Transcription
If there are 10 facilities, but 50 customers can only see or find two of them, those two are now taking up 50% of the entire demand of the market. That means you can find, own, and operate a facility in a market that has no good competitors, just like you would in a first tier market. That changes the game.
Self storage will continue to consolidate, but we have a really good 5 years with a huge amount of opportunity and wealth creation. There is a digital blind spot in the self-storage industry, and this has created one of the greatest wealth creation opportunities ever. Now, we have probably a five-year run, but this digital blind spot is perfect for first-time investors or investors looking to expand their portfolio. It's being ignored by institutions, large capital, and large self-storage firms. So, today I'm going to break down how this blind spot occurred, what it is, and how you can take advantage of it.
You see, self-storage changed wildly with the advent of online marketing and then analytics, data, and software. How this industry performs day-to-day has changed massively in 15 years. But that's not been evenly spread. You have to remember the average age in this industry is 67. And first-tier markets like New York or Southern California or big markets, they were introduced to REITs a while ago. Second-tier markets came after 2008. But third- and fourth-tier markets are largely untouched by major institutional players.
One of the things that makes all of this industry function right now is data that runs revenue management, dynamic pricing. That's how we analyze markets and how you can see the spread in rates and occupancy, where people are moving, and on and on and on. It is this data that fuels the software systems that run storage every single day that we all use. This is how investors allocate capital. This is how operators run. But there is about 40% of the market that sits in a blind spot. And this blind spot has a lot of inefficiencies. Inefficiencies create opportunity. And because of that blind spot, they are being overlooked when they definitely should not be.
You see, those first-tier markets, all that data software has made markets really efficient. The upside on those assets are more market-driven than anything else. They're buying, they're holding, and the market will appreciate, rents will rise. But that's not how I got started. That's not what we did. That's not even our business model. You see, we buy underperforming storage facilities and we increase the value of them through basic operations, increasing the net income. This can be everything from delinquencies. A lot of the small storage facilities you buy have delinquencies of 10% plus. That alone right there is a massive increase to net income. I mean, think about it. You have a net income that is roughly, let's say, 20% of gross income. All of a sudden, you have 10% delinquencies on the gross income. You eradicate that and you just put that to the bottom line. So you increase by 50%. The net income. That's crazy. But that actually happens a lot.
Now, the other things have to do with basic marketing. It has to do with rents, street rates, in-place rents, services, all sorts of things that are not complex. They're not complicated. They're basics. But in an industry that has been dominated by mom-and-pop investors that came around before 2008, before self-storage's business model got upgraded and the average age is 67. This blind spot occurs with those operators. The operators that are primed to buy and do the basics increase net income and the value massively.
How big is this blind spot? It represents over 19,000 storage facilities. 98% of the total cities fit in this blind spot. Now, of course, population, that's a little different because 5% of the cities in the nation have a huge amount of the population. But the point is geographic area, actual cities, and storage facilities in all of these markets. The vast majority of them lie underneath this veil and enter into this blind spot. I use our analytics and our partnerships and my own personal software, my internal brain that we have built out to analyze these markets to take averages and to look at what we consider a covered or blind market.
Here's how it works. In self-storage, in order to know what is the value of a facility or what can I achieve, you need to know a few basic things like occupancy, rents, and expenses. Well, when you go into a market, take any large or second-tier market. We could take Nashville, Boise, Austin. You go online and we use one of the many software systems. Practic, by far the best. It's the one we use at our firm and it's the one that we suggest. There are really two big data software systems in the industry to analyze markets and assets. Track IQ is the only one that you can actually pull occupancy as well as an unlimited amount of data. When we look at that, that huge source of data, what these do is the same things that your revenue management or your rate management systems do. They scrub online. They pull all of the rates and then they look at these rates and they tell you in this market a 10x10 is being charged on average $100. That allows me to see and put into a pro forma. If I bought this facility, what could I charge and where have those rents gone? Have they gone up? Have they gone down? How's that market performed?
