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Self Storage Investing with Scott Meyers
In today's show, Larry invited Scott Meyers. Scott is known as the nation’s leading expert in the self-storage business. He began his real estate career in 1993. He is also a speaker, educator, trainer, coach, and mentor.
Scott has built several multi-million dollar businesses in real estate from single family flips, to multi-family projects, industrial buildings, commercial office buildings, cold-storage buildings, warehousing, parking lots, and self storage.
In this episode, they talked about self storage investing and how it works.
- Who Scott is
- How he started in real estate
- Getting into the self-storage business
- How he started teaching people
- Self storage business model
- Their future plans
- What their typical deal looks like
- Bringing in property management company
- Different profit centers
- Calculating salaries
- Systems that help automate management
- Financing available for self storage
- "Systems run the business and we manage and tweak the system.”
RESOURCES AND LINKS FROM THIS SHOW:
- Faster than Normal by Peter Shankman
- E-Myth Revisited by Michael Gerber
- Apple Pay
- Self Storage Investing
Larry: Welcome to the Brain Pick-A-Pro Show live from Lake Wylie, South Carolina. Today, I have a special guest, a long, longtime friend, known him for many years, probably 10 or 15 years, something like that, this guy is the self-storage expert, right? Now, he has done residential, he has done multifamily, he has done other stuff, he is a speaker, educator, trainer, coach, mentor, but his specialty is self-storage and I’m so excited he is on because I’ve had a lot of people ask about self-storage and I don’t do everything, I don’t claim to do everything or know everything. I’d like to bring on experts, so today expert is Scott Meyers. What’s going on buddy?
Scott: Larry, all kinds of things are going on. How about over on your end?
Larry: We’re just having fun and making money, trying to stay focused. You and I both know that could be difficult sometimes, right?
Scott: Yes, we do.
Larry: Right. We were just talking before we started recording about ADD, ADHD and I have what’s called ADOS (Attention Deficit Ooh Shiny).
Scott: Yeah. You know, full-blown ADHD I diagnosed early on but as, you know, for many entrepreneurs that you probably have on this show and then we know that a vast of them has some degree of it or not whether it is not, you know, officially diagnosed or not, I think those of us that do wanna move forward, to move forward fast, yeah, we end up in our business because at the end of the day, we usually can’t work for somebody else. I mean I’m honest there.
Larry: They don’t want us there is probably the most important part, right?
Larry: So, before we started recording, I shared a book with you. I wanna share with the audience because I know a lot of entrepreneurs out there and I just started listening to this today. I used audible, I love audible Scott, I love it. You can listen to a book at 1-1/2 or 2 times speed, you know, a 4-hour book you can knock out in a couple of hours and this book is called Faster than Normal: Turbocharge your Focus, Productivity and Success with the Secrets of the ADHD Brain. And it’s a phenomenal book. It’s a phenomenal. So far, I’m only about a third of the way through it but it is really, really good. And it makes me know that I’m special but…
Scott: Yes we are.
Larry: Right, right. We are special but there is nothing wrong with us, right?
Larry: It is just we think different. So, Scott that’s enough of that. Why don’t you jump in and tell our listeners a little bit about yourself.
Scott: Sure. I’m live in Indianapolis, actually a suburb of Indianapolis called Fishers, Indiana, I lived here since I graduated from college and moved down here and once I get a job and actually making a little bit of extra money to begin to plan for retirement, I started getting into real estate as well. So, doing all the same things, you know, stocks, funds, mutual funds, maxing out my 401(k) in my employer and then started doing real estate on the side. I kind of always been a junker, I fixed bikes when I was a kid and then cars and then I thought it was a natural next progressive step. So, I started buying houses and fixing them up and re-financing them and pulling out cash and buying more and running them out and following the Carleton Sheets method and so I begin doing that until it wasn’t any fun anymore having tenants and toilets and I thought alright, we will get into apartments, at least I can hire a property manager or property management company to handle all these and once I get into apartments, I realized, yeah, I didn’t really like that too and much more because I still at the end of the day the responsibility was on me and I had to write the check for the damages and everything else and so I begin looking into, you know, other ways of investing real estate that didn’t have tenants and toilets and trash and well there is parking lots or there is self-storage and you cannot really build a lot of value in a parking lot but you certainly can with self-storage and so the more I dug into it and learn about it, I got my first self-storage facility and then really saw the light where if people don’t pay you, you basically locked their stuff up and sell it off. If they still don’t pay whether they move out on their own or if we have to hold an auction, what I’m left with is you know a steel box and a concrete slab and I don’t have to do paint or carpet or anything else. I don’t have to chase people for money, for evictions because we already got our money and so you know for all those reasons, you know, our model, our tagline around here is that you know we love real estate because it does not have the hassles of tenants and toilets and trash from what we are doing.
