, but you also, congratulations,
you put six grand in your pockets, but you just
shot yourself in the foot for 60 grand, so that's one challenge, but then the other is,
if you can't get any data on these things, if there's no records, a proverbial shoebox is
how they do their taxes and run their business, then
we can piece it together, if this is a community
bank that, given the in, here's what the insurance is gonna be, here's what the property taxes are, here's the income that we
can see coming in right now, here's our industry average,
this is how we're gonna run it from expense stand point, yeah we do, it's kind of the NOI
is, it's Frankenstein. We piece it together from what we've got, and if the bank accepts it, then fine. If we can show them the
path of profitability and how we can make this sing
later on, then we're good. But if they gotta hang
their hat on a hard number, and we can't get any banks
that won't see what's going on, then it's out, he's gonna have to start putting the money back in to the till, and then recording it for a year, before he can sell that property again, or try to sell the property. - Sometimes, I've been
hearing kind of returns, like an 8-cap, I've been,
you know 9-cap, 10-cap, I'm just curious like, in your experience, coming from more residential, buy and hold kind of a background,
people, I mean I knew people who wouldn't buy a property
unless they were making at least 15%, right? So in the storage unit world, I know that the average is eight to 10, is that what your experience
is, and is it okay, because just the numbers are a lot bigger so it's okay, like-- - We're talking about two
different things here. So capitalization rate
is the rate of return if you just buy it and hold it, right?
- Right. - That doesn't take in
to account depreciation, and also doesn't take in to account if I'm paying myself the management fee, and I'm paying myself a
property management fee as well, so the returns go up exponentially
from that stand point. But when you say a return,
if it's just a rental in the 15% range, yeah maybe, but look over the history of that and not too many folks are doing very well if you take in to
account all the vacancies and over a three to five year period. But also in the residential world, most of that is realized on churning churning properties over again. Well if I take a
property, and like I said, I'm looking for a 2x or a 3x return, if I turn around a property in two years, I bought it for 750, and
I'm selling it for 1.5, or 1.2 million, at that
point, when I exit, that pay day is huge, and my
returns are well north of 15% at that point. - Yeah, no that makes sense. - I bought it at an
8-cap, and I improved it, and now it's running along at a 9-cap, you know in terms of
just the cash on cash, you know what's bringing it in, but when I sell it,
ultimately I overhaul return, cash on cash, or net return to me is gonna be 10x that number. - So when you do your due diligence, is there like a certain
number where you're like if I can't make this in x years,
I'm not touching this deal. - Yeah, essentially.
- What's the-- - And well most of that
is predicated now, Jaren, on the fact that I have
private equity in these deals. So if it's a deal that
I'm doing on my own, and I'm not sharing it, and
I'm not splitting equity, meaning I don't have to
hit that high RR number, then there's some deals that I'll look at that don't have as big of a margin, or a big of a multiple on the back end, and I can afford to do that,
and it still is worth my while. So but most of the deals that we're doing involve private equity, so these things, they need to be not doubles or triples, they need to be home-runs
with grand slam home-runs, and so it is all a function of me looking out, saying
it's gonna take three years to convert this and lease it up, or it's gonna take five
years to develop this, and lease it and get it up to this place, and when I sell, here's,
based on our projections, here's what the number's
gonna be, and roughly the IRR, that is what is gonna dictate
whether I move forward or not, and if I have to give
them 90% of the cash flow and the profit on the back end, and I only get 10% in
order to meet that IRR, then that's when I back out, or I find a way to do it on my own, and pull my cash from somewhere, 'cause then the deal
may still really work. But then I'm getting 100%
of the benefit of that, using my own cash to find if it's okay, if it's okay with me
when I check with myself that I put that cash in to the deal, and to see those returns. - So if I'm understanding this right, so your ultimate goal with
every self storage deal is to basically buy it, turn it around, sell it a few years later. Like, do you ever buy and
just hold it like forever? - [Jaren] Are there SEOS? - I did that for about
eight months back in 1993, following the Carlton Sheets method. (laughs) and I was gonna
hold on to everything, and since then, if you look at, I mean I am not the most creative, I am not the smartest investor out there, but I get real estate math,
I understand it real well, and when you buy something
at current value, and then you sell it and you
pull that money off the table, and then you go buy two
more, or a bigger one, and you ramp it up in value, and then you recapitalize,
you know pull that cash out and recapitalize, you do
that over and over again, you are going to be
exponentially more wealthy than if you bought something,
put your cash in to it, and built value, and then just rode it out for modest increase in rent,
modest increase in value, or over time the market, you've
put all that money to bed, all your equity is sitting there, and your internal rate
of return goes down. You're not losing money,
but you're certainly not, as long as I've got
energy, and the ability, and a team around me,
to go out and do this, I will always go out,
buy and create value, and as soon as I hit