But here's the thing. Once you get below a certain point of actual competitors that you can look at, so actual units in the market, that information is irrelevant, meaning that you're not even seeing the market. So, we put that basically at 50%. So, if you go below 50%, you start to get in a gray area because you're not seeing half of the entire market's rents. So, you really don't know. Now you go even further below 40% that you can actually see and you really don't know. This is the blind spot. This is markets where occupancy, rents, basic information about square footage or anything else like that you cannot see from the data. The software systems don't have it. The data systems don't have it. Operators don't have it. These are mom-and-pop storage facilities in markets where 80% of all the facilities are running the old way and you can't get any kind of accurate or reliable data. They're not being published. They're not online rentals. They're not doing ads or marketing. These are the basic standards in self-storage today to operate. And there is way over the majority of the cities in the United States that the vast majority of the market, meaning over 60%, does not operate in this way, it doesn't even have that information to pull. We're talking about over 19,000 cities where out of the competition in those markets, these are incorporated cities. I'm not talking about non-incorporated cities. I mean incorporated actual functioning facilities. There's over 19,000 of them that have competitors in those markets that do not operate in what is considered the absolute standard day-to-day operations today. Nobody can see what their rates are. Nobody knows what they're charging for rates and they're not doing marketing or anything else like that.
Quick break from today's episode, everybody. I wanted to tell you about my favorite resources that come with self-storage income. So, you may not know, but I wrote a book. That's hard to even call this a book. I mean, this is a manual. We're talking 400+ pages, which include all sorts of information about how we have been in the self-storage industry. That's everything from how we got our first deals to scaling to buying deals in today's market. What's changed and what remains the same. This is an up-to-date book that shows you how the market has changed and how you can win today. This isn't simple. This is how you buy a deal. No, this goes into everything, including how you scale and create a self-storage business. You can get a physical copy, an ebook, or the audiobook, plus free access to bonus content at the end of each chapter. You can get it today. It's available on Amazon and other platforms in which you can follow the link.
Now, how does this create the opportunity? Well, first of all, remember that 50% of our entire industry are single-owned mom-and-pop operators. Those assets aren't doing marketing. They're not doing revenue management, rate management. They don't have online rentals. 85%+ of our tenants, they come and they rent. How? Through this. They search online. Those facilities, you can't get prices and you can't even rent online. Large investors cannot invest in these types of markets. It's just too unknown.
At the same time, this results in a very big spread in cap rates, meaning value of the facilities. Those big markets that are more efficient in all the data. Those cap rates are down low, meaning the price is really high. You go into third, fourth, and even fifth-tier markets in the United States, and the cap rates go from being a 5 to an 8, maybe even more sometimes. That is a fraction of the value. We're talking about a 40% difference in value for the same net income ratio. They're cheap in comparison.
Now, price isn't the only thing though that we care about. Also, because of this, it's a lot harder to get funding. This is why a lot of those facilities have to do things like seller finance, providing opportunities for those that don't feel that they can get financing and want to use creative financing to buy them. They also are not operating anywhere close to efficiency. They're not doing the basics that we would do in business, providing huge upside in both expense reduction while also revenue increase, therefore expanding that net income.
But the opportunity isn't still that. The opportunity is this. The technology that we use that everyone used to do that is still applicable in these markets. You can do online rentals. You can do marketing. You can do all of these things. You can have almost all your tenants on autopay. Our average for our company is 95% autopay. A lot of people say, "Oh, you can't do that in a small market." Because people don't want to do it. They want to pay in cash. I can tell you that is not only not true. We have disproved it as well as the students in our community have disproved this time and time again. Some of our smallest markets that are teeny represent the highest in autopay.
Online presence and online marketing allow you to capture the bulk of the leads in that market. Think about it. If you have five competitors in a market and you're the only one that allows online rentals and you're the only one that has marketing or a good web presence, 85%+ of our tenants find the storage facility that way. You've now shifted your own personal demand. The vast majority of people looking are going to find you. Also, they can't rent if it's not during office hours or they have to set up an appointment. If you've automated that, you can rent 24/7. Therefore, automatically changing the supply-demand metrics for your location.
