Seth: Hey, folks, how's it going? This is Seth Williams, and you're listening to the REtipster podcast, episode 173.

For years, I've wanted to find someone out there who specializes in solar energy, because as land investors, when we're looking at a prospective deal, depending on the property, this can be a pretty brilliant way to monetize a parcel of land. And this was actually one of the infamous monetization strategies I talked about in one of the most viewed videos on our YouTube channel called “Seven Ways to Make $1,000 per Month From Land.”

And ever since that video came out, I've been working to find experts in each of these different fields to explain in more detail how you actually make money from things like wind turbines or cell phone towers or RV storage parks, that kind of thing.

And I've been waiting patiently for a solar energy expert to reveal themselves to me. And they finally did. And this guy is Dakota Malone. And Dakota reached out to me recently to pitch this idea to come on the podcast. And I was like, yes, please, let's do it. That's perfect.

And today I'm going to grill Dakota on how this industry works and how to determine when this strategy makes sense for a vacant parcel of land. And as usual, we're going to pick up a lot of other tidbits along the way.

So, Dakota, welcome to the show. How are you doing?

Dakota: I'm doing amazing. Thank you so much for having me, Seth. I know that it's always a risk when you have strangers reaching out to you, but I appreciate you taking the swing on me.

Seth: Absolutely. So aside from the little I just said to introduce you, who is Dakota Malone? What is your background and experience in the solar energy sector?

Dakota: Sure. Yeah. I'd love to give you a brief background.

So again, my name is Dakota. I was born and raised in central New York area, upstate New York, currently living in the Midwest, down in St. Louis. And I've been in the energy space. For over a decade at this point.

So I just recently turned 30. It's crazy that I've been doing it for this long already, but essentially I went to community college, got my two-year degree, handed it to my parents, and asked them to leave me alone because I wanted to figure out entrepreneurship for myself. And sustainability has always been a core value of mine.

I've had five heart surgeries, and so my childhood was very atypical compared to the regular person. And really what I did, Seth, was map over those same ideas that I used in human sustainability to take care of myself and really mapped it over into entrepreneurship, and then I went even more meta into building a sustainability company.

And so Community Solar Authority has been around for over the last half decade. We're a stakeholder in the national community/solar partnership, and really we serve as full service consultants to some of the most significant solar developers in the country, essentially helping them in the collective mission of deploying as many renewable assets as possible. And this is at a nationwide level.

So some states have better incentives than others, as I'm sure you can imagine. But essentially, we work with landowners and also large rooftop owners who are seeking to generate value-add from their real estate in order to monetize it further using these solar assets.

Seth: So we can't just gloss over this five heart surgery thing. What happened there?

Dakota: So I was born with a lot of congenital heart issues. I had a narrow aortic valve. The doctors gave me an emergency surgery as soon as I was born. So they went in through my wrist—I had what's called an ablation—and they essentially broke my aortic valve and it was then leaking blood. So I had two emergency surgeries as soon as I was born, three more in high school. A week before I graduated high school, I had my fifth and final surgery, which was open heart surgery and absolutely life-changing, if you can imagine.

But actually, in unexpected ways, it really flooded my life with compassion. And I'll share briefly.

I was in the pediatric unit because I was still 17 at the time. And I was kitty-corner to a young kid who had a similar surgery. I'll try to skip the goriness, but the only way you can leave the hospital after open heart surgery is you basically need to drain your chest of the excess blood. And so you have to walk.

And it's very hard to walk with broken ribs and everything else. And I saw a seven-year-old kid walking up and down the hallway all alone by himself. And it just flooded my life with compassion and really changed the dial of my life and what I wanted to pursue and what I thought was important.

And so, again, over the last decade. I've also moved 40-plus times, essentially living out of my suitcase just with the intent of being an explorer and trying to soak in as much of life as possible.

So it definitely changed my life and like I said, planted the seed for what sustainability was actually going to do for me. And really, my intention is just to help larger entities and organizations think about the same way I thought about through my own life.

Seth: That's interesting. I can totally see how that would change your perspective on life. And, yeah, it's awesome.

Sounds like you're all good now. Or is everything like, stabilized at this point? Healthy as ever?

Dakota: Yes, thankfully.

Seth: Cool. Well, so what drew you to specialize in solar energy, aside from your prior life experience and the inspiration with your heart issues and all that? Did you take any other professional career path before you landed up here, or did you just jump right into this?

Dakota: No. So, like I said, I've been in the energy space for a decade now, community solar and renewables for about half of that. But my first five years, I was actually in the direct sales space in the electric and gas industry. So really helping energy supply companies think through their direct sales channels, building teams and really just working through those kind of strategies.

It was back in 2018 when I really saw the writing on the wall with renewables. Basically, the trajectory and job security of the U.S., and really from a global intention to deploy as many renewables as possible. If you look at the year-over-year growth of solar and expected growth rates, ot was too incredible to pass up for me. And I said, you know what? If I already have this experience working with large consumers of electricity, municipalities, investors, business owners, really, how can I take this into a higher opportunity vehicle, provide a greater impact and really help think through how to do this in a simple way?

And so that's really the tagline that we approach is simple sustainability. The world of commercial solar can be incredibly complicated, and when it comes to working with any of the facets that we do, because, again, we work as full cycle consultants. So even helping the landowner understand what this is going to look like over a 20-year period, to actually working with corporations or national retailers, think about their deployment strategy for ESG commitments, the whole thing can be very confusing.

And our intention is just to streamline that in a very concise way so that people can make the easy decision to be able to access and benefit from the word renewables.

Seth: A lot of our audience is land investors or land flippers, people who normally buy land and sell it relatively quickly just to make a profit between the delta, between their buy and the sale price, and buying a property to use it for solar, whether they keep it and lease it out to a solar energy company, or maybe the next guy wants to do that.

Who is your typical client? Like, it's a landowner who owns how much land and where is that land exactly? And what does the profile need to look like for you to even get involved and be like, yeah, you should consider this versus, no, this doesn't make sense for you, don't do it.

Dakota: Sure, that's a fantastic question, Seth, and I think that one of the things I'd like to do is either put it in your potential newsletter or just in the show notes. I think I had sent you our landowner's guide to solar leasing, which really spells out how to easily qualify your land and make sure it's a good fit. But I'll give you the brief rundown here.

So when it comes to solar assets, our typical landowner, or potentially, I'll also use municipalities, because they always have the extra incentive to do something similar, which. Is, hey, I've got vacant land; hey, I've got a waste fill or whatever it is, how can we monetize this? But our typical landowner could be a farmer or just an investor.

Like you said, one of my managing partners is also a land flipper. And so he was coming into this with a lot of additional knowledge as to what people were interested in and how they were doing it, from the owner financing perspective of basically buying and then reselling that land, but typically on the community solar side.

So there's two types of solar assets that we invest in and help other people do the same. There's a community solar asset, which is typically 10 to 30 acres, and that's going to build anywhere from a one- to five-megawatt facility. That's solar verbiage they don't need to know. But essentially, it's how many panels are going on that land and how much power is going to be produced every single year. And so based on that 10 to 30 acres, we'll essentially look at that available space.

And obviously, there are other qualifications. It needs to be close to what's called a substation. It needs to have certain power lines called phase three power lines. And I think it's also worth mentioning, Seth, that when we work with landowners, we do all of this turnkey. So what we like to do is, have people get a good idea of like, “I've got maybe 40 to 50 acres,” we'll take the 30 of those, and we'll transform it into solar. We'll go through and do the entire checklist to qualify it to make sure it's legitimate.

And then we'll actually run what’s called an internal RFP, and we'll just go to every single one of our solar developers that we work with, which, again, are amongst the largest in the nation, backed by many banks who have this collective interest. And we'll basically come back and shop around and bring back the best deal. And we don't charge a single dollar for our service. We get paid as consultants based on how much renewables we deploy.

And so, again, we're very streamlined in the fact that we get landowners the highest price of a lease and we're not affected by and don't charge for our service. So it's a very complementary thing.

So 10 to 30 acres is what it looks like on the community solar side. But then there's also what's called Utility Scale.

And so this could be 50- to literally 500-acre parcels that we look at. And the difference, Seth, is that community solar is available in about 30 states right now, based on pilot legislation, to fully completed legislation, but with Utility Scale, almost every single utility across the country needs to have some sort of blend of clean energy in their group of what they power. And so a lot of it's powered on brown sites or, excuse me, “dirty” energy. But then these utilities will also own 100 acres of solar farms, and that's used to blend their portfolio into clean energy. And so we do both.

Community solar is the smaller scale, but then there's obviously people who have tracts of land. So, for example, we're looking at over 800 acres in Virginia right now, and the legislation for Community solar isn't necessarily available. But again, in states where you wouldn't think about the opportunity to monetize your land, in states like Kentucky or a lot of the Bible Belt or southeast United States, all of those make for fantastic locations for these Utility Scale projects.

Seth: So it sounds like if my property is less than ten acres, I shouldn't even be thinking this way, right? Is ten acres kind of like the minimum to even go down this road?

Dakota: Yeah. When it comes from a leasing perspective, for what we do, at least, exactly. There are times where… I'll give you a very niche example.

We had a guy who was a consultant for us. He worked for us, and he had about seven acres of land that could build, like, a small PV system. So nothing for a solar lease. But he also happened to live across the street from a college, a university.

And so there are the times where you could build an asset on your property. It would be less than, again, a megawatt of power, which you could potentially sell to an end user, a university, a municipality, et cetera. And so it's not that it's ruled out completely, but for the sake of what we do, just to put parameters aound it, we work in that 10- to 30-acre space.

And I think that that's probably the most wise. There are probably better ways to monetize your land if you're under that.

Seth: Okay, that's helpful. And also, just thinking about other boxes that would need to be checked for this to be a viable option at all. You know, I'm not a pro, I don't know what to think of, but I'm thinking of how much sunlight is available at that place year round and how close it is to the power grid, that kind of thing. What does that need to look like?

Does this only work in Arizona? Or in places I think of, where I'm at in Michigan, where the sky is gray half the year? Or maybe everything is covered with snow, like, does this kind of thing not make sense in those parts of the world?

Dakota: Yeah. So contrary to popular belief, that's a great point, Seth. Many people think that the production factor of solar isn't as useful in states like New York, where I'm from, or Michigan, where you're at, compared to Arizona. Which does have a partial truth to it.

But the reality is that New York state, for example, is one of the leading community solar states. One for their policies and the way they do politics. But Michigan also has this legislation that's coming through the pipeline.

So a quick idea to think about as far as a checklist in order to qualify land, again, it's got to have easy access. And so, meaning it can't be in the middle of, you know. We just reviewed some area for the BSA, the Boy Scouts of America—I'm an Eagle Scout—so I reached out to them and they sent us a couple camps that were completely wooded.

So, we have no interest in deforesting land compared to putting it on a site that has the best and highest use case for renewables, like a waste fill or a quarry or something to that nature. So it's got to have easy access. Typically, like I said, it's going to be this 10- to 30-acre threshold. And then again, on the other side is like 50 to 500 acres. Typically, we're looking for state and local incentives to where, again, we can essentially bring back the best lease price.

Just as a broad range, we see anywhere from $875 to $1200 as a going per acre, per year lease rate for land. But I've seen as high as $5,000 an acre in the states where you have state and local incentives that can really juice up the price.

And again, part of our mission is to bring a fair practice all the way down so that these solar developers aren't necessarily not ripping off the landowners, but we're in the interest of making sure the landowner gets the best deal. I've seen farmers literally be able to retire because oftentimes they're old and they don't have the ability but they have to keep working, essentially.

And so, just as a total side note, we have a collective interest in that the land typically needs to be flat, bare, and not in a floodplain. So if anything's labeled in a marshland for zoning, we typically stay away from stuff like that.

It's got to be close to a substation, and that substation needs to have, essentially, “room,” what we call capacity lines to build solar energy. So oftentimes these substations have not been upgraded by utilities, and the utilities try to pass that responsibility on to solar developers.

Because we work with some of the most significant in the country, actually, globally as well. These guys can invest up to, we've seen $2 million to $5 million in substation upgrades. And so oftentimes we'll have landowners where they're like, hey, we tried to do solar in the past and we were told it wasn't possible. We're able to come in and make it possible because we can afford these substation upgrades.

It's got to be close to power lines, which, again, are the big, they're called phase three power lines. And so they basically have three levels to them. And that's basically what allows these solar farms to interconnect into the power grid.

It's obviously got to receive adequate sunlight. Which is like the least of factors, because, again, you still receive solar production on cloudy days, you still receive solar production on panels that have snow on them. Obviously not as much, and that's why O&M gets taken care of by the solar developer, meaning a landowner isn't going to be out there scraping snow off the panels if they choose to lease out their land. And I had mentioned that it's got to be close to a substation.

So I know I just spit a lot of information. Again, this is going to be in our landowner's guide, but that's essentially the checklist that we go through and confirm before we start shopping it around, trying to bring back a solar lease.

Seth: Yeah, absolutely. And I'm going to have a link, free download. You don't have to opt in anything. It'll be in the show notes, retipster.com/173 if you want to download that. And it's very well done. So I definitely recommend checking that out.

But with all the stuff you just mentioned there, Dakota. So some questions were coming up as you were talking. These might be dumb questions, sure, but I'm not familiar. So just to confirm, when you say substation, what is that? Is that like where the solar farm plugs into the power grid to get dispersed everywhere else? Is that what that is?

Dakota: Yeah. So a substation is essentially, they are very small lots where the utility will build exactly that. It's basically where the interconnection happens. And so you'll see these from the power lines. You'll drive by them oftentimes in rural areas, and they'll usually be gated off and it will essentially be there. It's owned by the utility. And it is how everything gets plugged into the power grid.

So you'll know when you drive by. Them, they basically look like very large HVAC units, I guess is the easiest way to describe it. And typically like a quarter-acre lot or something like that.

Seth: Yeah, I think I can visualize what you're talking about. Kind of ugly things that just look like a bunch of electric stuff happening there.

Dakota: That's a substation.

Seth: So say I just bought a piece of property, it's 10-plus acres. All the other boxes seem to be checked. It's flat, bare land with no trees, and it's not in a floodplain, all this stuff is there like some map I can go to to look at all the substations near me to figure out, “Hey, there's a substation there. Maybe this makes sense.” And how far away does the substation need to be? Is it like a mile, 10 feet, football field?

Dakota: Great questions. So there are maps. The utilities do make it complicated to find these maps. We have a GIS land team, essentially, that goes through and they check all of this stuff. If you were trying to do it on your own, you would just need to do a Google search of my utility, whatever it is. For me, it's Ameren in St. Louis and southern Illinois. So it's like Ameren’s substation maps, and with a little bit of research, you can essentially start to look at the hosting capacity.

And again, so you typically want to be less than 10 miles from a substation, the closer the better. And typically we see these off like major highways, stuff like that.

When it comes to the hosting capacity. Again, you want to look for two things. So you want to make sure that the substation is available, you want to make sure it's close, and you want to make sure that it has capacity for solar. And so again, even if you are close to a substation, there might not be any additional capacity because there's already solar farms surrounding it, and that's a good indicator of if it's going to be viable or not. If you live in an area where you see there are solar farms, they are going to most typically be plugged into a substation close to your parcel of land.

And oftentimes there are megawatts of power available. And so again, if you've got 10 to 30 acres and it reveals that there are 1 to 5 megawatts of hosting capacity available and that substation is close, that would be considered a prime spot for a solar lease.

Seth: Is there any kind of a nationwide map that shows where all the existing solar farms are located just to kind of get a feel for, like, hey, there's a cluster of them over here, maybe there's opportunity.

Dakota: Yeah, there's not that I know of, although that would be extremely helpful. And I think one of the reasons why, Seth, is because obviously, solar and renewables has been around for a long time. Actually, the longest standing solar farm, I believe, is being used by the military. And it's been around for, I want to say, over 100 years, and it's still generating power today.

So these things can definitely last a long time. But recently, especially with the updates in legislation, we add, and I say we, as in the U.S., adds maybe five to ten additional community solar markets per year. So the surge of solar farms going up right now is actually, like, at an incredible pace.

But I would love to have some sort of person track that, because it would definitely be able to help people understand, like, hey, is this a good opportunity, or am I just kind of wasting my time here?

Seth: Yeah, it sounds like, when you mentioned, are there any state or local incentives to get the best price and that kind of thing. Correct me if I'm wrong, but it sounds like politics are involved with this, depending on who gets into office.

Dakota: Very much so.

Seth: I don't know, say if it was Trump or Biden, does that mean, okay, this is going to take off or it's going to die, or. I don't know, how big of a difference would that make?

Dakota: It's a great question. So I'll tell you that with the Inflation Reduction Act, that really set the pace for renewable energy growth, which is very much a Democratic policy. In terms of the renewable sector, many Republicans want to slash parts of that bill, which would be bad for solar growth.

But on the same stroke of the pen, community solar is considered very much bipartisan, meaning that it's a conservative approach to utilizing renewable energy. And I think a part of the reason why is because when we're building these solar farms again, you can lease this land, and so a farmer can take advantage of it. Once you build 10 to 30 acres of solar panels, those solar panels typically get divided up into what's called subscribers. So my company helps fill these solar farms with large consumers of electricity, and small businesses and residential customers are also allowed to join.

And so instead of having a singular offtaker, basically “take the power of this,” it is a way for communities, oftentimes rural communities, that otherwise couldn't install solar. Same thing with urban. Basically, everybody has the power to benefit from renewables. And that's why community solar legislation, we're watching it go nationwide.

Now, when it comes down to additional incentives, like you had mentioned. Back to the IRA, there are specific pieces of legislation within that that allow know what's called adders, where you can claim additional tax credits, essentially making the deal more lucrative for solar developers, let's say, in areas where they are considered what's called an energy community or a low-income area.

And so oftentimes, our work revolves around working with affordable housing communities or low- to moderate-income subscribers so that the developers can capture that additional value-add. And again, we like to make sure that that goes all the way down to the person actually leasing the land to make it a full circle kind of deal on that perspective.

Seth: And when you said easy access earlier, what exactly does easy access mean? Does that just mean, like, there's direct road access from the road, or, say, if I got an easement that's big enough for one truck to go through, and that goes a mile back into this property, and then you can get there. How easy does it need to be?

Dakota: Yeah. So it really depends on what developer we're talking to and who really wants to take on the project. That should be fine in most case scenarios. Seth, we say easy access, and I'll give you an example. Someone passed me some land. It was about 45 acres. He was super excited to do it. And it was in the middle of the Adirondacks, which is like upstate New York mountain ranges.

And when I say, like, middle of nowhere, you could drop someone off on Survivor, and that would be, like, their territory. And there was no phase three power lines. There was no easy access to be able to get to his parcel. It was surrounded by other parcels that really didn't have any access point. And you do need to be able to get trucks back there. You need to be able to get the panels back there.

So it's one of the lower priority as far as the checklist goes, but it is something that we check for. So in your scenario, like, hey, I've got an easement, I've got an access point, it goes a mile down the road. As long as we can fit trucks back there, typically that's going to be good enough. And again, we just mentioned it, people aren't sending us parcels of land that we're just going to automatically disqualify because it's in the middle of nowhere.

Seth: And when you said $875 to $1,200 per acre, was that per month or per year? I couldn't remember if you actually said that.

Dakota: Yeah. So that is per acre per year. And so this will typically come. The way that it works is that the first couple of years are all dedicated to some sort of study. So those can be environmental studies, interconnection studies. And this is a time when no construction takes place on the parcel. If all goes smooth, Seth, it will typically be 12 to 18 months to get through this process, and the landowner can expect to receive small milestone payments.

So while these studies are going on, they might get a few thousand dollars a year, maybe $10,000 a year, just for the solar developer to basically tie up that land, do the studies, and as long as the studies look good, they'll move forward and develop.

Now, oftentimes, people can go through these studies and they end up not working out, which is a downside. And that's part of the reason why we built this guide and we built this process because we like to do all of the qualifying work on the front end. So, we like to check the substation, we like to check the phase three power lines. We like to do all of that work upfront so that, one, we're decreasing the likelihood that this project is going to be dropped later and really increasing the rate of success.

And so the first couple of years are all dedicated to these interconnection studies. They'll receive small milestone payments.

And then typically there are two phases. One's called NTP, which is notice to proceed. And that means everything checks out and you're ready to move forward with the construction of the project. The developer will then go and build the solar asset. And once it turns on, also known as COD, commercial operations day, that landowner will start to receive those yearly lease payments in the form of a single payment per year across the next 20 to 25 years. There are typically options in there. So, like 10-year options, 5-year buyouts, et cetera. But we've never seen a landowner stop wanting to monetize their land. So for us, that's never happened.

That's the expected per lease rate. Like I said, the $875 to $1,200 is pretty standard across the board. And again, I'm speaking at a nationwide level, so this could be a lot higher in certain markets and a little bit lower in other markets.

Seth: Does that annual lease payment step up each year to keep up with inflation, or is it just like, no, it’s $875 a year, that's what it is for the next 25 years?

Dakota: Sure. Oftentimes there are escalators. They're small, typically 1% to 2% escalator payments for that landowner, which isn't much. But we do consider that when it comes to inflation and everything else, and typically, almost every single time, the solar developer is responsible for any increase in taxes. So there's really no worries from the inflationary standpoint, other than you want to monetize and make as much money to live otherwise. But as far as, land increases, insurance, the developer takes on that responsibility.

Seth: Yeah, that was actually going to be my next question. Does the property taxes go way up, since it's now an improved property? But is it set up like a triple net lease where the solar farm pays for everything involved, or how does that work?

Dakota: Yeah, exactly. And so I've had people ask if they could cut the grass and get a higher lease payment, which I think is a great idea, like thinking ahead. Of how to get the most out of it.

But really, the answer is yes. So the developer takes care of everything front to back. And so, again, this is very much just them leasing out the property. It's completely hands-off passive income. So any operations or maintenance, any snow removal, any grass that needs to be clipped, or panels that need to be washed, everything's completely turnkey for the landowner.

Seth: Is the developer essentially the same as the long-term owner? Or does the developer build it, then they sell it to some other entity, and then they are the tenant that pays for that lease?

Dakota: It depends on the strategy of the developer. So we work with both. We work with asset owners, which can oftentimes be banks, or the companies that the banks own, essentially. And so we're partnered with the longest standing, most bankable asset manager in the community solar space. They're called Community Solar Platform. They manage assets across the entire country.

And so what we'd like to do, Seth, in the spirit of being full service, is that if we're working with a landowner and we're identifying that they're going to be a good fit. The last thing that we want to do is work with an organization that might potentially go under. Selling the project is really no big deal; that's actually very common in the community solar space. Many times, people will build the projects, and then once they get to interconnection—that interconnection typically costs at least half a million plus dollars, oftentimes in the millions of dollars, and those construction companies and EPCs simply can't afford it—and so they'll sell to much larger asset managers and other developers, essentially, that own portfolios of these projects. Which is typically a good thing, because, again, you want to make sure that that asset is being managed by someone who knows what they're doing, someone who has the tenure and experience to do that long-term, because these assets are going up for decades at a time.

And also, just as a total side note, there's always peace of mind with decommissioning bonds thrown into this. So that the landowner knows that should this project come to the end of its life cycle and they're not going to renew their lease, that that solar farm is going to be taken down and it's going to be appropriately brought back to its original state as a parcel of land.

Another point worth mentioning is a lot of times people have questions about whether or not these solar panels affect soil quality. I think it's called Jack’s Solar Farm, I believe they're over in Colorado. They do a fantastic job of doing these types of studies with what's called agrovoltaics, which is essentially dual-use solar farms. They'll have the solar on top, and they'll grow things like berries and herbs along the bottom.

And so when it comes to decommissioning and returning a land back to its original state, there have been no studies to suggest that the solar panels or the solar farms affect any of the soil quality or otherwise ruin that value of the land. And in fact, it's, no pun intended, one of the cleanest ways to monetize that land. And then obviously bring it back to its original life, if that's what a landowner chooses to do at the end of its cycle.

Seth: Does it ever make sense for a landowner to just try to build their own solar farm and then sell that power to the local utility company? Or is that never how it works? Or is that just not a smart way to go about this?

Dakota: A lot of co-development work, Seth, and oftentimes it's not with landowners, but it can be with municipalities, larger organizations. Commercial real estate companies love us because you'll see in the news a lot of times, like the big boys of commercial real estate, CBRE, these guys are adding renewables as a way to create value-add because they have the portfolios of properties and they know that they can claim tax equity and tax incentives if they build it themselves.

And so oftentimes we'll go into co-development relationships where it's like, hey, we have the access to develop and build. If you want to own this long-term, you can absolutely do that. If you want to turn it into an asset that's just selling power back into the grid. Again, it's not typical for landowners to do that, but it is possible

And again, part of what we do is in identifying. So if people check out our landowner's guide, they want to send us their land for review. I doesn't cost you a single dollar. We'll do it all for free. We'll get it qualified. We'll essentially be able to come back and we'll say, hey, what's your intention? Do you want to lease this land?

