Transcription
There's a lot of people looking at their first facility right now today. They're looking at smaller facilities because it's their first one. They're trying to figure out how do I make money with these things because I want to go in, I want to automate it. You know, I want technology. I want gates. I want security. I want all these fancy things, but they're having a hard time figuring out how to make those things pencil and what to invest in from a capex standpoint. What not to invest in. How would you look at those things if you were starting now today? That was going to be the play. We're going to invest in small facilities, run a more automated system. What would be the process?
So, when we're looking at buying small facilities, this is the number one thing I think everybody runs into.
[Applause]
What's up everybody and welcome to Self Storage Income. And today is going to be an incredible podcast because Connor just turned 60.
60 years old.
60 years old.
Gray hair is coming in hot. Um it's very obvious. Um getting older, man. It's going.
Happy birthday, man.
Thanks, dude. No, it's it's an exciting day. Um big 35. Big 35. And uh No, it's amazing. I was just talking to somebody yesterday. Feels like my mid20s. like 25 was literally just not that long ago. Um, hard to believe it's been like 10 years. A lot has happened.
That doesn't change. It's like it just keeps going like it was yesterday.
There's 10 years. There's 10 years.
Dude. Yeah. That's crazy. But man, I am so so grateful to in the past 10 years. It's like when I was 25, man, that was when I first even started looking at entrepreneurship, looking at investing, doing any of that. I think I was probably 25 when I met you for the first time.
That's probably right.
Um
Wow. Wow.
Yeah, that's something else to think. 25, 26, something like that. Um yeah, because I was looking at like real estate investing and listening to podcast and I heard this crazy guy on Bigger Pockets talking about self storage, you know, and um so yeah, we'd reached out or I reached out and we got connected and all that stuff. And
I mean, the rest is history. But man, so grateful for all the
all the experiences that I've been able to have over the past 10 years that,
you know, have brought me where I am today with just being surrounded by such amazing and incredible people. Um, I mean, your your network truly is your net worth, like they say.
And um, man, I just owe it to everybody that uh that I've been able to come into contact with. And um again this those opportunities and such a huge huge amount of those opportunities have come from this environment
and working in close proximity with you and all these amazing people that we get to interact with. It really is like you know the opportunity to just be in the room with all our listeners like I mean when we conferences everything else that networking effect that learning
um it's it's an amplifier it's like leverage
and uh it's probably I mean I know a lot of people say your network you know is your net worth but like
really until you until you really get serious about that really get in the rooms really spend time and effort working on surrounding yourself, uplifting yourself and start saying
the people around me affect me in probably the biggest way more than any other thing in life. Yeah.
Right. Conditions equal outcomes and so I am going to
be intentional about
protecting myself and making sure
that I'm getting the right inputs.
Being intentional, man. I like I like how you said that because uh me I used to be this hardcore introvert man. I went to two years of preschool because I was so terrified of people. Like I didn't want to leave the house. Wanted to be a little feral child in the freaking wilderness somewhere.
Like I I did not like people. I was super introverted. Um but yeah, just getting out and being intentional about building relationships and having a direction of you know, okay, I'm here. I want to go there. And you know, taking again being intentional about building the relationships with people to put you in those scenarios and drive you in those directions. Again, couldn't be more grateful cuz there's so much of it that I mean is divine intervention that and and just me being put in in circumstances and being able to capitalize on those things. But so much of those things have have been out of my control as well that I'm just super super blessed in in so many ways that um I I can't can't fail to recognize that as well. I'm just like, man, I'm just grateful, you know, wife, kids, all of that in in in any way, shape, and form. Just
amazing parents, all the things. I'm like, dude, I don't know. I don't know what I did in the in a previous life or what ended up happening to make me uh to be where I'm at today, but so grateful for it.
You know, it's funny because a lot of times I think people and this comes back to not only that intent uh being intentional about things in your life, but also the way you look at things. And I I've been seeing a lot, especially just content around people saying how they were either not happy or upset with their parents and you know the things that they were mentioning were frankly stupid and silly, right? Whether that was political differences or whatnot and talking about these things and and I I kind of looked at it and I thought, you know, maybe it's just because I have kids and and things change, but at the end of the day, you know, the fact that you had parents that cared about you, period, that were actively making sure you were safe, that you were happy, that you that is really that is a a big piece. That's a blessing. Not a lot of people have that, right?
For sure. And I know that there's a lot of people that have bad home lives and stuff and we we forget and I think this goes into investing. We forget how much of these small things accumulate to make big outcomes and how if you didn't have some of those things in life, you have now a chance to accumulate and create those conditions around you. And you can't plant a seed in bad soil and expect good fruit. And every day we have a chance to essentially replant oursel moving forward, right? And we choose as you grow up, you know, that's soil. And I think that's that's just really important and a good reminder when you're talking too when we're looking at investing in markets. It's the same thing, right? You these conditions that you are buying in that you're investing and who you're doing it with, right? Those will dictate outcomes. I think too many people look as time goes on and they see it as pure happen stance, pure
luck of the draw where you can look at very defining things and see the difference in outcomes.