And so then we started teaching other people how to do this. I was the president of the local rehab at Central Indiana Real Estate Investors Association doing some workshops and then a good friend of ours Larry, Mr. Paul Bower help me to, actually, he contacted me and said, “Hey, I’ve seen what you are doing. I’ve heard what you are doing and you know, I think you can go out and teach some other folks how to do this. I’ll get you out there and help you to write a course and assist people.” And so he did that and I’m not sure whether to thank him or not Larry because it has been great. I love to teach people but boy that kept me on the road and really took away from the investment side of the business. So, we continue to grow however in the 2 businesses of you know kinda going in tandem until about 2014 where I drew a line in the sand and said “Hey, if I wanna focus on my investments and if I wanna spend time with my kid as they are getting older, I have to shed one of these businesses or figure out a way to you know revamp them,” And so that’s what we did, we basically slowed things down on the education side. We increased our prices which really eliminated a lot of the folks that we didn’t really want to work with anyways and now working with high-caliber folks that we partner on their facilities that we help them to get into with. So, it scratches both itches. You know, my desire and my love to teach people but also now I’m teaching people that are gonna eventually become my partners and so the investment side does not suffer and actually now we are leveraging up on that end. So, in a nutshell that’s yeah, that’s about the past 15 years since you and I have known each other and how we got to this point.
Larry: That’s awesome. I love that whole strategy, that whole model about partnering and you are getting people that have the right mindset, they’re teachable, they wanna learn plus they have the resources, right? Because it’s pay to play.
Scott: Mm-hmm. Absolutely.
Larry: That’s great. That’s great. So, tell us a little bit about, I know you mentioned a couple of times you know no toilets and termites and all that stuff, it’s a concrete slab and a metal box, right?
Scott: Yup. Yup.
Larry: One of the things that I’ve always had a question about is, is self-storage really an investment or is it a business?
Scott: Yeah, good question. Good question. Yeah, so we look at it at a couple different ways. It is interesting you mentioned and asked at that way because one of the beauties of the business is in where we find these. How we go out and do our shotgun approach to marketing to find them. So, we look in to traditional real estate areas, talking to the brokers, looking on LoopNet you know and number of other ways and traditional real estate from where an investor but look for you know commercial properties of any sorts but if you put a hundred self-storage owner operators, you know, the Mom N Pop’s that we buy from in a room, you ask them, how many of you are in the business right now are considered self-storage a business, 50% of them would raise their hand and how many of you will say you are in commercial real estate and the other 50% would raise their hand roughly and then you ask them, you know, how many of you say that you are in both, well 100% of them would. So, yeah, it has a retail, it has a business component to it.
Scott: Because we set up shop, we don’t… it is not like if you want one single family house and it goes vacant, you put an ad on Craigslist, you know.
Scott: We usually gets 200 to 400 units, you know, there is always people moving out and people moving back in, so we set up shop, we have an office with a person working behind the desk that is answering calls all day and we have a website that allows them to, they can rent a unit online as well which is a beautiful thing or they can make a reservation and come in and complete that transaction as well. So, we have that property manager like in apartment complex, they still handle the accounts receivable and they work with the folks when they come in. The only difference is that you know they just don’t have a lot of problems. They are not handling you know arguments between 2 tenants or somebody parking on the lawn or what have you, they are just handling the basic transaction, move in move out, collect the money. So, yeah, it is. It is a business. For that reason Larry we are seeing at least within the past 10 to 12 years self-storage is really kinda come in to the limelight and it’s coming to main street so no longer can you build them and they will come in the middle of a farm field or in an industrial sector part of town. You know, you are seeing self-storage competing for that same piece of dirt on a main road next to Walmart across from McDonalds and then the path of travels where everybody goes has become you know a very integral piece of our lives and we are even seeing the city planners now including self-storage in their master plan when they plot out a development of a certain part of town or as it is expanding using self-storage included in that as well. So, I think that answers your question. I forgot what the question is now.
