Episode 190: Your Self-Storage Investment is a Business… Not a Hobby

Announcer  (00:03):

This is the Self- Storage Podcast.

Scott Meyers (00:10):

Hello everyone and welcome back to the Self Storage Podcast. I’m your host, Scott Meyers. And on today’s episode, we are going to be continuing our series of how to avoid the mistakes in pitfalls that so many people make when they get started in self storage. And so I’ve deemed these the top 25 greatest mistakes that people make or investors make when they get into self storage. And today we’re going to be covering number three, and that is that many people treat this like a hobby and not like a business, sometimes knowingly, sometimes unknowingly. And it’s very timely that we’re covering this particular mistake right now because we’re heading into an economic climate right now where we’re beginning to see the wheat separated from the chaff or the cream rising to the top. But more importantly, what is becoming very apparent, those that have not treated this like a business and who got into the industry several years ago by buying a self storage facility without giving really a whole lot of thought to or an actual plan in place for what happens when it comes time to refinance and how to create value in their facility, how to truly treat it like a business to make sure that it stays in business, that your facility stays open.

(01:16):

And now when we’re at a time in which people are coming to a place where they’re refinancing, and unfortunately they haven’t created enough value in their facility, and so when they purchased the facility, it was a 90% LTV loan to value loan at 4% interest rate. And now when it comes time to refinance, it is at a 65% loan to value loan that the banker is offering at a 7% interest rate or an 8% interest rate. And now the deal doesn’t pencil any longer because this investor, the owner of this facility, did not create enough value in the facility. And so they’re going to either have to show up to the closing table with cash or they’re going to have to show up at the closing table with the keys. And so you’ve probably heard me say this many times and this because this is what we exist for.

(02:04):

We are an education company to teach people the right ways to find, evaluate, purchase, and manage and operate a self storage facility to make them sing afterwards, to make sure that you increase and force the value and appreciation of a property so that you, A, don’t end up in a position like this, but B, that you are wildly profitable in the industry. But first, let’s focus on the fact that in order to be wildly profitable, you have to stay in business. And old metro mind once told me, he asked me the question, he said, well, Scott, how’s business? This is a gentleman now much older and more experienced and with many more gray hairs on his head than me. And I said, well, I said, that’s kind of a loaded question. He goes, well, are you surviving? I said, yeah. He said, well then you’re successful in business.

(02:47):

And I never forgot that because at the end of the day, when you look at as entrepreneurs, 80% of most small businesses fail within the first five years. And then I believe failure rate after that is also somewhere around 50% in the next five years. And so if you look at, depending upon what stat you look at being an entrepreneur and a small business owner is not for the faint of heart. And I know there are many people that want to become a small business owner and to be an entrepreneur, but it takes a little bit more. It takes a lot of heavy lifting, it takes a lot of grit and a team, it takes a whole lot of education, it creates a lot of scar tissue along the way. And at the end of the day, hopefully those of you that are truly leaning in and educating yourself and take it to heart, the lessons that we teach, this is what we exist for here, self-storage investing.com, and that is for the self storage entrepreneur, the self storage small business owner to not only survive but thrive in the industry.

(03:43):

And so what we’re going to talk about today is just that there’s some general rules. There’s a basic foundation in which you have to have and more of a mindset than anything in order to be able to survive, let alone thrive in the business. And here’s what I see is that there are about seven foundational points that self-storage investors need to get ahold of, get their heads wrapped around if they’re going to be successful in this business. And at first really kind of goes along with the old saying, you see dogs chasing cars, but if they actually catch a car, which I don’t know what that means, if a dog catches car, well what are you going to do with it? And I think I see so many self storage investors, they do just that same thing. They think, well, I want to get into self storage because I’ve heard it’s a great asset class and every real estate investor needs to have one.

(04:29):

But what happens when I catch one? What happens when I buy one and how do I manage it? More importantly, how do I make sure that I do the right things to be able to make sure that this facility continues to survive, to last into perpetuity so that I can either benefit from it or sell it at a profit in the long run? And I believe that really stems from how are you going? What are you going to do once you catch it? How are you going to manage it more specifically? And there are many ways to skin that cat. The first of being, probably the biggest decision that investors have to make right now is are we going to run this with a kiosk and are we going to run this unmanned or are we going to hire a third party property management company to run it?