Now it doesn't necessarily mean that you get exactly what you want or but you work on it to move forward to progress and that's the point. It's just that constant progression and constantly being aware of what you're doing, who you're doing it with,
why you're doing things, surrounding yourself over and over and over again. And that stacks and then over a decade,
it's a form of leverage that compounds those outcomes in a ginormous way. And then once you see it, that's all you can see.
Yeah. No, I mean, it's it's so easy to look I mean whether it's with you guys as owners and looking at what you guys have done over the last 15 to 20 years and you know with the legacy assets and all these different things even before Cedar Creek you know like it and it's easy to look at those things and a lot of times I think too especially when people are get first getting started they're like yeah that sounds really good like I'm going to get into it and I'm going to do that and there's just this expectation that it's going to happen in a linear direction a lot of times in a lot smoother their direction a lot of times and a lot more quickly a lot of times. You know, we've got people sometimes like in our online communities and stuff. They're like, "Man, like I've submitted two LOIs. Like, what am I doing wrong?" And, you know, cuz they're getting denied. And it's like, you're doing everything right. Submit like 50 more.
Exactly. You're doing everything right. Just now multiply and don't stop.
Exactly. Just keep going, man.
Keep going. like you said, it's those incremental things that you're doing every day, those seeds that you're planting every day to really drive yourself to that direction, to that place that you want to go, to that place that you want to be. And talking to that, one of the things that we wanted to I want to pivot a little bit. One of the things we want to hit today is talking about getting started, starting with those small facilities. I know AJ, when you first started, man, you guys were looking like the whole idea and the strategy like you've talked about was let's go buy a bunch of small facilities. We'll roll these things up, all that stuff. But as you got into it, you're like, "Well, maybe we don't do that." There's a lot of people looking at their first facility right now today. They're looking at smaller facilities because it's their first one. They're trying to figure out, "How do I get started in that asset? How do I actually make it cash flow? How do I make money with these things because I want to go in, I want to automate it, you know, I want technology, I want gates, I want security, I want all these fancy things." um but they're having a hard time figuring out how to make those things pencil and what to invest in from a capex standpoint, what not to invest in.
Yeah. How would you look at those things if you were starting now today and you're going to that was going to be the play? We're going to invest in small facilities, run a more automated system,
how would you look at those things? What would be the process?
So, first thing is we own small facilities that are fully automated. Um we own big facilities that are fully automated. All our systems are built to be that way. Um, even though some of the big facilities are fully automated, they still have people in because there's thousands of doors. Uh, but when we look at it, a few things I want. The market doesn't care. Meaning that I want to go put technology in and then I want to be able to charge a price for the technology like it, but the market doesn't care. It's going to do what the market does. This can be really hard. And the reason why that's important is size when you're dealing with storage turns into margin. A lot of the expenses that are associated with a facility that's 10,000 net renable square ft are the same as 20,000 net renable square ft. You just get double the rentable square footage, i.e. revenue. So there becomes an issue with ability to get return on certain investment into facilities the smaller you go because that investment is disproportionate to the revenue.
That is the largest struggle I see with people when they start small. This generally means the discount that you have to purchase that asset has to be much bigger. The expense ratio the smaller you go generally gets bigger. There's this wonderful sweet spot. This sweet spot is it's not it's kind of in between a small facility and a big facility. So let's take if we were to take a 65,000 net renable square facility versus a 30,000 net renable square foot facility. Theoretically you could operate that 65,000 net rentable ft² one. You you could operate that as an automated facility. But there's a lot of instances where that wouldn't work because 65,000 net rental ft in some markets that could be 900 doors, right? And so the logistics, you may not be able to fully operate it. So you need a personal, which that's fine because the revenue may totally justify it and make it work. Now the 30,000 though that's not how that works. You have a 30,000 foot netable one is very difficult if not impossible in all markets. maybe a few that would work to have a manage but basically 99% of all markets I don't know how you can make that work
because that cost is so big
in in proportion so now you need to get or that needs to be fully automated now as you go down when I say fully automated let's branch out what I'm talking about here first thing is we have hardware that can operate with your software and your marketing. Meaning that the life cycle of a customer is I click on an ad, I can rent and I can use the facility without have to have a person go to the facility.
Mhm.
Now, a lot of people do, oh, I do that without hardware. Hardware that talks to your software. No, you don't. What happens is someone goes and gets it ready. So, let's say that you don't have hardware. Somebody goes and make sure the unit's cleaned out, right? and they either put a lock there or they tell somebody else to get a lock there and they have it ready to go. So, there's still somebody needing to go there to do those things. They just might not be there when the customer gets that. But when you have hardware, you don't need to do that because the gate automatically opens and the door, the lock system is attached to your phone, it automatically opens. You don't need to worry about the lock system, anything else like that. Now, you still have to clean out the unit, but that is like we're talking more just maintenance stuff. So, a lot of people want it to be I click, I rent, I can open up the gate and a door anytime and I never need to have a person that's engaging in that transaction and they can do it anytime uh the day. So, they can do it off hours and then I can track everything they're doing. So, I can see when they open the gate, when they use their door, and then I can lock them out of their door when they don't pay as opposed to have to have a manager go when they don't pay and overlock it. That's what I'm talking about when I talk fully automate. You don't need a manager to go and get the locking system ready, unlock anything else for that person. And you don't need them to overlock or to take care of it. They just don't need to go to the facility in short to do it. The locking mechanism, your software, your property management system software, which you pay on talks with that door. It also talks with the gate and it talks with the customer. That would be a fully automated system. That is not manos. It is a real estate asset. You still have to do work on site. You have to clean units. You have to take care of things, but it may not need to be have any work done in relationship to that transaction of a customer.