You could potentially sell it to us. If we're interested in buying it, we have investors that we work alongside who will buy up these properties, and then we'll go do exactly that. We'll go develop it, turn it into our own asset, and then either sell it back into the grid or sell it to a developer. But the opportunities there, there are multiple ways to kind of monetize the land. And it comes down to what a landowner wants to do.

Seth: I've got a self-storage facility where we have a little over 27,000 storage buildings with flat roofs and thought about putting solar panels on the roof. I've never really looked into it. I don't know if it's smart or not. But in that kind of situation, I guess my assumption was I would own the solar panels and sell power back to the energy company, however that works.

But is it a smarter idea to work with you and say, hey, can you find some developer out there who wants to put these panels on the roofs of our buildings? Or does that not make sense for some?

Dakora: You know, I just saw public storage came out. They're working with a company called Solar. Landscape out of Jersey, who is doing a fantastic job of media coverage for the solar world.

It is very wise for storage companies to be able to use that as value-add. There, again are multiple opportunities. The easiest one is simply to just lease your roof and let the solar developer take care of it. Again, not everybody necessarily wants the… because if you were to sell the power back yourself, you'd typically be responsible for the O&M, which isn't the worst thing in the world. But you don't want to have to clean 27,000 square foot of solar panels as an additional job.

Typically, if I had to guess, based on what you do, so oftentimes working with storage facilities, which we're in the very beginning relationships with several of them, it's a fantastic play. Again, for the same exact reason, it's value-add to your real estate and it's passive income and you don't necessarily have to take care of any part of it.

So again, based on the state and where that's at, we'll determine which legislation makes it fruitful and really what it looks like. for example, a state like Rhode island, we're working on a mall over there right now, one of the biggest in the state, and the roof didn't really work out. So we're doing carports, which is very much different than a roof.

But my point is that Rhode Island, for example, has some of the highest utility rates in the country. And so when it comes to the lease rate, it's not that powerful of a lease. But we're utilizing carports here as kind of a multi-tool so that it's protecting cars, it's giving the coverage, it's taking care of the snow plowing for the parking lots, because the O&M's taken care of.

And so again, part of the creative process on our end is like, hey, if you bring us an opportunity, we're going to come back and we'll give you all of our consulting advice for free.

In the assumption—I don't even want to say in the assumption—but just in the spirit of providing as much value upfront as possible, and we'll give you options, we'll say, hey, here's what we think, here's what we can do. You tell us what you want. And, typically, based on the consulting that we give and the access that we have—which is the bigger piece to it, because we have the access to pull these projects off at scale—typically people are like, okay, awesome, let's do it. And so I hope that provides a little bit of insight to that question.

Seth: No, for sure. I guess it just helps confirm I'm not crazy for thinking that, but I guess maybe one drawback—

Dakota: You're very wise.

Seth: Thank you. I like hearing that.

If we were to agree to some kind of 20-plus year lease like this, and they go on the roofs of our buildings, I would assume we're kind of stuck for 20 years or however long the lease is. Like, if I want to knock those buildings down and build something else there, I can't really do that because that lease is there. Is that accurate?

Dakota: I'll give you an example. So, same group over in Rhode Island. They had a beautiful 60,000 square foot strip mall, and we were going to do solar. And the lease rate, I don't even remember what it was. It was decent, but we didn't factor in. Well, it's not that we didn't factor it in. It's that they had an opportunity to monetize it in a greater way.

So they ended up selling the strip mall because it had ocean view over on Rhode Island, and they sold it to a real estate developer for many millions of dollars, which ended up being a much more valuable play than just leasing out the roof for less than $100,000 a year for the next 20 years, which, again, is great money. But they were able to just sell the building instead in the spirit of that developer wanted to build vertically, and they were going to build condos on top of it with the ocean view.

And so my point is that if you plan on developing, and again, we'll give people this advice up front to help them think through it, which is like, “Hey, if you plan on knocking down your storage facility in ten years to do something else with it, maybe not the best fit.” Same idea when people are considering.

I was talking to a manufacturer the other day in upstate New York. They're like, hey, we plan on exiting our business in five years. So you have a ten-year agreement in front of us. And I'm like, well, yeah, maybe you're not the best fit for actually joining one of these solar farms if you plan on exiting.

So, again, stuff to think through. And that's a really good point, Seth. Is if you have better ideas for your property long term, one of the things you are in this scenario is committed. And so it's always important to consider that.

Seth: Yeah, along those same lines, I've seen a couple of really creative ways that people have utilized solar panels in a way that kind of kills two birds with one stone.

For example, there's this canal solar power project in India that I saw on Reddit this past year where they've got this big, long canal and just having an open, exposed area that water runs through, where water is scarce and it's going to evaporate. It's like, hey, why don't we cover that with these solar panels. So we're not only saving and conserving the water and has less evaporation and heat on it, but also we're creating tons of surface area of solar panels, that kind of thing.

Or, like, if you wanted to create a covered parking lot, normally you could just put up a metal roof over that. But what if you just put up solar panels to act as your roof? And these things seem like brilliant ideas. Have you seen any other creative ways to use solar panels that sort of accomplishes two objectives?

Dakota: Totally, yeah. What comes up first is my carport example, again, because, again, not only can you connect EV charging to that and kind of have it power itself, but again, you're shielding cars. And so any auto dealers that might be listening to this, we love working with auto dealerships, because they're being forced to deploy EV as that comes online more, but again, as a way to protect your assets underneath that roof and have the O&M taken care of.

Carport solutions are fantastic. Typically, they are the most expensive kind of product to make pencil, which is why the lease rates aren't always that great. But again, it's in the spirit of this dual-use, highest-use case of this.

I've also seen the canals. I have a contact who actually reached out to me not too long ago. He's at a large real estate organization, and he, you know, I've got this canal, and we want to put solar over the top of it, not necessarily for making sure the water doesn't evaporate. But I have seen stuff like…

You know, we actually just did another deal a few months ago, executed a lease agreement on another mall in upstate New York. But this guy came back to us. And said, hey, I've got three other parcels I want you to look at. Two are parking lots and one's a lake. So we're going to do a couple of carport solutions, and we're going to do, actually will be our very first, if we can get it to execution, our very first floating lake solar project. Which I think is very cool.

There are so many use cases for dual-use solutions. This is unrelated to what we do.

But I saw basically a roll-up solar. It was almost like, I guess, a roll of tape that they're using in the military for medics. And it's a way to do pop up wound care for combat soldiers that get hurt in the field. They basically roll out 100-plus yards of solar panels, very much like a fire hose, like a fireman rolls out their hose. They roll it out and it instantly starts producing power wherever they're at. So they can set up basically a medevac shop right wherever they're at, which I think is really cool.

And so I think a lot of these solutions that are coming out, we're just going to see more and more creative ways to kind of plug into the power of solar. But then also thinking about how can we get multiple uses out of this. I only think that's going to become more popular.

Seth: Yeah, I do wonder, kind of going back to the government policy stuff. So let's say I'm living in a time where the government policy is very supportive of solar farms and one is built, but then all of a sudden government policy changes the next year, and all of a sudden they're less supported or even discouraged.

Does that ever come back to bite a solar developer like, oh, man, you're going to start losing money now, you never should have built this thing? Or does it simply slow things down? Like it's going to continue expanding, but it just kind of slows down depending on if somebody's in office who doesn't support it?

Dakota: The latter. I've never seen a case which isn't to say that it's not true, I've just never seen a case where it hasn't been a good idea. It definitely makes projects not as lucrative, which no solar developer or financier wants to hear.

But I would say it more or less just slows it down more so than it does completely takes the opportunity away. There have been states like North Carolina which take away their net metering policies, which can be disadvantageous for people who were looking to take advantage of solar.

But again, especially because Utility Scale will always have a blend of renewables in their portfolio. In the case where they're doing these 50-plus acres of Utility Scale solar, that will always be a part of the strategy, regardless of what the legislation is. I don't think I've seen an example of where that has happened yet. Community solar has been around for 15-plus years at this point. Again, the management partner that I spoke. On, community solar platform, these guys helped pioneer the program into existence, and so they've been at it for a long time.

I can always circle back and ask and get you that answer. But I don't think I've seen a case where that's necessarily been true.

Seth: So this is maybe not totally relevant to you because it seems like you deal with larger parcels of land and commercial applications and that kind of thing. But sometimes I think about putting solar panels on the roof of my house or even getting, like, I don't know, any kind of a smaller scale solar thing just to generate energy, whether it's for, like, a residential generator or something like that.

But I hear that solar panels are getting better and cheaper every year. Does it make sense to just keep waiting five more years until the product is better before investing all the money into that kind of thing? Or is it better to buy it now? Any thoughts on that?

Dakota: Yeah, again, definitely not my expertise. I actually own a converted school bus. That has solar panels on top, and I get to be powered by the sun. And last summer I was road tripping with my bus, and I always found it so cool how I always had a full charge minus when I turned the AC on because it was so hot, I turned it very quickly.

But the power of kind of liberating yourself with clean energy from that sense is really powerful. I would say it's based on what your intentions are and your end results are. Again, when you install solar on your home, you're never really freed from the “grid,” as people say, versus if you were homesteading, producing your own power. I think that's a totally different scenario.

Again, when it comes to residential solar, I don't really have the expertise to speak for it. I mean, it doesn't hurt to look at what residential installer could bring you. Oftentimes they completely replace your electric bill, and obviously, you now have a bill to the solar developer, which cuts your electricity costs.

But to your point, Seth, solar technology is improving greatly. And again, this is full cycle, meaning that a lot of people complain about the fact that solar recycling, for example, isn't nearly where it should be. But over the next ten to 20 years, that problem is going to be, most likely, solved in a very powerful way. And so it takes the adoption of this technology in order to improve the technology.

But to your point, yeah, the solar panels that were around 5 or 10 years ago, compared to what's available now, are very different. And again, we're even seeing technology like the solar shingles come out, which are a very expensive solution, to my understanding.

But I think to your point, if you did wait over the next couple of years, because you could afford to, then I think, it really comes down to a person's options and what they think is best for their family. And I'm sorry, I can't give a better answer to that.

Seth: That's totally fine. Totally fine. So I often hear solar spoken about alongside wind energy, just because they're both green energy sources and that kind of thing. And a few years ago, I interviewed a consultant similar to you, about wind energy and wind turbines and how that all works. And he was telling me, in the many things we talked about, one of the biggest drawbacks of solar power is that it requires a lot more land than wind energy does, where just you stick that turbine there, and it's a smaller little footprint.

So this is your chance to strike back at those wind energy guys. What are the drawbacks of wind turbines where solar panels excel?

Dakota: Awesome question. It's actually funny, because I work with a lot of wind consultants as well. They'll actually come work with us as partners. When their wind projects don't work out, they'll turn around and say, hey, maybe you should do solar instead.

Seth: So they're not sworn enemies with you or anything?

Dakota: Not for me, at least. No. I find a lot of those wind guys know because they're working with a very similar, know, farmers, people with land. See a lot of off site wind projects going on and, like, the oceans and stuff. Again, over in states like Rhode Island, I saw they had a really big bill that just pased.

I guess I can only speak to. The fact that, again, I'm from upstate New York, so I grew up on a small town in between two cornfields right off Lake Ontario. But we've got a camp up towards the Adirondacks and what's called theTug Hill plateau.

I remember seeing the transition from this just bare land. It's got to be hundreds of acres. I don't know the exact amount, but it is massive. I remember when the first wind turbine went up. And now when you drive through there—I was just there over the summer—it looks like it goes on as far as the eye can see, wind turbines and solar.

But again, there are projects that are hundreds of acres of solar farms. Again, I'm in favor, going back to the technology question, I'm in favor of dual use. If we can incorporate more agrovoltaics to accomplish farming on top of power generation. I think that's really wise, and I support that and embrace that, contrary to what most people view as what a solar guy would be.

Again, my spirit of sustainability comes actually from my own life. It comes from the pillar of human sustainability. Oftentimes when you get in the clean energy space, it does get clouded by politics. And so I'm someone who's very balanced. Like, I believe nuclear is just as. Important of a conversation as solar. And so I think oftentimes that comes as refreshing because people sometimes approach us and they expect us to have a very linear way of thinking.

And really, I'm in favor of one understanding the complete details. I'm sure wind is complicated. There's not much I know beyond what I had kind of just mentioned, but I think that there's a use for both of those projects. I could probably argue and disagree with the consultant that came on, as far as whatever else he had to say about solar, because, again, there are often times where helping a farmer retire is going to be of equal use as to putting a smaller amount of wind turbines if his intention was to be able to stop working. So that's my initial thought.

Seth: So I think I know the answer to this, but I'm just going to ask it straight up, just so I make sure I know the answer. So if I own land and I decide to lease it out to some developer or energy company to build a solar farm, are there any costs involved for me, or is it just purely profitable?

Dakota: So in the case of a roof, for example, people might need to reroof, and that's obviously very expensive.

In the case of land, there are typically no fees associated. And if there is like a survey or something, we'll make sure the developer pays for it. So if they come back, and again, just as a total side note, if there are listeners that may already have a proposal from a solar developer and you want a second opinion, happy to review your agreement and tell you if it’s good or if they're trying to pull something. And happy to get second and third opinions and other proposals.

But typically there are no fees associated with doing this stuff. There may be the developer asks for a survey, maybe putting documents together, or other legal fees for reviewing agreements. But that aside, no.

Seth: And I kind of talked about this earlier when you mentioned bare land. So does that mean, like, to build a solar farm, you can't chop any trees down? Like, if I've got a 30-acre property that's just, like, packed with trees and we gotta mow it down to put solar panels there, that's a deal breaker? Or does it have to be truly, completely nothing on there? Like, if I got chopped down one tree, is that a deal breaker? Help me understand that.

Dakota: How many trees? No, that's a good question. Again, we're in favor of doing things for the best and highest use case. You can absolutely chop down 30 acres, profit from the timber, and then turn it into a solar asset.

Seth: Okay, got you.

Dakota: Typically that will need to be done before a solar developer takes interest in it. But again, if it's a smaller acreage where we're looking at 10 to 30 acres and a couple of acres are wooded, we may be able to find a solar developer that would go ahead and take care of that or work it into the process so that maybe the lease rate is slightly lower because they're paying for the trees to come down.

So, not to say it's not possible, by any means, it's just if we had two parcels of land, they both looked good, but one was bare and one needed to be deforested in any way, we would take priority over the one that's already bare. And that's just from, again, a streamlined perspective.

Seth: Okay, so if I've got like 20 acres or something, and I really want this thing to get leased out to a solar developer, is there anything I can do to make it look more attractive to them if it's not already done, or is it one of those things where it is what it is? You can't put lipstick on a pig.

Dakota: I mean, again, it really comes down to, like I said about the zoning. So as long as the zoning looks clean, you could potentially grade it. So it's like the slope of the land. But again, I don't think it's necessary to do. It really comes down to, does it fit in these parameters that we talked about earlier? So, from the substations, the hosting capacities, those are the biggest factors when it comes to this stuff. It's not necessarily if the land is going to look pretty with the solar panels on it. So, no. My answer is no.

Seth: I mean, are there any other preliminary assessments or preparations a landowner should make before approaching a solar company or before talking to you, or just pick up the phone and call you and you'll figure it out for them?

Dakota: Luckily, we have our GIS team that can work pretty quickly to determine if land is eligible or not. At this point, we're pretty much wide open across the country because of the legislation and intentions of development for the developers we work with.

And so, again, they have endless appetites to be able to deploy as many renewables as possible. And so it's a little bit extra work for us on the front end because we're qualifying thousands and thousands and thousands of acres of land per year. But for us, it's worthwhile, at least at this point, because with the given parameters that we have, if people are sending us the ten to 30 acres or 50 acres plus, from there, the work to do, the substation checks, et cetera, it typically takes us 20 to 30 minutes to qualify a parcel.

And so again, even if we get thousands of parcels a year, we're already invested in that interest of making that happen. So that's kind of where we sit with that. And I'm sure that will change over the next few years. But right now, we're pretty much wide open across the market for this stuff.

Seth: Do you have like a list of which states or counties or anything make the most sense for solar development? Like, if you're in XYZ state, don't even think about it. Or if you're in this state, pick up the phone, a call right now.

Dakota: So for the latter, I would know if you're in states and you have land in places like California, New York, Illinois, Maryland, these are all very hot markets. There are other territories, for example, there are energy grids across the country, one of them being called PJM, which is one of the primary in the country, they are kind of slowing down on their legislation and kind of getting locked up in policy. So, for example, we were looking a a portfolio in Ohio, and that's, again not to say that it's not favorable, but right now it's like a slower state compared to other opportunities that I had mentioned.

Again, if you know that your town where you locate your parcel, if there's no other solar farms around, and there's what's called a moratorium, where they just don't want any solar farms built—because, again, it does go down to a local level. Oftentimes we'll need to go into board meetings and you'll have the one guy stand up and scream in how solar is going to ruin everything, which is fine, and I respect all opinions—but if that's going on, obviously it's probably not a good idea.

But really, that aside, Seth, again, we're open to look at whatever you've got. If we get 1,000 parcels of land as a result of this podcast, that's fine, we'll go through it. And again, it may take 20 to 30 minutes to qualify a full parcel. Like all the way through, but if we get a bunch of stuff that doesn't qualify based on like, it's in this particular state and it's got this particular legislation, or it's less than… Basically, if it doesn't fit, we'll kick out all of that stuff and it may only take 30 seconds for us to look at and be like, oh, this is no good. In which case we would just send a very quick note back and say, hey, thanks for submitting, but this parcel doesn't look good for us.

Seth: Do you guys have like a form on your website or something where it's like, yeah, fill in your, I don't know, parcel number and coordinates and name and all this stuff and just an automated way of saying that? Or human eyes have to look at it every single time in order to make that determination?

Dakota: We have an opt-in form. We don't have any automations as like, oh, hey, this is going to be a good fit. Which actually isn't a bad idea. I might have to think on that, Seth. It may have just given me a good idea. It won't be accurate per se, but it's like, hey, we think this is going to be a good fit.

Our website is being redone. By the time this podcast comes out, I'm sure it will be out. So it's communitysolarauthority.com. We'll have a sector for land. People can essentially put in their land criteria and basically what they've got a hold of. I will make a note that we don't typically like to work with people who are like, oh, I want to buy this land, would this qualify? The process to get through that is just a little bit too strenuous, so I will say if you fall into that category, we can certainly help you think through it. But as a general note, we like to do deals with people who already own the parcel.

Again, part of our simple sustainability tagline is all about streamlining it, because we are service consultants for these developers and our mission is to just streamline it. And so I will make that note.

But you can go to communitysollarauthority.com and plug your information in, and they'll be able to kind of submit their parcels and we'll be able to reach back out and let them know.

Seth: Yeah, got you. So it sounds like based on that, it's not a good idea to speculatively buy a piece of land with the assumption that you'll be able to use it for solar. It's more of like, that would be a Plan B, like, have something else in mind first, but don't buy it assuming it's going to work out for this, because you can't really determine that before they own it, right?

Dakota: Exactly. Yeah. And again, it's really just in the spirit of we built our entire company based on partnerships, Seth. And so as part of our mission, we always like to start small and with pilot deals, because again, we have investors that work with us that do go and pursue land. They buy it up. They work closely with our internal team. We say, hey, this is a really good parcel. We know we're going to be able to monetize it, buy it up.

But when it comes to our first transaction together, we don't want that to be our first transaction together. We want it to be people who already have the land. They're like, hey, I've been sitting on this 50 acres, or I've been sitting on these parcels or a portfolio. We work with, like a trust, for example. They've got thousands of acres in a trust in a singular state. They passed it over to us. They said, here's 300 parcels. Which ones work?

We love doing that because it just. Increases our hit ratio, essentially. And so that's really who we like to work with. But again, if people just have a single piece of land, again, we'll happily take a look, as long as it fits into that criteria.

Seth: Are there any risks associated with doing this? Like, if I lease on my land to a solar developer and they do it, from what I'm gathering, it sounds like the main risk is just that I will probably be locked into this agreement for however many years unless I can somehow terminate the lease agreement early, which I wouldn't normally expect I could do.

But other than that long-term commitment, is there anything that would it devalue the land in any way, or can you think of any reason why you wouldn't want to do this?

Dakota: Again, if you plan on, and even if you did sell your land, that's okay. People buy solar assets all the time, and they also buy the rights to have these parcels leased.

So if anything, you could obviously take that monetization schedule that you have and say, “Hey, this parcel of land is 30 acres. It's currently leased at $50,000 a year on 50 acres. You buy this land, and you are coming into $50,000 of guaranteed income.” So really, there's a lot of advantages on that side.

But to answer your question, typically no, there's no way it devalues the land. There are really no opportunities, at least with the solar developers that we work with. I can't speak to this across the board. There's really no opportunities to lose here, which is the entire point of working together.

This is a massive opportunity in history with the intentions of deploying as many renewable assets. This is just really a piece of time right now where there's a window open for people to take advantage of the legislation in place and really benefit from the collective deployment of renewables. Again, a lot of people are. It's going to the banks of the world that own all of this property. We work with the corporations and the giant real estate companies, but we also love the hero stories of, again, the farmer that was able to retire, the family that was able to have the peace of mind for the rest of their lives, that they were going to be able to live without fear of inflation. And so we push for those stories as much as we do for the large clients that are looking for the tax equity and to make the breaks.

And so, yeah, I just think that it's a really valuable opportunity for those that obviously fit into the scope of what we're trying to do.

Seth: I think you kind of answered this question earlier, but say I or a developer put a solar farm on the property, 20 years goes by, and then that solar farm is removed. Are there any permanent modifications made to the land that's like, okay, well, before you were able to do this, but now you can't anymore because that solar farm was there and that permanently changed something about it.

Dakota: I don't think I've ever got that question before. Yeah, no, there's not. Again, the advantage here is that when it comes to ground mounts, which is what we call them, when they put them on the land, all of that is, again, in advantage of protecting the land and making sure that it could be returned to its original state.

The downside of that is that if the 20 years is up, those developers typically don't want to move that. They might go and replace the panels, but you can essentially keep that lease going. So if you're a young person and you've got this land, you can essentially just continue to lease that out every 20 years. And obviously the terms change, right? The price changes, et cetera. But you can keep going if you want to.

Otherwise, no, it'll be decommissioned, returned to its original state, and again, the developer will be responsible for recycling those panels. So that land is returned as is.

And there's nothing that I know of or could even imagine where work would be done on that land where you couldn't go and do something else with it. I'm trying to imagine a scenario where maybe they put gravel down, but that's not even a thing.

So I don't think so, no.

Seth: Is it a common thing for people to get these leases in place and then sell the lease while keeping the land? Like, for example, if I had a 50-acre property and half of that was, I don't know, a shopping center or something, and the other half was a solar farm. So I want to keep the whole property, but I want to sell off just that lease so I can get the cash.

Now, is that a common thing people do, or like a normal strategy that people take?

Dakota: I have never heard of that, I guess. Are you saying it would be a separate parcel from the strip mall, let's call it? Because if it's a separate parcel, you could obviously sell it.

Seth: I think that's one scenario, but the reason I asked this is because I interviewed a cell phone tower consultant similar to you, but he was specialized in cell phone towers, and he was mentioning that that was a not uncommon thing where cell phone tower leases are bought and sold, like just the lease, not the land underneath it. So I didn't know if that was normal for solar farms.

Dakota: I actually have never heard of that.

I've got a friend who does the cell phone leasing as well, or the tower leasing. I've never heard of a scenario where people sell their rights to the lease, so I guess I can see why because they want to keep the land. But they would be able to basically almost like an exchange to pull out the equity.

Seth: Yeah, it's kind of like selling a note or something like that.

Dakota: Yeah. Which is obviously very common in what you do with land flipping and what your audience does. I've actually never heard of that. Again, I'll have to come back and see if that's a thing. And if it is, we could throw it in the show notes.

Seth: Yeah, you bet.

So as a land flipper and a land investor who's just always looking for different opportunities out there, what advice would you give me if I were scouring the country trying to find markets where I can buy parcels of land? This might not be the primary strategy, but it could be like a Plan B.

It sounds like I should be looking for parcels that are 10 acres and larger, preferably in a state or market where there are incentives for this kind of thing, with easy road access, preferably close to a substation. Anything else I should put in my filtering criteria as I look around for potential properties for this kind of thing?

Dakota: Yeah, I mean, again, almost in the pirit of doing it, even easier, and this obviously creates a split, but if I were to run a strategy like that, I would do exactly that. So I would start to look around for pieces of land that might make sense, like open farms, et cetera. And I would actually probably even start with the partnership route.

