Mar 31, 2022
Is self-storage worth it?
We have invited guests before who had talked about self-storage, but still, there’s more to this space that many investors have yet to learn about. Jay Bowman drops by our podcast to talk about his experience jumping from single family to self-storage.
He started his real estate journey by buying his first rental property for $11,000. Little did he know that it was a big mistake and his tenant moved out only after two months. This misstep has prompted Jay to find other ways to invest in real estate, which led him to the self-storage space. He now helps his fellow investors buy self-storage properties through his company, Beyond Storage.
[00:01 - 02:48] Opening Segment
- How Jay Bowman learned how to be a landlord really fast
- Here’s his journey of how he jumped from residential to self-storage
[02:49 - 10:56] Why Invest In Self-Storage
- The difference in evaluating between a single family and a self-storage property
- Here’s the right way to evaluate a self-storage property before buying
- How should you set the prices for your properties?
-
- Jay gives a sneak peek into their approach
[10:57 - 15:21] Properties That Are Worth Investing
- Jay shares his thoughts about tenants leaving the properties
-
- Why do they leave in the first place?
- If a property is 40-50% occupied, is it still worth it?
-
- Jay gives his thoughts
- The biggest surprise that Jay discovered after jumping to self-storage
[15:22 - 17:38] Closing Segment
- A real estate mistake you want our listeners to avoid
-
- Not educating yourself before buying properties
- Your way to making the world a better place
-
- Giving back to the surrounding community
- Reach out to Jay
-
- See links below
- Final words
Tweetable Quotes
“...when you got 300 or 300 units in a facility and everybody's leaving, a lot of times, it's just because their usage is done.” - Jay Bowman
“...you got to be educated, you have to understand what it is that you are actually purchasing…people are gonna tell you how passive self-storage investing is, and whoever tells you that does not know what they're talking about.” - Jay Bowman
-----------------------------------------------------------------------------
Email jay@gobeyondstorage.com to connect with Jay or follow him on LinkedIn. Are you planning to buy storage facilities in the United States? Beyond Storage can help you with that!
Connect with me:
I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns.
Like, subscribe, and leave us a review on Apple Podcasts, Spotify, Google Podcasts, or whatever platform you listen on. Thank you for tuning in!
Email me → sam@brickeninvestmentgroup.com
Want to read the full show notes of the episode? Check it out below:
Jay Bowman 00:00
When you're evaluating a business, such as self-storage, you're going in about how much net operating income it's going to throw off at the end of the day. And so you're having to look at maybe an asset that is not being operated correctly or the rents aren't high enough or there's some other things that you can make changes to drive higher rents monthly, to drive in the end your net operating income higher, which therefore then increases the value of the property.
Intro 00:29
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 00:37
Jay Bowman is a former buyer of single family rentals rehabs and flips, and he has successfully transitioned to self-storage purchases. Jay lives in Kentucky with his wife and two children. Jay, welcome to the show.
Jay Bowman 00:49
Thanks for having me, Sam. Appreciate it.
Sam Wilson 00:50
Hey, man, pleasure’s mine. There's three questions I asked every guest who comes on the show. In 90 seconds or less, can you tell me where did you start? Where are you now? And how did you get there?
Jay Bowman 00:57
I started here in Louisville, Kentucky, moved here in 2004. And started by buying my first rental property for $11,000 in a really bad area with one tenant. And I thought, “Man, this would be great. I'll buy a house and there'll be a tenant in there and he'll pay the rent.” And two months later, he moved out and I learned how to, how to be a landlord really, really fast.
Sam Wilson 01:19
Yeah. And would you recommend buying $11,000 rentals?
Jay Bowman 01:23
I would not recommend that. It was also the first rental property I ever got rid of. It took me a while but I took a beating good enough, and I sold it for cash as well at the same time.
Sam Wilson 01:33
Right? Yeah, you have to I have a story similar to yours in starting out and you go, “What was I thinking? What exactly was I thinking?” That's really, really fascinating. Tell me where are you now?
Jay Bowman 01:44
We're based out of Louisville, Kentucky. Oh, this where we've always been all my portfolio is my single family portfolio is here. But our storage portfolio is spread out. We have units or we have facilities in Indiana, Missouri, and currently one under contract in Louisiana.
Sam Wilson 02:01
Interesting. Okay, so right. So just to follow this transition, you were in single family, you started off, obviously, you know, some really small stuff. I'm sure you ran the gamut in single family from me, did you do everything you could possibly do in single family before you gave up on it and said, “Hey, I'm going into commercial.”