That customer in and out, you know,
Bingo. Yep. So when I look at that, that requires the hardware, the software, and the reason I include marketing is because the customer, you're reaching out to the customer, and they're able to engage in your marketing system, which connects it all together. Now, if I want to do that, so I can lower the trips and the visits to the facility and lower the management cost. I can have one person go on site just once a week, clean the place up, clean out units, just make sure everything's good, and then leave for an hour once a week, right? Then I can have a lower cost as opposed to having, oh, well, we have a new customer coming in, so you need to go on Wednesday. Oh, somebody didn't pay. You need to go in on Friday.
Every trip costs money. So, having that system allows for that. Now in order to pay to get that system the smaller the facility goes that cost is very burdensome because you're taking out the return. So once you start to go smaller and smaller most people find I can't buy a facility and I can't put this technology on it like the hardware that I'm trying to do because doesn't make sense. I got to pay all this money a door and it's too expensive. I I I'm adding new fees for the servicing of the hardware from the third party, right? The monitoring. It just doesn't work. And so then they run into the problem where okay, I want to do this, but now I have to do how it more used to be done, how we used to. So when we were first investing um prior to 2008 all our small facilities were automated right we didn't have technology or anything but they were all automated as in we didn't have somebody sitting
there wasn't a manager sitting there because they were small facilities so even at that time the economics were the same you couldn't afford it and change it right so we had to do like these wraparounds well what you do today is you have a website somebody goes they rent a unit via the website or they call and then someone picks up the phone and then sells them a unit, right? Um, one of those two ways. I don't suggest obviously you want a website that can rent. That's how you should do it, but I'm just giving examples of how you could work around it. From there, the person would get on the website, they would rent it, an email would go to them with the gate access and their number after the confirmation of the purchase. Then that person could go open the gate, get in, and then you could either leave a lock underneath the door that's unlocked, ready to go on that unit that was already preset up. That's why on the website they could rent it because it was ready and available for rent. The property management system put it online or you could make them buy their own lock or you could give them the lock including the cost or they can figure it out on on their own. Right? Then they can go in, access the unit. Then when they don't pay, you just have to have somebody go to the site, overlock it, right? And then do the auction manually. So all you're doing is changing that one step where the communication of the hardware, the locking out the gate, the door, right? That's not automated, that's not done. There's risks of having that because people can start gaming system and then it just can cause some issues. But you can do it. So that's how you can operate a smaller facility that you can't afford to add in this technology, but it's still burdensome with the cost. The sweet spot is, you know, you get into that whatever 25,000 depending on the rates in the market and every market is different, but 25,000 let's say to that 60,000 square ft where the hardware, the software, everything minimizing or at least controlling a lot of those expenses, but yet there's enough units to make that profitable. And then the higher up you go, the more profits generate. Now, there is complexity with units. Just once you start to get over 50,000, you have to have it down. You have to have your system down. You have to know, right? You cuz you have way more doors, but your margins are way bigger.
There's less risk because you have that unit diversification, different products, all those things. That's something else that really comes to mind too for me when we're talking these small facilities, man, is how much risk there is when you've got that 5 or 10,000, you know, square foot square foot facility. you only got a handful of unit sizes, a handful of units total. And when you go in and you start changing things, you start moving rates, all that kind of stuff, dude, it's it's, you know, when you've got Yeah.
a percentage of tenants that make up, you know, 10 tenants make up 20% versus 10 tenants making up only 2%.
It's a big tenant base.
Yeah. Yeah. And so what is the optimal size now?
Small facilities, what is the price and how that varies wildly because it's based on revenue. So value comes from net income and that asset based upon revenue and even things like property taxes that makes a big difference. So a small facility that has the same revenue in one state versus another can have huge difference in net income purely because of things like insurance and property tax. You can have a small facility in Florida at the same rate of a small facility in I don't know somewhere else that the Florida one doesn't even make money because the rates are the same. The unit mix the same. But property taxes insurance are so expensive in Florida that it eats up all that net income. Those are things you have to be careful. You get a huge jump in taxes or insurance to offset that to a small group of people. That's a much bigger cost incurred that maybe large facilities don't have to. the cost of the technology is more prohibitive because it's not dispersed amongst other people. This this this sweet spot though of this midsize kind of small midsize facility that tends to be awesome and work really good with the system that we're talking about. I mean, we've had facilities even for us that it's like, dude, we're not going to go in and put all no key ducks on all these units. So like it won't it doesn't make sense.