that peak, I'm exiting and pulling out, and going in to, and doubling down in to the next one. That's how the wealthiest
people in the world have made their fortune in real estate. There's a whole lot of wealthy
people that are buy and hold, but nowhere near as wealthy as the folks that know how to create
value, went out and done it, and then they do it over,
and over, and over again, and rinse and repeat. So essentially when I get,
let me the last part then, Jaren, and Seth, when I get old enough that I don't wanna do it anymore, I'll keep those last two or
three or five facilities, and then ride in to the
sunset, but for now, I'm just building the empire. - What does your work week look like, in terms of hours, are you
primarily just focusing on acquisition, like
what does that look like? - Yeah I understand the
best business practices, and I've got third party
property management companies that manage our facilities, we don't manage anything internally, I don't hire employees or staff, those facilities, those are all done by third party property
management companies. We have three of them, arguably
four throughout the country, depending upon geography, that we use, and we hire them to
manage those facilities, and they oversee that. My job is to just meet with them regularly and make sure that we're
all driving the needle in the right direction. So I'm not working on that, and besides I can't see managing anything, that's no fun, so for me it's
putting the deals together, so yeah I'm in acquisition mode, I've got two roles in my business. And that is to raise the capitol, and to find the deals and match 'em up. So I'm doing these two
things all the time. Obviously there's other
things that need to be done, and the meetings with a management company is on that side, but yeah my primary goal is to create the vision for the company, and then make sure that it is going up in to the right, and that happens if I mess up with management. - How much hours do you put in per week? Is this like, is this like
a full-time, you know, from that four hour work
week mindset, right, like is storage units a, I mean obviously if you just bought it and you didn't care
about being filthy rich, and you just wanted to
like live on the cash flow, then it is a viable option,
but for your method, like how many hours of work
are you putting in per week? - That's hard to gage. I went to a strategic coach,
a number of years ago, in Dan Sullivan's program, to learn how to be an entrepreneur who isn't working 24/7, 365, 'cause those of us here on this call, and many of the folks that are, I mean we all know that
it can get that way. All of us are type A,
and we all could do that, and I did that for a couple of years, but also made a conscious decision that I wanna raise my kids,
so our kids are home-schooled, my wife works in the business with me, as well as helps to teach the kids at the school that they
go to, and we travel. I'm on, we're on vacation
around the mission field for about six to seven
weeks out of the year, and that doesn't include
holidays and whatever else we do, so when I'm working, I'm
at my desk usually at 7:00, and I shut it down at 5:00,
and I'm there for my kids, and I'm at every activity that I can be at unless I'm traveling for some reason, and I don't work on weekends, so that's it, there's some weekends, or some a season, maybe there's a week where we gotta put a deal together, and I have to work a little extra hard, but outside of that, I
keep those boundaries, so but I'm in a different place now, you know the fly wheel is spinning, and I'm just adding to it,
versus the heavy lifting that needs to be done in the beginning, and so there's no substitute for that. In the beginning, you're
gonna have to put in the work, you're gonna have to put in
the 60 hours a week to do so. But some of our folks,
I mean we've got doctors that you know, sold their practices and didn't make enough to retire, and they came to our events
and got some of our mentoring, and we got him in to a facility, and they bought one and sold
it for a million dollar profit, rolled it in to the next one, and that provides now a
supplement to their income, to retire the way they wanted to when they first got in
to the medical practice. It just depends, what's
your number, you know? Are you find with 20 grand a month, can you live on that? Some people need 40, or want 40, some people need 50, or some people wanna just continue to grow, and grow, and grow, and others wanna buy it just
as a hedge to retirement for that one deal, and
maybe end up with $2 million when it's all said and done, and then they sell that one facility off, that they held for 15 years, so I mean come on, we could
all work 100 hours a week if we wanted to, but we can
all also reach our goals and be rich in life
without having to do that, and it's not about the
numbers and the money. - I actually got a question about the management
company aspect of this. 'Cause I know that's just
a, no matter what you do, whether you're planning
to get in and get out, or manage it long-term, that's
just a crucial component. - [Scott] Yeah, absolute. - First of all, what is exactly is this management company doing? Like what is the day to day task, and then how much so they cost? And then where do you find a good one? Or like what questions do you ask to know that you're dealing with an able? - Sure, sure. So there's two components
to the management of this. So there's a property management company, and they oversee that asset. So they're responsible for that, which means if they do the bookkeeping, they do the marketing for
it, and they staff it, which means that they do the hiring, they do the interviewing and the hiring of the person that is on payroll that sits behind the counter, so that is the property manager, but that has nothing to do