(05:10):

Are we going to manage it ourselves or some combination of all three? And there’s a lot that goes into that decision. Well, first of all, the budget, which is dependent upon the size of the facility, if it’s a smaller facility, you’re probably not going to be able to afford a third party property management company because they start at a minimum that we’ve seen over the years is at $2,000 a month to manage a facility. And that’s just bare bones. Most property management companies are in that $2,500 range minimum to be able to handle the management of a facility and or a percentage of the top line revenue that the facility brings in. But those are the minimums. And so if you have a small facility that is only a hundred units and your top line revenue is only a few thousand dollars a month, well obviously that’s not going to be able to afford.

(05:58):

You’re not going to be able to afford a third party property management company. And so you are going to be leaning on technology and you are going to be managing it yourself. But this also depends upon where you plan to take the business as well. Are you going to adhere to a business plan? And this is going to be the first of many facilities in which you’re going to go back to your lenders and your private equity partners and say, this is our business model. We’re going to have nothing but unmanned facilities and they’re going to be this size and they’re going to be in secondary markets and we don’t want to have employees, we don’t want to have managers. It’s not our business model or this is how we plan to manage, which is a combination of technology and kiosks. It really starts with the business plan.

(06:33):

And quite honestly, that should be really number one in terms of treating this as a business versus a hobby, which is having a plan to begin with instead of not knowing what to do once you have caught the car, so to speak. So not only is budget one of the main driving factors beyond this, but what are your plans for the business itself? Is this truly a hobby? Is this just a one and done? You just want to add one self storage facility to your portfolio, which again, no business is a hobby. You need to walk the four corners of your business and you need to maximize at all costs. You need to maximize the net operating income at all times, which means that you need to minimize your expenses, reduce them as much as possible, and increase the income you need to constantly working at the business and making it stronger.

(07:17):

But let’s just say that it’s just one, if it’s just one facility, you need to determine how you’re going to manage this facility and the best ways to be able to make sure that this is one of the better investments that you have in your portfolio. That also means that you’re going to, if it’s going to be unmanned, and if you’re not going to be hands-on then when the next considerations is that you need to allow the technology to do more of the heavy lifting for you, you may have purchased a facility as many of our folks do, many of our students will get into a facility in which there is no website or it’s a very poorly performing website. And in today’s day and age in our industry, an integrated website, which means that it integrates with a desktop computer, your cell phone, that is where the battle is won in our industry right now because when people are searching for a facility, they’re going to look online, they’re going to look for self storage in their area and their market, and you need to dominate that.

(08:11):

And not only do you need to dominate the search, and there’s a lot that goes into that that we’ll discuss in another podcast in the future, but you need to have a website in which they can reserve or rent a unit online when by the time they hit your website because they’re not shopping, this is a commodity. And if you don’t give them the ability to do so, some type of a hook to be able to check this off their list, they’re going to move on to the next one of your competitors. They’re going to move on to the next step storage facility, one of your competitors. That gives them the ability to either a reserve unit online to then come down and finish the paperwork or finish the transaction or to just be able to rent the unit online. Another consideration that really separates the folks that are treating this as a hobby versus a true business is having a solid marketing plan.

(08:59):

We’ve talked with so many individuals when I would meet them at their facility, and again, we call ’em the mom and papa operators that haven’t really leaned into technology, they really haven’t leaned into their business and they were treating their business like a hobby. And I would sit across the desk from them, and I remember this one time talking to a gentleman and I asked him, I had a solid set of questions, the same questions that are in our self storage evaluator. If you’ve been through that, it is all the questions to get all the data that you need to be able to determine whether you want to move forward with a facility or not. And as I’m going through my list, I’m talking with this gentleman and I asked him about his marketing plan and I fully expect I know what to expect typically when I ask this question.

(09:40):

And he told me about how he was advertising on the local buses or I’ve had some folks say the local park bench. And this particular gentleman said just that he actually was advertising on park benches and he also had, and he was very proud of this, he was advertising at the local diner on their place mats that sit on the table and he had the top left corner, which is where everybody’s eyeballs go first. And he was so proud of that and one year he even sponsored the little league team. Well, that’s fantastic. And I told him, that’s very smart. Congratulations. That’s great. And I believe also that the name of his facility was quadruple a all access aardvark storage because then that allows you to be at the top of the yellow page as well. Long gone are those days. And so were those techniques and his strategies, because that wasn’t a strategy at all.