No. And again there's no way that we can have a manager staffing that facility full time. So like I mean
work. Yeah. No. Exactly. There's been a number of assets that we have done that on. Um so it's not just something we're talking you know theory wise. It's like this is literally what we have done and are literally doing today with some of the assets that Cedar has right now. And I'm going to take this and we're going to go a little deeper now with this. Let's dive into those costs. We're in Mississippi right now and we're turning this storage facility around. Now, lots of people are out trying to buy facilities, small ones that range everywhere from $300,000 to $45 million. Now, they're worried about getting the money or having the financing. This is why we team up with Live Oak Bank because they get this. They understand storage. In fact, we have them help us underwrite deals for our students and others because they are one of the best people in the industry when it comes to getting loans, especially small business loans. They can actually help the customers when they find the asset understanding how much debt can I get, what's it going to look like, not just because of the customer they're working with, but because of their knowledge base. That changes them from being a bank to being a real asset to the customer. We recommend Live Oak Bank to our students as well as others that are trying to get into the storage business. They have an indepth knowledge of this asset class. So, it's more than a bank. It's more than simply getting money. They're actually an asset and a partner to them, helping them go through all the things that they don't know and understand.
So, let's say you buy a facility that is 10,000 square ft versus one that's 30,000 square ft net rentable. We'll just make it a scenario. Same door size, same rents. When you buy it, there's certain costs that people forget about, like the price of this asset is $500,000. Okay. When you buy it, there's certain cost that you will incur outside the purchase price. First of all, there's cost to transact.
Oh my gosh. You're talking bank, you got titles, You've got surveys, you've got, you know, studies, legal, all of that. That's all relatively the exact same. That doesn't change.
Yeah.
Right. Well, then that's the upfront cost getting to purchase it. So now 500,000 is 550 or maybe 520, whatever, doesn't matter. Pick one of the numbers, right? We'll just say 520. But now when you take it over, there's other cost. There's signage. Now you have to change the signs, right? So let me make sure this is very clear. We're going to before I go to illustrate this. When we talk about capex, there's two different types of capex. There's capex that you want and there's capex that is sustained. And what I mean is when you buy it, that asset that you're buying that makes 500,000 that makes $50,000 a year. I'm just making up numbers. But the when you buy it, you should look at it and say, the capex that is needed, right, is only predicated on that revenue coming in. Meaning that if it makes $50,000, you don't get to say, "Oh, but I want to lower the price cuz there should be a gate."
You don't get to do that because the gate isn't required to make the $50,000 that you're buying.
He doesn't have it. He's like, "I don't care if you want a gate or not. You're buying this asset that makes this money. What'd you get? Now, what would be an expense that you would need to go back to the owner? Okay, you have let's say uh you simplicity sake, let's say 50 doors. 10 of those doors that have tenants in them are having issues and need to be replaced and the paying tenants are like they need to be done. Well, that 50,000 that you're paying is coming off a 12 month. It was included in those units. So the expectation is that those unit 10 unit doors work to get that money. So I'd go back to the owner and be like, "No, because if not, I don't have 50 working units anymore. I only have 40." Right. So you need to fix that. That either needs to come up the purchase price. That's different.
Yeah. Anything that you need to actually run the business
as is. Exactly.
Anything else that you want, that's improvements. Okay. So outside that once you buy it, you have the upfront cost going in. signage. You got to put your name on it. So, you have a sign and this can be huge. This $5,000 to $30,000.
Yes. Sign is very expensive, right?
Yeah.
And then you also need to get your new website up. You need to do all of those things. So, let's just make it easy and call it $50,000. All right. That is included. We'll say your signage change. We'll put in there your website change. We'll put in their contracts. Um and then the uh talking about changing over the lease, the work to onboard, working with the city, state to get all of the onboarding of the asset stuff done. So like you know the power all that kind of stuff right
now when you have that overchanged it's another $20,000. So now we say you're at $540,000 each of the two assets $540,000. Now, there's another thing that you need as far as expenses go. You need operational cash flow. Why? Because your expenses may hit on the 10th of the month, but your full revenue doesn't come in until the 30th or later. So, if you have a facility that is not automated payments, meaning it's check cash, right? You have to collect all that. You have to get that.
That's that's actually expensive. You have to get it. You have to then send it to the bank. you have to input it, right? That that cost you money.
That's a really big and important piece to talk about, too, is when you're setting up that payment processing and how many issues that you're probably going to run into that first even
Yeah.
two to three months
and getting the payments to the right place on the right dates. Um, I mean, you could have a ton of money getting going to the previous owner if they're just
you have tenants that are sending checks over, dude.
Yeah. there's or the bank has is has dropped the ball somewhere or there was wrong account numbers or something like there's so many reasons
so many reasons flow doesn't make sense the first two months you don't get it all but you
say business like businesses you know it might take them a long time to go through their process on their end to get the a information updated or or different things like really dive into and understand the tenant base how they're making payments and have a plan for those first couple months to make sure that you have enough you know whether it's working capital whatever that you can actually float operations and make sure that you're not going to be like scrambling, worrying about paying bills cuz you don't have the revenue coming.
These are not ATMs. I've said this a million times over.
People don't understand when you own a business or a large asset, revenue goes up and down every month for a variety of reasons. So do expenses. A lot of people think because they read Rich Dad Poor Dad that I'm going to buy it and I'm going to get X amount a month just forever. It's just it just pays me out, right? That's not reality. That's not how these things work. And so when you look at that onboarding of that asset, those re those revenues may not come in like that.
In fact, they may be really really drug out. Guess what's not drug out?
Your expenses.