with property management of the property or the asset itself. So there's two functions. And so they basically handle all of that. Their compensation, I will only work with property management companies that also have a performance component to their compensation. So it's not a flat fee, they're gonna manage this
facility for two grand, and then I pay on top
of that, the hourly rate for the person behind the counter, that clock watchers need not apply. That doesn't do me any good, I don't need a caretaker at the place. Our property management
companies work for a base, a minimum amount per month, and then the rest is at risk, and so as the performance
of the facility goes up, then so does their, their compensation, and it goes up by quite a bit, because I don't make money, our equity investors don't make money, unless the property is, and so yeah, if I had it my way, when
I become supreme ruler of the universe, if
anybody ever votes me in, all jobs will be performance based, and there will be,
nobody gets paid per hour just for showing up, and
sitting in a chair, or standing. - I love that yeah, thank you. - So that's, so then the third part stuff is where do find 'em? I speak at the industry trade shows. I'm there in the community if you will, and so we interview and we
know who's doing a good job, it's a, it's an extremely large community, yet a very small community, when it comes to the folks
who are doin' a good job, and the property management space, and we know who they are, and those are the folks that we use, and one of them, we've
been able to really grow their company, as a result of us expanding in to different markets,
and we'll pull them in, and then they'll hire regional managers, and find a way to be able
to service that market, and then they'll go out and
try to find others on their own to manage as well. - Yeah, have you ever had to fire one? - [Scott] Fire a management company? - Yeah. - [Scott] Yep. - And like, was there a
particular reason why, like what were they not
doing well, what caused that? - Making me money. (laughs) Yeah, it's some basics,
just and you could tell, you're never gonna get
a management company, or manager behind that counter that's gonna run it as well as you. They're never gonna have
that same sense of urgency, in all facets, but you
come to expect that. You give up perfection, and
you can't expect them to, any person or company to do that. But when they're not coming close to that, to the point of just
really neglecting things, and having these same conversations and maybe some of the
basics aren't getting done, then it's time to move along. But some of them, one of
them just grew too fast, and they didn't have
enough regional supervisors to keep on top of the managers,
therefore the properties, and we just weren't seeing
that increase and performance that we knew that the
property and the market would dictate and warrant, and so it was just they
weren't driving it, 'cause they didn't have
enough man power to do so. So that's about it. - Sure. - But again, if you've
got that performance, and it should be there, if
you've got the performance, so their compensation,
their and I mean naturally, that should drive 'em. Not in all cases, but at least helps. - Alright, Scott, so one
final question for ya, is from my friend Tyler. So he's the guy that I told you is buying an existing
commercial pole barn, and converting it in to a storage unit. He just wants to ask like, with the rise of percentage rates from the national prime level of like what lenders will lend on, if it continues to go up, if it goes up to where
back in like the 80s, where it was like 15%
that you have to pay, or 18% that you have to
pay your bank for a loan, what is your take, like
how does that affect the storage unit world? You know, because the ROIs are smaller. I guess, like we kind of
touched on this earlier, I guess that it's a communication between the cap rate and the ROI, but what's your take on that question? - Yeah so you're right that the cap rate goes in step with interest rate, so as interest rates rise,
so does the cap rate, so you have to have, if
interest rate goes up a point, technically cap rate should
go up a point as well, and be in step, otherwise
nobody would make money. That's the yield is the
gap between the two. At the point of interest rates go up and cap rates stay the same, then all of a sudden, you're
just, you're breaking even, you're not having returns, and it could get worse eventually, so the market and cap rates
naturally kind of level off, and people just understand
what an acceptable cap rate is, if you're gonna sell a
property, and also the bank. If it's a really low cap rate
and interest rates are high, it won't cash flow, and it won't hit the net service coverage ratio, so the market just takes care of that. Now if it gets up to
15 or 18%, oh my gosh, you'd have to be buying stuff, I think people would have
to come out of pocket to sell something, or we'd
just be going back to the bank, so I mean I know what our answer is, is that we obviously watch that. Some projects, development
projects, won't work if it doesn't cash flow for two years, and then we start paying on that, well then if it's a
accrued during that time, or if we're paying interest
on interest at 18% or 15%, most of these projects are dead before they come out of the water, and so there will be no development. The existing facilities
that are out there, people would just be holding on to them, and they won't be able to sell it, and they would have to get
such a horrible low price because of that high cap right, 'cause the more you
drive your cap rate up, if you're selling, it means
you have to lower the price of your property, so by default, those folks are just holding on to it. But, at some point, those
folks that are holding on to those facilities, they're
gonna have to refinance, and it will be a rate reset, and they may have to come out of pocket, if they didn't create enough value in it to cover the cost, and that can't happen if they're not coming to