Jay Bowman 02:17
Sure, I started buying a small rental and then started wanting to do rehabs. As everybody else in the brother did back in, you know, five, six, and seven, got into that and then bought one in ‘08, couldn't sell it. So we just turned it into a rental and from there just continued the fix and flip rentals and then just started acquiring and going from there. And then after a while around 2020, the transition to self-storage came available. And after years of construction and heartache and pain banging your head against a brick wall, we decided to make the transition to self-storage.
Sam Wilson 02:49
Tell me what was that process like? Because a lot of people want to make that jump, they want to say hey, you know, they're just like you just like where I used to be. They want to say, hey, I want to get out of single family. But I don't know how or I don't have the team or I don't have the finances or I don't X, Y, Z fill in the blank. How did what were some of the things that you mentally said I don't maybe yet have the skill set to take that down, but that you, kind of had to fill in the gaps on what did that look like for you.
Jay Bowman 03:13
Really the biggest thing is, you know, the acquisition is very similar. The only difference is being able to evaluate the property while you go into a single family, you may say, Oh, hey, this is $100,000 house, when it's all well and done buying it for 50. It needs 20 Oh, there's a $30,000 spread, right? Easy peasy. That's pretty easy. When you're evaluating a business such as self-storage, you're going in about how much net operating income is going to throw off at the end of the day. And so you're having to look at maybe an asset that is not being operated correctly, or the rents aren't high enough, or there's some other things that you can make changes, to drive higher rents monthly to drive in the end your net operating income higher, which therefore then increases the value of the property. So its evaluation is completely different. And I would recommend that anybody who gets into storage, learns how to evaluate those properties. Outside of that we do basic rehab stuff. Same thing as houses, you have paint, you have some fencing, you have things like that, and then making cold calls and talking to business owners instead of homeowners. It's still the, very similar conversation. It's just the operations of the business is different.
Sam Wilson 04:17
Right? Talk to me, if you don't mind, take a few minutes and go in-depth on property evaluation. You know, when you look at a deal, what are some high-level things maybe that you guys look at out of the gate and say, Hey, further interest or pass and then when you take the next the kind of the second round of underwriting, what does that look like? And you break down those kind of two phases for me?
Jay Bowman 04:35
Yeah, sure. So when we begin, we want to discover what that seller is, what his motivation is why he's looking to potentially sell. And so we're talking to him about his or her personal situation. You know, a lot of these people are older people, they bought these facilities in the 80s or 90s. When they were 30 years old. Well, today, they're 60 and 70. And they're still sweeping out units with a broom, and they're still sitting in an office right? Physical leases and they're getting really tired of that. So we start talking to them about what their process looks like, what their facilities look like, you know, what's your unit mix? How much are you charging? What's your occupancy? Are you fence, “Do you have automated gates?” Do you have a website and we start to gather that information. And we put that into our analysis, and they would begin to compare it to what's going on in their competitors. And what we do is we start with a basic target, and we go, Hey, who are the competitors, then zero to one miles, then 1,2,3. And then three to five, rarely, we're going to go out and five miles, because storage is very, it's just very a local business. Nobody says, you know, unless you're in the middle of nowhere, when I'm going to drive 25 miles to go to this storage facility, you don't have a lot of that. So that's our initial underwriting. If we can see that there's value to be had there, we're, we're more than happy to talk to that seller about making an offer on that. Once we do that, that second round, we're going to go to a site visit, because you can't attend, you can't go visit these things. You know, I'm in Kentucky, I'm not going to drive to Memphis where you are to go see a facility just because I have a conversation with somebody. So we need to get the details first. And then once we have that property, under a purchase and sale agreement, we will actually go visit the physical property, do a walkthrough, identify any other issues that we may have, and move forward from there because we need to be able to put our eyes on that property and evaluate physically.
Sam Wilson 06:28
Right? Sure. Yeah. You want to make sure that there's no unknowns, maybe that when after you're under the purchase sale agreement, when you get there, you might find some things that were lurking that weren't disclosed. But then I guess on top of that, let's ask because obviously, this is all net operating, income-driven. That's how you decide this is how much we can pay for the property. How do you determine in an efficient manner, what going rent rates are without surveying the 135 mile every, you know, potential competitor in the 135-mile radius? Is there a quicker way to do that than just actually getting on and writing them all down on a spreadsheet and figuring out what that looks like?