The bills.
Got to pay those bills. And two, they're higher because you're in the middle of switching everything over. The previous owner is going to say, "Get my name off there."
Mhm.
Like, you can't just hold it. You got to do that stuff now. It's part of the contract. You got to move over. You can't use my IP. Right.
Yeah. Signage, man. We've had that same thing where it's like, "Oh, dude. Hey, it's been 30 days. The sign's not done yet." And we're like, "We know." Like,
we're trying. We're trying. We're like, "Get it off."
Yeah.
And so, you have front end expenses to make that asset yours.
You're in revenue collection time. This causes when those revenue changes a gap. You may collect first month 50% of payments. You have 100% though expenses.
Mhm.
So that first month you may not even make money or you make less. Now the next month you're trying to acrew trying to catch up. It's just not even. So you need to have operational cash on hand to get you through onboarding that asset. These are months a year, right? So that process, a lot of people just forget about it.
They're like, "Well, I thought the revenue was supposed to come in and I'd pay expenses."
Yeah.
No, the expenses come in and you got to go get the revenue.
Well, dude, and even the banks, the lenders, I think a lot of times won't consider that. And you should be that guide for them to say, "Guys, this is an amazing asset, but this is what I need to make sure that we can protect this asset and hedge against any issues that we might run into." Like,
here's here's what I think working capital needs to look like um over the next 6 months or here's the working capital and the line of credit that I also want to have. Um that's another thing is is like the SBA that uh Walker Dyel uh book, the buy then build. Yes. was
fantastic book if you haven't read it. It's about buying businesses great applicable to self storage all that stuff. But in there he talked about the SBA loan process and saying hey we need to not only not only get the working capital but also get that line of credit or the cap line when you're getting your SBA loan. And dude I mean that is a fantastic way to not only get the working capital but also to have that revolving line of credit to use on there's a rainy day if there's extra expenses that come up. You've got that. I mean, get the freaking lines of credit as much as you can. Have those open and ready to use. Super duper oranges for cash flow issues. That's what we're talking about.
Yes.
Now, all right. First, we have before you buy it, expenditures. Covered that. Then we have once you buy it, the things you got to do, expenditures, signage change, all that kind of stuff. You got to get the new vendors, you got to get the new websites, you got to get hire the new people, all that. That's expenses. Then you have the cash flow stabilization period that you need to have on hand cash to float the spreads when there are some. All right, so there's 1, two, three different times where there's expenses that people don't think about. Let's amount so far all these up to just 50 grand for each asset. Once again, one is 15,000 square feet and the other is 30,000 square no, sorry, 10,000 ft² and 30,000 ft². You're still though equaling it out, right, to 50 grand for both of them. I guess the price can't be the same. So, we'll say one's 200 and one's 500. 50,000 though is it's going to be roughly the same. Maybe a little smaller on the other one because some of the maybe the cash flow you don't need now as much, things like that. So, let's say one because it's bigger is going to take 50,000. The other one is going to take, you know, something like 35,000. But the signage that that doesn't mean it's just the same.
And then when you look at it, the next thing comes in
operational expenditures that you need to get that's the the asset cash flow doesn't cover. And you're going to say, wait, hold on. What c what what what cash does the revenue not cover? Well, first of all, you have things like insurance deductibles that have to be met. You need cash on hand. You have an insurance thing that comes on or a major capex problem. All right, your gate breaks. The gate vendor comes out to fix it. Send gives you a bill. You're like, "Oh, my insurance company will pay it." Okay, but I need to be paid now. Work with the insurance. get the claim and stuff done, which you got to come up with the money to get the deductible to get the insurance claim.
But two, the gate guy wants to be paid. So, you may have to bridge that. That's common to bridge till insurance pays you back. How much is that going to be, right? So, you need to have reserves for these things. You need to have reserves for capex issues as they come up, right? Some things you don't want to submit to insurance, but you have to have them, like a computer breaks,
whatever those things are, right? Maybe you have a lock mechanism that breaks and it costs $500 to get fixed. You're not going to submit that to insurance. Your deductible is three grand. Yeah. Yeah.
Right. So then, you know, I need to have cash on hand for that to cover that gap. I need to have cash on hand for my insurance deductible. There's uh the next thing that you need to look at is cash flow. Summer it's high, winter it's low because of the fluctuation. You need to have cash on hand to go through the year. The point is at the end of the year it may all wash out. Meaning that the one asset that nets $50,000 and the other one that nets $25,000 after everything's all said and done, you actually end up getting 5025, but you're negative 25 for the first 6 months.
Mhm.
Right. Because of how it just works out
for sure.
This cash flow discrepancy that could be really really big on a small asset that you have a lot less doors to cover. But a lot of these expenditures that we're talking about are the same for a 30,000 and a 10,000. So the impact is disproportionate. The 30,000 square foot facility, I'm making numbers up, could have $50,000 in revenue. The 10,000 one could only have 25,000 or 30 whatever that number is. So the the signage, it's the same for both of them. Makes up how much of that revenue?
Margin of stupidity is getting awful thin. Yes.
And those smaller facilities, man.