And again, this is just specific because this is how I build my entire businesses off of partners. And so again, we'll partner with wind consultants who may not be able to put their wind farms up, but their client still has a need to either generate income through a lease or electricity costs. And so they will pass as clients, and we'll work in tandem.

So if I was running this plan for land, I would start to focus on farmers and other people where this land criteria kind of comes up. And I would say, hey, I want to help you monetize your land through solar leasing. And so instead of trying to take the full dive myself, like you said, and potentially find the land and then buy the land and then try to qualify it, as a starting point, to keep it simple, I would just start partnering and say, hey, I want to make a chunk of whatever your land lease is, or let's do a flat fee.

You only have to pay me if I get a solar developer to come build. So that way, again, it's very like Airbnb arbitrage style, where you are arbitraging other people's property and land, generating a solar lease. You can get a couple under your belt. And then from there, I would start to, okay, like, what does this actually look like for me to do?

But again, I'm a very big believer in starting small and derisking the opportunity. So that's how I would start. And actually, that could be crazy lucrative. And again, we have people on our team that are simply 1099 contractors, but they are basically bird-dogging land that way. They're going into partnership, finding a couple of those deals, and then after they get a few, they're starting to kind of build the opportunity larger and wider.

Seth: Now, how do you make your money exactly? Because I think you said that it doesn't cost anything for the landowner. Are you making your money from the developer in some way, or how does this become a profitable venture for you?

Dakota: Yeah. So no matter what we're doing, so from land leasing to actually installing solar for a real estate group to enrolling a national retailer in a solar farm, we just get paid as simply an extension of these solar developers, what's called their origination teams. And so, very similar to any sort of consulting work, we get paid a fee based on how many megawatts of power we either develop or enroll.

And so again, when it comes to land leasing, we could charge for our service. Probably not that much for landowners, but in the case of, like, we work with national retailers and corporations, we could charge hundreds of thousands of dollars for what we do. We choose not to, again, for the sake of competition. There's a lot of sustainability consultants that don’t execute and charge lots of money.

And so we just kind of put the process in reverse and we don't charge for our service because we know we're going to get paid based off of execution. And because we've been doing this for so long and I come from the sales world, we're really results-driven. And so again, we'll get paid based off of how much power we actually develop.

And so other opportunities in land, Seth. Sometimes developers will pay people just a finder's fee, so they'll pay them like $10,000 to $20,000, just as an example, for finding the land and bringing it to the solar developer, which, again, can be lucrative for the right person, not our collective interest.

We want to do the full lifecycle. And so we're going in making these deals with solar developers for the long term. We're finding the land. We're helping build and construct on the land. We're subscribing that solar farm once it's built, and then we're managing the asset long-term over the next 20 to 25 years with our management partner.

So a very different strategy compared to what other people are doing. But that's kind of like some insight into how we get paid. And again, there are opportunities for us to monetize elsewhere. We're just long-term players. And so that's how we think about things.

Seth: So it sounds like you get paid upfront and then also sort of long term as you help manage it?

Dakota: The opposite. We typically don't get paid on the land that we invest in for a long time. And so again, it will come in what's called milestones. The landowner will always get paid first. And if we get paid any sort of upfront money, we'll pay it to the person who brought us the deal. And so again, if we're working with consultants who brought us the land, we're like, just take all the upfront money so you get a payment. We're willing to wait because we make a lot of money for what we do elsewhere and we don't need the cash flow necessarily from a small milestone payment.

And so again, part of the reason why it's cool to work with us is because we think in decades where everybody thinks about instant gratification. And so because we have the ability to think in decades like this, we are willing to wait a long time invest right alongside the landowner to make sure that project actually goes through. And again, that just leverages the opportunity because we're invested in making it work and we don't believe in wasting our own time.

So when we choose to work with landowners and say, hey, we want to do this for the long haul, they can believe us because we're very transparent in our business strategy and how we think through things.

Seth: So as we wrap this up, I guess my closing thought is how do you see the future of land leasing for solar energy development in the next five to ten years? I don't know if there's ever going to come a day when this is saturated or like we don't need any more solar farms or anything like that, but it sounds like clearly this industry is growing, maybe growing faster in some states than others.

But do you kind of think that we're at the beginning of that growth curve, or in the middle of it or near the end of it, or how much more opportunity will there be in the future?

Dakota: Yeah, so I think the opportunity is only going to grow. Who's to say how long of a window we have? But I think we have clearance at least for the next decade. And so again, I think in decades. So I'm committed to doing this for over the next ten years.

And I think that, as I go on, I think a lot of cool things I see other people doing are like funds and syndicates for this type of stuff in the commercial real estate world, for example. And I would love to start doing that with solar farms and again, partnering with people, with audiences and networks, because from our side we're invested in building these projects, but we also want to own and buy up our own land to run these strategies, too.

So again, we practice what we know. My intention was to come on today and provide as much value on the subject as possible, but also let people know that this is the same strategy that I'm running internally at my company. I co-founded Community Solar Authority over half a decade ago at this point. And we are in the collective interest of having land leases ourselves, buying up property and owning that for solar development. And so we're going all in on this area for at least over the next ten years and hopefully that kind of paints an arc as to where we're thinking and what we're seeing out on the field.

Seth: Awesome. Dakota, thank you so much for coming on and talking to us today. I learned a ton from you. I'm sure a lot of people listening have as well.

So just to recap, if people want to find out more about you or talk to you or figure out if their land is a good fit for this. Do they go to, is it communitysolarauthority.com?

Dakota: Yes. So that is our website.

I would actually prefer if you come connect with me on LinkedIn. So that's linkedin.com/dakotamalone. And the reason why is I create content on LinkedIn daily. I've been on there for over a year at this point and it is a way for your listeners to be able to come on and actually have conversations with me. They can have, obviously direct access and also continue to learn about a lot of the projects that we do and what we've got going on.

But if you do have those 10 to 30 acres of land or 50-plus acres of land anywhere across the country, you own it and you're interested in a solar lease, you can go to communitysolarauthority.com, put your information in, and we'll reach back out to see if it's a good fit for some of the solar leasing that we're doing.

Seth: Awesome. And I will include a link to that LinkedIn profile in the show notes. Again, retipster.com/173.

And if you people out there are listening on your phone, feel free to text the word free, F-R-E-E, to the number 33777, to stay up to date on all things going on in the world of REtipster.

Thanks again, Dakota. Thanks everybody out there for listening and we will talk to you next time.

Dakota: Thank you so much, Seth.

Seth: Hey, everybody. How's it going? This is Seth Williams, and you're listening to the REtipster podcast.

So today, I'm talking with Joseph Woodbury, the founder and CEO of Neighbor.com. So Neighbor.com is a marketplace that is disrupting the $500 billion self-storage industry. And Joseph started this by raising more than $65 million in funding with part participation from the world's top investors, including the creators of Airbnb, Uber, and DoorDash, to name just a few. And Joseph and his team have grown Neighbor's user base to cover all 50 states with more storage options than any other storage company out there. And the hosts on Neighbor.com are earning tens of thousands of dollars annually.

And when I first got an email from one of the reps from Neighbor, I honestly had some mixed feelings about this because I am a new self-storage facility owner and I'm all excited about getting into this business.

And when I heard about Neighbor, on one hand, it was like, this is a brilliant idea. Like, I can't believe nobody's thought of this sooner. And I downloaded the app, and it's very, very well-designed. I mean, it is crazy easy for anybody with extra space to get started with this. By the way, we have an affiliate link retipster.com/neighbor, if you want to check it out.

But on the other hand, it's kind of like, man, this could be terrible. What if this totally ruins the self-storage industry? What if all of my neighbors around my property decide to lease out their space and then I can't get tenants? Are we in huge trouble here? I don't know, but we're going to find out in this interview.

And I think I ultimately thought it would be a big disservice to not tell the world about this because this is an amazing opportunity for anybody out there who has space to dip their foot in the water and just figure out, do I like this? Could this be a thing for me? And there's a lot of people I know who have actual businesses making money with things like Turo and Airbnb and all these other things, and this is that kind of thing for self-storage. And just seeing how well the app was put together, I was like, man, these guys are doing it right. Like, this is going to go somewhere.

So I'm excited for this. Joseph, welcome to the show. How are you doing?

Joseph: Great. Thanks for having me, Seth.

Seth: Yeah, absolutely. So let's start at the very beginning. How did you first get this idea? Did you work in the self-storage industry yourself then? Or what made you come up with this?

Joseph: So I wish I could say it was my idea. I'll tell you, I had the exact same reaction that you described when I first heard it from my co-founder, and that the first thing out of my mouth was, how has someone not built this already? How does this not exist? So my co-founder, he had the idea from just having the pain himself. He felt the pain that I think a lot of Americans feel when they go to purchase a self-storage unit. He and his wife had just gotten married, and shortly after getting married, they flew down to South America to work for a humanitarian organization. And of course, you just get married. You go to South America for four months, you need a storage unit for your items while you're gone. And they looked into getting one and had a very similar experience to most Americans where the storage facility close by them was totally full. So they were going to have to drive like a half hour to the next city just to find one with any vacancy, and they were going to charge him several hundred dollars a month.

And as a college student, he said, I don't pay several hundred dollars a month for anything. My Netflix is $10 a month, my Internet is $30 a month. So he found a friend who was willing to let him store his items for the summer in his garage. And so they dropped the items off, and it was actually not until he got back that he had the idea. He went to pick his items up, and as he was getting the items out of his friend's garage four months later, he was just thinking, this was such a better experience. I felt so much more peace of mind knowing my items were in a nice, clean garage in a neighborhood I trusted than in a storage facility on the outskirts of town. Plus, I saved a ton of money. Why doesn't everyone do this? There's got to be empty space in every neighborhood in the country. Why isn't there a directory or a marketplace where you could search out what space is available?

And he approached me and our other co-founder and told us about the idea. We both said you're brilliant. This is amazing. He let us come along for the ride. And we've been building ever since. And it's been a lot of fun.

Seth: So I know when I first downloaded the mobile app and tried to sign up as a host, I was struck by how easy it was. Like, it is dead nuts simple to use, which I think is crucial for something like this to gain mass appeal and get adoption from the masses.

But I also know from experience that when you make something that easy to use, there's a reason it's that easy to use, because a ton of thought and effort and design went into that to make it really natural and intuitive. So is that hard to do? How much work did it take to make this app and this website that just functions really, really well?

Joseph: Yeah, it's definitely been years in the making, but I'd say when we read our user feedback, we thought when we first started this that the predominant feedback we would get be how cheap it is or how close it is to my home.

But like you've said, the most frequent piece of user feedback we get is just how easy it is to use. Self-storage has never been done through a mobile app. A few of the larger companies have started, but we're the number one ranked mobile app. So we're kind of bringing self-storage to the people so they can have it on their phone.

As far as getting to that point, we really have our users to thank for getting us there. When we first started this over six years ago, we really focused on our home market of Utah. We're now in all 50 states. But we didn't start that way. We started in Salt Lake City. And what we did for the first year of being in existence is we didn't spend on marketing campaigns. We didn't try to grow the business. We just let users organically come to us. And we listened to that user feedback and anything they said sucked about the product. And there was a lot that sucked about the product. We would go and modify that and fix it.

And we really built it as a user-first company. Because ultimately, marketplaces are a very unique businesses. We don't have a product that we sell. Instead, our hosts, they have a product that they sell to our renters. We have two types of users: hosts and renters. And so it's all about getting those users to interact well with each other. And we, as a platform, what do we bring? We bring trust. We bring insurance, we bring the payments. We bring all the systems you need to make that transaction as smooth and easy as possible. So we're actually not the product. What we do is we make that interaction between a host and a renter easy.

That is, what we're paid to do is to make it easy. And so it's got to be the center of our attention and the forefront of everything we do at Neighbor.

Seth: Now, why did you choose this name, “Neighbor,” in the first place? Is there some story behind that?

Joseph: Yeah, it ties in with our vision for where we'd like the company to go. It's actually not often that we're able to talk about it, but the name Neighbor, we could have called this company Store-this or Stash-that or Space-something. And there are many companies in the storage space that have named the company after the space or the items being stored.

The reason we called it Neighbor is we're the first marketplace to ever really have neighbors interact with each other. If you think about Airbnb, you're staying in some other country or in some other state, some destination. Same thing with an Uber. You get an Uber when you're in Chicago and you need a car, your DoorDasher typically isn't your neighbor. They may live in the same city as you, but they probably live in a different part of the city.

With Neighbor, though, you want storage as close to your home as physically possible. So we'll have two people that live two doors down from each other that may or may not have spoken with each other before. Maybe they've said hi or run into each other on the sidewalk, but they'll rent from each other because that makes it very convenient to access.

And now we have neighbors in almost every neighborhood in the entire country renting from each other. That's kind of a fulfillment of this original name that we chose is we wanted to make it not about the stuff or the space, but about the people.

The last thing I'll say is we have this vision of being far more than storage. Storage is certainly the beginning for us. Just like Amazon.com began with books, and they sold books, and they became the world's largest bookstore, and then they branched out to other items. We think at our core, what we are is a platform that connects neighbors. And right now we do that with storage. And it's this huge, you mentioned it's a $500 billion industry. And so we can make a very big, well-run company just in the storage space.

But what else could neighbors do for each other now that they're renting out space to their neighbors? What else could they rent out to their neighbors? Perhaps you have a basketball court that I want to come use and I could rent that from you. Or I have a $2,000 table saw. And you don't want to buy a $2,000 table saw, so you just come over to my house and use it and pay me instead. We eventually want to be the platform that enables neighbors to bring back a more hyper-local economy and serve each other in that way.

And so that's why we chose the name Neighbor.

Seth: Nice. Do you have any timetable or plan for when that other stuff is going to start happening? Or is that just kind of a “someday we'll do it” kind of thing?

Joseph: It's definitely part of the vision, but we're laser-focused on what we do today, which is storage. It's such a big industry. I mean, storage does about eight times the amount of revenue on an annual basis than the entire taxi and limo industry that Uber and Lyft disrupted. So it's just massive.

And you've seen how large Uber and Lyft have become as companies, how globally encompassing. And so we could spend a decade just in the storage space. It's so big and the user base is growing.

You mentioned at the start of the call, your worry about how does this affect your storage facility that you're building? And I'd argue that it doesn't affect it at all. Storage is an extremely supply-constrained industry. I think the average occupancy nationwide is 95%. You probably knew this; this is probably why you built the storage facility. Because storage facilities, they have the highest occupancy of any real estate asset class. Way higher occupancy than retail or hospitality or certainly office. Today, no one even comes close. No other asset class comes close to a 95% occupancy.

And the industry builds, I want to say, $4.5 billion to $5 billion a year, is spent on new construction of storage facilities. By the end of the year, all of them are filled and the occupancy rate is still 95%. And so this is an industry that just needs more supply. There are millions of consumers every year who are unable to find the right storage unit for them. We just need more space.

And what we're doing is unlocking a bunch more space that hopefully helps take the pressure off the problem. I think your storage facility, we could unlock half the doors in the neighborhood and your storage facility would still get full. That's how pervasive this storage problem in the United States is.

Seth: A year from now, when that happens, if things don't go well for me, I'm going to hold you personally responsible, Joseph. So I'm going to remember this.

Joseph: We honestly don't discriminate. So if you really want to hold me personally responsible, just list your storage units on our website and we'll get them filled for you. We don't discriminate on the space type. We'll take all types of space and get it leased out.

Seth: That leads into my next question. When I was first getting into self-storage, I went through demos from all the different self-storage property management software companies. Not all of them, but probably like 80% of them, almost all of them were just terrible. I mean, just laughably bad. Like, looks like it was designed in the late 90s and it only works on a Windows desktop computer.

I mean, it's just terrible. I don't know how they survive. I think the only reason they do survive is because there are not that many options and the ones out there are all really bad. And then once people sign up with them, they kind of hold you hostage, so it's really hard to move to another one.

It makes me wonder, seeing how well Neighbor has done at putting this together. I mean, it is light years ahead of anything else I've seen out there. Although I know a lot of the reasons why people use these self-storage property management software is because it integrates with the gate company, it controls their gate, and it assigns a unit number, and all this stuff. But it just makes you wonder, do you know of any legit storage facilities with 100 or more units that are using Neighbor as their software instead of one of these other terrible software options out there?

Joseph; Absolutely. We have storage operators in most states that have listed on our site, and that's not our primary customer type. That's just been a byproduct of building it.

I was at a conference last month and I had a guy come up to me who was a large storage operator and he said, “I was checking out your platform.” And he mentioned very similar comments to you about how outdated and archaic all the software is, super legacy. And he said, “It seems to me that in building tools for your customers, you have built basically self-storage SaaS. And let me get this straight. You give it away for free?” And I was like, “Yeah, I'd never actually thought of it in that light. But basically we do. Anyone can sign up, list their units, we'll get them booked, we'll keep track of which units are booked and all that stuff. And we do it for free. We don't charge you for the outdated legacy software like everyone else does.”

And so, again, certainly not our target customer base, but there have been some smart kind of tech-savvy storage operators in most states that have noticed that. And I don't want to say they have taken advantage of us because they're welcome, but they really have just taken advantage of basically free software by signing up.

Seth: So how does Neighbor make money? Like, where are you guys getting your revenue in this process?

Joseph: Yeah, and it's a novel concept for the self-storage industry because they've never thought about our monetization model. But it's not a novel concept. In most other industries, we just use the Airbnb model. So when you list space on our platform, say you list your garage or say you have a parking lot, and you list it for vehicle storage, you will set the price that you want for each of those units. And then we'll take that and we'll charge the renter that price plus a service fee. And that service fee is what we make.

So it's just like Airbnb where you go to checkout and you see the host fee and then you see the service fee that Airbnb gets. And that's how Airbnb makes money. And so we just make this little piece of each transaction. Almost all the money that we process goes to our hosts. It's pretty amazing to see all the money that our hosts make every year.

Seth: So the money is made from the renter, not the host. And what is that fee?

Joseph: It's not a set percentage. It depends on the price. So for lower price spaces, like, we have some people, they list spaces like a closet on our website. I saw a fun listing the other day in New York City—it's just amazing how tight space is in New York City—someone listed the storage space under their bed on the platform and it's been booked for like a year and a half.

And so a space like that where you're listing it, you may list it for $20 a month. And so our fee, if we applied a flat percentage to that, say the percentage was 10%, then that would only be $2. So we charge a higher fee for those smaller dollar spaces. And then we have big retail REITs and office REITs that list large spaces on our platform, and they can be $1,000, $2,000, $5,000 a month. And our fee just slides down. So it starts out and slides down.

But to give you an example, for a $100 space, we may charge the renter $120 or something like that.

Seth: Like on top of the cost of rent?

Joseph: That's right. So if the host’s price were $100, we may charge $118 or $119 to the renter and make our portion.

One thing people unfortunately find out too late when they store it in a storage unit is that storage facilities don't provide protection for your items. I don't know if this is something you've considered for your storage facility, but 90-plus percent of storage operators don't offer any sort of protection.

And so when you're entering a storage unit, you're signing a contract that says if anything happens to these items, flood, fire, if the whole place burns down, theft, then you're on the hook for replacing your own items. There are some forward-looking storage operators that have started to offer tenant insurance options to their customers where you can get $1,000 or $3,000 or sometimes even like $5,000 in coverage for the items that you store. We're the only platform in the country that offers up to $50,000 in item protection or vehicle protection in all 50 states.

Seth: Is that part of the cost or do they have to pay extra for that?

Joseph: So that's something you can select at checkout. You could book your garage or you could book your storage unit, or you could book your parking space on Neighbor. And at checkout, we’ll provide you an economical option and a mid-level option and a premium option. And you can select your plan, or you can select no plan at all. And then if anything happens to your items, we'll replace it.

It's also worth mentioning, Neighbor tends to be a much safer platform than traditional storage. Oftentimes, traditional storage is built in industrial parks on the outskirts of town. Most people don't know that one in ten storage facilities is broken into every year. So pretty high break-in rates.

Whereas residential areas or commercial areas have much, much lower break-in rates because there's a lot of people there than in those industrial parks. FBI statistics say that residential commercial areas have seven times lower break-in rates. So not only are items typically more safe stored in one of our commercial businesses or our residential homes, but also we provide the best protection in the industry for them as well, the highest replacement cost. So we like to talk about Neighbors as the safest place you can possibly store your items.

Seth: So it sounds like just like renters insurance, right? Like the tenant has the option to pay extra for that if they want that coverage, but if they don't want to pay the extra, they just don't have it and just shoulder the risk of something having to do it. Is that accurate?

Joseph: Yeah, it's totally optional. You're not obligated to pay for it at all.

Seth: Yeah, I mean, most of the self-storage facility and owners I know offer something like that because it's very small, but it's an extra revenue source and that kind of thing.

It is kind of funny how that works, where it's like, you can store your stuff here, but if anything goes wrong with it's not our fault. It's like, well, what's the point of storage then, if it's not going to actually protect it from anything? But I guess that's the cost of just having a roof over this stuff and having it enclosed and that kind of thing. But it doesn't mean it's going to be safe per se.

Joseph: Yeah. When we first did our map of this industry and identified what are the big consumer pain points, what are the big frustrations a consumer might have? That was one of the big ones that jumped out to us, this expectation that when you're renting a storage unit, you're just renting a place to stay. You're not actually renting safety. There are no guarantees being made about your items. It's just there's a roof over your items.

One was the price. It's the single largest subscription payment that most Americans will make in their lifetime. I mentioned earlier Netflix, your Internet bill, there's not much you pay $200, $300 a month for. The closest thing to it is like a car payment. And storage is going to have a higher penetration. Most Americans will use storage at some point in their lifetime, and at any given moment, like today, one in nine Americans is in a storage unit. And again, that's not the percent that will use storage in their lifetime. That's just today, one in nine Americans is currently paying for a storage unit. So it's one of the highest penetration items in the country.

So price, safety, the proximity was another thing that we saw as a major consumer pain point where because of being zoned industrial, oftentimes… I think the self-storage almanac says the average drive time to a storage facility is 30 minutes or more.

Seth: Oh, really? Wow.

Joseph: And for millennials, that boosts up to closer to 40 minutes because they're a little more price-sensitive, so they'll drive further. Whereas the older generation, they tend to pick the storage facility that's just closest to them regardless of price. And so these drive times can be burdensome. Neighbor, by crowdsourcing, can really localize the storage to you.

So again, these three value props we like to talk about cheaper, safer, closer. And everything we try to do is to try and bring it cheaper, safer, and closer to you, or at least provide that option.

And then we also have, as I mentioned, actual self-storage operators that will list on our platform. And so the consumer has all the choice right before them. We just want to be this super consumer-friendly platform where all of your options, anything you could ever want, it's right there for you to evaluate the pros and cons of each and make the best decision for your situation.

Seth: Random question. As a storage facility owner, if I wanted to use Neighbor.com for my software, say, if it was a non-gated facility or even just like a personal vacant land where people can park stuff, is there a way to create a website URL that just contains the units that I have at my facility? Not just the main Neighbor.com thing where you can see all the storage stuff all over the place, but like, here's just my facility, here's what I have available. Does that happen?

Joseph: There is, and that's actually a fairly recent development, something we've rolled out just earlier this year. You can create a dedicated page for your storage facility. You can have a unique URL where you can send people to, where they'll see all of your units listed. It's quite good. We can do a lot of the management in setting up Google Maps listing for you. So you drive Google Maps traffic and it drives directly to this URL. We can do a lot of that kind of site-specific.

We'll even send you signage. Some people, they've built the units or they have the parking spaces, they don't want to think about branding or signage. And so we'll send them out signage that's actually got QR codes that link directly to these pages. It's very cool.

Seth: Another random question that just came up as you were talking. So I know some of the complaints I've heard about the big self-storage property management software companies is that not only do you kind of get held hostage by them, once you start using them just because it's so difficult to leave and migrate to a new platform, but they also take a lot of your data and share it around in ways that may not necessarily be in your best interest. And it's really valuable data because it tells anybody who wants to know in the market how many storage facilities are in this area and what's the supply and demand and what's the pricing and all this stuff. A lot of people don't like it.

But I'm curious, does Neighbor.com do that kind of thing? Like, does your data get shared anywhere? And I guess what I'm thinking of specifically is market data companies like Radius Plus or Storetrack that you can go to to find out like, okay, how many facilities are in this geographic area and what's the square footage of that facility and what's all this pricing and all this stuff. But I'm just curious, how would those companies or would those companies have any way of saying, yeah, in this market area there are these storage spaces hosted on Neighbor.com. So be aware of that as well because that affects the supply and demand in the market.

Joseph: Super familiar with Radius, actually a big admirer of what they've done. I think they've really changed the face of how the storage industry operates. Neighbor is a consumer of Radius data, so we pull that Radius data down. Fascinating.

