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How to Scale Commercial Real Estate


Apr 4, 2022

Where is the best place to learn self-storage?

You may have already known the benefits of investing in the self-storage space, but you may still be wondering where to start learning more about it. Scott Meyers and his affiliated companies own and operate more than 2.4 million square feet across over 14,000 units of self-storage facilities. 

He talks about in this episode his outlook on the self-storage space and the ways aspiring investors can buy and operate storage facilities on their own. He also shares some resources to learn the basics of investing in this recession-resistant space. 

 

[00:01 - 04:05] Opening Segment

  • This is the reason Scott Meyers jumped from single family homes to self-storage
  • Why the self-storage industry can survive a market crash like the one in 2008

[04:06 - 09:58] Why Self-Storage is Recession-Resistant

  • What’s happening in the real estate market when valuations are going down?
  • Scott explains what bridge debts are
  • How investors can find what Scott calls “conversion opportunities”

[09:59 - 15:52] How to Protect Your Assets From Rising Interest Rates

  • Self-storage facilities have not been owned by real estate investment trusts yet
    • Here’s why
  • Interest rates are rising, and this is how Scott’s team is protecting their assets
  • If you’re planning to get into the self-storage space, here’s what you need to know
    • Listen to Scott

[15:53 - 17:35] Closing Segment

  • Your way to making the world a better place
    • Ending generational poverty through building houses
  • Reach out to Scott
    • Links below
  • Final words

 

Tweetable Quotes

“We're in the middle of a big roll-up in self-storage again, where this is one of the last few frontiers in commercial real estate that hasn't been rolled up and owned by the [real estate investment trusts].” - Scott Meyers

“You really need to master the art and the science and the math behind underwriting for any piece of commercial real estate. You need to understand the asset class and the nuances of it.” - Scott Meyers

“You've got to determine what your values are in your organization, your core values that you hold near and dear to you…and then you hire based upon [them].” - Scott Meyers



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Email scott@selfstorageinvesting.com to connect with Scott or follow him on LinkedIn. Create wealth through self-storage by visiting Self Storage Investing today! 



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Email me → sam@brickeninvestmentgroup.com




Want to read the full show notes of the episode? Check it out below:





Scott Meyers  00:00

We syndicate just about everything that we've done in the past five or six years. So we have private equity involved, and they want their money back within four or five, six years, they don't want to tie it up any longer than that. So our projects are modeled out. And then also, you know, during that time, that's when you create the most value, you buy a piece of dirt and you put an income stream on it, build a building and put an income stream on it, you've created a lot of value. And then after five years when it stabilized, and the value goes up a little bit with rental increases, maybe get better at expenses, but that value is created in the first four to five years.

 

Intro  00:27

Welcome to the How to Scale Commercial Real Estate Show. Whether you are an active or passive investor, we will teach you how to scale your real estate investing business into something big.

 

Sam Wilson  00:39

Scott Myers and his affiliated companies, they focus on acquisition, development and syndication of self-storage facilities nationwide. They own and operate over 2,400,000 square feet and over 14,000 units. Scott, welcome to the show. 

 

Scott Meyers  00:53

Thanks, Sam. Good to be here. 

 

Sam Wilson  00:54

Hey, man, the pleasure’s mine. Same three questions I ask every guest who comes to the show. In 90 seconds or less, can you tell me where do you start? Where are you now? How'd you get there?

 

Scott Meyers  01:00

Yeah. So we started in single family homes with the Carlton sheets home study system bought a bunch of houses got into apartments after that, realize that we did not like tenants, toilets and trash. So we got into self-storage and by way of the only other former real estate that doesn't have tenants, toilets and trash, except for parking lots. And so we sold everything else off. And since then we've done nothing but buy acquire, develop, convert nothing with self-storage facilities. And that's how we got to where we are now.

 

Sam Wilson  01:30

Man, that's absolutely amazing. When was that transition year for you?

 

Scott Meyers  01:33

2005 is when I bought my first self-storage facility, and then the balance in 2006. And a little bit into 2007 is when we sold our last apartment complex.