If you look in a perfect world, supply and demand is simple. I have 100 tenants and I have 10 storage facilities. That means each storage facility should get 10 tenants. That's how it works. Except this customers do not know and care about that. If you have 10 facilities, but 50 customers can only see or find two of them. Those two are now taking up 50% of the entire demand of the market. That's why you have certain facilities that perform much higher than others. All of those things are available to you today to do even in the small markets.
Now when we get into revenue management, dynamic pricing, a lot of people think that you need competitor data and that's how it used to be. But since AI has come in and since all this data has been around, we actually developed what we call our brain. That is a software system in which I can do dynamic pricing, revenue management, and I don't need competitor data. I can actually see opportunity and risk of each individual tenant. I call that now metrics and it's what I lovingly refer to as my brain. I built it over a three- to four-year period of time after building out software and data for a decade in the industry. If you want to know more about that, comment "now metrics" down in the comments. But essentially, that gets rid of that problem. That means you can find, own, and operate a facility in a market that has no good competitors, just like you would in a first-tier market. That changes the game. It's almost like you're not competing in those markets. You can get the most tenants, charge the highest rates, you can automate, and you can lower your expenses and so you can expand that net income, therefore growing the overall value of that facility dramatically.
See, this is the playbook that I used. We went into small markets and we did just that. That is the playbook that I use also in second- and first-tier markets, even though it's much harder in those markets. Third, fourth-tier markets, you're also dealing with facilities that are much smaller. So my organization today is a lot bigger than it used to be. We're buying facilities at $50 million. We'll buy a portfolio of two or three for $60 million. Well, when I got started, I was buying them for $300,000 per facility. So, it's a different world and a different game. It actually doesn't make sense for me to buy anything under millions of dollars because my organization is not built for that. I can't allocate $100 million or $50 million in facilities that cost $300,000. That would kill our operational cost. It would skyrocket. That's the problem most organizations get to as they grow. But the model I'm talking about got us to a point where we could grow and go beyond that. We built a portfolio of six, seven assets worth tens of millions of dollars as we grew and kept going and predominantly in these small markets.
That's what I love about storage. You can scale and the entry point to it is very different than other commercial real estate assets. And you also have all these levers that you can use to change the value of the facility. It's what I teach in my community. It's what all my students are doing now, which we have lots of videos which you can go check out and see the actual case studies and what they're doing. It is my favorite model by far because storage is so dominated by mom-and-pops. They're everywhere and you can find them and compete in ways you never could. Not when I got started. The technology that's available today we couldn't have dreamt of using literally 10-15 years ago. Yet the marketplaces like these small facilities are operating like they were 10 to 15 years ago. That provides this great opportunity for investors. It's what I teach and it's exciting. It allows you to create wealth in a way that you just can't do buying a single family or duplexes. You can spend the same amount that you would on a duplex in most cities to get two doors on a storage facility in cities that you get a hundred.
But this won't last. You see, self-storage has been consolidating. Remember when I started, we're talking about 90% were mom-and-pop. Today, that's 50%. And people are trying to break into those smaller markets to deploy capital. That's actually a benefit for you. Why? Because you can buy and you can grow and scale, package up, and then sell to somebody bigger that needs 10 facilities, not one. This is a wealth creation cycle that will dominate and outperform and is one of the greatest opportunities I've ever seen. But in the next 5 years, self-storage will continue to consolidate. That's why I think this runway, we have a really good five years with a huge amount of opportunities and wealth creation.
So, make sure you guys subscribe, like, and follow along to learn about how you can do this too, and all the things that you need to do to find, value, buy, own, and operate storage facilities. And for those of you that already have storage facilities, make sure you're subscribing and make sure you're commenting below what you're doing today. Where are you guys looking? What markets are you looking at? What size of facilities are you looking at? What's your buy box? Also, if you own and operate, make sure you are checking out all our content about operations and how you can expand your net income to create more wealth. Thanks everybody.