I will say, in many ways, Neighbor itself has the best pricing data of any operator because of the pricing variability and also the geographic distribution. You look at like a public storage, large company, $55 billion publicly traded company, huge. Amazing to think that they only have 5% or 7% market share. That's how big this industry is, is that this $55 billion company only has 7% market share.

But as large as they are, they only have facilities in 39 states. We're the only operator in the country that has active people in almost every city in all 50 states. Furthermore, we see a lot more price testing because if you're a self-storage business, your appetite for testing is smaller. You might do some price testing plus 5% plus 10%, minus 10%, but ultimately, you need to somewhat play it safe and just make sure your units get filled.

Whereas residential users that are listing out their space, we actually don't require them to list at our recommended price. We'll give you a recommended price and we give you the price that makes you 90% more likely to get reserved. But you can set the price at whatever you want.

And you'll see consumers test all sorts of stuff on our platform. You'll have people try to list it really low. You'll have people that will say, “I think I can charge $800 a month for this 10x10.”

Seth: That'd be nice.

Joseph: And it would be nice. And our system will tell them like, we don't recommend you list at this price, but they can try it anyway and it gets listed. And then we get to observe as a platform what works. And so we get to see a lot more pricing variability than almost any other platform in the country. I'd say more than any other platform in the country.

And that goes back to Feed, our pricing recommendation engine. So we have one of the best pricing recommendation engines in the country for those that are looking to optimize their prices because we just see more experimentation than most platforms do.

Seth: It's actually really interesting when you say that, because I know I'm looking at a new possible facility right now, like a development from the ground up. And one of the huge questions in that, that can make or break the deal, is what can I rent each of these unit sizes for in this market?

And currently the only way I know of to do that is to look at the other facilities in the area and figure out, well, what are they charging and are they full? But Neighbor might even have a better way to do that. Because like you said, you have so much information out there of what different people are doing, which probably includes facility owners and just somebody who's listing their closet for rent. So it would be interesting to use that to do the property research and figure out, okay, what is the going rate? For real, not just looking at storage facilities, but everything else that's out there.

Joseph: Yeah, absolutely.

Seth: So if I go into Radius Plus right now and I do market research to figure out how many facilities are in this area, the listings from Neighbor.com will not show up in Radius Plus, or they will?

Joseph: They will not.

Seth: Yeah, I mean, I guess that's good or bad, depending on who you are and where you're coming from on that.

But you mentioned a little bit about the types of spaces people are listing on Neighbor. Like I've heard under somebody's bed in New York City, which is crazy, I never even thought about that. But what is the smallest space a person could legitimately rent out? What are the most common types of storage spaces people are renting out? Is it like garages or like closets or barns or just under your bed? What's normal?

Joseph: I'll talk about different asset classes because they're going to have different common spaces.

To answer your first question, there's a small, call it 5% of the storage industry, that's like student renters, very small contingent, but we have hosts that will serve those people. So they'll rent out a closet and a student will come store one box in that closet for the three months they're gone for the summer because that's all the items they have. It's just like fits all in this big kind of tote box. And so that's the smallest you're going to get, where it's like a 3x3 or something like that.

As far as most common spaces, certainly those are not the most common spaces on the platform. In the residential space, hands down, the two most popular spaces on the platform are the garage, because you can store items in it, you can store vehicles indoor in it, and then also the adjacent kind of driveway or RV pad.

There's a huge shortage in RV boat storage in the country. And so being able to, instead of having to drive down to some RV lot, being able to park your trailer, your camper trailer, or your boat on the side of your neighbor's house and be able to go get it whenever you want is extremely convenient. And so those are very popular spaces, the residential garage probably being the most popular space.

Actually, we're seeing a huge surge in sheds as well. People renting out, they have a shed adjacent to their house and they rent out that shed for individuals in their neighborhood to store whatever they'd like in that shed. They may not have room for a shed at their own house and so they just walk a couple of doors down and rent their neighbor's shed.

In the commercial space. It's going to vary by asset type. So in the retail space, you'll often have strip malls where they'll take, they rent out 80% of their units but they've always got the 20% of their retail suites that they just struggle to get a tenant in. And they're typically around 5,000 square feet. They'll give us the retail suites in the back, they'll list them on our platform and we'll rent it out. Sometimes we'll dice it up and rent it out for individual 10x10s, sometimes we'll rent the space as-is to someone who's looking for small warehousing and they want the full 5,000 sqft.

For small business, inventory can be a great option. And then also these retail spaces will often rent out parking spaces because they're required by the city to build X number of parking spaces, but they don't ever use them all. And they've got the parking spaces behind the retail. They'll rent those out and we'll fill them with long-term boat, RV, and car storage.

You get a very similar thing with office. Typically when we do office, we are doing some sort of build-out of the space. You'll get a lot of high-rise office buildings where they struggle to rent the first floor and the second floor, especially. They get those top floors all rented out, but no one wants the first or the second floor. And so they'll give us the first or second floor, we'll convert it to storage. These are often located in very central kind of urban downtown areas and so they get rented very fast.

I think of one office building we did in downtown SF, there was a WeWork on one floor, there was a tech company on another. We took the first floor, converted it to storage, and we had it to full occupancy in 60 days after launch. So that's something that office providers will do.

The multifamily space—oftentimes multifamily builders, they actually have built storage cages or storage lockers in the multifamily complex that were supposed to be for the tenants to use, but the tenants never use them. They stay like 30% occupied, and so they'll list them on our platform and we'll fill them with the broader community.

And then as well you'll see multifamily where again they have that problem. They're required to build so much parking, they assign a parking stall to each tenant, but then they have a bunch left over and they'll list it on our platform. And we'll rent it, some to their tenants, some to people that live elsewhere and we'll make sure every parking stall is revenue-generating for that multifamily provider.

So it really depends on the asset class, what type of space is most popular.

Seth: When you say you convert the first floor to storage or just that word “convert,” what does that mean? Does the property owner need to build infrastructure so that it's storage unit, like put roll-up doors and that kind of stuff in, or how much work does it take?

Say, if I've got an empty office space floor like you mentioned, do I have to change anything or just leave it as offices? And people can kind of come and go when they want and that kind of thing?

Joseph: Yeah. In an office building like that, we'll typically build out actual units, and we handle that process on behalf of the office provider. So the office provider has to contribute some capital for that, but we go and manage all of the contracting and everything, and we get it done. It's typically about a two-month process.

Seth: Wow. I mean, what does it cost for you to do that?

Joseph: It's going to depend on the area in the building. It can be as cheap as $10 a square foot, as much as $20 to $25 a square foot, but it's very minimal.

Seth: Wow, that's awesome.

When you were talking earlier, you mentioned people renting out their sheds. So I have a shed in my backyard, and I put myself in that position, and I think, suppose I rent this shed out, do I need to let that tenant access the shed at any point? Like, they can just show up and whatever they want unannounced walk into my backyard and get their stuff? Or can I set hours when they're allowed to show up or restrict times when they can access it?

I might not necessarily want people to just kind of show up when we're having a family picnic and they're getting this stuff out of my shed, or worse yet, if it's in a closet in my house or under my bed. How do you control that? Or is there a way to control that?

Joseph: Yeah, so access is set entirely by the host, and it's actually a required question when you're signing up your space. We'll ask you how often would you like the renter to be able to access their items? And there are some standard selections that you can choose from, such as “business hours only” or “after hours only,” or “by appointment only.” Many hosts will say, you have to set up an appointment with me before you can come over.

Some people will have a large…For example, we have a middle school teacher that had a large (kind of) side yard, a big plot of land next to their home. She's now making $10,000 a year renting that out for vehicle storage, and it's very accessible. That's an area where you're able to allow 24/7 access. Just come get your trailer when you need it, that sort of thing.

And so we have 24/7 access available as well. Many of our commercial spaces will grant 24/7 access, so it completely depends on the host. The renter is able to see the access before they book the unit, so it's really prominently displayed on each listing. And so the renter can kind of shop for what's right for them.

In the storage industry, fortunately, most people are not storing things that they need frequent access to. They keep those items in their home. If you're going to use something every day, are you going to go put it in a storage unit? No, you may go put the Christmas decorations in the storage unit, and once a year you go trek down, get them. You may put your boat in a storage unit once a year. You go grab it in May, you get it out, you use it for the summer, you go put it back in September, and then you don't touch it for the rest of the year.

And so we provide a bunch of variability and access options for consumers. Again, it's like the perfect consumer place. You can find exactly what you're looking for.

Seth: How many of your hosts just rent out vacant land for outdoor parking? Like that example you just mentioned. Because I know as a land investor, this is an awesome idea. And I suppose it depends on maybe the zoning of the property, maybe and what the local municipality will let you do with it. But for example, would you have to paint parking spaces on the land and make it a gravel parking lot first? Or put a fence up? Or literally just take raw land and rolling hills and say, there you go, park whatever you want there. I don't care. How involved is that?

Joseph: Yeah, it's very common on our platform. We're actually trying to spread the word more and more about this because as an investment opportunity…

I'll just use my home market of Salt Lake. If you had $500,000 to deploy and you wanted to deploy it into real estate, you could purchase a rental property, get yourself a $500,000 townhome, and that would yield, in the Salt Lake market, somewhere between $2,000 to $2,500 a month in rent. So call it $30,000 a year.

If you converted it to a short-term rental, if you put the furniture in, it's a little more investment, but maybe you return $40,000 or $45,000 a year in rent from making it a short-term rental. But that same $500,000, that could purchase you somewhere between an acre to a two-acre lot in Utah, which on Neighbor would earn you around $100,000 a year. So just a much better cash-on-cash return profile than just buying another rental property. So it's really attractive.

As far as improvements that have to be made, it really depends on the municipality. We have many people that have literally listed unpaved lots, just dirt lots, on our platform, and they get booked full. There is so much demand for this. We recommend putting down some sort of either gravel or pavement. It's not very expensive. Even nice asphalt is only around 50 cents a square foot, so it's pretty cheap to put down. But it's not required. You can increase your prices the more you improve it.

Seth: When I signed up as a host, I was trying to go through the process of listing a vacant lot. Maybe I was doing it wrong, but I noticed that it seemed to require me to put an address in. Which, with vacant lots, a lot of times there is no address yet, there's just a parcel number. And if you don't know the coordinates of that thing or the address next door, you can't really find it.

So does Neighbor have any plans to add like, yeah, put the parcel number in or tell us the coordinates of it and we'll do that. Or you would have to register a physical address before you could officially start using it?

Joseph: So this may be a feature we need to make a little more prominent in the flow. But if you type in an address, it will show you a map of where that pin is and it'll prompt you and it'll say you can actually move the pin. So if it didn't land exactly where you wanted it to, you can actually drag the map and drag the pin exactly to where you want it. So as long as you have an address that's close.

We don't have any plans to do like a parcel number system or anything like that, since many times that's going to be local to the county. We have to operate off of a kind of national mapping structure. But you can drag your pin to exactly where the lot is.

Seth: I guess if you're going to rent to somebody and then you want to give them directions, you would have to say, go to this house next door. But that's not it. It's actually over here to the right.

Joseph: You can send, just like an Airbnb, you can send detailed check-in instructions, but also, if you put that pin in the right place, we'll show them that pin and so they'll be able to navigate directly to that.

Seth: Does the app show like parcel lines of each property?

Joseph: It doesn't, no.

Seth: Okay, because I know that's another big thing with vacant land. Because there's nothing to go by, there's no building there, if you don't know the parcel lines, you don't really know when you're at it. So anyway, it might be another idea.

And that kind of data is actually not that hard to get. There's a bunch of databases out there that can provide it to you.

Joseph: We've built a really cool tool that actually allows you to use to actually pull up in addition to uploading photos of the space, we encourage hosts to upload detailed photos of their space, five or six photos.

We've also built a tool that allows you as a host to see the parcel on a kind of a satellite map and to layer on actual digital parking stalls to that parcel. And the user, the renter, will be able to see that, and you can even label them. You can even say, this is parking stall A1 or B2, and they'll be able to see that, and they'll be able to see exactly where that is and where A1 is on the lot itself.

So all of these things to help the user identify where the right spot for their RV is, is kind of built into the product.

Seth: If anybody out there is listening to this and they have a vacant lot they want to use for this purpose, as Joseph is mentioning, it's very helpful to indicate, like, hey, here's parking spot number one, number two, and that kind of thing.

So I actually spent a lot of time trying to figure out the right way to do this. How do you actually indicate on-site where is the parking spot? Do you have a post there or a bumper or paint lines or what do you do? And I'm sure there are many different ways to do it, but it can depend on does this place get snow that's going to cover up whatever you put on the ground or not?

And I have a video that I'm putting together as we speak that thoroughly explains how I handled this. So assuming that video is published by the time this episode goes live, I'll put that in the show notes. And this is retipsier.com/169, if you want to check that out. Just if you need some inspiration for how to handle that.

We talked a little bit about the different types of spaces that people rent out. Have you seen any creative ways that people have repurposed their properties for this kind of store? I remember hearing years ago about somebody on Airbnb who built a snow fort in New York City and rented that out on Airbnb.

I don't think you're allowed to do that anymore. But it was just one of these, like, oh, wow, that was unexpected, but I didn't realize you could do that. Can you think of any weird things people have done to create storage space? I guess that thing under the bed was kind of creative. I'd never heard of that. But anything else come to mind?

Joseph: Yeah, I mentioned some already that are fairly unique. I think the principle here is that there is a shortage of space in the United States, and Americans are really hurting. We live in a world where space has gotten extremely expensive, especially living space. I think we've all run into this.

There used to be that there was this affordable housing crisis that existed in coastal cities, New York and San Francisco. That over the last decade has really spread into the interior of the United States. You now hear about the affordable housing crisis in Austin, and Salt Lake, and Milwaukee, and everywhere across the country. There's an affordable housing crisis in almost every major city.

And so that's why the storage industry is booming as it is. Millennials are using storage at much higher rates than their parents did, which is surprising given that what we thought about millennials is that there are these minimalist individuals. And to see that their usage is outpacing both generations before them just shows how big of a problem this is. People use storage because while expensive, it's still a cheaper cost per square foot than buying additional living space. And so that's why they shift to storage.

So the reason I bring this up is to say if individuals have space that they're not using, no matter how unique that is, whether it’s a closet or a space under a bed in New York City or whether it's a large lot in Austin or Salt Lake City or Michigan, or whether—we've had individuals list barns where they bought a property with a big barn, but they don't have animals; they just liked it for the aesthetic—and now they store a bunch of their neighbor's vehicles in the barn.

Really, we're at a shortage for space. People are willing to pay for that space, and there are ways to make that space extremely safe and protected. In fact, oftentimes the more unique spaces are safer than traditional spaces. And so we can solve this space shortage problem in the United States by coming together as neighbors.

That's the thesis of everything we do is that neighbors can help neighbors. We've seen people come from the residential community. We've seen office buildings come and say, I'm not using this space. I can't get anyone to rent this space. Why not give it to someone for storage instead of for office? Because there are not many people renting office right now. So let's help solve this storage problem which continues to grow. We've seen people come from all different walks of life and different real estate backgrounds. And we've even had self-storage operators who have built purpose-built self-storage space, list that space on the platform. And then consumers are able to come onto the marketplace and see all these different options and not feel so stressed as my co-founder did when he first went out to find storage and all the spaces near him were full.

That's a common experience. 50% of storage facilities in the country or close to it are completely full. It's an average occupancy of 95%, which means that everyone above the average is pretty close to 100% full. And then you have about half below the average that are somewhere in the high 80s, low 90s. And so it's a common problem to go look for storage and not be able to find any space available. And we can solve this problem.

Seth: I know people who have gone out and bought cars for the sole purpose of renting them out on Turo. I also know many people who have bought houses for the sole purpose of renting them out on Airbnb. I know people who have bought cars for the purpose of being an Uber or Lyft driver.

Are there a lot of people who build barns for this purpose? Because in their mind they're thinking, I'm going to list this on Neighbor.com and make money that way. Is that a normal thing? I'm not sure if you have that information or not.

Joseph: Absolutely. And I'll say I'm a Neighbor host, I'm also a Turo host and absolutely love the program that Turo provides. It's great way to earn income on an idle asset.

And as you mentioned, people will start with one car and then they'll get to three, and then they'll end up with ten cars in a fleet that they go park by the airport because you can make so much money off your cars. And we see the exact same thing on our platform. We actually have dedicated landing pages that we can send to you that help real estate investors think through how to evaluate a real estate investment. We'll have individuals that'll, as I mentioned, instead of deploying money into a short-term rental or into a rental property, they'll buy a lot instead in a central area and they'll rent that out. And it's a higher yield return, it's a higher cash-on-cash return.

We have individuals that have rental properties already. Maybe they've got 15 rental properties in a portfolio and their ability to increase their cash-on-cash return on those properties is limited. They can increase the rents each year, but that's about the options they have. But we can come in and we can consult them and we can help them see that you could rent out that space or that shed, or there's a third car separated garage that you could rent out on Neighbor.

And all of a sudden we're able to double their cash-on-cash return in many instances because they make $2,500 and the mortgage is $2,200, they're making $300 a month. And so if we can add an extra $300 a month on each property, that's really meaningful, and in most cases we can.

Seth: So I would love to use Neighbor to manage my self-storage facility, to get tenants and collect payments and all this stuff, but my problem is I have a gate on my facility and currently the way it works is it hooks up with the gate software, which communicates with our self-storage property management software. They all work together to assign each tenant a gate code and then assign them a unit. It's honestly a huge pain to do this stuff, but that's what you get if you're going to have a gate, to give people this illusion of security.

Am I correct that given that's my situation, I can't really use Neighbor.com because there's this gate factor that Neighbor doesn't control? Or is there a way to use Neighbor but just have a separate system that somehow manages the gate? Do you know anything about that?

Joseph: Yeah, so we've had individuals do both. In most scenarios, the storage operator will say, I'm going to use Neighbor and I'm just going to separately manage the gate code. I'll just have the gate system generate a code and that'll be my one message that I send to the renter through the Neighbor platform, is I'll just send them their gate code.

In some limited instances, depending on who the provider is, I'm happy to have my team sit down with you. We may be able to actually connect with that provider, but it's not one of our main offerings. So in most instances, it's kind of separate.

Seth: Yeah. Interesting.

How often can a host increase their rent? I know this is a strategy a lot of self-storage owners use where they'll get somebody in at a super low price. Maybe it's half off on the first month or free for the first month, but then, like clockwork, every couple of months they increase it by $5 a month. Low enough that nobody's going to move out because of that, but they can.

I mean, it's a serious, powerful strategy for increasing the value of your storage facility because $5 times 200 units is a lot. I mean, that adds up when you keep doing it. So are there any limits on how often you can increase people's rents?

Joseph: Yeah, so that's actually one of the huge advantages of using Neighbor as a renter. When we went and did this map and identified a bunch of the pain points, one of the big pain points that most renters do not realize is exactly what you're talking about.

I saw an interview with the extra space storage. It was an earnings call or something, and they were kind of bragging about how they increase rents like 144,000 times a month or something like that. They increase price 144,000 units each month, they increase their prices.

So to explain this in layman's term to the average renter, you'll get advertised a move-in price, and that price may be $100 a month or even free. And then you'll pay that for the first month and it'll revert to the normal price, which may be $150. And then every four to six months on average, although some are more frequent, some are less frequent, you're going to get a price increase and that'll be more nominal. So it may go from 150 to 170 to 190 to 210. Three years in, in some scenarios, you're paying double what you started paying.

And to answer your question, Seth, that's not something we do on the platform. So when renters join Neighbor, the price they pay is the price that they pay. Now, if a host absolutely needs to increase the price on them, then what they can do is they can have a conversation about it. They can message them and say, “Hey, I'm going to be increasing my price to X if you're not okay with that you'll need to move out.”

We require hosts to provide renters with 30 days notice before evicting them. So as long as that notice is provided, then that's good. But the host can confirm that that's okay with the renter. And if the renter is okay with it, we can actually enable a host to increase the price on the renter, but we require that that acknowledgment take place. We don't love the idea of these kind of blind your-price-is-this-suck-it sort of mentality.

So we don't allow that because we believe in kind of protecting the consumer that way unless there's an explicit acknowledgment that's taken place where the host has proposed it in advance.

Seth: Yeah, it's interesting. With a platform like what you're running, how do you decide who to prioritize since their interests are often at odds with each other? Maybe not often, but sometimes they are. Like, do you focus on we want to make the hosts happy or no, we want to make the tenants happy?

At the end of the day, how do you decide which side you're going to give preference to?

Joseph; Our philosophy has been always to treat both sides as adults. You can talk about preferencing one side or the other, but think of this example that I just described.

We don't do one thing or the other. It's not like we don't allow hosts to increase prices if they want to. What we do is we require them to be explicit about it. I don't know that that preferences one side or the other insomuch as it kind of does what's right, it necessitates that that conversation take place so that the two individuals can interact as adults in a marketplace. Because at the end of the day, our hosts, they're business owners and our renters are individuals purchasing something for a fee.

And we can be adults about this. We don't need to dupe our hosts into doing something. We don't need to dupe our renters into doing something. We can have them come together and transact and ultimately that's again, our job as a platform, we're not a storage company. Neighbor is not a storage company. We don't sell storage. Our hosts sell storage. And what we sell is easiness. We sell trust. We sell the ability for transactions to happen quickly, safely, easy, cheaply for both parties because that's going to produce the biggest scale possible.

And so that's what we focus on is just we're not really in the host camp or the renter camp. We're in the transaction-taking-place camp. So whatever we can do to make that transaction happen and happen safely so that both parties are satisfied, that's our incentive as a company because that's how we make money.

Seth: So if there was a situation where somebody's going to walk away upset, is that person going to be the tenant or the host? And I don't know hoff that even happens, but I'm sure there are probably disputes from time to time, but ultimately, who wins?

Joseph: We believe in doing the, as I mentioned, we believe in doing the customer justice. So for example, we've had situations before where a renter, they said, and this happens in the storage industry, this is actually a benefit of using Neighbor where a renter will stop paying, right? One of the things we do to benefit our hosts is that even though the renter has stopped paying us, we keep paying you while the items are in your space.

Seth: How does that work? Where are you getting the money to do that? Or why would you do that?

Joseph: That's because we want hosts, especially a lot of these residential hosts that are not a large storage business. We want them to feel comfortable listing their space, knowing their items, that they're not just going to get stuck with items in their space that they're not earning money for.

And so we foot the bill. As a company, it's part of our host payment payout guarantee that we'll foot the bill and eat the cost and then we actually run the entire auction and eviction process on behalf of our hosts.

So many storage facilities are aware that different states require different procedures in order to dispose of items. When a renter stops paying, you can't just take those items and throw them away. There's actually a proper process and procedure to follow, and we do that on behalf of our hosts. We take care of that entire process and we take care of the auction and we're able to recoup our costs for protecting your payouts, when we sell those items in an auction. Occasionally though, the items don't sell for much and we're out. We take a loss and that's fine.

Again, it helps more transactions happen because people feel safer and they feel like they're taken care of. So that's an area where hosts are benefited.

We've had scenarios where a renter, they'll say, oh, I was charged for this, but I don't want to pay that. Because they decide to move out and they try to get a bunch of months back or something like that. And we take a look at it and they may say, oh, I'm going to give everyone a bad review or something.

And we just look at like what's just? And if your items were in a space, you should pay for that space. And so we're always going to come down on what's just. So that is going to benefit the host and not benefit the renter. Whereas if a host says, I want to jack the price on our renter, again, we come down on the side of what's just. Well, what's just is you should have to tell the renter that you're planning to jack prices on them and they should have to acknowledge that. And so that comes down on the side of the renter.

So again we don't really care about renter or host. We care about what's just, because ultimately that's going to be the most in our favor over the long term if everyone can trust that our platform is just going to be the safe place to interact and that no party, whether the host or the renter, is ever going to be able to take advantage of it. They're all going to have to transact in a very honest, straightforward manner that's going to invite more and more people. And it has! I mean that's the reason we're the only storage provider in the country that operates in every city in all 50 states.

Seth: Yeah that's an interesting thing, coming down on what's just, because what's just kind of depends on who you are and what's in your best interests and it's kind of presupposing this moral standard but it's like whose moral standard? Who gets to decide that?

But I hear what you're saying, though. I mean I think 98% of the time it's obvious.

Joseph: This is going to get existential real fast. We need to get into absolute versus relative truth. This is going to be a philosophy podcast pretty quickly here.

Seth: Yeah well it's truth. I mean everybody has a moral standard. It's just a question of where is that coming from? Is there an objective basis for that or is that just kind of am I using society or is it just my feelings this morning or where does that come from?

So anyway it's kind of interesting.

Joseph: I'm a big believer in absolute truth.

Seth: I am too. Glad to hear that. Not everybody is. So anytime somebody says they don't believe in absolute truth I'm like are you absolutely sure about that?