(10:32):

I said, well, that tells me where you’re advertising, but could you tell me what your marketing plan is? And he looked at me as if I had a foot growing out of my forehead. And he said, well, what do you mean I just told you? I said, well, typically in our industry we advertise different places, but then a marketing plan shows us how we’re going to go after folks and whether we’re driving for occupancy this quarter or whether we’re driving for revenue the next quarter. And our marketing plan really dictates how we do that. And then also it has a set rules of engagement for our managers who go out and do the gorilla marketing and working with other realtors and the apartment owners and different business owners within the geographic area of our facility to be able to lease it up. And I could tell as I went on that his eyes were glazing over and that was going nowhere.

(11:23):

But I was thankful because I was buying his facility that he didn’t have a solid marketing plan in place because he would’ve had a higher occupancy and probably would be doing it much better than he was. But it’s important for you then to not end up in that position so that myself or somebody, one of our students comes along behind you because you didn’t have a solid marketing plan and you were treating this like a hobby and just assume that whatever the seller was doing, you would just continue to do because it worked for them and it would work for you as well. Because today, self storage is no longer a static business in a static industry. It is ever changing and the battle is won with where you market and how you market your facility.

(12:03):

I also see another mistake that new self storage investors make as they’re treating this like a hobby versus a business is that they don’t double down on the profit centers. So they can be added to their facility, first of all, doing their own little mini feasibility study to test the various profit centers that can be added to this facility, such as adding a retail sales component by selling locks and boxes and moving supplies, offering renter’s insurance at the time of move in. As a matter of fact, we mandate renters insurance where we get a split of the premiums that are paid to the company or offering your own tenant protection plan and mandating at the time that the client rents a unit. We also offer temperature control and humidity control units for a premium as well. And if there are areas of the facility in which you don’t offer that currently, well, you can add that by insulating some of those areas and being able to offer those types of units for folks that need to store furs, art, other collectibles, we’ve converted other areas of our facilities over to wine storage with redundant systems for humidity control, temperature control, and also a very much more secure area for high-end items being stored as well.

(13:15):

Various truck rental programs is probably the most common ancillary income stream that you can add to a self-storage facility. By adding an agency and renting out those trucks, your manager would rent those out, third party, and those can be done not only now in store with a manager that is onsite, but also by way of a kiosk. And so the list of income streams we’ve identified over the years that I’ve been at this almost 20 years now, identified over 40 plus profit centers that you can add to a self-storage facility to determine whether you can add those as income streams and whether they’re viable for that particular facility. We can put billboards up, we can put cell towers up, minimal space with a no cost to us other than just getting the permit in some cases and then getting the recurring up revenue for years after that offering eBay services and pack and ship services as well for the Amazon drop shippers in eBay companies.

(14:14):

Again, the list continues to go on and on, but it’s just important to make sure that your facility in its geographic location will be able to take advantage of some of those. We add record storage to our facilities for medical facilities and attorneys sometimes who have to hold onto their physical records for a number of years by way of HIPAA guidelines and regulations where it makes sense for them to house those offsite and file those offsite than it does to have them onsite because it takes up a lot of room, although now digital media storage is taking the place of that, but not in every instance. However, will this work at your facility in that market? You can test that before you add them to it, but don’t stop there. I’ll always be looking for ways to be able to add income streams because every time you add another income stream to the facility, when it comes time to sell, well you just divide that by the going up market cap rate and that is the additional value you want receive for your facility for doing so.

(15:08):

And probably the most important piece to all of this is having a standard operating procedure for every procedure in the facility itself. If you are going to run this facility on your own, well eventually you’re going to hire somebody or you’re going to sell it or your kids or your heirs may take over this facility or they may be managing it on your behalf at some point. And so it’s good to document each and every one of the processes in your business not only to be able to hand this over as a legacy business to somebody else, but also to make sure that you are compliant with all the rules, regulations, and laws as it pertains to liens and auction sales, how you’re going to move somebody in, but the entire process from front to back. What does it look like to begin charging late fees, which again ties into that lien process.

(15:55):

You have to document each and every one of these transactions when it comes time to selling somebody’s unit off at to auction if, if we go to the place where we have to enact the lien laws, again, the beauty of self-storage is the fact that we don’t have eviction laws like we have inhabitation real estate, but each and every state has their own set of lien laws and you have to adhere to them. So not only do you need to know what it is, but you should have your own policy and procedure written out for yourself if you’re going to manage it for your manager and your third party property management company should know this already, but you need to make sure that they are adhering to this. And there is a procedure that is followed because if you don’t, that opens you up to a whole lot of liability if you should have failed to meet those guidelines and have an improper sale at auction because you didn’t follow those steps.