Larry: Yeah, yeah. No, that’s okay. Just you know is it a business or is it an investment and that’s a really, really good point. If you own a lot of single family houses, you know, that’s an investment but you’ve got somebody in accounting, you know, you got a CPA, you’ve got a property manager, so it’s really not a whole lot difference other than your person is on site, right?
Scott: Right, right and then we do, you know, as we scale uhm you know there may be a bookkeeper behind the scenes you know and as we have that support staff but looking at just one self-storage facility whether it is a manager or management company, yeah, they’re handling everything at that site level and the good news is is that then it becomes an investment because it is hands off.
Scott: There isn’t, you know the hassles of the tenants and the toilets and the trash to take care of from that standpoint which I know you and I have talked about this before, we are both big fans of Michael Gerber and the E-Myth and you know the systems run the business and we manage and tweak the system and the good news is is that yeah the system really does run the self-storage business because we take out a lot of that human factor and the headaches that go along with it in this form of rental real estate.
Larry: That’s so true and in a few minutes I want to talk about some of those systems because with self-storage especially there is a lot of really cool things that you can do to where you can really run a facility to a certain extent without anybody on site and that’s really, really cool. But first I want you to tell us a little bit about the model. Is the self-storage model that you do and maybe you can touch on different models you know is it buying and hold long term, buy increase the value, sell it, you know that sort of thing.
Scott: Yeah. But anything we do is value-add. You know, that’s how you build your safety net, your buffer. I mean no different than houses. We are buying houses, you know.
Scott: We are buying distressed stuff, you know, because that’s how you make your money obviously but it is also how you don’t lose money is if you buy it right.
Scott: But with self-storage that was our model in the beginning was really kind a stepping stone from where you come with houses and apartments except the value-add is not necessarily making it prettier although that’s a component of it. It is raising the net operating income. So, increasing the income, reducing expenses and so our model in the beginning was to buy and hold. So, find a facility that was underperforming, tired, mom and pop, you know that took their eyes off the wheels so to speak and you know they grown up on technology and I love it Larry when we walk in to this mom-and-pop facilities or meet with them they say, “Well, you know we are full” and I really think you are doing a great job, how did you manage that? “Well, we never raise our prices for years.” First of all, I’m thinking that’s fantastic because I mean it.
Larry: I know.
Scott: We already know even if it is full you know we think there is no value-add to it but then we look at the rents and there are 20 dollars a unit below everybody else times 400 well they are boom already. We are in the money the minute that we take over so it is buying those distressed that you know have low occupancy where the rates are low, where they don’t add in or haven’t added in all the profits centers like selling locks box as a moving supplies and truck rental and you know all the other profit centers that you can add to a facility, so yeah you can’t raise rates in an exposure as much as better and including pictures for your website if you have that curb appeal and the place looks nice that only goes so far when you are talking about investment real estate and something whose value is just created on increasing the NOI. So, we also look for facilities that we can add on to as well. So, we look at our 4 acre a facility that is 4 acres and it has 4 buildings on 3 acres well then we know that once we filled this up we can build another building and that is usually no-money-down construction loan from a bank to add that and then we start leasing it up and just it is nothing but increasing income and we got the dirt for free. We got the land for free.
Scott: So that was the business mind on the beginning. Always value-add. Always taking a class C facility to a B, adding security, adding the technology that is available to us today and then just running it better, running it like the business instead of like a hobby.
Scott: And those we look to buy and hold long term but then we realized that you know we have been through a couple of economic cycles now and understanding the difference when cap rates come down, interest rates are low, cap rates come down which means the value of our facility is worth even more because the cost of capital is cheaper and so selling at the top when we have already created all those value and taken all those profits off the table and then doubling down and buying another one, a bigger one, two more and doing that over and over again, really falling into kind of a 5-year cycle, Larry and a lot of these sometimes 3 in turning them around but the good news is is that we enjoy some big cash flow and you know those 500,000 to 2 million to 3 million to 4 million dollar checks on the backend are kinda nice as well. And then we started looking into development and conversion, so buying you name it all warehouses, bowling alleys, old retail and grocery stores and converting them to self-storage and then just you know buying plots of land, getting it zoned and then developing, you know, we are doing multistory climate control in the different parts of the country, we got multiple projects going on right now with our student partners in Denver, in Detroit, in Tampa, in Minnesota, two here in Indianapolis local, and again same 5-year projection on most of those. Now that 5-year projection is based upon our private equity investors that we are bringing in, you know, they only want their money up for 5 years, that’s usually the amount of time in which we raise that value and get to the peak in which again we will exit and take those profits off the table and I’m coming to an end and so we will continue to do that until I ran out of energy and out of breath on my lungs and then maybe the last 3, 4, 5 we will hold for that long-term, meaning long term until they put me in a home somewhere. So, that’s the plan for the Empire right now.