So I'm wondering are there any particular kinds of markets where this makes the most sense? Say I have a spare garage but I live in the middle of Brooklyn or I live way out in the middle of nowhere. Does the current supply of storage have something to do with that or the population? I have a feeling your answer is going to be, “Yeah I can work anywhere.” And I'm just curious if I was going to go out of my way to build three extra sheds in my backyard for this purpose what would I want to see in the market to make sure yeah this is probably a good idea.

Joseph” Certainly the markets where we have… well I'll just say what you just said. And that is we have users getting rented everywhere. We have users in cities that are like 2,000 people. They don't even have a post office where they've signed up space. And it has gotten rented through Neighbor because those areas are kind of neglected by traditional self-storage operators because there's not a big enough market to justify an investment. And so these individual guys can take advantage and get rented.

Hands down, though, where we have the most excess demand, we… Actually on Neighbor, we're a supply-constrained marketplace. We have millions of renters that come to our site every year that go unserviced. Meaning like we just don't have enough space for them. Even us with all this crowdsourced, like we need more supply in the United States. I think anyone who's spent any time in the storage industry has realized this reality. It's severely undersupplied.

So hands down where we're going to have the most excess demand is going to be top 25 CBSAs [core-based statistical area) in the country. So many people in such a dense area, it's just impossible to build as much.

So oftentimes when investors are coming to us and we're setting them up with our account executive team that will walk investors through, help them purchase in the right locations and stuff like that, we'll help them see that some of the biggest return opportunities are in these major cities.

Seth: Could I sublease space for this? Like say if I was renting, I don't know, an office somewhere and all of a sudden I don't need that space anymore, but I'm going to lease it to somebody else. Is that something people do?

Joseph: Absolutely. And in most cases this doesn't qualify as like a sublease. Obviously check with your attorney, don't take our word for it, but some contracts will have prohibitions on sublease. You can't sublease this space. Typically they're referring to having another person, another individual, sublease the space. If you're still the primary user of the space and you're just taking a portion of it and letting people store some items there, that's typically an allowable use for your space.

So it happens all the time. We have renters, we have many renters on our platform that have listed part of their space that they're renting on our platform and helps earn them money and helps pay their rent, right? We pay part of their rent for them.

Seth: And one interesting thing about this is based on everything I've heard you say, sounds like your property does not need to be zoned commercial in order to use it for this purpose. Whereas if you were actually running a storage facility, it would need to be. So it's kind of convenient that you don't really have to rezone your property just to use it for this purpose.

Joseph: It's very convenient and again, often comes down to primary use of the property. And that's why self-storage facilities have to deal with this as their primary use of self-storage.

But every municipality is different. So we do tell all of our users, make sure to check with your municipality because states tend to have similarities across states, but municipalities can get very different. You'll get some municipalities have a lot of authority to go one way or the other. And so it's always good to check with your municipality to see what local zoning is.

Seth: Now I know we've talked a little bit about the supply and demand and how your opinion is that this is not going to hurt a self-storage facility owner long-term.

But I'm just curious, let's pretend for a moment that you're wrong and this actually is going to totally screw up supply and demand, or it's just going to change things. Like Airbnb, it didn't destroy all hotels, but it did kind of change the landscape. I mean, there's just different options out there. And in some ways, hotels have kind of had to up their game to make it worth people's while to come there.

And I'm just wondering, as a self-storage facility owner who wants to stay competitive with Neighbor out there now, what do you think I need to, like, how can I up my game to make sure people want to come and rent for me instead of John Smith down the road who has a old barn to rent out. Is there anything I could do to stay relevant and stay attractive without having to lower my prices?

Joseph: Well, it comes back to a lot of these pain points that we identified. I think, if anything, Uber, when they disrupted the taxi and limo industries, taxis and limos in all of North America were doing around $5 billion in annual revenue. Uber today, just one company, does over $50 billion in gross bookings. Well over that.

So how did that happen, given that the entire North American taxi and limo industry was only doing five? And guess what? The entire North American taxi and limo industry, ten years later, 15 years later, still does almost five. So how did that happen? Uber provided a different service, a more convenient service, at a different price point than what taxis and limos were offering, and it expanded the market.

There's a famous guy, Bill Gurley, he's one of the partners at Benchmark, one of the early investors in Uber. He wrote a famous essay on the ability to attract new people, blue ocean, to the industry. And so I'll start with that and say we view ourselves as doing something very similar. Storage is a much larger market. Instead of $5 billion in North America, storage does $50 billion just in the U.S. in annual revenue. So just a huge, huge industry.

And we don't think we're going to contract that at all. We think we're going to expand it. We think we're going to open up the amount of people that feel like storage is now within their budget. And so we're generating new customers.

We did a survey early on. It's been several years, but we found that many of our customers had never used self-storage before, so they were entirely net new to the industry. So that's the first thing I'll say.

If there is one thing we're forcing, though, that I think you're seeing is just enhanced customer service. I think there was a belief in the industry before that you were going to get filled regardless, and you kind of do whatever to your customers, you didn't need to pay attention. Storage is famous for being super low OpEx. You don't need to do much.

Actually, one of our investors from Andreessen Horowitz, shortly after investing in Neighbor, we had told them about some of these stats on crime and other things like that, and he called me a few months after he invested. He said, I remember you presenting, and my son just called me, and he had a storage facility in SF San Francisco, and the storage facility got broken into. And he, of course, was super mad. So he marched down to the storage facility and he said, hey, all my items were stolen. You're going to replace them, right? And the storage facility was like, no, we don't cover that. Like you're on the hook.

And he was enraged and said something along the lines of, well, I'm never going to store at your place again. To which the operator responded something like, I've got a waiting list of 20 people for your unit. I don't care. Leave. I'll just call the next guy on the waiting list, and the unit will be filled tomorrow.

And so if there's one thing Neighbor’s bringing to the industry, I don't think it's much change in occupancy, but it is a little more focused on customer service and customer support and doing right by the customer.

You mentioned that it's becoming much more popular to offer some sort of property protection. I like to think that Neighbor is in part driving that trend because we offered early on, I mean, since the very beginning, since we first started out, we offered $25,000 in protection. Now we offer $50,000 in protection. We've been doing this for six or seven years now. And I like to think that over the years, that percentage of storage facilities that are really looking into offering this to their customers, they've realized it can actually drive revenue for their company.

So that's part of the adoption, but also part of it is it's, I think, becoming more expected because we've advertised this aspect so much. So I like to think of that as our impact.

And that's to answer your question, how you can compete in the marketplace is just be the storage facility that's not just profit-motivated, but also cares about the customer and is willing to offer things like property protection, is willing to be transparent about price increases, things like that.

Seth: Yeah. And I know a lot of new storage facility owners. They'll look at very basic metrics, like how many square foot square feet per person are there in this area? And that kind of thing. And they may see something like Neighbor and be like, oh, all these new square feet are going to come to the market and saturate everything.

But it's so much more granular than that. Like, is it climate-controlled or not? Are they 5x10 units or 10x30 foot units? There's so many different kinds of storage. So whatever comes out of the market, understand what is that, what kind of customer is that serving, and how can I serve a different kind of customer if I need to?

Joseph: One customer type, that is typically a lower price per square foot. And so most storage facilities have kind of neglected it to build interior space, which makes a higher price per square foot. But RV and boat storage has been highly neglected. Again, it makes a lower price per square foot.

So there's a huge opportunity for those, especially in areas where RVs and boats are very popular, maybe close to national parks or lakes or things like that. It's a huge opportunity to build very custom solutions for them.

We actually have a large operator that's listed on our platform, a group called Rec Nation. They've listed their spaces through us, and we help fill them. They are entirely focused on RV and boat storage. I think it's really cool what they're doing and the vision that their CEO has had to focus entirely on that segment of the market that's been underutilized. And I want to say they've been able to raise over $500 million from investors to go deploy into this area. And they're offering a great service. I think they're being very successful.

Seth: Yeah, I know we're probably going to be looking at that when we expand to phase two of our facility. I don't know if we'll go that direction or not, but you're right. I mean, RV and boat storage is pretty severely neglected. And I think historically it's been because even though the cost per square foot to build that kind of storage is pretty cheap. In a lot of cases, the amount of rent you can charge for it doesn't justify the cost.

But I feel like that's changed a lot since the pandemic. A lot of people have boats and RVs that didn't have them before, and they don't want to park them in their own yard. And there's a huge need for that. So I think it is definitely worth looking at.

Well, I know you've been very gracious with your time, Joseph. One last question here as we wrap this up. So I know whenever a company like Airbnb or Uber gets huge and adopted by the masses, inevitably you start to see news articles that talk about horror stories on the platform. Like, I remember hearing about Airbnb owners who couldn't get rid of tenants who would like, squat in their property and that kind of thing.

I mean, I don't know if Neighbor has encountered that kind of thing yet, but what are some of the biggest, unexpected challenges that you've had in trying to create and run this kind of platform? Does anything weird like that happen, or do you anticipate any of those kinds of, I don't know, PR nightmare issues coming up or what do you think?

Joseph: Yeah, I count my blessings every day that we're in the business of storing items and not in the business of storing people, as we like to refer to Airbnb, they're in the business of storing people. Uber is in the business of transporting people. And anytime you deal with people, the regulatory scrutiny goes way up and you have all these restrictions, these kind of tenant laws to deal with.

Storage is much, much more simple. In the vast majority of states, within a 60-day period of non-payment, you can have a renter out of the unit. There's no sort of kind of long-term squatter stuff like you talked about that Airbnb has to deal with. You don't have to deal with a lot of the tax burden, the room and board tax.

So I definitely count my blessings every day that we're in storage and not hospitality. That's a nightmare of a world with a lot of liability involved. For our business, what's been unexpected to have to encounter most things are just fairly straightforward that you'd expect in the storage industry. Like, a tenant stops paying, and so you have to deal with a tenant that's no longer paying for their unit. Or a renter's items get damaged in some way.

And those are things that's why we exist, right? That's why we are able to have a company, is because those things happen and because we're able to provide things that make them better.

So nothing crazy yet. I wish I had a better soundbite for you.

Seth: No, I mean, that lack of controversy and lack of drama and lack of excitement is why a lot of people get into self-storage. Just because you're right.

I mean, you're not storing if the people aren't living there in the property and if it's boring, that's ultimately a good thing as an investor.

Joseph: Yeah, we do occasionally and we'll filter these out, we'll occasionally have individuals come under our platform and they'll say, hey, can I live in this space? And we strictly prohibit that. Even if a host was willing, even if a host said, yeah, we don't allow that to take place on our platform for those very reasons. We're just not interested in ever dealing with any of the rules and regulations around living.

Seth: Yeah, that makes sense. So, Joseph, thank you so much for spending your time here with me. I know it's been fascinating. I think it's an amazing thing that you're doing. The app is very well made.

If anybody out there wants to give it a retipster.com/neighbor, I'll have links to that and a lot of other stuff we talked about in the show notes for this episode, retipster.com/169.

And I'm really excited to see where this goes. I mean, it's just a brilliant idea, and I'm shocked nobody else has done it yet, but maybe it's that whole thing of an idea is only worth so much as it's multiplied by action. Like, there are lots of great ideas out there that never get anywhere because nobody will do anything about it.

But this is one of those things where the idea was there and the action was there and look what we have now. It's pretty cool. Thanks again, Joseph. Appreciate it.

Joseph: Thank you, Seth.

Seth: Yeah, absolutely. I'm excited to keep an eye on Neighbor and see where it goes.

Seth: Hey, everybody, how's it going? This is Seth Williams and you are listening to the REtipster podcast. Today, I have the good fortune of talking with AJ Osborne, who's the CEO of Cedar Creek Capital.

Now if you're not into self-storage investing, you may not realize who this guy is, but I can tell you, as someone who has been deeply immersed in this business over the past year, this guy has become a pretty well-known figure in this industry because he runs an annual event. He's a pretty big-time investor himself. He puts a ton of really good videos out there on YouTube. He does a ton of stuff in the self-storage space.

AJ founded his private equity firm, Cedar Creek Capital, because he wanted others to benefit from the same financial freedom that saved his family at a time when they needed security the most. And he's been featured on top real estate podcasts and kind of like the go-to resource for self-storage investing.

AJ, welcome to the show. How you doing?

AJ: Doing great, man. Thank you. Appreciate you having me on.

Seth: Yeah, absolutely. Aside from what I just said there, who is AJ Osborne? What's your story? How did you get into real estate? How did you get into self-storage investing? Tell us your story.

AJ: Real estate. I think anybody that's interested in business and money and entrepreneurship, all that, real estate is always there. It's always in their mind as an option. I think most people recognize that it's the most consistent, safest way to create wealth and income. I think that's a generally accepted thing.

When I got started in life, I followed in my father's footsteps selling insurance, and that's what we did. We sold insurance. And the reason why we sold insurance, and the reason why I wanted to, my father grew up in extreme poverty. He grew up like they didn't have running water. They didn't have a bathroom. They had an outhouse in the high desert of Southern Idaho, and would have to walk to it when it was 20 degrees below zero.

And my dad's not that old. We're not talking about the Depression, everybody. That's not what we're talking, we're talking like 70s. When you look at his position where he was, he needed something to do to get him out of his situation, and he was determined to do that. His brothers and sisters, unfortunately, did not. They became drug addicts and they've all since passed homeless as a lot of people in that situation do.

He met my mother and started selling insurance and pulled himself out of poverty through that. And I think for me, he was able to take control of his life by selling insurance because he was in control of the income that he would make. I think it's the uniform idea that draws people into sales. I control my income. If I want to make more, I'll sell more. I'm in control of my time. And I think there's just so much to that. I wanted to be my own boss. I got paid on commissions. My clients paid me.

In my adult or career life, I never had a standardized paycheck. I worked right out of college for Aflac, where I was there, for lack of a better word, a secretary that just kind of sat at the front. And I would process claims as people emailed in. I was the worst they'd ever had. And they told me, they're like, “AJ, you are by far the worst person we've ever had at this job. And I'm sorry, but this isn't working out, but our clients love you, so we're actually going to have you try to be more in a sales role.”

I just kind of went down that road, followed in my dad's footsteps, and sold insurance. And I quickly learned, I made money. I made good money. I had a knack for it because I think I'm hardheaded and I just don't stop or give up.

But what I thought was financial freedom, what I thought was something that would create wealth and income, actually turned out to be not true. Instead of not having one boss, I ended up having lots of bosses. And my income, although it had unlimited potential, it also was not stable. And so, it would go up and down. My wife and I had to live on a fraction of our income. We saved everything.

And reading about successful people that were huge, like billionaires, things like that, it was clear that their time wasn't connected to their money. And so, the idea of real estate was simply to not have my time connected to my earning potential anymore. Whereas in sales, it was directly correlated. The moment I stopped working was the moment I stopped making money. And that was when I'm looking at like most of us do, more than even just ourselves. When I was looking at my family, when I was looking at everything else, it's like “How do I take care of everybody? How do I do this? How do I take care of my parents? How do I take care of this? Because if he stops working, he stops making his money.”

I think the simple principle that I found out is in order to grow wealth and income, you really have to compound your money. And in order to compound your money, you need stable revenue sources and you need to have a known rate of return that you could repeat over and over and over again. And that stable revenue source couldn't be connected with your time. That's it, really. That's it.

The only things that you play with at all to compound wealth and grow is your return, meaning the input, the money coming in. And then the density or volume at which how many times you can regenerate that return. So, how many times can I buy that source to repeat that income and in what timeframe?

And that's it. Those three things are pretty much all that it takes.

And when you look at people like Warren Buffet, when you look at people that created immensely successful businesses, whether it was Apple or whatnot, there was volume and magnitude. You either sold a ton of widgets and your machine was always selling them, or you sold things that were really, really expensive. And it is usually a combination of the two, and you got volume and magnitude.

I looked at that and it became clear, I'm never going to get off this. And that's when my position really became, it was like a treadmill. And that's how I viewed it. I viewed it and I was working with my dad, like, we're on a treadmill here. We make good money. So, I guess you could say selling insurance made us rich, but just like anybody with a high-paying W2, it was solely dependent on that. Sometimes you made more money, sometimes you made less money. It wasn't consistent like a W-2.

So, real estate became our avenue to escape the treadmill, as I called it. And we wanted tax benefits. We wanted recurring income, and we wanted there to be light at the end of the tunnel that we could get off this treadmill. And so, we started investing in real estate.

But the real estate to me, I actually didn't like. I know I shouldn't be saying that, but when I started out, I didn't like real estate at all. The reason being was I looked at the amount of money that I needed and the return I was going to get, because being a sales guy, everything was cash flow. We didn't focus on anything but cash flow.

Looking at saying, “I'm going to pay this and I'm going to get this in return,” it was like, “Wow, that seems like a really inefficient use of my money.” And the cash is just not meaningful at all, not realizing the whole rest of it.

So, I love the piece of business where I could affect the income. I'm going from a place where it's like “I have total control over my income,” then going to investing in real estate “I have no control over the income to raise it.” Now it's totally not correlated with my time. But at the same time, I was like, “I can't really do anything to build this up.”

And we found storage. And storage seemed like it was a mix between the two. This is prior to 2008. My father actually bought the first little storage facility with him and a partner because of trying to do something. And it was out in a small town in Idaho. I was actually looking at multi-family and some other assets. And he's like, “Look at this.” And we thought, “Okay, well, maybe we can get some cash flow from this.”

But the big thing was I looked at it and said, “This isn't a real estate asset, it's a business. I can actually control the revenue in it.” And so, from there, we just started buying up these small little storage facilities, which we were looking at. And the whole design behind it was they'd be paid off and they'd be giving us cash flow.

We quickly learned that we could affect the income a lot more than we thought. And so, we kept buying it and thought, “Hey, this is our way off our treadmill.” This is the way that we can do it and win basically where we can not have our cake and eat it too.

And as I went forward, we started to get a lot of assets. We started being successful. I was actually running the branch location here in Idaho for a huge $40 billion company out of Chicago. And I had golden handcuffs. They paid me really, really good then at the time. And then I had my storage and I was just like, “I'm winning at life.” It's just kind of thing like, “This is the top of the game.”

And it was at that point, as it usually is, the game ended. I became paralyzed overnight, essentially a quadriplegic, not essentially a quadriplegic. I was paralyzed from the eyes down and I was put on life support.

Seth: Wow.

AJ: And I couldn't speak, eat nothing. And I was fired.

Seth: How did that happen?

AJ: It is something that is called Guillain-Barre. It's a trigger. And what happens is your white blood cells, for some reason, the trigger, there are different triggers that your white blood cells get confused. And they thought my nervous system, my central nervous system was the threat, was the virus. So, my body got scared, and produced a hundred times the white blood cells that are normal. And it tore my central nervous system apart. It destroyed it. And so, it severed my brain from my body, essentially.

Seth: That's insane.

AJ: And it happened within, literally, it was like one minute I was fine. My legs were hurting. The next minute my legs stopped working. And then I didn't even say goodbye to the kids, went to the hospital. And within two, three days, whatever it was, I was being put on life support because my whole body had stopped functioning. And then I was paralyzed from the eyes down. They put me in a coma. When I came out, I was hooked to life support.

Seth: That's terrifying.

AJ: It was pretty crazy. We just had our fourth child. And from there, at that point, I was fired from my job in the hospital. There was no exit date for me in the hospital. We didn't know what would happen or how anything would occur. So, I was fired from the hospital. And after months on end, I finally went from hospital-to-hospital rehab facilities. And then I went home paralyzed to hang out at home.

And when I was sitting in the hospital, I wasn't worried about losing my house. I wasn't worried about anything like that because my real estate was paying for my family to live. Even though I'd lost my high-paying job, I was okay. I could still take care of my family. I could still live. My wife didn't have to leave our four children and now a paralyzed husband to go get a job. And I thought, “This is really important. This is really impactful.”

And so, at that time that I made a promise, I was like, “Hey, I'm going to teach others about this and how to do this, and then I'm going to let other people come along with me to achieve the same thing.” And that's when I started the private equity firm to allow other people to invest alongside us as we bought real estate, hold for the long term so other people could participate in that financial independence that I had.

And that became my “why.” That became my purpose. We didn't know if I would ever walk again or if I'd ever recover. And so, I started working and started my private firm out of a wheelchair. And we just started moving forward. And that's really what I've been doing for the last five-plus years.

I should have probably quit my job prior and done this and started a long time ago. But I'm so fortunate and we've been through so much in our real estate investing experience from the Great Recession to owning, operating through it, owning other businesses. I owned everything from tech companies in the self-storage space, property management system, companies to co-founding that as well as co-founding the largest, self-storage co-op.

So, we don't consider ourselves a fully integrated firm. We consider ourselves a universally integrated firm. It's not just we're fully integrated, like we do the management stuff. We actually own the infrastructure in the industry, and we dumped millions into that stuff so we could perform better at what we do. So, we became, and our goal was to try to build out the industry, build out our company, and allow others to participate. And so, yeah, that's what I do.

Seth: Man, that's a lot. You covered a lot there.

AJ: Yeah, it is a lot.

Seth: How long did it take for you to fully recover and how did you recover?

AJ: I still have to take pain meds every day, all day. My nerves were destroyed. I still have problems walking. I still have to think every time I take a step. I don't have full functionality over my lower legs, but I am out of my leg braces and I don't need walking support, which was more than we thought.

And I was told I would never get out of my leg braces or my walking help and being able to walk alone. And at that point I left the hospital center, so I never went back. After they told me that, I said I'd been going to rehab for years, I was like, well then, no reason for me to be here if you don't even think that I can come back for it. But really, how you come back, there is no medicine, there is no cure. It's just they hope your body will work on your nerves and build them back.

And Guillain-Barre normally has a really good outcome. The vast majority of people that get Guillain-Barre, it's like they get weakness in their legs, things like that. I was in the top percentile. You could say I won the lottery when it came to that. I was as bad as it gets. We got to a point where it was like, we don't know if he's coming off tubes.

The odds of me recovering even to where I am at, not only was it not looking great, it was not something that was expected by us. And we just had to learn really early on. When I was in the hospital, I thought, “Listen, I'm either going to become AJ, the guy in the wheelchair, or I'm going to become AJ something else.” And I meant not AJ, the wheelchair, like being in the wheelchair was the bad thing. I actually didn't mind if I was in the wheelchair. It meant more to me of that's who I became, as the wheelchair. Or I was AJ something else, even if I was in a wheelchair.

I had to kind of make that decision and had to say, “Is this who I am now? Does this define me? Is this going to be, “Yeah, AJ's a paralyzed guy. He sits at home and luckily, he has income off it, and it's what he does. He hangs out with his kids and things like that?” Which, not that I don't like hanging out with my kids or anything else, not even though that it's bad, that's just not what I wanted with my life.

And I wanted to try to show my kids that it doesn't matter how bad the situation is, you can be more and you can be better from it. And I knew that if I didn't do it, how would I ever tell my children that? I had some friends that had become quadriplegics and they came to me and they weren't my friends first, but I was in the hospital on Christmas Eve and I had one of my good friends, he's a quadriplegic. He came saying Christmas carols to me in the hospital on Christmas Eve, because when he became a quadriplegic, he was like, I never want to let anybody else stay right in the hospital on Christmas Eve. And he was paralyzed twice. Crazy story.

But he's completely confined to a wheelchair and still today and has not a lot of use of his arms. And he was the definition of that. He has non-profits. He's so much more, and honestly, he probably does more and is more than he ever would've been before. And I was like, that's what I want to be. I want to be more in the situation, not less because of it. But that's a personal choice we all have to make, no matter how big or small the situation is.

Seth: Do you think that the paralysis experience was kind of like a gift in disguise?

AJ: I'm better because of it. People are like, “Are you mad at God? Are you mad at anything?” I'm like, “What? Why would I be?” I guess I'm not so egotistical to think that those things should happen to other people and not me first of all. I was young. I was 33. My thirties, which are almost over now, were essentially taken away in a large format for me.

I was a big bag packer and a big fly fisherman. I was a big outdoors guy and that identity part of me, it was taken away. I lost one of my highlights, my youthful time where I'm supposed to be youthful and I'm finally making money. I have a wife and kids and the world has changed. And so, I turned and said, “I'm going to make my thirties in a different way.”

I think a lot of people, we have a lot of reasons to be mad. We have a lot of reasons to make excuses. We either make a choice too or not, no matter what situation you're in. And that doesn't mean I was always happy. No, no. It's a great story, but it was hell.

Seth: Yeah, I'm sure.

AJ: Literally, I just lied on a bed and people would roll me over on my side as I looked at the wall, as people would wash me down. I couldn't speak. I got home, my brother had to move in with me and help take care of me and my wife and the kids and he would have to carry me. And when you see your kids and you're just like, “I was your hero. I was this big giant type of person and then now I'm whittled down to asking them to help me to do things because I'm stuck in a bed.”