(16:45):

And the last thing you want to do is end up in court, which will land you in hot water if you did not follow those guidelines. And so it’s very important with regards to labor laws, lien laws, and just general operations of the facility to have a standard operating up procedures manual drafted and always ask if the previous owner has one already in place. In many cases where these are value add facilities that we’re buying, if we’re buying existing, they may not. But throughout the years we have a standard operating procedures manual that is very similar to almost all of our facilities. Each and every facility is just a little bit different. But that is again, over the years, we have honed these operating procedures to make sure that they are not only compliant, that we won’t land ourselves in hot water with regards to local laws and the same laws that would apply in just about every facility in just about every state.

(17:38):

And these are things that we share with folks that are in our community and in our tribe. And so at the end of the day, you can create those on your own, but it would probably be best to gather those up from somewhere to make sure that you have dotted all your i’s and crossed all your T’s. Because the last thing we want to do is to end up in hot water with regards to the local authorities or the courts because you didn’t adhere to the state laws as it pertains to just running and operating your business on a day-to-day basis. And at the end of the day, the most important thing to note is the difference between a hobby and a business is well taking a page out of Michael Gerber’s book of the E-Myth. And that is the fact that he runs his businesses like a franchise.

(18:17):

That is the crux of the whole book, is that you set your business up to be like a franchise with these standard operating procedures and things that you put in place so that you have time to work on your business, not in your business. So if you’re going to be stepping out and you’re not going to be managing and you’re going to be handing it over to somebody else, then it needs to operate just like a franchise, like a will oil machine with standard operating procedures all along the way that allows you to step back completely if that is what you want to do and grow the empire to grow and scale. Or if it is just one facility that you’re purchasing to supplement your retirement, that it is running well, running smooth. And you can check in with your employees, your staff, your third party property management company to make sure that they are adhering to your standard operating procedures and what you’ve put in place to be able to maximize the NOI and to continue to create value in your facility because that is the position that you’re in.

(19:10):

I strongly recommend that you spend just a little bit of time at your very first facility behind the counter, if you will, running it maybe a 30 day cycle part-time in and out, just so that you understand the intricacies of that particular facility at that site and perhaps even the industry. But that allows you to be able to then very skillfully craft your standard operating procedures, but then also understand what it takes to be able to manage this facility and understand what it’s like to work with the contractors, to work with the clients, not tenants because they don’t live there but your clients. And then also how to properly then train your employees so that they will fill in for you when you are not around or to have that standard operating procedures manual in place so that if a manager, the manager of that facility goes somewhere else or you ask them to go somewhere else, if you free up their future to pursue other career opportunities, then you can move somebody else in and they step into a franchise like model so that you can continue to operate the facility in maximum capacity and ultimate efficiency no matter who is behind the desk once they get up to speed with the system that you have put in place.

(20:13):

And so you manage the system systems, run the business, you manage and tweak the system, and you were just moving people in and out to be able to follow that set of guidelines and the operating procedures that you have put in place for your investment. And so what that means is if you notice the fact that I say you and yours because you own it, and it is not a hobby, a hobby is something you pick up from time to time when you are a owner of a facility, you own it, you own it from the time you wake up until the time you go to bed. And so you need to have that mindset and develop that mindset if you’re going to be successful in this business. And of course, we have numerous to do just that to support the self storage investor because when the best leaders in self storage win, then the entire industry does.

(20:56):

And that is our goal here at Self Storage Profits Incorporated. And don’t forget, we have all the resources you’ll ever need as a self storage investor because that’s what we exist for. Because when the leader wins, the entire industry wins. And that’s what we are doing here, is creating self-storage leaders in our industry. And so I would ask until the next time we meet again, leave a review, we’d love to see those. It helps the podcast move along and to be able to help other people. And speaking of helping other people, if you know other investors in self-storage that you feel could benefit, then I would ask that you share this as well. And so with that gang, lean in because the next time we are going to be covering yet another mistake pitfall that people make in this industry, but more importantly, how to avoid them. So with that, this is Scott Myers signing off. We’ll see you on the next one. Everyone take care.

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