 

Sam Wilson  01:41

Okay, cool. Self-storage in 2005. Walk us through the 2008, 2010 era, what happened, then how does storage survive?

 

Scott Meyers  01:49

Yeah, you know, self-storage is second only usually to the liquor industry in terms of performing well, during a downturn, you know, nobody can go on vacation or do anything else. But they can certainly take a little liquid vacation. And so liquor industry does very well. And so storage usually does a sector of the economy does about as good. We're somewhere in the top five. And that's because businesses downsized during that time. And so they stuck excess inventory and furnishings into those storage facilities. They either downsize or they close up shop period, individuals lost their jobs. And so they move back home, they move in with friends, family, whomever, and they put their extra goods into storage until things turn back around again, in that time zone get better. And so for those reasons, you know, starts does very well, during a recession, we do very well, when times are good, people buy more stuff, and we go up into the right, when we come into a recession, we get the hockey stick effect. And so that's what we saw during that time as well. I was in self-storage. And I wish I had more lenders and more private equity partners because we would have done a huge land grab bigger than we did, you know, at the time, because we realized that there's a whole lot of folks that got into the business, you know, during the good times, and they leveraged them up to 90% and they got some appraisals that may be a little higher than they should have been. And then they didn't do anything. They didn't bother to create any value in them. So then 2010, 2011 comes along, and it was time to refinance their 90% loan and now the banks were at 65 or 70%. And they didn't create value. So they were handing the keys over to the banks where they were having to sell it off. And so we were the benefactor of some of those. I'll be honest with you, Sam, had we known, we know now, you know, we absolutely would have had more lending relationships and would have raised more private equity and had more cash. But we did we sold off on we sold in 2007, the bulk of our portfolio and I can't say I can't put any credit, give any credit to myself for being smart enough to see what was happening. We just created a value in most of our portfolio and exited at that point. And we were just getting ready to redeploy and we did, we just didn't do enough of it. So this time around, we've learned we had a whole lot of lending relationships, and we learned how to raise private equity through the years. And we are getting ready for the biggest land grab and self-storage coming into this next recession, which we're heading into, you know, some say this month when we hit our first rate hikes. So we have been teed up and ready for this one since 2010 or ‘11 now.

 

Sam Wilson  04:06

So walk me through that, you said you guys sold most of what you own a, 2007. That was in the multifamily space or that was in self-storage?

 

Scott Meyers  04:13

Yeah, that was a little bit of both. We sold off all of our apartment complexes as well as our houses, we bought some single self-storage facilities and not any portfolios, but just single story, you know, mom and pops, turn them around and then sold some of those off and then heading into eight and nine, we were still selling it at that point as well. We created enough value, interest rates had come down because the federal government was trying to spark the economy again. And so storage was on a high and so we created a value in these that we were selling during that time as well as acquiring but just certainly, you know, hindsight is always 20/20 I wish we would have had more to be able to do more.

 

Sam Wilson  04:48

Right, now walk me through the example you gave of people turning over the keys to self-storage facilities. How did that happen? Again, I mean hearing the self-storage is recession-resistant. Why were people losing their properties?

 

Scott Meyers  05:01

Mm-hmm. Yeah, good question. Well, when times are good, I think there's a false sense of security out there from folks that get into the business when times are good. And they could do no wrong, Thanks for lending at 90%, that the self-storage sector was absolutely on a tear at that time. And so, you know, anybody that could fog a mirror would walk into a bank and get a loan for a self-storage facility, while they were doing it without any knowledge of the industry or knowledge of real estate finance. And so they thought it was just a set it forget it easy business easier than houses or apartments, and they didn't have to do anything. Well, that's fine except for, you know, you have to stay. First of all, that's fine, except for the fact it's a business, not a hobby, and they treated it like a hobby. So instead of welcome to four corners of their business, and keeping an eye on accounts receivable, understanding that they had to raise rates, so they had to do proper marketing to increase the occupancy in the value of their facilities. And so they just started coasting along and maybe raising rates a little bit or increasing occupancy, but they didn't create enough value. So that two, three years later, when that adjustable-rate mortgage was due, and they had to refinance. Now, the banks had adjusted because we were on the back end of the recession. And they said, Well, you know, congratulations, good job, you got into this facility at a 90% loan to value but you haven't created enough value. And now we're only gonna refinance at 65 to 70% of the current value, and you didn't raise the value that much. So if you want to keep it, you got to come to the closing table with 100,000, 200,000, $500,000. Or, you know, you're gonna have to sell it or figure something out. Right. And so, it was the rookies, the, you know, the folks that didn't know what to do. And it was not all of them, the sector, you know, again, did well, but there were some folks that if they didn't build up, you know, 15 20% value over the time that they bought it, so that it appraised high enough to be able to now be able to refinance at the lower LTV. Those are the folks that got caught out and just didn't know what to do except for yeah, sell or give the keys back to the bank. 