I think we hear those stories and a lot of people are like, “Man, if I had something like that, that would get going.” It's not what you think it is. I'm really happy with where I'm at and the challenges and everything else, but it's not fun. It wasn't easy. And although I say I wouldn't ever change it, obviously. I don't ever wish for it or anything else, but I do believe that I'm better off for it. And I do believe my family's better off for it. I believe my children, my wife, I believe that I have a better business and I think I’m just an overall better person for it.

I never want to lose those gifts, ever. They're so important to me because those gifts became my gifts regardless of my situation. And they were gifts that I created. And that is the biggest lesson I think that I could ever have, was that I can have these things and these gifts regardless of my situation. And I never want to lose that. And that's hard because even as I got better, even now, we all fall back into old ways and I got to remind myself that's not that important. Remember, when you get down on yourself and you start to think about it or anything, “Hold on here, come on, we got to put this into perspective.” And I hope I don't lose those.

Seth: Yeah. We haven't really gotten into it that much yet, but I wonder if Cedar Creek Capital would exist today if that hadn't happened. Think of all the strength you have as a result of going through that trauma in your life.

AJ: Yeah, it probably wouldn't at all.

Seth: I think a lot of people have probably, say if it's something much more minor, say if you're stuck in a job you don't like and you decide to go do something on your own. You wouldn't do that if you didn't have that discontent and that struggle and that friction with something that you're not enjoying. And if you do have a job you like, I guess that's awesome.

AJ: And two, you bring up a really good point. When I talk to people who are like, “Oh, I shouldn't complain. Oh, I got a divorce but I shouldn't have complained,” kind of thing. And I'm like, “Hold on here. There are always two sides to this coin.” Although I physically had this happen and everything, I had my family intact and I couldn't imagine what would've happened or my life would've been like without having the support of my wife and my family and my kids. Actually, to me, that sounds way worse because how much I had to have that at that time.

There are always two sides to the coin. And just because somebody else thinks that what they're going through is smaller or not, that's just not how it works. And two, our brain doesn't distinguish things like that. So, if you're struggling with something that's really bad and devastating in your life, like a divorce or something else like that, it's not like your brain is like, “Okay, well, we have a skill of bad here.” No, it's just bad. And so, when I was in at the worst, I don't know that I thought that it would've been worse in another situation. I think that's really important for people to remember.

So, the way that we approach any problem is the way we approach all problems. And that is universally true, I believe. And so, all those difficult things in our lives, they can be motives. Your boss yells at you at work and makes you embarrassed in front of everybody. That could be the motive for you to do something that you want and to take that and make that into something else. And make that into more. I think that's really important

Seth: On that whole thing about the financial security and having recurring income that kind of saved you in that crisis. It makes me wonder do you think, is there ever financial security if your income isn't recurring, permanent, and dependable? You can make millions from something that requires your active involvement, but if it's not recurring, it's not going to last ultimately, right? I don’t know. What do you think about that?

AJ: A hundred percent. I learned very quickly there's a big difference between being rich and being wealthy. And rich people, they are at the highest risk of losing it all. And the millionaire status is the most volatile social class there is. So, more people come in and out of the millionaire status than any other social class.

And when you look at the financial support and financially rich people, they make a lot of money and they can spend a lot of money. They usually have lots of nice things. And wealthy people, they don't have to work for their money. And then you have what I'd consider the super wealthy, which means they're rich and wealthy means they make lots of money and it's all non-correlated with their time and support.

That's kind of the end goal. You're like, “I want to make lots and lots of money, but it also needs wealth.” But too often, I think we default to making a lot of money, having the nice things to securing the income, because you pay upfront for income security on the back end. That's just an economic reality.

And so, people that make lots of income, they're usually actually at risk of losing their standing the most because if something happens, where do they have to come back from? The distance is huge. If you're a doctor that works with his hands and you make $400,000 or $500,000 a year and you break your hand, what are you going to do to make $400,000 or $500,000 a year? Your whole entire lifestyle, your whole entire life just got uprooted and can disappear in an instant. Unless that income is not tied to your time, it’s diversified and is backed by real assets that are stable and not at risk.

Yeah, I don't think there is a lot of income security. It didn't matter how good I was at my job, my income stopped. I could have been the best in the world. It didn't matter. It was over and I was 33. So, it's not like, “Oh, this is something for you to worry about.”

I like to say everyone has to retire. That is a universal fact. At some point, you will no longer be able to work to earn an age. That is guaranteed. At some point, you will lose your income. So, you would think that more people would put all their effort and stress into understanding, finding ways to prepare, and have that retirement. But that's usually not something anybody thinks about until their 40s, sometimes 50s.

And because of the way that stable income works, it doesn't work like, “Oh, I'm going to do this now and receive this income.” There is this tail end to it. Time is a big factor when you're talking about true stable income and wealth. So, people that start in their 20s, it's not the same as if you started in your 20s and your 40s. Now it doesn't mean that it's not possible, of course it's possible, but your strategy has to change and you need to do things differently. So, it should pretty much be like the goal or at the foremost goal of everyone because it is a 100% certainty.

Seth: Yeah. And not to mention, you've probably met people like this too. I've met so many people with jobs who make a really good income, whether they're lawyers or doctors or bankers and a lot of them, they want to get out. They don't like it. They're making a great income. It's like if they could quit tomorrow, they would absolutely do that in a heartbeat. So, just knowing that so many people want to get there, it's like, you might as well get to work on that. Do what you have to do so you don't have to work anymore.

AJ: Exactly. A hundred percent. I don't think I've ever met a professional that said, and a lot of people think, “Oh well, if I were making a lot, lot of money, then all my problems would be solved.” That is not how it works. I've never met a working professional that makes six figures plus that was like, “Yes, I never want to stop ever working. I don't want there ever to be an exit here doing this one thing that I'm doing.”

I don't believe in retirement from the standpoint of meaning, I don't believe people are ever designed to retire, but the functionality of how we make our income, that's what we're talking about. So, I'll never retire, I'll always be investing, but I can do that because it's not tied to my time. Now, anybody, any working professional doesn't believe that their income will last forever. And they don't believe, it's like, “I'm done. It's over. I'm good.”

So, when you look at people, whether you're making $30,000 a year or $300,000 a year, at the end, their concerns are all still the same. They really are. Now I know someone that's making $30,000 a year hearing that saying, “Hold on, it is not the same.”

And I get that reaction because it's true. You aren't the same as far as your life that you live or your worries or your concerns. You're worried about making payments. You're worried about literally having money in the bank account to do the bare necessities. What I mean by that, and I'm not at all trying to say that their concerns or struggles are the same, it's just that everyone is working toward a goal or everyone's thinking about a goal. Most people just don't understand what that goal is or how to get there.

And that's one of the biggest problems that we have in the United States. Most educated people are financially illiterate. And the two, lots of times I find that the more financially you are paid for your jobs, things like that, generally they are more financially illiterate because they haven't been looking for solutions or trying to understand it. And so, there's no pressure for them to do it. So, they're not really looking.

Where a lot of people that are making less, lower middle class or even more of an upper middle class, they're looking and they're trying to understand and they're seeking for knowledge to increase their position. And I think that there's a huge advantage doing that because you can do it right. I know lots of people that are in their 60s that are dentists, doctors, they can't retire. They just barely paid off their medical bills.

Seth: Wow. That's crazy.

AJ: Yeah, it's crazy. Literally. I know somebody who is 55 celebrating paying off their education, their medical bills. And I'm like, “What? It took you your whole life to get to that point and you're a high-paid individual.” So, it's a universal concept.

Seth: I'll have to go get some antidepressants after hearing that. That's really sad.

AJ: Well, hopefully kicks us all into motion, right?

Seth: Yeah, exactly. Exactly. So, you mentioned in passing, did you say you own a co-op and property management software?

AJ: Yeah.

Seth: Did I hear you right?

AJ: That's right.

Seth: Which ones are those?

AJ: We have store local.

Seth: Yeah, I'm familiar with that.

AJ: Which is a self-storage co-op. The reason why a store local was built, why we co-founded it, was because of the need for independent operators and people that wanted to get into storage. We wanted the competitive advantage and landscape to be universal. Meaning the big companies that come in, we didn't want to end up like the hotel industry where five brands own the whole entire market. We wanted independent owners and operators to compete at the same level. And so, the co-op allows people to get there by services and get everything at the level of the biggest companies. So, it creates a situation where their competitive advantage is higher.

And then the tech company is a property management system and that is called Tenant Inc, the product of Hummingbird. That property management system is an open-source system. Once again, we're trying to create an ecosystem in which independent operators can operate like REITs. And it was very clear that that was impossible without the tech playing into it. We didn't have options so we had to create options for the storage operators and owners. And that's where the tech company came from. Yeah, both of those things.

When I look at real estate, there's two parts to real estate. Most people focus on the market, meaning the market makes you that disconnect between their time and their money means they fully rely upon the market. I focus on returns that are driven from our actions, not the market. And so, we focus and pour a lot of money into things that would generate power for us to affect the returns of our assets.

Whereas most people just pour their money simply into the assets. We poured it into the ability to operate the assets at a higher level. That made us more proficient, that made us understand opportunities better and take action on those opportunities. And we did that and created that so everybody can use it. It's one of our missions.

Seth: To the listeners out there, AJ did not tell me to say this, but I've actually got a little reminder in my calendar to join store local and I've been on demos with I think seven different self-storage property management software companies. I've spent many, many, many hours now trying to find the best one for my new facility because I know it's a really big decision. It affects every single day.

And Tenant Inc is by far the best one I've seen so far, by a long shot. And I think the problem with that whole software realm in the storage business is that a lot of them are terrible. They're just really bad systems or they're antiquated. And I think the reason that happens is because first of all, there's kind of a monopoly going on, but also a lot of them are sort of made to trap you. Once you get into their system, it's very hard to leave. It's a huge hassle. So even if you know it's terrible and you know you're overpaying, switching and jumping ship is not an easy thing to do.

I don't know how big Tenant Inc is in terms of market share right now, but I have to imagine just based on what I saw, if people could, people would be going over there in droves because it's way better. The user interface is very clean. It's easy to use, it's easier to understand. The websites look great. I'm planning to sign up with you guys.

AJ: The thing that we look at in the industry is, when you look at property management systems, let's take self-storage for example. They were built by tech guys. And the tech guys built it to own the revenues coming in from the subscriptions and their data. So, your data, the intellectual property that they had is part of the intrinsic value of the company. So, it was never open and never shared. And it was tech people.

The other operators like Extra Space and the big REITs, they built their systems for their companies and for storage. So, they perform astronomically better. Tenant was built by storage people. We built it for storage operators, owners. We all came together, we funded it and then we hired tech people to build what we needed in storage.

And that simple difference makes all the difference. Having it be open-ended allows us to do true automation. And things that help storage operators make more money, through increasing revenues, interfacing user customer experience, as well as limiting their overall cost. And so, when you look at it, this was built by operators for us. So, the owners are the end users and that is a very different setup than anything that exists.

Seth: And that does make a huge difference. I know the common feedback I hear from people using other software out there is, “This thing is terrible. It needs this feature and this feature.” And they'll tell the company and they just get ignored because the company doesn't care and they don't have to do it because the person is not going to leave.

AJ: Yeah. The first time we said, “Hey, we need our data on another property management system,” they said, “All right, you pay us $5,000 and we'll get you your data.” It's not usable, it's not anything else like that. But we needed it to switch. We literally had to pay that astronomical amount of money to get our own data to do what was best for our company. And it's like, “Oh, this is a racket and it's not made to benefit me.”

And that's the problem. We never wanted to start a tech company. It's not like we're like, “Oh, how can we make a ton of money?” That never occurred. It was literally because we were forced into it.

The co-op, we were trying all these large storage operators and small operators mean single operators, we were trying to get the companies to work with us and to build us out something that we could utilize in the way that we wanted. They just all said no, nobody would ever do it. So, then we were like, “Okay, well if we need this, I guess we got to do it ourselves.” But it was never designed to go, we never thought we wanted to own or start a tech company. That's not how it worked.

Seth: Yeah. Well, it makes sense that you'd be involved with this just given your size. Because I've had that same thought where it's like, “I wonder if I could build my own software, but I'm just not big enough and it doesn't make sense for me to do that.” But when somebody gets to your size, it's like, “No, it kind of does make sense because I'm big enough and I have the connections and other people could use it.” And so, I'm glad you jumped into that. It's a great idea.

AJ: Thanks. We're excited about it. Everything that we do is long-term. And I think that's one of the biggest things when you're looking at anybody in any industry, no matter what you go into, the more long term you are out, and the more long term that plan is, the solutions that you need change and they change pretty dramatically. And so, a lot of storage operators feel that way.

Seth: One thing I wanted to ask you about because I know you must have done this to some point. How do you form partnerships in the storage industry? What role do you personally play in the facilities that you own or have a part ownership interest in?

AJ: Yeah. When you're looking at partnerships, in general, real estate, everything else like that and in storage, there are a few things that you need to realize that the individual assets or industries may be sensitive to.

Storage is very sensitive to the operator. You can have two storage facilities on the same street. They could be next door and they will make different amounts of money. Exact same products. So, it's not like the market set the price of a two-bedroom, one-bathroom with this quality. And so, that is the price of that thing in this market. That's not how storage works. It is like a business. We do things like dynamic pricing, revenue management. We maximize this square footage through offerings.

I view storage and I teach in storage that the unit is a product. We are doing product market fit. So, when we look at our storage facility, we have 10 different types of units. They're 10 totally different products that have 10 different customers. We also have our add-ons, we have insurance, we have other products that we use. On one facility we may have what would be considered 20 sources of revenue. And then we may have our managers at that point and we are doing full-time marketing because of the short-term leases people are turning over. That gives a much larger component to more like a retail business, getting people in the door, working it on that end.

With that, storage is very dependent on the quality of operators that will be operating the business. And so, for us, we operate all our own assets. We don't do third-party management. We do not third-party management for anybody else. Our entire management company and system are predicated on our assets. My father and I built up over $100 million, $150 million in assets with just us, no investors. And our management company was predicated on that. Why? Because we had no third-party management options when we got started. So, we were forced into it.

Now, because of that, when we do partnerships, partnerships are based upon risk, work, and money. In real estate, that's what you got. And so, when we look at it, our partnerships are broken up into the fact that it's predicated on us operating and owning. Now we joint venture with people. We have investors that come into our deal. So, we generally have it set up as a general partnership with limited partners and we'll have co-GPs if we do like the joint venture partnership with an individual.

But we always are the ones that run the assets, meaning we have to be the operators or else we're generally not going to do it because our entire system of valuing it is predicated on our system. So, when we do our feasibility studies, when we're underwriting assets, the inputs that are coming into that are directly correlated with how we run the system. So, we're not guessing. It's like I know exactly the expenses, I know exactly the return on ad spend, I know what we have to do, I know how long it's going to take. All of that.

When we underwrite something, we know what we're trying to do and we have the tools and means to do it to execute it. Partnerships we do and utilize our technology like we're talking about to do it. We also have large technology pieces that do the revenue-generating piece.

We come in and we're going to be the operator. And then other people come in and they'll own it with us. So, we have equity splits, fee splits, and differences with that deal. And depending on it, we'll depend on how that deal works. So, if somebody brings us a deal that only they have and only can get, it's an off-market deal, they have a lot more say and power because they now hold the opportunity. And so, we're happy to do deals and we're happy to look and go with other people or they may bring in lots of money.

There's just a whole variety of the ways that the deals can be done and shaped. But we don't ever do deals that we're not managing. And I hold the risk on all our deals. So, I hold the debt, I hold everything. Our investors, they don't. And so yeah, it's a variety of different structures that is dependent on the deal and the parties involved.

Seth: So, you basically have your own management company that uses Tenant Inc products to manage everything. And this is over how many different facilities?

AJ: We have 2.5 million square feet across 10 states. We're in Washington, Oregon, Idaho, Nevada, Arizona, Oklahoma, Missouri. Through a whole bunch of these different states, that we own and operate. The amount of facilities, I think it's like 24, 25, something like that. Our average square foot per facility is 85,000 square feet. We've done everything from conversions. We've turned bankruptcy for Kmarts in storage facilities. We're currently doing an office building into a storage facility that we bought right when the coronavirus hit and all the markets were shutting down and the financial markets. We picked up an office building that everybody was scared of and in distress.

So, we were very strategic. We do ground up huge developments in strategic opportunities. But yeah, we're agnostic so much to the location as it is the opportunity. I don't ever want to trump. I want to be here. And that trumps the overall opportunity in returns that we would get.

Seth: Maybe we'll just pick on this Kmart deal. I know you've got a great YouTube video with Ryan Pineda kind of walking through that thing, which I thought was fascinating. A similar thing happened to a Kmart near where I live, so it's kind of cool seeing what happened from your end.

But for something like that, what portion do you personally own? And it sounds like you manage it. So, do you get a management fee for that too?

AJ: Generally speaking, 30%. How it works when you're dealing with partnerships in general who's doing what work gets the general fees associated with it. We take the ownership splits or generally we have it put in like this, it's 70/30, so the limited partners get 70%, we get 30%, but they're paid first. So, you have an 8% preferred return, and then they get paid their 70% and we get paid 30% of the profit left over.

We get a management fee, which the average management fee in the storage space is 10% to 15%. Now, a lot of management companies, they market that they're 5% or 6%, but they also take in the fees for everything else. They'll take signup fees. They take all the insurance premiums. And so, as a gross revenue component, they're 10% to 15%.

I don't like that at all because obviously the value of the property is predicated on the net income. So, if you have third-party management that is taking 15% to 10% of the gross revenue, then your value, because it's associated that's coming off the net profit, is astronomically hit because the value is leveraged and we express in the form of a cap rate.

So, to give you an idea, if you have a million-dollar property and are making $100,000, that's a 10% cap. Now, if I have a 5% cap on the exact same property, that's $2 million or it's $50,000 net income. So, you're talking about the moment you start taking away from the net income is the moment you start cratering the value.

So, for us, we do a 6% flat. We take no other fees, nothing else like that on it. And it's a percentage of gross revenue. If gross revenue goes up, we make money. If not, then we obviously don't. And that should be a component of the management company and we're very strong believers in that. So, we directly correlate our returns with the performance of the asset. And that's a big deal no matter who you're working with.

Seth: That 6% flat fee, that's the property management fee?

AJ: Property management.

Seth: Gotcha. Cool. It sounds like you and your dad grew, I don't know if it's relatively fast, but it seems fast when you talk about $150 million in assets even over a decade. That's huge. How did you do that? Starting from where you were in 2008 to where you are now, what was the secret sauce to make that happen? It's probably a very convoluted question or question and answer. What are your thoughts on that?

AJ: No, it's not. Let me walk you through it. It was a little complex on how we stumbled into it but the method is actually very simple. We started in 2000. My dad bought that little one first in 2004, then we bought our next one in 2005. And then we bought some small ones, rode through the recession, and then just kept going.

But because of our situation, we had to manage, because there was no third-party management available. So that meant when we bought them, we needed the revenue to pay for us and the management. But in order to grow our portfolio, we needed to do two things: we needed to get our money out and get it working again.

So, we couldn't have our money trapped in the assets, or that would kill our ability to grow. And so, if we sold it though, we would lose the income to pay for the management.

Our simple strategy was we are going to find underperforming assets, and then we are going to increase the revenue, refinance those assets, take all our money out plus profits. Use that now tax-free to buy another one while that asset is still paying us. And then we would buy another one that was underperforming. We'd turn around, refinance and do it over again.

So that meant we could compound our money without ever losing the original source and we could do it in a way that we didn't pay taxes on it. Now, we did that and that obviously worked very well.

Then we also started up businesses and selling businesses to try to get more capital to throw into the machine because it was working so well. We started brokerage firms and even after I got out of the hospital, I started another one, which built up and then just sold to try to get money into our system.

Now I learned very quickly that it's a whole lot easier to just partner with other people than starting businesses and trying to sell them to get the money. So, then we found out, “Well, you can do that just doing it with other people, using OPM - Other People's Money.” Then we still got our compounding nature. We could still get our capital moving. We didn't lose that at all, but we didn't have to go start a business and sell it to amplify it. Instead of amplifying it, we just had other people come along with us. And from there it obviously just exploded after we'd figured that out.

Seth: How did you find these deals or historically, what has been your best trick? Using direct mail? Are you just calling people up? Is it just a networking thing? Is it all the above?

AJ: Until last year, I'd never bought a deal on market. Until last year, last year was the first year we'd bought in deals on markets. We have a three-tiered approach. We work with brokers. Prior to that, we had a relationship with two brokers. One of them was the main broker. And he brought us the deals off-market. And he'd bring them to us, they were in these markets and everything. We were very clear on what we wanted.

So, we developed great relationships. We also developed relationships with storage facility owners. And it wasn't that we would go out and say, “Hey, sell me your storage facility.” No, we actually went and developed relationships, which paid off big time.

And after 2008, capital was tight, you couldn't give money and our money was tied up maybe in another deal or we didn't have it available to us. We did a lot of owner financing. So, then we brought in owners and had them seller-finance our deals, which allowed us to bring very little capital, if any, and didn't need bank financing and we could do that too. And that all came from our off-market nature.

Developing relationships with owners and brokers tie to networking. Then we'd go out and we would network, we'd be very involved with the industry, and then other people would bring us deals. And the networking, the organic searches, meaning we would identify a market that we wanted. I would find all these facilities in that market. I'd list what the best facilities in the market were predicated on their location, their size, and whether they were being poorly operated or not.

So, the best location with the perfect size for us that we wanted, that was being horribly run, would be number one on that city in our hit list. From there, I would go around and basically the top five we would try to hit, but I would go talk to all of them in that city and we would try to develop relationships, learn from them. And those resulted in acquisitions.

Seth: You said something interesting about how you develop relationships without actually asking to buy the facility.

AJ: Yes.

Seth: How did you do that? Because in my mind, that's the only way to start the conversation. What does this relationship look like if you're not just going right for the kill right away?

AJ: These owners are getting hit every single day, 10 times over mailers, emails, calls, people stopping by asking, “Hey, would you entertain selling your storage facility?” Because they've just got it all the time, that is the straight opening for them to say no.

It doesn't mean that they don't want to sell. It's not what they're saying. They're just saying, “No, I don't want to talk to you about this because you and everybody else, and no, I don't know who you are, so why would I talk to you about this?”

Instead, we develop relationships with the owners because they're in this market, they're in the industry. “Hi, my name's AJ Osborne. I'm in storage. I saw you were part of the statewide SSA. I'd love to take you out to lunch and talk to you about your facility, see what's going on in the market, what are your concerns, everything else.”

Now we're talking shop and we're talking about the industry. I'm trying to learn from them, “How'd you get your facility? What'd you do?” And then we have a professional relationship. And after that it may be like, “Well, you're a great person, you're a great guy in this market, you know it well, I'd love to enter in the market. So, if you know anybody in this market that'd be willing to sell, just keep me in touch.” I didn't ask him to sell me his facility ever, not once.

Now we're acquaintances. We know each other and he knows I'm in buying mode. And a lot of times that results in, “Well, I don't know anybody that's buying a facility, but if you're trying to move into this market, why don't you just buy mine?” “Well, alright, we can talk about that.” Or if not, he may give me some names, then I get to go talk to them. And then we keep in touch and keep in base. He knows I'm actively trying to buy. We know who he is. He knows ours. Then two, three years later calls us up, “Hey, we're having health problems, whatnot, I want to sell, you buy us.” That happens. So, we've bought people four years later that we'd talked to every single year and knew.

Seth: Yeah. Now that I hear you say that, it kind of sounds like a no-brainer. “Duh, just become friends with people and then they'll trust you,” and that kind of thing. But that's the thing most people won't do. They just don't want to put the time or the effort in. They're just like, “Nope, just give me what I want when I'm done.”

AJ: It's easy to do mailers because you pay somebody else to do an action that takes no time. And I'm not saying that mailers are bad, I'm just saying you should expect what you paid for. And in times like the last three years, those things worked. They just didn't work very good. And you got a certain type of seller because they know they can make a lot of money. They know the markets are good, things like that. When you have a relationship with somebody that changes everything. It changes your discussion. It changes why they're calling you. Because then they're like, “Well, I don't have to pay a broker. I already know you. You want to buy.”

We had one guy that we were talking to saying, “Hey, we're looking.” He's like, “Wait, why didn't you buy ours?” And I'm like, “How much would you sell it for?” And he is like, “Wouldn't sell it for anything less than $4 million.” We looked at them and said, “All right, $4 million.” First time we'd ever been to the site. He said, “Really?” We stuck in our hand, shipped the hand, and the deal was done. We sent over a purchasing sell agreement at $4 million and we bought the asset, and it was him. He's the one that asked us to buy it. And so, it's a little different, but it's meaningful when you're dealing in real estate.