Larry: That’s awesome. That is really good. I love that. So, it is very similar to some of the other value-add type commercial investments like multifamily or whatever, you are gonna hold it, you know, 3 to 5 to 7, ideal probably 5 years and then you’re gonna cash out, cash out all your investors and yourself and roll that in to the next deal.
Scott: Absolutely. That’s the plan.
Larry: That’s awesome. Can you run through what a typical deal might look like, I mean when you coach your students and you are buying deals, look at deals is there like a minimum number of units, maximum number of units, a value, a price that you are looking for, kinda run us through that deal and how it is structured.
Scott: Yeah. So, number of factors that we look at. Again, we are not just looking at you know taking like a house and making it the prettiest in the neighbor, we know if it is the pretties then it is gonna get this amount of money, you know, in appraisal loan and the value.
Scott: And we are looking to where we can take this thing in an exit strategy and sell it.
Scott: So, if it is an existing facility, we look at where it is at right now, rental rates, cost of the structure, you know, where can we take this thing, at 85% occupancy and given the market rate right now, here’s my gross potential rental income. So, here’s the top.
Scott: If I add in retail sales and selling lots of boxes and moving supplies and putting in moving trucks, here’s my income, where we can take this. That’s the potential. Then I look at the expenses currently, can I reduce the property taxes by structuring a sale where I am buying the business separately from the real estate and then appealing the taxes on the real estate, can I reduce the management by adding technology like you mentioned earlier by you know replacing a full-time employee with a part-time employee and then having a website that does the rentals and/or kiosk that also does this like a Redbox. You know, all down the line in putting LED lights in, you know, where can I reduce all of my expenses and you know coming to a number, here’s my net operating income, now compare that to where it is right now, you know, what I am usually looking for is about a 2X return within that timeframe, you know, 3- to 5-year timeframe. So, if I buy it for $500,000, I wanna be selling it for $1,500,000 or a $1,700,000 if I had to put 200,000 into it so I net a million on that, I’m looking for a 2X return on that and that’s the same for our deals in which we are partnering with bringing in private equity, we have to have somewhere around that at least the 2X return in order for them to get the internal rate of return that they desire for investing with us on a project and then we still there’s enough money left on the table that we are satisfied with that if we are bringing those folks in. So, from a number’s standpoint, that’s how we back into it and obviously, if you don’t have to bring private equity investors in then you can do with less than a 2X return ‘cause you enjoy cash flow and you are fine with that.
Scott: But we also in terms of size as you mentioned, and this gonna vary for everyone. I mean some people are happy coming in to what we consider a small facility which is 50, 60 units and I say small because it is in terms of numbers and size and it doesn’t require a lot of work. However, the challenge with that is is that it does require some work for the owner because it won’t be able to support a part-time manager, you know, you can use the kiosk, you can use a website that is a responsive website that is interactive to allow them to rent units but that only goes so far, you still gonna have to do some of that management on your own, which again is great, we are just not at that level where we want any involvement. So, we want to have facilities that are baseline, bottomline usually 200 units and above and in 200 units and above, it is really a function of the NOI to support a manager but right around that 200-unit mark is where Larry we can put in a third party property management company to then run it for us and then we are just guiding them. We are providing the vision, folding it into our brand and giving them an idea of what we want to do with it, but at the end of the day, they take it, run with it, they are the ones that move the needle and we are not involved in the day-to-day operation.
Larry: That’s really good. So, you just mentioned something I wasn’t aware of. You mentioned about bringing in a property management company, I didn’t realize there were property management companies for self-storage I just thought you know every self-storage owner, hired their employee.
Scott: Mm-hmm. Yeah, you know, a lot in the small end in the Mom N Pop’s that we buy from, yeah that’s the case. They are running at themselves with their, you know, their sister-in-law or whoever the family is out of a job, they stick them out you know.