 

Sam Wilson  06:51

And do you made mention of the given indication that maybe you see that coming yet again?

 

Scott Meyers  06:56

Uh-huh. Yeah, I do. The lending industry and we, as investors, we did learn a lot of lessons and there are some guardrails that have been put in place. But we are still seeing some higher LTVs and banks that are making some loans that, you know, are bordering on the, you know, reminiscent of what we saw back in 2005, 2006, and 2007, again, and human nature is very similar. You know, we've had this bull market for a number of years in real estate. And there are a lot of folks that got into the self-storage sector and other forms of real estate that think that they can do no wrong, they have had this humungous wind in their sails, in this booming economy, that gives people once again, this false sense of security, that they are these stupid businessmen and women, and that this will never happen to them. And so we are heading into a high-interest rate environment where cap rates are going to go up, which means valuations are going to go down. And once we get deeper into the recession, no matter how deep it is, or what it looks like, three interest rate hikes in one year, and with a war thrown in there and a few other factors. Yeah, I think we're going to see that the banks aren't going to be lending as readily as they were before they're gonna back their LTVs off, they're gonna have more stringent underwriting. And those folks that didn't mind the store, and they didn't create a lot of value in their facilities, they're gonna get caught out again, those same types of folks.

 

Sam Wilson  08:11

That's really, really intriguing. Do you see bridge debt as part of that problem?

 

Scott Meyers  08:15

Sam, I want to be a bridge lender when I grow up. Those guys and gals, that's where it's at, man. They just click fees all day long and high-interest rates. And you know, they don't get on the riskiest deals, but ones that just, you know, need a little push, and they make a ton of money. That's what I want to do. Do I see them as being a part of the problem? Well, yeah, I mean, anytime that somebody is reaching out to a life preserver because that they're starting to sink, you know, the chances are better than 50%, that they are going to sink. And that's when the bridge lenders step in. And unfortunately, you know, they add to the compound and add to, you know, the troubles of that asset. And it's already in trouble adding the higher, you know, expensive, more expensive debt on top of it to get it out, while you're heading into a declining value economy is not a good recipe.

 

Sam Wilson  08:56

Right. That's really, really intriguing. Love your perspective on that. Thanks for sharing that. Right now, one of the things I've heard in the self-storage space here in the last few months, and I'm going to use this term, it's probably the incorrect term. But I have heard that we've seen kind of a hardening, if you will, of the market, where just cap rates are just compressing it at an extremely abnormal rate. Do you see that occurring?

 

Scott Meyers  09:16

Yeah, we're experiencing it firsthand. Right now, we've got a portfolio, two portfolios that we put out to market to sell right now. And one of them is a three-facility portfolio of conversion opportunities, and the broker listed at a 2.3 cap. So if you say that there's compressed cap rate environment out there right now, 100% we're experiencing it and seeing it.

 

Sam Wilson  09:35

That's crazy. When you say conversion opportunities. What does that mean? 

 

Scott Meyers  09:39

These are buildings. They were a former grocery stores, furniture stores industrial buildings that have been repurposed and built out as self-storage facilities. We put a mezzanine in and created two storeys where it used to be just a single tall, you know, 18, 20-foot clear warehouse or industrial building, and then we can burn it put in walls and doors and some cases, create a second level and tournament to self-storage facilities.