Seth: Oh yeah, for sure. For sure. Wow. These brokers who would bring you off-market deals, do you have any idea how did they find those off-market deals?

AJ: Yes. The brokers that we worked with, and particularly the one, he had spent years developing relationships. He had a network of relationships with storage owners all over. He didn't work on volume, so it's not like he had a facility. It's funny, I'm buying a storage facility from him right now. It was never volume. It was always quality. He was an independent shop. All he did was storage, nothing else.

And so, he was an expert and I developed a relationship with him through our viewpoints and how we viewed the industry. First time I found him, first time we ever had lunch, I sat down and talked to him for three hours. And I didn't say, “So, you got any good deals?” I don't say that. I say, “What do you think about the market? Where're things going?” By the end of it, we thought about the same things. We discussed, how you come up with value? How's valuations done?

And so, as we developed that relationship, and as I understood more of him, he understood more of me. He knew what I wanted. I knew how he underwrote and valued. Then as deals came along, it was “AJ, I've got a deal that fits what you guys like and what you're doing.” And I knew he views the way that I do. So, the deals coming from him are going to be good quality deals.

And at the time it became, “Hey, why don't you take a look at this deal?” And then we would close on a deal. And he then knew if you guys say you're going to close, you're going to close. So, I'm not at risk and I have a really good buyer.

Then when he talked to owners and the owners were like, “I really don't want to go through this whole thing with sellers all coming to the property and I don't want to be jerked around anything else like that,” the broker would say I got a guy and if he likes your asset, he'll buy it. And if he says he's going to close, he's going to close and he won't put you under a contract if he's not going to buy it, he won't trick your time around. He's willing to pay a fair market price. He's not going to come nickel and dime you. So, if that's something you're willing to look at, let's just go to him. And they'd say, “Yeah, that'd be great. I can avoid all the mess.”

So, we're providing value to you and they're coming to us. And that's where I have this whole analogy that I call “Be the bear.” And the idea is that you have this fisherman who's running around on the banks of the river and he's trying to, I'm a fly fisherman, so he's trying to trick the fish into biting the lure. He's trying to get the fish, he's going over there, he's trying. And out of all the fish he's not doing a very good job and he's just trying to fool that one fish.

Where a bear walks over on a waterfall, sits down and sits there and the fish just jumps straight into his mouth and he eats and is happy. The idea is I want to be the bear. You sit on the path of opportunity and let the opportunity come to you. So, focus more on creating the conditions of opportunity than you do trying to force it. And you'll be a lot more successful.

Seth: Now, how often do you build new facilities versus just buying existing ones? And when I say build, I also mean converting like a Kmart into a climate controlled. How often is it just buying what's there versus starting something new?

AJ: Our primary mode is acquisitions, but generally, my rule of thumb is in a given year, the assets we're buying, 20% of them, we want to be billed developments. And we are uber-picky about developments. The reason why I like developments is acquisitions, you get what you get. And markets are the largest determining factor if you're going to be successful or not.

Self-storage is wholly predicated on demand. So, if I go find a market that's just an amazing market, and I know the asset will be successful, it doesn't mean somebody's going to sell me an asset. Then I want to mix our acquisitions with assets in premier markets that are just amazing and I want to diversify our portfolio and our overall end.

But when I'm looking at a development, I'm looking at three times cost to value. So, if it costs me $10 million, I want it to be worth almost $30 million when I'm done. And obviously, that means what you're putting down is way more because you're not putting down $10 million.

When we look at that, that really limits us. It really does. But the reason why is if it's achievable, that means the market is awesome. And so, I don't build to build. I have what I call my margin of stupidity. Warren Buffet has his margin of safety. The margin of stupidity is that the market is so good and the assets so good I can be stupid and I can do stupid things and we're still going to be successful. And that's really important to me.

And so, when we look at developments, we want the markets and we want the assets to be home runs to where we don't question the success, we only question how much. And that keeps us out of trouble and it creates diversified markets into really good assets and asset types.

Seth: Gotcha. Do you do all your own feasibility studies in-house or do you use a third party for that?

AJ: We do now. We have over 80 employees in-house and we do our underwriting, we do all our own feasibility studies. When I started, I paid for other people to do them. Now, people pay us to do them. They go to our site and they buy them, and we do it under the same way that we do our own. Yeah, we do them all internally at this point. But no, for years, we paid for somebody else to do them.

Seth: Yeah. I've always wondered when I see things like a Kmart, that's a lot of square footage that suddenly is new storage space on the market. Does that mean there has to be a severe lack of storage in that market to justify that? How long does that take to lease out when that suddenly hits the market?

AJ: I've never had a deal that took over eight months to lease out, but that's not normal. You should never expect that. Three years is what you should expect and you should do. And you're right, the biggest problem people have is they build in areas where they think there's demand because things are occupied. High occupancy doesn't mean high demand. That is just not true. They build in those markets and they find out, unfortunately, the hard way that there wasn't the demand we thought about.

And if you're not in a market that is really good and growing, some people they'll develop in markets where the demand is not there. And guess what? It's not going to be there. It may take years for the demand to ever get there, if at all. And that's the danger.

Seth: When you say things are occupied, do you mean storage is occupied or just buildings in general?

AJ: Storage. Just because you go to a market and the market's a hundred percent occupied doesn't mean there's high demand. And the reason is storage is cheap in a lot of markets. The demand equation is a three-dimensional one, but I'm just going to hit on two sides to understand.

The relationship between the price or the cost of the square footage and the square footage being occupied is a very delicate one. A lot of people have 100% occupancy, but their economic occupancy is like 80% or 70%, which means the rates aren't in reality what they think they are.

And two, frankly, the demand may not be. So, you're building at a price point that you think it is and it's not there. All of a sudden, the reason it's occupied is because they're charging so little. Somebody's like, “Ah, I don't care, sure, I'll use it.” But if you increase that five by five or that 10 by 10 from $60 to $90, nobody wants to rent anymore and they won't rent at that price point.

So, what you see as demand doesn't really reflect reality because you have 100% occupied and you're like, oh yeah, and they charge 10 by 10 for $100. Little do you know though that the owner, 50% of his occupancy only pays $50 and they won't pay $100. So, the occupancy is way, way less. And so, developers get trapped in that. They are fooled by the occupancy fallacy.

Seth: Yeah. So, how do you see through that then? How could you know if the people are actually paying $50 instead of $100? Can you know?

AJ: There are a few ways. You can find that out through acquisitions, but in general, what we look at is we look at the past. We look at the past and the past offerings. So, what was occupancy and what were the rates at that time, and then what happened when occupancies or prices went up?

The sensitivity of the relationship between prices and occupancy, that tells a lot. All of a sudden, we lifted prices and occupancy went down. We lowered prices and gave discounts and occupancy went back up. There's not a lot of demand, even though they're at 100% occupancy.

And we found this in places like the Midwest where you're like, “Okay, everything's occupied. They don’t have a lot of square footage.” So, we thought that there would be a lot of demand. And then what we found is why have prices never changed, even though you have really good operators here? And then we go and ask managers, “How is it getting rates up?” And then we'd find really good operators and the highest prices in town and they had the lowest occupancy.

And so, you're like, there's a direct correlation here to price and occupancy. And the more direct correlation between price and occupancy, the less the true demand really is.

Seth: So, there are places where you can go and find this historical data like what were prices three years ago and what was occupancy then? Is that stored somewhere? How

do you know that?

AJ: Yeah. There are a few ways you can do it. One of the biggest sites you have is Yardi and then a site called Radius Plus. And they'll usually look back and show you rates and pricings. Now the more rural market you get into, the less you're going to be able to find out any of this. And hence one of the reasons why there's more danger in rural markets.

So, if you're going to develop in a fourth-tier market, you're not going to have a lot of data. And not only not going to have a lot of data, the smaller the market is, the more sensitive it is to new square footage and the less the future is to do it. When you get into smaller markets, risk increases dramatically, very, very big. And that has a lot to do with the less amount you want.

If future demand is the next thing we look at and you say, “Okay, well, today's demand looks good, but there are 200,000 square feet of storage on the market.” And I have people that call us and they say “I'm doing this deal, it's awesome. They've never not been 100% full.” And we look at it and we say, “You're developing a hundred thousand square feet and there are 200,000 square feet in the market. How can you know that this market can take a 50% increase in supply?” I don't know that, and I don't think you can. I just don't think that.

So, if the market is going to get hit with 20-plus percent new supply, I start to really argue that you don't truly know if there is demand for it. No ordinary business would assume that they could increase supply by 20-plus percent and truly know if there's demand.

So, you look for the tighter square footage. The higher the square footage, the less of the impact of square footage gives you an idea of demand. So, if I'm looking at a market and I say, “I'm going to put 5% supply on the market and I can look at certain type units that we're going to put on there, they're all a hundred percent full. They've been getting rate increases every single year and they're not moving out,” then obviously, there's demand for them because there's not even the 5% gap that you're putting on the market. That's not even inexistent.

So, there is demand for it. Make sense?

Seth: I think so, yeah. How often have you seen facilities that basically made this mistake, built a new facility and they shouldn't have, and there's not enough demand, and as a result, they go out of business? Does that happen often or do they just find ways to just float it until it does fill up?

AJ: Yeah, a lot of people just find ways to float it. They lose money in it. What's happened over the last five years, you've had the largest increase in demand for self-storage ever seen.

So, to give you an example, last three years, the average occupancy for self-storage in the United States was 96%. In the history of self-storage, the next highest point ever averaged was 86%.

Seth: Wow.

AJ: So, all of a sudden in an environment like that, the market is bailing out bad players and it's bailing out people that made stupid decisions. And that's why when I look at it, the real estate market in general, the risk I see is that people didn't learn because they didn't have a situation in which they learned.

Now, in 2008, that wasn't the case. In 2008, if you built a storage facility, you were going under. I bought a lot of people that were going under because there was no demand. We bought facilities that had 20% occupancy. And their 20% occupancy was 50% below market rates.

When markets are propped up by the federal government printing trillions of dollars, so it's totally not normal, then you don't have a lot of people failing. But it's important to remember that's not normal. And right now, we are seeing people not struggling to fill up, and we are receiving calls because people are moving into permanent loans out of their construction loans and they want to sell it off before they go into perm loans. They're not filling up and they have to move into higher debt. So, we're now going to see a lot of that.

Seth: Do you think self-storage is safer or risky right now just given where it's been and where it seems to be headed?

AJ: Yes. What I mean by that is self-storage is coming off the all-time high of all-time highs. If you don't expect self-storage to do what it did in the last three years, then you expect a normal market cycle. And if you're in a market that didn't double its square footage or didn't have a 30% increase of square footage in the last three years, and that square footage is not predicated on growth, then you're okay.

And it's very safe. You've got good margins. You should be underwriting at sustainable levels like occupancy at 85%, 86%, not at over 90%, which has never existed on average. And you should be looking at markets that have been tight all along and have had little impact on new square footage. So, it really comes down to the basics.

Now, if you are looking at storage in areas like Austin, Texas, you should be concerned. That was predicated on growth rates that were the highest in the nation and they'd been building storage like there was nobody's business. Because the developers were building storage and selling them as if they were fully occupied. So, the money they made on it was stupid. They were making millions. Well, now they can't do that. So, all this storage is going to be hitting the market and it's going to need to fill up and in order to fill it up, they've got to drop rates. And then that means the whole market rates start to slow down and go down.

So, is storage dangerous right now? Only if you're in bad markets, only if you have bad expectations. Other than that, no, it's not. So, we're opening up our fund in the next two weeks here, that's our distressed asset fund. And basically, we're going in to buy people that were either developing or refinancing and they made bad, bad assumptions.

I call this “event-based investing.” And people that did acquisitions, what they did is they bought it and they paid these astronomically high prices. They couldn't afford the debt, so it didn't matter because they were going to get an interest-only loan for three years. And at the end of three years, they were going to sell it at a four cap and that's how they were going to make the returns.

The returns were predicated on the sale. Well, interest rates rose, they can't give four caps anymore. So, now they're going to refinance into 8% interest where they couldn't even pay it at first, and they don't have a sale to get them the returns to get out. So now they're just trying to get out.

Did the asset fail? No, but did the person that bought the asset fail? Yes.

Those are very different things. So, I buy good assets that people failed on. And that is actually more common than the opposite. The assets don't fail, it's the people that are doing the assets that failed. And that's the perfect situation.

There's a difference between intrinsic and extrinsic value when it comes to storage, when it comes to markets in general, but particularly real estate markets. Extrinsic value is the buying and selling of assets. So, what's it worth? It's worth this price because the marketplace of buyers and sellers put that price on it. I call that extrinsic.

Intrinsic has to do with the cash flow that that generates. The intrinsic value of this is $200,000 of net profit. Then what I pay for it is my value predicated on the yield that I get off that asset. I only focus on intrinsic value. So, if you only focus on intrinsic value, you don't expect markets to bail you out and you're okay.

Seth: Kind of a hypothetical question. If you had to hit the reset button right now and you started over from either nothing or wherever you were back in 2008, knowing what you know now, if you had to start over, what would you do? How much money would you need?

AJ: Take money sooner. I was operating on our income. My father and I, we took no income from our real estate for a decade. We didn't pay ourselves. We only pumped money into our real estate. That limited how much we could buy the opportunities that we had. If I would've obviously taken other people's money to supplement our capital, we could have bought way more and grown faster and done it just as safely.

Seth: You think getting other people's money involved a lot earlier is probably what you'd do? Getting other partners and that kind of thing?

AJ: Yeah, that would've allowed us to do more, be more stable. It would've protected us and our investors more. I was just scared of it, so I didn't do it. Now, you always say that hindsight is always 20/20. I tell people when they're like, “Okay, yeah, but you're risking my money.” And I'm like, “Please, I'm risking our $200,000? I have $80 plus million that I hold the note for. I've been doing this for 15 years and I never had your $200,000. I'm not risking your money. You're riding on the back of my expertise.” And that's true.

And so, it makes it so I can tell people and look at them. “No, you don't. I'm not risking your money. I risk all my own money.” And I did that forever before I ever took anybody else's money. So, although I say that I wanted, I think it plays really well to my story and it gives me a lot of credibility that I didn't. So, hindsight's always 20/20.

Seth: Well, that's interesting because if we go back to 2004 or 2008 or whatever it was that you get started, you hadn't done a deal yet. You had no track record, you didn't have this $80 million, you really had nothing. But if you could start over with your same brain, a person might not be throwing their money at you because they don't see your track record. So, for somebody who is getting started, do they take down their first one on their own or do they partner up on the gate with somebody?

AJ: Either way is fine. The only deal that you have to remember, if you're getting started and you don't have anything, there's a skewed platform on the relationship between you and your investor. Right now, I get a 70/30 split and I get paid to do the work. People have to pay me for what we've done and built. If I'm starting out, I have nothing, I don't get those terms. I don't get that. The person that's putting in their money is taking way more risk than I am. And so, you have to be sensitive of that relationship. That means you're going to have to give up a lot, you're going to have to work for free. You're going to have to do things that maybe you don't want to do. And to be frank, you may not make a lot of money, but it's going to add to your experience.

And two, that may be their only option. Now, I don't believe that. I think you should start out by yourself and go get someone that will seller-finance it. And then you can seller-finance it. You do it, you get your own experience and then you immediately can do your next one now with experience, with assets under your belt, with other people. Now other people may not know how to do that. I think you can learn, but they may not want to. That's fine.

I have a guy that's part of my inner circle who got a lot of connections with a lot of capital. That’s his superpower. So, it makes no sense for him to do a deal not using other people's money. But at the time when we got started, I didn't even know how to ask people for money. I'd never heard of that. I'd never been around people. I was from Boise, Idaho. And Boise, Idaho wasn't a thing. We didn't have rich people where I lived. We came from families of farmers. I didn't know who would you ask. I didn't know you could take money like that from people. And there were no books on self-storage. There was no podcast, there was no social media.

So, from that we had to figure it out the way we had to do. And I think that's the key. It's not about, “Oh I don't have that opportunity or I do.” It's about figuring it out. And if you have the opportunity do. If you don't, find somebody that will seller-finance it. If you have your own money, use your own money. And three, do a combination of all three.

And that's how I do it. I use all three.

Seth: Yeah. One of my questions here, it's kind of a generic question, but just how much money does it take to get into self-storage if you were starting from nothing? Does it take anything if you could do seller financing or should you have a certain nest egg put aside?

AJ: Nope, it doesn't take anything. But this is one of the biggest fallacies there is.

I have people that are like, “I need to start in single-family homes.” And I go, a member of my inner circle, we just got them a $250,000 storage facility, which we wholesale. So, we called directly the owner and negotiated with him. It’s an owner-done deal directly to it, $250,000 and has 50 doors. And I asked them, in your market, what does a duplex cost? And this was six months ago. It wasn't $250,000. It was $400,000.

All of a sudden, I'm like, is it really harder? Is it really more expensive? And two, by the way, is the owner of the duplex going to do things like seller financing? No, they're not. So, all of a sudden, I showed him how you could basically take half of what it would be to buy a duplex and you can get into storage and instead of having two doors, you have 50. Which one's safer? Which one has more upside?

And so, I think that's just an argument that you can quickly tell people that you don't need your own money. And even if you're using your own money, you don't need a ton of it. I know storage facilities that will sell it for $80,000. Now you may not be able to be in LA. I wasn't. When we got started, I went to places like Bonners Ferry, Idaho. For any of you that don't know where Bonners Ferry, Idaho is, there are more grizzly bears than there are humans there. And I think that's actually true. It's a one-street kind of town. I don't even know if there's a stop sign or anything, but that's where we could go. So, we bought a dirt gravel facility on the side of this highway up in the mountains, going through Northern Idaho. And we went where we could go.

The next place we went to is Pendleton, Oregon. Why? They would seller-finance. So, that's where we went. Too many people want the market to give them what they want. The market doesn't care about you. Why should it? And so, you got to stop thinking like that. You need to go with what you have and go to the place where the market will deliver opportunities. If not, you need to change your circumstances and stop making excuses and figure it out that way.

Seth: Yeah, that makes perfect sense. Now, you do a lot of stuff obviously as we've talked about. You've got software, you've got the co-op. You've got the Self Storage Income. Is that a conference you run every year? Is that what it is?

AJ: Yeah. Self Storage Income is basically our educational platform. Once again, it was a promise I made in the hospital. We give away all our information for free. So, YouTube, podcasts, everything, we get on every single week, we tell numbers. I do it on Instagram, we show backend. We show what things are doing, we show case studies, we walk through how do you get financing when we're interviewing all these people. And so, it's our educational platform. It's where I have the best-selling book in the industry “Growing Wealth in Self Storage” by AJ Osborne. I put that out.

And then I have my inner circle, which is just people come and they join and they get my time and then I jump on teaching. I'm like, “If it has to do with my time, you got to pay me.” That's kind of how the bottom line is. But that's just for people that want more and want to do things like that.

But all my information is for free. You can go listen to everything, do everything. It's always been a big, big thing for me that if the industry does better, I do better. And if the participants in the industry are making money, that means I'm making money. If I'm in a city and a storage facility owner is doing poorly and not making money, that doesn't mean I'm doing great. That's not how it works.

So, I want the industry to be better. I want people to be better so that my assets, because I don't make income from education, I only make income from doing right. That's where all my income is. And so, I need those assets to work and I need it to be good. That telling everybody through what we do, how we do it, that generates opportunities in the form of investors and also deal flow. People say, “AJ, we understand you. We know what you do. Here's a great deal that we have.”

The idea with Self Storage Income is we want to be not just the largest educational platform in self-storage in the world. We want to be the highest quality platform for self-storage. We do events, which our first event that we did cost me $150,000 out of my own personal pocket after everything was paid to due. We don't go cheap. This isn't something that's like in a hotel. There are firework shows at a resort. This is high-end. We have the largest owner of self-storage, privately owned self-storage in the world speak.

We had Ken McElroy who owns $2 billion in real estate, owner of The Rich Dad Poor Dad. Awesome, right? He speaks at our events. Things like that. So, we try to do everything quality, high-end. We're not trying to do it to generate money from it is to generate opportunity, which makes us money. The money comes from doing and that's our whole goal and our whole purpose. And that's what we do on that end. We want to be the leading brand in quality.

Seth: If I can work it out, I'm hoping to make it to the one next year. because I saw the video recap and yeah, it looks like an awesome time. Kind of a smaller group, right? You could actually get to know everybody there for the most part.

AJ: Oh yeah. You're meeting with all the members. We could do a thousand members. That's not what we do. In fact, I literally have a meeting today to plan next year's event, but if we even go to 300, you're done. So, nobody else can come in after that point. Why? Because we want it to be intimate, meaning the speakers and you. People, we're just hanging out together. Ken McElroy's out there hanging out with people till 03:30 in the morning. He's out on boats with people. I'm out on boats. That's what we want to be known for is quality.

You can go to ISS and SSA that have thousands of people. That is not what we're trying to do. They hold their place, they do a great job for it. But we are not that, and we are not some ginormous convention center that you pay a ton of money to go to. And the speakers that are there, who knows if they're good or not, and everybody's trying to sell you something. We don't do that.

Seth: Cedar Creek Capital. So, if I understand it right, could I go and invest money with you there? Is that how that works?

AJ: Yes, hundred percent. We take accredited investors and they come in and we view it as right on. They're actual owners. They get K-1s, they get all the depreciation, they're owners of the storage facility with us and they come along and invest alongside us.

That's my mission. Cedar Creek Capital is my mission and we hold long term. So, we don't kick investors out. Why? Why don't we kick investors out? Because the goal is that other people have long-term wealth and income. It's my “why.” I believe you can change the world by changing the financial well-being of individuals. Why? Because financial independence is the only true form of freedom that we have. Meaning you can make any decisions that you want.

And it's not like a political thing where it's like, “Oh yeah, you do something for me, I'm going to do.” No, we want to allow other people to be independent, to change their own lives through their own financial system. And when you do that through economic participation, the whole divide that we have in the United States is predicated on one thing: people who own assets and people who don't.

So, our goal is to get as many people owning parts of the economy as we can for the long-term. Not some quick fix, not a stock that they own that may go up, may go down, but it doesn't produce any income and all the benefits go to everybody in between. No, you actually own the assets and we're big believers in it.

Seth: Are you allowed to talk about what kind of returns a person could expect or can you not go there?

AJ: Yes, I can. How our filings and how we're a 506(c) so I can talk about things. I can't talk or promise obviously anything. And I don't have anything as of right now that we are funding. I don't have anything right now, that will come out in a couple weeks, where we do our fund. Generally speaking, though, I can't tell any deal specifics, which I don't need to and I don't have. But I can say our mode of operations, it's very, very simple.

Our goal is unlike any other fund that's on the market. The goal is this. They come in, they invest alongside us. We improve the asset, we pay everybody all their money back plus a 20% return in our three to five year period. And then they own the asset free and clear and have infinite returns forever. And then we refinance it. You keep getting those returns and those profits.

The goal is just like how I build on my company. You asked me, “AJ, how did you guys do that so fast? How did you do so much?” It's because we got our money out, but we still own the asset, and then we could redeploy that money back in and keep it growing.

My goal is that somebody comes in and invests with us and in 20 years they're like, “AJ, I've been investing with you for 20 years and now I own 50 storage facilities with you and it's all off the same money that I started out with you. So, I didn't even put more money into it. In fact, I took the profits out and pocketed them, but my money just kept going back into more and more deals.”

And then they own this huge portfolio of deals alongside us. Our returns, what we shoot for are targeted. Everything else, all the principal paid back plus a 20% return in three to four years is generally what we target. And then infinite returns from that point on. And they're getting it in a way that is set not tax-free, but the most tax advantages that you can.

Because if you sell the deal, what happens is you have huge splits with the promote that you have to do. You have to recoup depreciation, pay capital gains tax. So, all of a sudden, your true return is much smaller than you ever thought it was. And then you have to take that money and go reinvest it to try to get those returns.

The way that we do it allows you to get that money back but not have to pay recoup on depreciation or capital gains returns. You don't have to pay taxes on it because it's in the form of a refinance. So, we believe that it hyperdrives people. It gets them to a point where they own assets and have zero risk in them whatsoever. And when they start out, they don't have any risk. I take all the risk of the debt, everything else like that, but then they don't even have the risk of capital but they still own.

Remember, our goal is economic participation. It's not just purely returns. And we think that beats out 24/7 all the time, every day. One of the reasons why we can do this is our company is built on my and my father's assets. So, our management company, everything else like that, that's paid for by the assets that we already own. So, we don't have to sell assets to generate big returns to pay bills. We don't need to do that.

Seth: Yeah, that's amazing. That's making me wonder, I almost wish I had known about this before I decided to build my own facility because this would've been way easier. Is there like a minimum investment required to play ball with you guys?