Larry: Right, right, right. That’s why they are going to sell.
Scott: Exactly. I love that you know, because then we can look at the payroll and say, “Woohoo, that’s way too high.” And there’s lots of opportunities there but yeah you will see that on the smaller end either the owner has to do it or they’re gonna have somebody as an employee because the management company as you know there is overhead that is involved in that and so there has to be a sizeable amount of dollars allocated as a percentage to the managers in payroll in order to do that and so yeah, the big folks that we see out there, the public storage, the extra space, the U Store at the Light Storage, not all of those stores, those storage facilities that you see are corporate owned, many of those are developer like myself has come and built it and then you know somewhere 3 months towards the end we decide which one of those companies managed it and then the sign goes up and then all the branding goes on even though it is ours and they are managing it.
Scott: And then there is also small third party property management companies that don’t have a big brand that owned but that run the issues like he would hire for an apartment management company or even like some HOAs they operate on that fashion and they will come down into the smaller size facilities because they are smaller as well and don’t have many layers, but they understand the business and they do only self-storage management and so, we work with them about 3 to 4 of those companies and they are usually regional but we use about 3 to 4 of those companies nationwide in our facilities depending upon location.
Larry: That’s great. That’s really good. You know, I’m in a small town Lake Wylie, South Carolina, it is not even incorporated, right? The closest town is Clover which is incorporated and we have 4 self-storage facilities here locally. We have Public Storage. We had Kodiak, but I think Public bought them out and then we have 2 other independent storage facilities right here in Lake Wylie and I actually went and visited all 4 of them recently to kinda look at them and see what’s going on, check them out and also I mean we owned our office building so we are always leasing office space, so I left some brochures for our office space because I mean I even ask them, “do you ever get people that come in and are asking to lease office space” you know just kinda goes the reason that people who are moving or whatever they might need some space, “yeah, yeah all the time”. So I left them some brochures for our office space but it amaze me all the different add ons and you mentioned a couple of them earlier. It amazed me all the add ons and up sales and things like that. Talk a little bit about that.
Scott: Yeah, you know, so that was again another one of the reasons why I like self-storage over apartments is that you know there is ancillary income streams and profit centers you can add to apartment complexes, you know, you can start by submetering the utilities, laundry, vending and you know there is a few others but it really stopped at about a handful but in self-storage, when I begin looking in the industry there’s over 40 different profit centers that we can add on. So, I mean just you know rent it and move in again the locks boxes, moving supplies, moisture resistant canisters are admin fees believe it or not are income because we don’t take a deposit, I mean, there is no reason to take a deposit. There’s not gonna be any damage to metal box and concrete slabs.
Scott: So, it is a nonrefundable admin fee of $19 when they move in so that’s a profit center in itself on every rental. We offer renter’s insurance. We don’t sell in because we are not licensed to sell insurance but we offer that and then in some cases we are seeing throughout the self-storage landscape the big guys, the rates are demanding it. They are saying you have to have insurance, renter’s insurance or you can’t rent a unit here and so by the way here’s what we recommend and then they get a kickback for that or even some of the big operators it’s their own insurance company. So that is an income stream generator. We do have vending machines. We have sometimes a business center that is available like you said for people to you know maybe do a little bit of work out of so that they don’t have to work off the kitchen table or out of their truck or out of Starbucks and then in some cases our facilities yeah we are building out and using a co-working space or like a WeWork-type spaces in these locations as well. You can add propane refilling when you start adding both in RVs you can start adding another amenities to those buildings and closing them and adding electric and water you know and I’ll charge for each one of those along the way or seeing concierge services now. I mean you have the list goes on and on and on about those income streams and profit center, so again you know building value in self-storage is based upon the NOI and so anytime you can continue to increase that, that’s gonna increase the value. We do record storage and then shredding services. So after 7 years, after the HIPPA guidelines are met, they can be charged to shred it by the pound as well. Medical records and delivery services and scanning and emailing and pack and ship center, eBay, the manager is sitting in there with idle hands, you know, we can eBay some of those folks goods and we have a lot of eBay and Amazon drop shippers that our manager can walk over to the pack and ship center in our office and then charge them for that package service if they are too busy.