And that's the problem right there. The smaller you go, every expense is disproportionate to the revenue that you get. And a lot of those expenses do not change because the asset is simply smaller. This is why even operating expenses are could be the same for each one. So one you may have a 40% expense ratio. The other one you could have 55 or 60% expense ratio
doing the same thing.
Doing the same thing. The exact same thing. So when we're looking at buying small facilities, this is the number one thing I think everybody runs into. In theory, I'll just buy a 10,000 square foot one. And as long as it's a six cap, it's the same. I'm netting the same. I'm making the same. It just the the reality is it doesn't work like that. You have smaller margins and if something goes wrong, it's a bigger impact. Just like if you bought a house and you were renting it out and you were making $200 a month on that house and then the water heater breaks and then it floods in the same year, you're negative 15 grand. You're only getting $200 a door. There's only so much expenditures you can offset, right? That's that's kind of the point here. The bigger you go, the more revenue you can acrue. So you put in and maybe you don't frontload those expenses. is all you do is front load a little like what we'll do capex. We frontload some of the expense for cap capex but then we acrew 3% every single month into an account over the years for capex until it reaches a certain amount and then we stop acrewing.
Do you know what that amount is off the top of your head?
Depends on the size of the facility and the quality of the facility
because some are going to need more capex.
Yeah. It's usually a 3% rule though. So will usually acrew more predicated on the facility than 3% just monthly. Got
acur. Okay. Cuz if for whatever reason I had 10% in my head from like a reserve standpoint but I couldn't I was like okay is it like 10% of the revenue each year or is it 10 like so like okay brand new facility. Let's say you buy a co deal.
Yeah.
We're going to crew hardly any into because first year everything's warranted right and everything's just brand new. So we just need less an older facility like we're just going to have more issues with doors everything else right
definitely have a larger reserve
and so everything we talked about everyone does not get into adding technology we haven't gotten to the what's you know what's the no key 250 a door
yeah we usually looked at it like 300 a door
300 a door
we haven't looked at you know installing we haven't looked at the software fees the monthly fees all of that we haven't even got
so You can see how the savings from that system on 10,000 are not square feet isn't nearly as big as 30,000 ft because 30,000 square ft it may not be three times as many doors. Could be more than that because door sizes like you were saying you only have so many. So big units are disproportionate on a small facility. That means that 10,000 ft facility may have 30 doors. The 30,000 one may have 150. Well, all of a sudden now if you have 150 transactions going on, that technology saves you a lot of money. If that is a, let's say it's a 10% a month turnover, that's 15 people a month. Some months it's higher. That's almost, you know, we're talking almost daily or every other day to do locking system everything else. That technology s starts saving you a lot of money.
If you have 30 doors, your turnover may be nothing for months and then it's one. So your ROI is way bigger on one facility versus another because of your savings due to that investment. So that is where in the small facilities that cost structure you can see is this horrible example that I've given with numbers that I'm making up out of the top of my head.
It's perfect.
It's just it all adds up everybody. The line items all the math perfect. Uh so it's just very disproportionate on multiple lines on multiple segment of expenses needed pre during the uh transition of ownership to operations and then into your actual onhand savings, right? It's just portion. Then also getting into adding perfect example, you have 50 doors. You need to build a gate. the gate cost you 30,000. You have 150 doors, the gate cost you 30,000. It doesn't change, right? So, there's a big difference in that. What makes it to the point where you should versus you shouldn't. That is simply going to be determined by size, number of doors, but mostly revenue. And that's it. It's just percentage of revenue. This can vary on markets, right? That is the biggest issue we see with the automation of small facilities. Small is different from everywhere. Some people like, oh, I automate small facilities all the time. I have, you know, 5 45,000 foot facilities that I automate. And you may go, that's not small to a lot of people. Small to other people is 5,000 net renable squared.
So, you kind of got to be careful of looking at it like that. uh beginners will probably look at it a lot different but there is a sweet spot but there's also a danger z meaning I have a number where below it we have to audit we just don't have a choice right and then up until we get to a point where it's too small to add in even technology well under 50,000 is kind of my break where I'm like under 50,000 we can't afford managers or anything on site has to be automated that's how we've always pretty much done it without exception. That's why before we had a lot of the technology pre, you know, we're talking 2008, pre we would not buy um above a certain portion and then after 2008 we would not buy below. So we would not buy below 65,000 net rental ft
for this reason. Whereas today we could buy let's say 40 to 60 because we can automate it and get that margin still through automation. But we're not going to buy under 20,000 netable square feet because the way we operate we need certain technologies to operate into one business model. The business model doesn't even work.
Yeah. No. Exactly.
The best time the best thing that I see for those small facilities is a local small facility. It's 20 minutes from you. You have 30 doors. You can just run down there and take care of it.
Mhm.
You don't need You have a website. You have your cell phone. Somebody moves out. You go sweep it out, take care of it, right?
And then put a unit up on your website. Somebody wants to rent it. They call you. You go down, meet them, fill it up, lock it. That's perfect for that.
But not for free.
Yeah. Not for free. No, no, no, no, no, no. Yeah. Make sure.
Yeah, definitely account for that.
So, Connor, did I make any sense here?
No, it made a ton of sense and and a few things that come to mind, too, as you're walking through all these things because I know a lot of people, like you said, you threw out a lot of perfect maths and all the things.