 

Sam Wilson  09:59

Got it. Okay, very, very interesting. What do you think is driving, I mean, selling things at a 2.3 cap, that's crazy, in my opinion, what's driving that?

 

Scott Meyers  10:09

So depending upon the facilities that are going out and property, you know, there is still a value add, you know, these are in lease-up, and so there's still money to be had. So that's on the trailing 12 months, they're not all at 100% and they're not all at full street rates in terms of the rental rate. So there's meat on the bone, a lot of meat on the bone than if it were something that is completely stabilized. But you know, let's just say in a normal cap rate environment, if you want to call it that, or if it was a stabilized asset, we're seeing these Class A facilities go out onto the market at a four and five cap. And so, you know, same question you have is, like, who's gonna buy that? And how can they do that? Right, it's all the Delta and the triage on the debt, you know, you've got these real estate investment trusts, that they've got cash, or they've got 2% money. And so if they're buying it for and five caps, you know, it's all about I mean, just all along the way, we're all you know, right in that two to 3%, Delta, that two to 3% arbitrage that we're, you know, that's where we make our money is above the cost of our debt, the cost of our capital. So if these guys are coming in with these funds, and they got 2%, money from XYZ company, or they got cash, and then they fold some properties or a property into the mix, and they can eliminate some layers of management or marketing from economies of scale, they've already got a website going, they've already got regional managers in these markets, and, you know, a lot of things in place that go away from the P&L, and therefore the NOI, you know, it makes sense. So we're in the middle of a big roll-up in self-storage, again, where, you know, this is one of the last few frontiers in commercial real estate that hasn't been rolled up and owned by the REITs. And self-storage is now still 75%. Still Mom and Pop and, you know, regional operators, and REITs are on a tear, and we're gonna see the, you know, by the end of the next four or five years, it's going to flip flop, and we're probably only gonna see about 20 to 25% or left as Mom and Pop.

 

Sam Wilson  11:49

Right? Well, I mean, I think we're seeing that across virtually every asset class. I mean, yeah, clearly, yeah, the institutionalization of practically everything is, and I'm a while right, beyond talking about interest rates, what are you guys doing to protect yourself in a potentially rising interest rate environment?

 

Scott Meyers  12:05

Well, potentially, we know what's gonna rise, period, we just don't know how much and so you know, really the only thing that we can do, because everybody's crystal ball is broken, or in the shop, or, you know, it's impossible these days, you know, just being conservative in terms of your underwriting. I know, that's cliche, and that's gray. And there's no other way to define it. But, you know, if we feel you know, that interest rates are going up by two points, and we're going to exit in five years, you know, what are the interest rate environment going to be in three, four or five years? Well, we're adding another half to one point on top of where we think that's going to occur. And that's what we underwrite to and hedge against that. We also stress-test the heck out of everything and assume worst-case scenario, that we can still either get out, make our investors whole, and then we're not going to lose money. And we have some options. So it's just building in those barriers. And I know, we don't have time to go into all of that. But that's really what we're doing is you know, any investment, you make money on the buy. But man, if you got an exit strategy in five years, six years, and you're still betting on, you know, four and 5% cap rates on an exit and an interest rate environment, that's going to be two to three points higher, you're not going to make it. So just being mindful of where we're going to be when we exit the facility and then accommodating for that within the math.

 

Sam Wilson  13:10

Right, that makes a heck of a lot of sense. Let me ask you this question. Why other than the fact that maybe you're just getting insane prices in the market, why do you guys sell your assets? I mean, the idea behind these is to buy an asset and collect the cash from plummet? Why are you selling? 