Scott: Again the list goes on and on. I mean you can virtually get your property manager, the site manager, her salaries either paid for, covered or at least subsidies by some of these other income streams because they are just sitting there for the most time, they are not that busy in a self-storage office as compared to you know other types of property management.
Larry: I love that. I love that. And I’m sure at this point you’ve got it down like salaries or employee cost, you probably know how much per door you can spend on salaries. How do you calculate to know how much that is? Is it per door or per unit?
Scott: No, it is a percentage of effective gross income.
Larry: Oh okay.
Scott: So we allot a certain percentage to that because you know when we are breaking this down and looking, we underwrite it just the way public storage would underwrite a facility if they’re gonna buy it from us which help, I mean we are building these things up to be the size that we would sell eventually to these folks and so we underwrite the way that they do. We underwrite the way that a banker does to get it funded to begin with and so there is some market norms and some percentages and so if we got a 400 unit facility and it is bringing in $280,000 a year, here is the effective gross, we know that we can allot 5% towards the management company to oversee it and then payroll is gonna be X number of hours at this rate and so here’s the office hours that we have to work with and then technology will pick up the rest and so, I’d love to say that I’ve created something to be able to dial it in, we just follow the numbers from what the market is doing and the big guys you know we reverse engineer with their doing and we’ve created a system within our framework and the size of the facilities that we buy and develop and yeah it is kinda plug and play.
Larry: I love that. I love it. That’s awesome. Now, I’m assuming it is not like a rental property where when a tenant applies, you got to pull their credit, check their background, call their previous landlord, you know, you are looking for somebody that has a credit card, right?
Scott: Yeah, because if they don’t pay us, we put a lock on it and then we sell their stuff. I mean that’s it. It is pretty simple.
Larry: Yeah. So, there is no approval process right?
Scott: Not necessarily. We do do some background checks and we also have cameras in place and obviously let them know that they cannot be bringing anything in but you know, inherently within the facility, we don’t you know get the bad actors because you know they’ve given us all their information, that’s their unit, we are there, we’ve got cameras all over the place.
Scott: You know, people, a lot of the questions that I get are you know, what about if they have been storing dead bodies and meth labs and you know all the stuff, it is like “well, they gave us all their information. We’ve got their pictures, their fingerprints, you know, we’ve got videos all over the place. If they holding a dead body in and then they decide to leave it and not pay, we find it and we know who left it there.”
Larry: Right, right, right.
Scott: Or they are not gonna run a meth lab in a facility with cameras and people there all the time. So, that bad element you know just by the nature of the business, we don’t worry about it.
Scott: They will go to abandoned apartments or the abandoned houses and they will do all that stuff where nobody watching.
Scott: Because we are always there, we are always watching.
Larry: There you go. That’s awesome. So, let’s talk about some of those systems that you put in place and some of those I mean I love what you said a minute ago about the kiosk of seeing those before, I mean that’s phenomenal, so talk a little bit about some of the systems to help automate the management.
Scott: Yeah, so we are on, you know, we are pretty static industry, it is pretty straight forward. It is a simple profitable business model and so one of the biggest splashes in the industry came back in 2006 with the advent of the kiosk. We have been seeing kiosk coming in to permitting our society in all levels. I mean it started at the gas pump by being able to pay at the pump and then you know to Redbox, to hotels, airports, I mean you name it.
Larry: And now Carvana.
Scott: And now Carvana.
Larry: I know.