Um, one of the things that we see a lot of questions on and hear a lot of questions on is going back to like how much is this and how much is that and how how much does all this stuff cost? I'm telling you right now, go and talk to those contractors and those vendors in those areas. Whatever it is, if it's the gate, if it's asphalt, if it's doors, if it's no key, if it's any of that, go and get real numbers.
Don't guess.
Do not guess. Do not try to talk to your friends, like whatever. Go and actually get a proposal from them. and that because again, you're going to have to really look at what this is going to actually look like and how it's going to impact the facility so you can actually accurately underwrite. Um, and also be able to have that information for the bank or the lenders or investors or whatever it might be. Um, you can't just go in and have like this rough idea. You know, we said 300 a door. Yeah, sure. Maybe back of the napkin you can say maybe 300
A door to install, no key. Go get a freaking proposal. My favorite thing is I'm like, "Well, I know a guy that, you know, builds at $30 a square foot." And I'm like, "Oh, wow. That's amazing." And then I talk to a guy that's building $30 a square foot. It's like, "Well, that's the cost of material."
Yeah. Yeah. Oh, well then how much is installation? How much this? How much was the land? All of a sudden, get done, it's $60 a square foot.
Yeah. So much can be lost in translation, dude. It's like, really make sure you're doing a deep dive and also make sure that you're looking at your like competitors in the market. If there's not an ROI there, like, like asphalt's a prime example of it. We've had that same conversation here in the firm. I mean, we've talked at length like, what do we actually need to do to be able to achieve the rates that we want to achieve? Can you achieve those rates in that market? In that market without having to invest 50 grand in asphalt?
Yeah. Freaking do that all day. Why? It doesn't make any sense. You're not getting an ROI. Don't just improve because, you know, it's nice or it looks better or because you just think it's going to work better. Again, like you said, the market doesn't care. Market is. Do what is absolutely necessary to achieve the rates that you want to achieve. Obviously, within reason, make sure that you can actually achieve those things based on real conditions in the market. Don't just assume. No. Those are the couple things that really stood out to me as we walk through a lot of that because I see it all the time. You know, the cost stuff and then making sure that there's an ROI to those improvements that you're doing.
The amount of facilities that I see on the market that are small facilities that they say their expense ratio is 15%.
Oh, it's ridiculous. It's so crazy because when we go through and we do this all the time in SSI, so what we do with our community is I we get they bring their their facilities and I underwrite them live. We just go through. I open up the website. I never even seen them. Underwrite and we see these things. Their 15% expense ratio, right? And by the time we get done, we're like, "Okay, well, they left out all labor."
Yeah, exactly. They didn't adjust taxes and they. You go through like three things and just with three things that they left out, the expense ratio is 40%.
Spent $3 on marketing last year. Like, okay.
Yeah. It's just it's wild. So you got to be really, really careful about these assumptions that first of all, you hear people say. I hear people say, "Oh, I operate at a 15% expense ratio."
Wow. And I'm like, so you know, but then they're not including costs that exist.
Meaning they do all the work but they don't charge labor.
Okay. So you just work for free.
Exactly. That's fine.
That's why I said don't for free.
Yeah. Yep. Exactly. And they, you know, they've never gotten a tax increase and they bought it 20 years ago.
Yeah. And so if they sold it or if you were to build, your taxes would be four times or more what theirs are. I don't think I've ever seen a realistic small facility that had an expense ratio under 25%. Even 25%.
Yeah. I would really argue that. Yeah, anything below 30 years like I don't know.
It's because it's disproportionate. A perfect way to look at this once again is simple expenses. If on a small facility, gate issues, just one one gate replacement.
Yeah. And your expense load is like, okay, well, that's operational expenses.
Okay. But now let's look at real expenses.
Because when you're buying it, you care about what you will actually make.
Yeah. The net. The net. You don't buy something at if none of these expenses happened, I would get this. But that doesn't happen.
Like that doesn't make sense. Um, but that's how a lot of people sell small facilities. They sell it as if that. And I see people that buy them and then they're shocked because their expense ratio is twice what it was and they find out there's all these things that were included that it's not even that they lie. It's just their taxes had to adjust. The owner did everything for free. They had no technology. They didn't raise rates. They weren't running a business.
They weren't running it. Right? And so it doesn't matter how they're operating it. It matters how you're going to operate. That's what matters. We do not take someone's expense ratio that we. So, let's say, uh, we get a deal on the market. They come and they're like, "Oh, we have a 15% expense ratio and so that means this is the net income and that's the price." I don't care what their expense ratio is. Why would I ever care what their expense ratio is? It's not mine.
Yeah. Yeah. It's not what I pay. All we do is take what we would have to pay and what we do over it and then we say here's the actual revenue that came in. Here's our net income. Here's what we're willing to pay. What their expense ratio is doesn't matter. It's irrelevant because it's not what it'll be for us.