the closing table with cash, so they're handing the
keys over to the bank. Banks aren't in the proc, or business of holding on to real estate, so yeah those of us who
have the vortex of capitol, and cash that we had mentioned earlier, we'll take advantage, and
we'll be snatching those up if that's the case. So after the last recession,
my crystal ball's broken. I have no guesses as to when the next recession's gonna occur, I get a sense for when
that's gonna happen, only 'cause I follow
three folks pretty closely that I trust quite a bit, but I also don't know
how deep it's gonna be, and what interest rates will go up to. I don't, never say never
again, never say always, but man, I can't imagine that
we would get in to that place where we're up in the 15 to 18%, that would just shut everything down, but I'm fully prepared for things to go up to just shy of 10%, and
we're prepared for that. You know the deals that we get in to, nothing is a total
guarantee or with no risk, but we put ourselves in a position that we're projecting that five year, this is a five year project, here's where we think we're
gonna be at five years from now, and given rate increases,
even interest rate increases, how much do the feds really raise rates with the net time, we look
at worst case scenario., and is this thing still profitable if we sell it at that cap rate where interest rates are
at that interest rate, that's how we approach our
investments at this point, so again, Tyler, I can't tell ya, I'm not gonna sit here and
say, yeah don't worry about it, self storage is great, you know five, seven years down the road, you're at your 15%, you can
refine, or you can sell it, because I don't know, but
I'm not banking on that, that doesn't effect the way
that we're investing right now. What does affect it is that we know the interest rates are gonna
go up be a certain percentage and we factor that in to our exit strategy and evaluation afterwards. - That's awesome, thank you for that. - I guess that kind of
underscores the importance of buying right in the first place. If for some reason everything
goes horribly wrong, and you can't sell it, like it's okay, 'cause you still have a really
nice cash flowing machine that'll last you for awhile. - That old adage, is your
money is made when you buy, and investment, I will tell you, you build your buffering on the front end. - Yeah, for sure. Well, Scott, I really
appreciate your time. I know we're kind of going over
our allotted time slot here, but before we wrap this up, if people wanna learn more about you or connect with you for any reason, what should they do, how
can they get ahold of ya? - Yeah, probably the best case, I mean if you're certainly interested in the self storage side then our website selfstorageinvesting.com is
the best place to go for that, so we've got some free
resources, and tools, and we do have live events. They're exclusive events
for folks that are looking to step up and get
in to the commercial realm, and learn about that side. We offer a class, a three day class, so these are classes that are hands on, they're 201 level, on
how to find, evaluate, and purchase self storage facilities. We also have one on development, and then we also have one on
how to raise private equity, and it's syndicated with Visa together, so each of those are three days long, and we cover A to Z, the nuts and bolts on each one of those
facets of the business, so yeah go on over there
and check that out, and pull down some of those videos, and we'll do whatever
we can to support folks that are lookin' to get
in to this business, 'cause it's incredible. - Well, Jar, we should plan
on going to one of those. That sounds like a lot of fun. - Yeah, I mean I-- - [Scot] Be my guest, please do. - Yeah, that's awesome. Yeah, so I actually as you were talking, I just pulled that up on a new tab, and I'm checking out dates
after we jump off here, so. - [Scott] Yeah, perfect. - Yeah I normally am not
interested in those kind of things, but I don't know, this subject just, you know, giving the things
that you'd be covering in that sounds really applicable
to what I'm interested in, so yeah.
- And it sounds like the value's there, Scott. That's something I do wanna
just give you a compliment on is you seem to really have no fluff, just actually, I really
appreciate your approach and how in depth that you've gone, so thank you for what you do. - My pleasure. Our ultimate goal is
to partner with people, and if don't give them the
tools and the resources and teach 'em, then we
don't have a back end to our business, and I wouldn't teach if we didn't have, if I weren't
partnering with other folks, and so yeah, you know Seth you said I usually don't go to that stuff, I know what you're talking about. There's lots of folks out
there that are teaching that don't, aren't actually doing it, and they aren't really
teaching much at those events, when ours are 201 and we're
giving people the content so that they can go out
and find these deals and then bring us in to 'em, and if we've held anything back, it wouldn't do us any good, so those two businesses feed each other, the education side feeds
our investment side, and so they go in step with one another, so yeah, we're showing you what we do on a day in, day out basis. - Yeah, absolutely. Sounds cool, man. Boy, for people who listen, if you guys wanna check
out links to all the stuff we talked about in this conversation, links to all of Scott's stuff, be sure to check out the
blog at retipster.com/28. That's where you can find the shout-outs, and the original video, and
audio clip for the interview and everything, so thanks again, Scott. Appreciate it, man.
- My pleasure. Alright, thanks Jared.
- Hopefully we'll talk. - Thanks, Seth. Will do, take care. - You bet, thanks.