Scott: Yeah, you can literally, you know, you and I both know as being road warriors, you know, I can travel, I would not have to talk to somebody, I can fly down to CU and I can book a ticket online, I can go to the airports and check in through a kiosk, get on the plane, get off, go to the kiosk, get my rental car, come see you and if there is no room at your place, I go stay at a hotel and check in with the kiosk there and all backwards all over again, come home without ever having any contact with anyone. So, the kiosk is for these low labor intensive type transactions like this, it is perfect, you know, they insert their driver’s license, barcode uploads all their information, so that’s the approval process, we’ve got it. It takes their picture, we scanned their fingertip with the kiosk and then they insert their credit card and we got the payment. At that point, once they pick their unit from the map, if we have an electronic version of a door mechanism and unlocks that door otherwise, we got a tab on it, they unlock that one, they go to their unit and put their stuff in and then they can make their payments online through a website, they can go into the office if they want to but the beauty of this Larry is when it is all tide into the property management system, so those kiosk really act as a manager and it ties into the property management system so on the 6th of the month which is when rent is late with all of our facilities, the system locks everybody out, you know, their gate code does not work. They can’t get into the facility if they have not paid ‘cause that is tide into the property management system and so then they have to make arrangements to pay online, it will be a credit card, they can do it from their phone while they are there or they can come in to the office and that’s how we keep track of that. And so that was you know almost early on it is almost outdated now because since we have responsive websites, meaning they respond to whatever you know if you are on an iPad, if you are on a phone, they match that. So, in interactive website where we can do everything that I just mentioned that a kiosk does with the exception of selling a lock, those kiosks will sell a lock and they can’t accept a credit card but yes it can because we do that with Apple pay and so now that kiosk has been replaced by this and so when somebody is looking for a storage unit, they can find us, get on our sites, they can rent a unit from our site and then when they show up, the entire transaction has been completed and they have their gate code in hand or QR code to be able to get into the facility and to get into their unit. We are also seeing you know one of the newest technologies available is that on the inside of the door, we have a locking mechanism that locks on the inside and so that through a QR code or another code, unlocks the door, they don’t even have to have a lock on the outside or a key or anything else and the beauty of this is that they get access to their unit but then we do as well and so instead of in the past where we at the 6th of the month when somebody is late, we go in over locked their unit, put our lock on it and place locks. Now, automatically, at the 6th of the month, anybody who hasn’t paid, their lock is automatically locked from the inside electronically without a property manager or anybody even stepping foot on site. You know, that’s probably the greatest and then along with any invoicing and communication that goes along with that, you know, the move in move out process and how we manage everywhere in between again very, very little human interaction because it is just not needed, it is not necessary.
Larry: That is awesome. I love that. So, somebody could pull up to the gate on the 7th of the month, they haven’t paid their rent for that month, they pull up to the gate, they are locked out, they get on their phone, they pay on their phone, it sends some QR code and one of those little fancy looking codes, you know, and then they hold it up there and then they get scanned in and the door opens for them.
Scott: Yup, you got it. Or their gate code that they have if it is a punch pad, you know, automatically works now because they paid.
Larry: Okay. I love it man. I love it. That’s awesome.
Scott: Give me both.
Larry: That’s good stuff. That’s good stuff. You can just about run a facility without anybody there, right?
Scott: There is many folks, there is a business model followed by several people including one of the largest in the country, half is being located here in Indiana as well. It is a friendly competitor of mine, he’s got 8,000 units across 7 states and his whole business model from the beginning is no employees on site. So they are all run by a kiosk and even before a kiosk, he has been doing this for 20 years. He had a ringdown phone if anybody on here is old as Larry and I remembers what a ringdown phone is. I mean it is a red phone, like a bat phone, you pick it up and it automatically goes to his call center and they will conduct the transaction and then go to the unit but he replaced that with kiosk. He does not like tenants. He does not like toilets. He doesn’t like trash and he does not like employees and so he has it all run by a kiosk. So yeah, we have a couple of our facilities that run by kiosk but our model is to generate more sales, more revenue and so we do have people in the office that are doing the epistles on the retail and all those other ancillary income streams that are mentioned earlier, but yeah multiple ways of getting the catch, it just depends on what you know the site, the facility and your business model.
Larry: That’s great. That’s great. So, talk a little bit about the kind of financing that’s available for self-storage.
Scott: Yeah, it has been fairly abundant. Self-storage is you know obviously I am bias but I became bias before I was bias. So when I began looking into the financing for self-storage back when I was in the tenant-toilet business and my credit was not all that great and I was broke, I realized very quickly that you know self-storage financing is pretty abundant and that’s because banks look at low-loan default rates and the business sector and the model itself and you know self-storage does extremely well during good times like we are experiencing right now where people have more money and they buy more stuff and they need a place to store their stuff.
Scott: What happens with most real estate asset class during a downturn is that the values go down but in self-storage, well the development financing stops that speculative financing to build new self-storage facilities or build anything new just kinda stops but the demand goes up for self-storage because now people are downsizing. Businesses are downsizing and we actually see a steep increase in demand for self-storage during a recession at the same time development is coming to a haul through at least dramatically slowed. So, therefore you know the values go up, occupancy goes up, we get absorption and so we have seen this in every economic cycle of self-storage for the past 20 years is out paced all of the real estate asset classes for that reason because we benefit from a recession and so self-storage has the lowest loan-to-fall rate across all real estate asset classes and so for that reason banks love to have these things in their portfolio it’s safe and their returns are high. It does well during good times. It does even better during a recession and so the returns are much higher. And so for that reason, you can’t really do this on the internet but I think everybody is familiar with the term, I mean you swing a dead cat on the internet and find finance companies and banks that want to finance self-storage, they are clamoring for it, they are out seeking it.