It's so true, man. Yeah. That that whole pro forma of where things could be or where they're at today like it gives you a good idea of where the revenue is at currently and where you can it gives you a good picture of what's going on but again I mean yeah you are going to be the one running that asset in your business model you have to understand what expenses that you're going to have the marketing the operational expense if you're having that person that's managing the facility or if you have that one guy that's coming in once or twice a week whether you're running more remote whether I what the new taxes are, what the insurance is, how you're going to automate it, on and on and on. Maintenance of the asset, right? Like if you have to have um landscaping crew come in there every week and the previous guy had his son do it and so he didn't charge, but that doesn't mean that the work wasn't done. These are the kind of things we're talking about. This is so important everyone on small facilities because little expenses eat away so quickly at that net income. And when you buy an asset, you are buying it off the net income. If you have a small facility that's net income is $20,000 a year, a few things can take that down by 50%. Let's use an example of what that means as far as what you purchased it. You bought it at $20,000 at a 10 cap. What's $20,000 at a 10 cap? $100,000 would be a million. So 20,000 would be $200,000. 10,000 at a 10 cap means $100,000. You lost $100,000 in value, right? 50% of your value goes away. It's so easy for that to happen on small facilities. So we don't translate that. We think, "Oh, well, yeah, that's just $10,000. That's 50% of the purchase price."
Mhm. You just lost half the value of the entire business.
For sure. So, remember that little things add up really big in real estate. And then they're leveraged. Now, on cap rates, it's amazing looking at that value because you look at just the little incremental things where you're like, "Oh, yeah, it's only a few hundred extra bucks. Like I was only able to raise rates on this one unit type, you know, and it's a few hundred extra bucks a month in revenue. But yeah, you put that on a cap rate, you look at that over 10 years, like dude, that's a freaking ton of value in a ton of money. That's an amazing win."
And that's a 10 cap. Try five cap and you just lost $200,000.
Yeah, it can go both ways, too. So like you could say a business owner could be running a ton of expenses through the business, like personal, right? So you could end up finding out that there's a lot of expenses that you actually aren't going to have. So it can also go the other way if you and two you can improve revenue. That's the magic and what we talk about why we do what we do.
I want to buy something that is making in that example $20,000 and I want it to make 30 or $40,000 based upon today's market just improvements we can do.
Right. The biggest things and why we're focusing though on expenses is so many of that you don't have control of. You can't fix that. It doesn't go away. Taxes. And you only limit them so much, man. Like you do not grow wealth by limiting expenses.
Yep. You do not grow wealth by limiting expenses. You grow wealth by increasing revenue. You can only limit so much. And the moment you start limiting expenses, you start limiting future value. You start cutting things like capex. You start cutting things like labor. You start cutting things like marketing. That turns into bad reviews, less tenants, and a poor asset. Now you are leveraging the future value in a very negative way and you have a deteriorating asset that the only thing you can do to improve it is inject massive capital because you've been doing that for two years.
Yeah. So you erode away future value. That's why limiting expenses is the worst way to think about managing an asset and creating value. You should eliminate non-necessary expenses. Get rid of the waste.
Get rid of the waste. Operational efficiency to increase revenue. That's how I look at it. But that's also why when you buy, you cannot buy at an expense ratio that is below what you can operate it at because then you have to decide what you're going to cut.
And that becomes a downward spiral. Especially when you're in an environment where interest rates are high. Think about if it was 3% then it went up to 6%. What effect that would have had on a small facility.
No kidding. Small facilities can generate a lot of equity and value quickly. Buy it, turn it around literally in a year and all of a sudden boom, you pop your revenue because you did all these things and changed it and you doubled the value of the asset. You only put 30% down. So now all of a sudden you almost 4xed your or Yeah. Yeah. You 3xed plus your money and then you sell it. That's awesome, right? That's an amazing amazing thing about this asset. It just goes both ways.
That's how you got to remember. And once again, small facilities are leveraged much higher than normal facilities when it comes to expenses, operational cost, um, with limited action to improve revenue. So, you just got to be careful.
Now, a great rundown of small facilities, man. Thanks for for doing that because I know there's so many people out there that are getting started that are wanting to get the small facilities um that are like, "Hey, these are they're really fitting my buy box, whether it's, you know, the the price or whatever." um or they're just wanting a smaller facility to kind of get their feet wet, get started, some of that, you know, which is a fantastic place to be.
Awesome. That's how I did it. Everybody, not only did I do it to get started, I did it for years.
Mhm. I still own small facilities.
Yeah. I operate them. We have them, some of them that are fully automated, you know, tech, hardware, software, everything. Then others that are partial. So, we obviously believe in it because it's what we do. It's how I got started. And I I that's how I actually suggest people getting started into storage.
Yeah. Well, and again, I mean, looking at the long game, yeah, maybe you jump in and get started and maybe you make a little money, maybe you don't the first deal or couple deals or whatever, but now you can go bigger and you're going to make less mistakes because you have the experience and that experience is worth so much.
It really is, man. It really is. Awesome, guys. Thanks so much for tuning in. It's been an amazing episode. Make sure that you guys comment, leave us comments in the YouTube videos, like the videos, subscribe, all those things. And please leave us reviews, man. Leave us reviews.
Makes a big big difference.
Huge difference cuz we've we posted stuff. I mean, we've had reviews just evaporated off of certain platforms. It's been a battle that we've been trying to fix. And most importantly though, guys, tell Connor happy birthday. You only turned 60 once.
Yes. Thanks, man. I appreciate it. Thanks. Catch you guys next time.