I opened this episode with a couple of general observations I’ve been reflecting on, and then later dive into live listener Q&A which I’ve organized into some common themes. The Q&A gets pretty detailed into the financial metrics of real estate and self-storage deals, so I highly recommend giving it a full listen if that’s of interest to you.
Aggression and Patience
My first two thoughts are a bit counterbalancing, aggressive tax strategy, and passive decision-making. I’ve seen a lot of people on Twitter bragging about how little they pay their CPA as if it’s some kind of strategic savings for them. I’ve had four CPAs in my career, and I’ve noticed there are really two types:
Some CPAs are afraid of the IRS and lazy, so they act like their job is to get their client to pay taxes. A cheap CPA may do this because it’s easy. Better CPAs work for you and fight for you, and are ready for questions from the IRS. Better CPAs figure out ways to save you money. I had one CPA recommend that I don’t perform bonus depreciation on a property out of fear of recapture taxes down the road, and I fired him because paying taxes years down the road is better than paying now as an investing strategy.
I’ve also had a lot of people reach out to me on Twitter asking what they should do in a situation, and without needing full details I’ve noticed a common thread: the best reaction is almost always to do nothing. You can sit and watch a deal go by rather than overpaying, you can sit and hold onto an asset as it produces cash flow and gains value, you can use time as your friend. Real estate is a game for the patient and unemotional. People typically make bad decisions out of panic, fear, or greed. If you sit and wait, you can avoid a lot of bad decisions. If time is your friend, you’re in a great business where all you need to focus on is daily execution and you’ll be setting yourself up for success.
Pricing and Market Selection
The most exciting thing about self-storage used to be that we could manage remotely and cut costs, whereas competitors were spending tens of thousands by having on-site staff. This was a huge competitive advantage, but we’re now learning that the true greatest power at our disposal is revenue management.
There’s this human desire for 100% occupancy that is a detriment to business and can cost you thousands of dollars. The number one opportunity in real estate is mispriced units and below-market rents. Most real estate investors are quite wealthy, so they see cash flow and don’t push the envelope with rent increases, but that’s how you can create instant value.
Charging market rents is hard, raising rents is hard, but 10% revenue growth at a 50% expense ratio raises your NOI by 15%, and it can be done overnight. We target about 90-93% occupancy in our units, and anything above that means we need to look at raising prices.
You’ll find most of these mismanaged properties in tertiary or even 4th-tier markets that have no good operators, full vacancy, and low rents. However, there is some risk to small markets; sometimes it goes really well with rent increases and occupancy remains stable, other times people move out after raised rents. It’s hard to go to markets that charge $30-50 monthly and underwrite a notable rent increase, especially early on in your portfolio when you can’t afford to miss.
Interest Rates and Bear Protection
I’m a 70% bull and 30% bear when it comes to interest rates, meaning I’m 70% confident that the market will continue ahead without any hiccups, but 30% confident that high interest rates will shake things up. Rates could go up to 6%, especially for smaller deals where debt is more expensive, but I don’t see a case where they go above 6% without a huge pain to the real estate industry.
With Bolt Storage right now I’m in the business of not losing money. My job is to protect the downside, and 80% of my energy goes into making sure we’re protected against the bear case.
Market Analysis and Deal Finding
It’s hard to be a small investor right now. It’s hard to find the great deals that you need to hit on, and it’s hard to buy them. Once you reach a certain size you enter the business of capital deployment and buying tons of good deals, but until then you need to find a couple of great deals to launch your portfolio.
There are 30+ metrics you can investigate to look into a market’s viability, and you’ll never find a screaming deal that fits every one of your criteria. Rather than focus so much on the market data, we like to simply look at competitors and economics. How are competitors operating? Are they full? Are they answering phones? Are they remotely managed or do they have on-site staff? What is the market occupancy? What is the market rent? Are people charging market rent?
Nobody is smart enough to guess how all 30 market variables will combine, but with some basic competitive and economic analysis you can find out if a property will meet your yield requirements.
Use Google and make a list of small operation self-storage facilities within a three-hour radius and call them. Look to buy your first one at 100-120X monthly revenue. Use Loopnet, it gets trashed on Twitter as being a subpar deal machine but we’ve found some fantastic properties through it, and it’s a great way to get practice underwriting deals.
Employment and Sourcing
We pay a laborer $15-30 an hour to sweep units, clean units, take pictures for auctions, pick up trash, and do everything else we need to be done on site. It’s not easy to find people, you need to get resourceful. Call local businesses, hardware stores, and landscaping companies, and ask if they know anybody who is looking for work. There’s no secret, you have to go out and work for it. The answer is always cold calling.
Three Key Takeaways
- Real estate is a waiting game. When in doubt, do nothing and let time work for you.
- Don’t fall into analysis paralysis with all the metrics used to scope a market, use basic research and indicators to understand if a deal meets your criteria.
- In your first set of deals, you need to hit home runs. Once you grow your portfolio you can take on more risk, but not in the early stages.
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