Jay Bowman 07:02
No. I keep that, you know, we want to talk to those people, we need to know what these other people are charging and how full they are. So if all of your competitors are 100% full, and they're bragging about how they're they haven't raised their rates in the last 10 years, and we're just charging ahead, we know that there's room to grow, how much room to grow, and how high you can raise those rates is another is a different question. So if somebody has a 10 by 10, for $70, and everybody's charging $70, and everybody's 100%, full, well, then we know $70 is too low, you know, we want to see roughly anywhere between 87 and 93% occupancy on a unit mix. And so that way, as these people move out, if they have cheaper rates, we want to be able to charge a higher rate per month for that unit size, what that unit, what that is 75, 80, 85 what that market is willing to bear is the risk that you take. So we never like to see that. You know, you have a lot of people who are 90% full, and everybody's charging the same rates, there's really no room to run there. You know, unless operationally you are looking to contain to drive, you may drive your clients out if everybody's charging 80. And then I step in and I go, Well, we're gonna charge 95, we could easily lose those clients and drop below a threshold that we were really comfortable with.
Sam Wilson 08:22
So say that again, if you see that it is 90% full, and everyone is charging the same rates, you say that there's no rent growth possible, that what you just said, Did I hear…
Jay Bowman 08:33
That's what, that's us, yeah. So we're gonna look at that and go, Well, should we go in? And should we charge an extra $5? Well, if somebody else has 10%, left to fill, we may be pushing some of those people out. It's usually not everybody's running for the door. But you're always gonna have those people, a lot of people just call and shop. And if you have three competitors that are really close by and those are, what your comparables are, you need to proceed with caution in that scenario.
Sam Wilson 09:01
Right? Yeah. Because I mean, if you're shopping, and you're 10 or 15 bucks more a month, and they're only 90% full, that means they can just as easily absorb that person who's looking for a place to go. Whereas conversely, if you said, if you shopped, and you said that, hey, they're 100% full, and they're all charging the same rates, then you say, Hey, wait, there's room to grow?
Jay Bowman 09:18
Yes, exactly. Because everybody, it's full. And they're all just taking waiting lists waiting for somebody to move out? Well, if we raised $10, and we have 90% of our people stay, we're happy with that we've increased our revenue pretty dramatically. And then if there's everybody else is still full, there's charging the same, right? We just go up a little bit more, but we're the only ones with units available. And so we're driving the market at that point.
Sam Wilson 09:42
Do you just kind of test this as in you know, take a few units and say, Okay, we're gonna put this out there at 10 bucks more per month and just see what happens. How do you adjust that dynamic pricing or testing model?
Jay Bowman 09:55
Sure, the websites that we use software that we use, we are able to set that up So we will take, depending on how many units there are, we will take that and say, Okay, once we hit a 87% occupancy, we are going to raise the rate of this unit, let's say a $70, unit 10% to $77, we're gonna raise a seven bucks, oh, but if it fills up a few more units, and we hit 93%, occupancy, we're gonna raise it another 15%, because now we're pushing that rate higher. And then once if that starts to fill, we're going to look at all those people who may be paying 70. But now the market rate is shown to be 85. And we're going to start to move them up to the market rate. And maybe we don't raise them up, immediately we do it in stage over a few months, we will go from 70 to 77, or 70, to 80. Keeping them there. And then we noticed storage is a high sticky factor, we may not see a whole lot of people leave, and then we'll just push them straight to market and then begin that process all over again.
Sam Wilson 10:57
Right, that's really, really intriguing. What is that conversion ratio? Or percentage of someone? Maybe they came in at 70? How many people that you then raised 85 actually stick around or and then how many of them? Do you find that lease renewal end up going somewhere else?
Jay Bowman 11:11
You know, that would require a lot of asking why those people are leaving, we don't do that when you got 300 or 300 units in a facility and everybody's leaving, you know, a lot of times, it's just because their usage is done, really, you're gonna find a lot of people leave, if you buy a value add facility at the very beginning. And people are there for the value there for the cheap rates, they're just looking to put grandma's dresser somewhere, and you were the cheapest in town. And when you step in, and you clean up that facility and you go $40 rates going to $70, you're no longer that value, that's not our client anyway, we're not looking for that client, there's another facility a couple miles away, that doesn't do as great of a job, it's a little rougher facility, you're like, hey, they're right down the road, you can head over there, but we're gonna replace that $40 person with a $70 person, that's what we're looking for. When you've already have when you have people who are operating poorly, you know, we're gonna go in and make value there. Or if you have rates that are really good, maybe the market rate is 60. But they've got a lot of people at 50, it's not really value, they just haven't done their job, the operational side, in raising the rents to the market, because they're always afraid somebody is going to leave, we're happy to invite them to leave, because we know somebody else is going to fill them at 1015 20 25% higher, right?