 

Scott Meyers  13:25

Sure two reasons. One, we syndicate just about everything that we've done in the past five or six years. So we have private equity involved, and they want their money back within four or five, six years, they don't want to tie it up any longer than that. So our projects are model out. And then also, you know, during that time, that's when you create the most value. You buy a piece of dirt and you put an income stream on it, build a building and put an income stream on it, you've created a lot of value. And then after five years, when a stabilized and the value goes up a little bit with rental increases, maybe you get better at expenses, but that value is created in the first four to five years. And so why would you just put all that equity to bed and tie it up, just we refinance, we sell pull that out, and then we double down and do it all over again. So it's an IRR driven from our private equity partners to be able to sell to give them their money, they also don't want to tie it up that long. Some of these folks have gray hair, and they've been around a while they're not sure they're gonna be around in 10, if we hold it or 15. And the second is, yeah, if you look at if you do the math on buying a piece of property, putting 100 grand into it as a down payment and hold it for 30 years and create some value in it versus $100,000 into a property creating a massive amount of equity and value in it in five years exit and do it over again and then do it over and over and over again. You're going to be a far wealthier human being at the end of the 20 or 30 years after you've done that strategy of rinse and repeat.

 

Sam Wilson  14:38

Got it. I love that last question for you on the theme of the show how to scale what is recommended piece of advice if somebody wants to get into self-storage and scale their selves towards holdings. What do you tell them?

 

Scott Meyers  14:49

It's the same for anything in any business and anybody that we tell getting into storage is you know, it's been touted as a you know a very simple predictable business model. And it is doesn't mean it's an easy business and you need to treat it as such. It’s a business, it's not a hobby, and I've already kind of touched on that. So I think you got to learn. And you really need to master the art and the science and the math behind underwriting for any piece of commercial real estate. You need to understand the asset class and the nuances of it. Beyond that, in terms of scaling, again, you can't stress enough that you've got to determine what your values are in your organization, your core values that you hold near and dear to you, and then your organization, and then you hire based upon that. Because if people don't fit, they're never going to fit, they're going to create a cancer, they're going to create issues with your other employees. And pretty soon you're going to have a dysfunctional team if you don't start out with one, to begin with. So you cannot scale until you get that right. And those that have, they will tell you along the way, it has been very painful. And it's been very expensive, or the business imploded because they didn't do it right. So everybody equally yoked in the same direction. And it starts with you as the leader, the CEO of the core values. That's how you hire.

 

Sam Wilson  15:53

Love it. I absolutely love it. When it comes to investing in the world, what's one thing you're doing right now to make the world a better place? 

 

Scott Meyers  15:59

Well, we have always been mission-minded, mission-focused in our organization, 10% of all our profits, and all our companies go towards a well in one big kitty. And what that kitty does is then we go invest in and build houses in Mexico, we take two trips per year, we build two to three houses each time. And it takes a team of about 20 individuals to do that. And so what we've done is we've created a four-day family-friendly safe mission trip where we pay everything except for people's trip to California, you then need to drive or fly to San Diego. After that we pay for the house, we pay for the bus down to Mexico, we put you up in a hotel or on the base and we pay for your entire trip so that you can experience what it's like in two days to build a house and hand the keys over to a deserving family and ending generational poverty, one family at a time. And we've been doing that for the past eight years now. And we're getting ready to ramp that up and should do about six to seven houses this year. And God willing even more than that next year.

 

Sam Wilson  16:52

Man, that's awesome. I love that Scott. If the listeners want to get in touch with you or learn more about you and what you do, what is the best way to do that?

 

Scott Meyers  16:58

Go to selfstorageinvesting.com, all things self-storage. That's the best way to find me and the best way to dip your toe in and learn as much as possible about this wonderful world of self-storage.

 

Sam Wilson  17:07

Wonderful. Thank you, Scott. Appreciate it. 

 

Scott Meyers  17:09

Thanks, Sam. Good to see you. 

 

Sam Wilson  17:10

Hey, thanks for listening to the How to Scale Commercial Real Estate Podcast. If you can do me a favor and subscribe and leave us a review on Apple Podcasts, Spotify, Google Podcasts, whatever platform it is you use to listen, if you can do that for us, that would be a fantastic help to the show. It helps us both attract new listeners as well as rank higher on those directories so appreciate you listening. Thanks so much and hope to catch you on the next episode.