Scott: So, we don’t have to chase money for self-storage and then the same for private equity groups. You know, these guys are bankers essentially, they are seeing… they know the same metrics. They are seeing the same things and so if you can’t get a bank to fund your self-storage project and if you can’t find private equity to fund the self-storage deal, you are just, you are flat out not trying very hard or you don’t really have a deal, you got a project on your hands that for whatever reason nobody wants. But when you truly have a deal that works, we have no shortage of people throwing money to want to invest with us in this asset class because it outperforms everything else.
Larry: That’s great. That’s great. When you bring in private investors, passive investors, what kind of returns are they looking at?
Scott: You know that depends. Depends on the economy and interest rates but you know over the past several years, we have been looking at targeting number on our projects of north of 20% internal rate of return. So, we are trying to be in those mid 20s and our goal Larry is always to, I don’t want to have to beg for money and we don’t have to but you know what in order to get more people coming in, I want to provide returns that are greater than the crowd streets, the fund rise, a realty moguls, some of the crowdfunding sites and people and even other people they are doing projects like ours.
Scott: And so their returns are in high teens, low 20s, I want to be in the mid 20s so I can get the project funded and get it done, perform for them and then have them invest with me over and over and over again and have them not even look at anybody else. So, that’s the case over the past several years now. We see interest rates creeping up a little bit and inventory is a little more scares and across the entire you know that private equity landscape in real estate period, we are seeing those IRs come down a little bit now.
Scott: Now, we are still, we are shooting for you know right around 20% to 21%. We have been raising capitals successfully at 19% but that is because all those other folks that I have just mentioned you know their IRRs for their investors are now down 14% to 15%. So, I’m shooting for 3 to 5 basis points above them and that’s all based upon the IRR that we return to our investors.
Larry: That’s great. So, somebody invest you know whatever a couple hundred thousand dollars, I am assuming you are working primarily with the credited investors or sophisticated investors when you do an offering, so are they getting a monthly check or is it like at the end of the 5 years their average return was 20% per year?
Scott: They get the big pop on the backend. So, if it is an existing facility that we are turning around, as soon as it begins cash flowing then usually 4 to 5 months after that we build a cushion then we start the distributions. And so that could be from 6 months to 12 from the time we take over a facility. In our development projects, that takes a little bit longer and it could be 2 to 3 years before the thing gets in titled, zoned, built and then we start reaching the break even and then over into the positive cash flow section of the holding period. So, most of our folks are not investing for cash flow place, they are investing for building wealth because yeah they will start getting cash flow in years 2, 3, 4 and then also they will start to kick up and you are 5 but that’s the point that then we stabilized, we sell, and then boom, that comes the big pop which when you calculate IRR over 5 years that yeah that the majority of their profits are at the sale of that property. In some of these cases, we may have a construction loan like a project that we are working on right now. There is a construction loan which in 2-1/2 years, we will refinance that and recapture some of those profits and pay our investors at that point and then again they get the balance of that another big pop on the backend.
Larry: Right. That’s awesome. And Scott this has been some great, great information, good solid content, and man I just love it. I just love it. If somebody out there wants to reach out to you and learn more, I know you teach this and you have some events as well, so how would people get in touch with you?
Scott: Just about everything that we do and anything anybody wants to know is in our site at selfstorageinvesting.com. So, there are some free resources there, some videos and then listings of our events, we talk about our charities and our house builds where we take folks down with us as well which is a big focus of ours at this point and everything in between. So that’s where it all happens.
Larry: That’s awesome. Man, I really, really appreciate you sharing all of these. This has been some awesome information. A little over from what we normally do but it is great content, great information and thanks so much for sharing that. That’s been awesome.
Scott: Yeah. Well thanks for having me Larry. It is good to catch up with you again as well.
Larry: Awesome. Thanks a lot. Take care.
Scott: Alright. You do the same.