Sam Wilson 12:33
What do you or how much time do you build in for, we're gonna call it the lease-up phase or the release phase when you take over a facility?
Jay Bowman 12:42
Yeah, so we usually look our market and have facilities where we've had to experience that it's been about 2.5% a month. That's a pretty good rule of thumb for us so far. So and I'm going to be really bad at doing the math here. If we're at 65% occupancy, when we take over facility, we would expect in 10 months to achieve 90% And 2.5% a month, that's really our that's what we shoot for when we do our pro formas. And so say that, like we know this one, it's sitting roughly at about 40 to 45% occupancy, and we're going to go in, it's gonna take us a while to get that thing full. But you have to go in and you have to begin advertising, you have to set up the website, you have to get the Facebook ads out there for these people who are searching for places to put their stuff. And a lot of these older buildings that are run by people who've had them for 30 or 40 years. They're just not doing that. And so we're going to go in and take advantage of that opportunity.
Sam Wilson 13:40
Does it concern you when you find a facility that's 40 to 50% occupied? Like how do you know when you buy that, that, hey, I can actually turn this around? I mean, other than just going hey, I think I can or you know, I mean, what are some things when you look at those facilities that hey, wait, there is unmet demand here? And I mean, walk me through that that would be intimidating.
Jay Bowman 14:01
Sure. So when we have other competitors surrounding us, and we see those competitors are 90 to 100% occupied and then we're like, Well wait a second, you know, the old Sesame Street thing. One of these things is not like the other and we're going it looks good. It's in the right location. Everybody else is full. So what's wrong here? And you have to look at that and wonder why? Well, I mean, it's pretty obvious when they're not answering the phone, there's no website, they're not running ads, you have some management that's just not are owners who are not doing their job, and are very hands off or don't care. And so at that point, we are very, very confident that we can go in and increase that occupancy.
Sam Wilson 14:41
Got it Jay this is absolutely awesome. What's been one of the biggest surprises you found personally going from single family into storage.
Jay Bowman 14:49
The biggest surprise that's a really good question. Had I known the power of owning a business over owning real estate, probably would have made this transition sooner. The operational side is it well, single family, you're still a landlord, you're managing people, your oven is breaking, your lawn needs mowing, all of that. I didn't realize how much I would enjoy the operational side or the investment side of actually buying a business that comes with real estate as opposed to just buying real estate itself.
Sam Wilson 15:22
Man, that's fantastic. Jay, I've certainly enjoyed this today. Thanks for taking the time here to come on. Next question for you. What is one mistake you can help our listeners avoid and how would you avoid it?
Jay Bowman 15:31
Education. You absolutely want to before you go out buying little bitty facilities, we rarely work in the tertiary markets. We're not buying in the middle of Louisville, we're not buying in the middle of Memphis, you know, Class A facilities are not our thing. We look for tertiary markets, class beat facilities, not trash, but it's not super high end, we're looking for value in those markets. And to just go out and start buying that. It's like handling a gun, you got to be educated, you have to understand what it is that you are actually purchasing. It's not just a people are gonna tell you how passive self-storage investing is. And whoever tells you that does not know what they're talking about. There is operations to this and you have to understand what that is, and how to do that effectively to be able to manage that business,
Sam Wilson 16:18
Right? A lot of that. What is one way you're making the world a better place?
Jay Bowman 16:23
You know, when we go in and we buy a facility, we immediately contact some charities and we donate a couple of units to them. Sometimes if we don't have a fenced facility, we're also contacting local police departments, we're donating units to them as well. And it's, I'm not gonna lie, it serves a double purpose when, you know, you're saying hey, we'll give you a couple units if you're happy to drive by once a week and do that but we always want to make sure that we contact those Sherry's and we want to make sure that they're they have a unit or two and begin to work with him.
Sam Wilson 16:54
Man. That's awesome. I love that. Jay, if our listeners want to get in touch with you or learn more about you, what is the best way to do that?
Jay Bowman 17:00
Yeah, you can find us at gobeyondstorage.com. That's go beyond storage dot com. I'm on Facebook. I'm on Twitter at Jay Bowman and on LinkedIn.
Sam Wilson 17:10
Awesome, Jay, thank you for your time. Appreciate it.
Jay Bowman 17:12
Thanks, Sam.
Sam Wilson 17:13
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.