AJ: Yeah. Generally speaking, we'll do $50,000 for first-time investors, but we're trying to keep it at $100,000. Now our end goal is that we create economic participation for everybody, even people that don't have $50,000 and $100,000. But how the government works right now is the government set up laws that basically say, “Unless you're a rich person, you're stupid.” And I am so absolutely against this, but that's literally what the law says. You don't know enough to invest.

And politicians put this in the framework of protecting investors. They're not protecting investors. They're protecting Wall Street. Why? Because if you could invest your money directly into a cash-flowing asset that has equity and participation and tax benefits with people that have track records to the tune of hundreds of millions, you're doing that. You're not putting your money in your 401(k), you're not putting your money in with some random stocks on Wall Street that everybody gets their cut from.

I believe it's a totally rigged system that the government set up to shelter economic participation. The vast majority of funds and assets that the wealthy play in, nobody hears or knows about it because it's against the law for them to talk about it. That's crazy to think about. And when people are like, “Yeah, the rich get richer and they have all their secret deals and their secret things they're doing.” It's secret because they don't want to go to jail. That's why it's secret. This is government-instituted.

I personally have a big problem with that because it's like, how are you supposed to get ahead if you can't participate in the economy and the government is stopping people from doing it? So, we want to get to a point where we actually do more of not a 506(c) but one where you can take non-accredited investors or non-rich people.

That is a huge thing though. It's going to take us a while to get there because of the legality of it. It's a really big deal. But that's our end goal is that we open it up and allow access to everyone. But the government makes it really, really hard to do that.

Seth: That's interesting. I never thought of it that way until I heard you phrase it like that. But that's kind of the truth though. It really limits a lot of people from being able to play a ball. It's kind of crazy.

AJ: Yeah. And I know a lot of people that are not accredited investors and are much smarter than accredited investors. So, this idea that you are protecting them because they don't know is total BS. The statement itself is to me ridiculous. That somehow you pass an income, you become a millionaire, or you pass an income of $300,000 a year and suddenly you're smarter than when you were making $150,000 a year. What a joke, right? It is total BS and right now they're trying to change the laws. So, they're trying to change the laws to make accredited investor status up to $10 million.

Seth: Really? Whoa. Who's going to make it even worse?

AJ: Tell me this. Who has 10 million of investable assets? That doesn't count your house. You're going to eliminate investments in the super-rich, not even the rich. And it's shocking. And they're pushing. That's a big, big goal of theirs and they're trying to push it through right now. And they're trying to limit it. We just play with the rules we can get, but we don't allow things to just happen to us. We're going to fight against it and try to do what we can for our investors.

Seth: And you can't even include my $10 million house in that. That's crazy. Oh.

AJ: Exactly. You can't. Sorry, man.

Seth: Well, AJ, you've been very generous with your time. I appreciate you sharing. There's a ton of stuff we've covered here. It's been awesome.

If people want to find out more about you, it sounds like we've talked about a lot of this stuff. There's this SSI, there's cedarcreekwealth.com. You've got an awesome YouTube channel. I'll be linking to all this stuff in the show notes. You can find that at retipster.com/146.

Is there anything else people should do or any place they should go, or anything else you want to share?

AJ: If you go on to my Instagram or Self Storage Income, email us, we email you back. I try to get back to DMs on Instagram, so I try to directly work with people. Yeah, just check it out and learn more about us and what we're doing. We're fairly easy to find, Google. All the links will be there, but you can Google “AJ Osborne Self Storage,” and you're going to get inundated.

Seth: Yeah, sounds good. I'll link up to all that stuff in the show notes again. And thanks again, AJ. I appreciate it.

AJ: Hey, thank you, man. I appreciate the talk.

Seth: Hey, everybody, how's it going? This is Seth Williams, and you are listening to the REtipster podcast.

Today, I'm really excited because I get to talk to my good friend, Jon Farling. Jon and I, we go back. I think it was in 2019 when we first met, if I remember right. It was the first ever BiggerPockets conference in Nashville. And I didn't know Jon. I just showed up and I was looking for people. And Jon had sent out an announcement on the app saying, "Hey, everybody. There's a self-storage gathering over here." And like six or seven people showed up, including me and including Jon.

At the time I was just starting to learn about self-storage. I didn't know a whole lot about it, but I wanted to rub shoulders with anybody who was there. I got to toggle with Jon a little bit. And I think at the time, Jon, had you just bought one storage facility? Or did you have two at that point?

Jon: I think I had one. Yeah, one that I owned and then one I was under contract on.

Seth: Okay. Got you. These were not huge ones. How many units was each one?

Jon: First one was about 100 that I owned. And then one that I was in contract on was about 130. They're both around 12,000, 13,000 square feet. So yeah, not very big.

Seth: Got you. When I met Jon, the thing that struck me about him was that he was just a normal guy. Just a normal, everyday person working a job and he wanted to get into this business. He had a dream to go far with that and he was really doing it. He wasn't just learning about it and reading books. It's like he was actually making it happen. He just seems to have a lot of good practical knowledge, even in the early stages that he was in. And I was just picking his brain.

It was one of those interesting situations where I felt like I was getting more value just talking to him than if I was talking to some guru or course maker or something, just because he was just a real guy. I wasn't getting sold on something. I wasn't being told something that isn't true. I was just hearing the whole story from him.

So, Jon and I, we stayed in touch. We ended up forming a mastermind group together with a few other people. And I learned a ton of stuff from that. It was crazy how much I learned, which on one hand it's not surprising. I usually do learn a ton from mastermind groups. I still have pages and pages of notes from just talking to Jon, talking to the other guys that were in this group.

And fast forward a few years to now, and Jon, how many facilities do you have?

Jon: Own and operate eight myself, and then passively invest in two others.

Seth: And how many units is that?

Jon: About 1,200.

Seth: So, in the span of just a few years, he's gotten up to 1,200 units and you quit your job. And this was like a couple of years ago now when you quit your job?

Jon: Yeah, just about two years ago.

Seth: And I remember back when we first met, I don't want to put words in your mouth, Jon, but just from what I recall, it's not like you hated your life or anything, but like most people, you weren't super content with that life of just working your job. You wanted something more and you felt stuck and you wanted to get out. Is that accurate?

Jon: Yeah. This is being recorded. I didn't hate my job, but I wanted to definitely do more. I've always had an entrepreneurial spirit about myself. That actually fit in the job that I was in. But yeah, I wanted to go further. I had hit my ceiling there. I was there 11 years doing outside sales. I had hit my ceiling probably in year three. So yeah, I was ready. I started real estate investing in 2015 with a single-family rental. So, there's a lot of groundwork that was done before, one, I got self-storage, and two, I was able to even think about leaving my job.

I left my job in 2020. So, I had five years of trying to figure this thing out. How am I going to leave my job? Yeah, there's a lot of foundation work that a lot of people may not know about or realize. That's everyone's story, I'm sure. But yeah, there was a lot of foundation that had to be laid first.

Seth: Yeah. Maybe we should just go back to 2015 when you started it. So, you were doing, was it single-family or multi-family or the rental property thing as most people do, right?

Jon: Yeah. Actually, I was thinking about it this morning. Yeah, 2014 I was actually coaching basketball, and had to quit that lifestyle because our first child, our daughter was born, in March of 2014, and then the wheels start spinning. It's like, “Okay, how am I going to pay for her college education? How am I going to retire?” I remember all these thoughts.

Just doing the math and I'm like, “Well, one, I'm never going to retire if I keep this up, or I'll have to live off $30,000 a year.” And then going down the rabbit hole of how to pay for her education and that eventually led me to, “I need to do something else on the side.” And I've always had a bug for real estate. My parents were in it. They built spec homes as I was growing up. They had a few rentals here and there.

And looking back in 2014, I probably looked at no less than 20 houses, maybe 40. I wish I would've had enough sense to buy all of them, but at the time the rents didn't match up with what I would've been paying for them. But yeah, right now they're all triple the value easily.

So, I did end up finding one. I bought basically one per year, starting 2015. The first one I did all the rehab myself, which was good and bad. I was grinding, learned a lot. But you can't scale a business that way either. And that proves too, because I did literally one per year and then finally, I decided I wanted to get into something bigger and eventually found storage and was able to scale from there.

Seth: When and why did you find storage? What was it about the storage business that enticed you to pursue that versus the rental property thing? I know my reasons, but what were your reasons?

Jon: I looked at everything. I tried finding multi-family, and this goes back to 2017-2018. I couldn't find anything that made sense. I tried doing a mail campaign with single-family. It just didn't work. I wasn't doing the right things obviously. I didn't have the right systems and processes. I looked at small businesses to buy, Subway franchises, everything. Eventually, I found a car wash down the street from where we lived and found out I could get an SBA loan, which, for that deal, I think I could have brought 10% as a down payment, which to me excited me, because I could get into a larger asset, make more of a cash flow, better return with less money in.

The deal ended up falling apart. However, after that I did a little bit more research on SBA and found out I could get into self-storage with an SBA loan, and then start digging through there. And then that actually led me to Mike Wagner, who taught me storage and a bunch of other things too. But yeah, that's kind of how I got there. I was just digging through SBA loans, seeing how they worked, what they cover, and storage was a great fit.

Seth: I know for a lot of people who are curious about the self-storage business, the numbers are a big thing in terms of like, what does it cost to buy one of these things? How much money can you make from them? What kind of down payment do you need? And just that whole financing thing. It sounds like you were coming from this world where you had rental properties. So, did you sell off a rental property and use that for your down payment? Is that how you handled it?

Jon: I've done all my deals by myself other than one personal loan that I had, which basically was for repairs for one of my deals. But yeah, my first deal, what did we do? I think we had cash, but I think we technically use our HELOC. Second deal, same type of thing. By the time those two were rolling I was like, “I see the pot of gold at the end of the rainbow. It's time to get rolling here.” I started selling off my single-family rentals. Actually, I cashed out my 401(k) after I quit my 9-to-5. So yeah, I basically sold everything off and had some cash too, to be able to get in all these.

But yeah, the first two deals were using HELOC and leveraging that. We had some equity in our house. I was able to do that. It was the right timing. Things just lined up and were able to roll from there.

Seth: How did you find these first couple of deals?

Jon: Yeah. When I said I tried doing mail marketing campaigns for single-family and multi-family, it didn't work for me. It worked for me in storage, and the main reason why is because I went into these smaller towns and they had never received a letter before. So, I hit them at the right time in the right areas.

Now, only three years later, things have drastically changed. I get letters probably once a week at all my facilities. Whereas three years ago, those owners of the same facilities weren't getting any attention. So yeah, I was the only one. It was a good time.

Seth: Why do you think that changed? Is it just because it's so hard to find deals these days? I've noticed that in the land business too and I have some theories as to why, but in terms of self-storage, why is it that it was something that wasn't done and all of a sudden everybody's doing it?

Jon: COVID, good and bad. Yeah. More investors came in because of COVID. Just a ton of reasons. COVID is supposedly recession-resistant. The lean process is easier. So, when we couldn't evict tenants in houses or multi-family, I was still evicting people in storage.

Well, you think about all the assets that kind of failed too, right? Office isn't doing very well. Retail. So yeah, you just had more people coming into the space. Technology has changed storage a ton over the past five to seven years. There were people coming in slowly and then COVID just dumped a bunch of people. Good and bad. It dumped a bunch of renters too. More people are using storage now, but more people are buying and developing storage as well.

Seth: Yeah. Now, if I remember right, didn't I hear you say that you were just cold-calling people in your area, like just Googling self-storage facilities and calling them to see if they wanted to sell? Was that something you did a lot?

Jon: Yeah. I did some of that, mails worked for me better. I don't really know why. I haven't called for a while, but yeah, that first year to two years where I was really hunting for deals, mail really worked for me. I got my first two deals off 60 letters, which is almost unheard of. Actually, you could probably say three deals because I think my third deal was in that campaign, they just didn't get back to me till later.

Yeah, my response rate was great because I was the only one that was fishing in this pond, but I did make some calls. I think more people are calling now than I don't want to say more than letters, but yeah, more people are definitely calling now. I don't get it as much because I have a property management company answer my phone calls. But yeah, people are calling now. It's turned into any other asset trying to find deals.

Seth: Do you think that's going to go backward? Say if, I don't know, office space suddenly becomes hot again, whenever that day is coming, do you think people will stop caring about storage again? I don't know, any theories on that?

Jon: That's a good question. Well, I know some markets are already saturated, which is going to affect things. We'll see what this downturn recession, whatever does. There are people that are definitely in too tight of deals. So, we'll see what happens. Yeah, there are stats that say storage is the least defaulted asset, but you look at it too. People have been, even myself, even three years ago, we were buying these for dirt cheap. So, the default rate is going to be less because we're buying them for dirt cheap. Things have changed. That default rate is absolutely going to go up. Where? I have no idea. I try to buy right the best I can, even in today's market. But yeah, there are people that definitely overpaid and areas that are saturated. So, we'll see. But you also have technology changing a lot of things in storage. I run all my facilities with no one on site. So yeah, it's hard to say.

Seth: Yeah. A couple of different lines of questions. I'm just trying to figure out which way to go first. So, you mentioned the technology. Maybe let's just jump into that. What are you using to manage these things and how does that work?

Jon: This is the thing I couldn't wrap my head around, because I had no idea what Mike Wagner not helped me the most with, but showed me the path. Technically, I have a property management company and what they do is they have a call center. They answer all the phone calls, during hours.

Then I've got a website through them at each facility. So, if someone wants to rent a unit, they can technically do it at the fence, at my gate. So, they can pull to the gate. They can either call the phone number within five minutes they can get into their unit or they can go online on their phone, rent a unit online and have access immediately.

Seth: Are there instructions at the gate that tell them this? Or would they have to go to the website and figure it out from there?

Jon: Pretty simple. But yeah, I've got signs that say, "Sorry, we missed you, call us or visit our website." You go to the website, you just click rent online and it takes you through the process. So, it's super simple. Yeah. There are people that need help figuring it out. But yeah, it's super simple.

Seth: Yeah. Because what you're saying there makes perfect sense, but for some reason, I don't know why I've never connected the dots in my head that I could literally drive up to a facility and rent it at the gate. There's this idea in my head like, “Okay, I got to go home. I got to open up my computer. I got to go. Then I can come back.” I don't know. I wonder if you could put a QR code at the gate, "Scan this and rent now," something like that.

Jon: Yeah. Some facilities are doing that. And in terms of technology, I'm probably 12 months behind. But the newer facilities, the Reeds, the bigger players, yeah, they've got QR codes. Some of them you'll walk inside and they'll have a tablet that you can rent your unit on and then they'll have a video that shows you, one, how to rent it, where your unit's at, all that stuff. So yeah, technology has changed storage so much. Even before all this, kiosks were a big thing. I'd say for the past decade. There are still people that still believe in those, I think, but yeah, basically our smartphones have taken over that kiosk.

Seth: And with the kiosk thing, it's basically the same thing as your phone. There's just a machine there where you sign it up. Do you get a lock from those kiosks too? Or you got to handle that on your own.

Jon: That's a good question. I don't know. I've never run one.

Seth: Maybe they work in different ways.

Jon: I kind of came in when those were being phased out. So, I don't know. I really know nothing about kiosks.

Seth: Those things are kind of expensive I would imagine, right?

Jon: I want to say $10,000-ish, in that ballpark.

Seth: Yeah. It sounds about right. Got you. And Easy Storage Solutions. Is that what you're still using? That's this company that handles all this stuff?

Jon: Yep. Well, another thing is it's moved. A lot of reasons. Technology has moved so fast. New owners have come into the space and then other, I guess, legacy owners, they're all rushing too, they've all found out, “Hey, I don't need to take the phone call anymore. I can use a third party.” So that's also helped or hurt companies like ESS, because they've just been inundated with business.

So, what's happening is that it's hopefully getting worked out because I've had some growing pains with them. But you also have other property management companies come on board where now you have other options. Those options are, I think within a year or two years, we're going to have some pretty good options. Right now, I don't want to say there are not great options, but everyone's trying to figure it out, trying to dial things in.

Seth: Yeah. I had always heard about that, the dangers of a company growing too fast and I was always like, “What are you talking about? How is that a problem?” But when I was doing my MBA, a number of years back, I started to understand the problem. I think this is probably a perfect example of how if you don't have the systems in place to handle all the new business, you can't deliver and people are going to get mad at you and then your reputation goes into the tank. Yeah, it can be really tricky when all of a sudden demand spikes like that. I know with Easy Storage Solutions, one of the issues I've heard of is that they don't take calls on Sundays. Is that accurate?

Jon: They don't. To me, that's not a big deal.

Seth: People don't call on Sunday?

Jon: People do. Not everyone has their facility set up like this, but I get an email with the voicemail. So, if someone calls in, and I have an operations manager he'll check the emails. If someone calls in, he'll call them back, and if they want to rent a unit, we'll try to run it to him, or just tell them to go online and do it. And that's for after-hours too.

But yeah, as far as growing too fast, they ran into the same issues most businesses during COVID, which was people. Their call center was fine. And without COVID, even with the same growth, my guess is they would've handled it better. But yeah, it was a people problem. They just didn't have enough people answering the phones, couldn't hire fast enough. And the quality that they were hiring was not very good. So same problems as any other business that's been trying to grow.

Seth: Is there like an alternative to them, like another company that does basically the same thing?

Jon: Yeah. And that's the thing, that's where things are getting better. I don't know if there's any company that has a software and call center that you can get together, but you can use their software and use a different call center. You can use other software and use whatever call center. They are great for, if you own one or two facilities. They're great. Their software is super easy to understand. You can plug anyone into it and within half an hour understand everything on the software.

I haven't changed just because for that reason. It's just super simple and having had enough pain point to change, but there's more advanced software I could change too. Better call centers I could change too, just haven't done it yet.

Seth: Yeah. It's like the blessing and the curse of having any company or software or whatever that does so much. It's such an easy, obvious solution when it's working well. When it doesn't work well, it's like, uh-oh, all of a sudden, it's a huge problem.

Jon: Yeah, well, they were… Yeah, and I don't want to…

Seth: Yeah. I'm not trying to single them out. Just in general, like anything in life when you rely too much on a single thing, there's some danger in that.

Jon: Yeah. Well, they were bought out by a large company too, which changed some things, I think. They're no longer the mom-and-pop company, which they were when I started with them. So that changed.

Seth: Yeah. I think you're right though. Just given where things are going, there has to be an improvement there. I don't know how it couldn't happen. Since the demand is there for that kind of service, whether it's with them or other companies doing better, whatever, but I'm sure it'll only get better from here.

Maybe we just look at that first deal, because I know that's always a big first step, the first deal in any new business. So, what were the numbers on that thing? How much did it cost? How much money did it make? How much cash did you have to come to the table with? Just walk us through that.

Jon: Yeah. And I'll kind of take you back even further. So, all four of my rental properties basically cash flow about the same, which was between $250, $300 a month. And each one I probably had between we'll call it $25,000 and $40,000 into each one of them. So, my returns weren't all that great. Obviously, I wasn't growing fast enough.

When I found my first deal the owner wanted $375,000 for 12,000 square feet. And at the time, obviously, if you go further down the road, you learn more, but I just figured the same rental rates as what he was doing, the same sales, technically somewhat the same expenses and then I included my property management, ESS. I included their fees in there. And I knew I was going to cash flow at least $1,000 a month.

To me that was like hitting the lottery. I'm like, “Okay, I'm going from $250, $300 a month for each single-family rental. Now I can get into one asset for about the same amount of money.” So, with the SBA loan, I brought 15% down, which I think was roughly $50,000. So roughly around the same amount of money and I'm making almost three times as much per month. I'm like, “This is a no-brainer. Why would I not do this?”

And then once I got into it, I realized, “Oh, wow, I can make a lot more than that.” But yeah, that's the real numbers. I bought it for $375,000. Actually, my second deal numbers were almost identical.

Seth: Well, when you say the SBA loan, was this a 504 or 7(a) loan?

Jon: I always get them confused. And I just did one this year too.

Seth: Yeah. The 504 loan is where there's a bank loan and then an SBA loan. So, you got two separate loan payments. The 7(a) is where there's just one bank loan that's guaranteed by SBA.

Jon: Yeah. My first two deals were 504. My one this year was 7(a). So yeah, I had two bank loans. I've since refi-d both those loans, cash-out. But yeah, real numbers, sales for my first deal from the previous owner were about $50,000 a year.

Seth: We're talking about the first storage facility right now?

Jon: Yeah. For the first deal. Sales were $50,000 a year. Revenue was $50,000. I'm now at $90,000 to $95,000 a year. So, I've almost doubled that.

Seth: And how did that happen?

Jon: What's that?

Seth: Yeah. Did you add units or raise the rent or what caused that change?

Jon: I've added units, but that's only been two months ago. So that doesn't even include those units. Just raising rate, it's called rate management. But yeah, it's crazy how over time, the rates just increase. I also included or added setup fees. When someone rents a unit, late fees, auction fees, you get money from auctions, just all these little fees. I added six parking spots. All these little things just start adding up.

For example, I want to, say, for 10 by 10, when I took over, they were renting those for around $55 a month. I think I'm $90 to $95 a month. So yeah, you raise rates with existing customers and then really raise rates with street rates, and then over time the existing customers start to move out, you put people in with street rates and the revenue just keeps stacking.

Seth: Yeah. When you're looking at a new deal, I guess either back then or today, because I know this is a very common thing where you'll find these smaller mom-and-pop facilities that aren't really managed that well, they're not advertised well. The rates don't make sense. So, what are some low-hanging fruit opportunities that you're always looking for in terms of here's how I can make this thing worth more immediately by just flicking the pen and changing this here or there. What are some examples of what you would be looking for?

Jon: Rental rates. That's the main thing. What's their rental rates compared to the market? What's crazy is even that first deal, there's a REIT in town, which is a Real Estate Investment Trust. So, a large storage owner in that small town, my rates at times are higher than theirs. And their facility is obviously better than mine. I've got weeds grown that are hard to control. And it's almost leaving the city, going out to the country. And then you have this, we'll call it B-plus facility, that's asphalt, drive up. I don't want to say more secure, but it looks more secure than mine, someone on site. And yeah, there are times where I'm charging more for my units than they are, which is crazy.

So, if I get one- or two-unit sizes available, I'll really jack more rates. Because at some point someone's going to come by and say, “I need a unit. I'll pay whatever. Give me that unit.” That happens. So that's how over time these rates just keep increasing. And then if I have five units of one size become available, I'll drop my rates a little bit till it fills up. It's like the airlines, you're constantly moving rates based on demand.

Seth: I mean, just looking at these numbers, it looks like demand has gone up and up and up. I mean, it must be if rates are going up and up. What is making that happen and what would make demand go down? What would make rates go down? Does that ever happen? And if so, what causes that? Just a recession or something?

Jon: We'll find out. I haven't been in that long enough. Well, there are a lot of things going on. There are a lot of things going on. One, there are more people now than two years, three years ago that are using storage. One reason, people are moving. More people are moving right now and we'll see what happens with the housing market. Will more people be moving? Probably not as many. So that's one reason.

But then you may have a recession where people will downsize and need to store stuff. People are also buying more stuff right now. I don't know, I don't have exact stats, but people are buying more stuff now than ever. I think that's only going to increase with time. So, will we ever go back down to 2019, 2015 numbers of people using storage? I don't know. I think it's going to just keep increasing. It's going to come back down a little bit, obviously, it can't just keep increasing, but yeah, I think over time it'll just keep increasing as we, as people, just collect more junk.

Seth: Yeah. That whole issue of this being a recession resistant business, I've heard the rationale because even if people lose their jobs and lose their homes, they still got to store their stuff somewhere, that kind of thing. Which I get that to some point, but I look at states like Michigan. It's always been either a boom or a bust state for the most part. Either people are coming here in droves or they're leaving here in droves, for one reason or another, usually the auto industry.

But I don't know. I know I was actually closing SBA loans for my job back in like 2011, 2012, 2013. We did 504 loans for a handful of storage facilities and I saw the prices go way up just in my time there. I quit that job in early 2016. So, that was before all the growth that you saw.

I know values definitely do go up and down. It's not just a static thing and it is risk-free, but it just makes you wonder, what's the ugly side of this that we haven't seen yet? How could a person get burned? It sounds like, if you were to try to hit the reset button and do everything you've done so far, but starting right now, not back in 2018 or 2019, or whenever you started with the self-storage stuff, what would be harder about it now? Were the prices super advantageous? Were the rates better, like less competition? Just try to compare and contrast the two time periods.

Jon: Yeah. A lot of things. I'm in these smaller markets. For the most part, the population is under 70,000 in all my markets. No one was looking for storage facilities to buy in those markets, and or building. Well, that's the other thing. That's going to increase rental rates and saturation. These bigger markets, without a doubt, are areas that are going to be oversaturated.

Yeah, it is hard. I don't want to say it's harder. You're paying more now, but rental rates have also gone up because you've got more competent owners in a lot of these areas. So as time goes on, we're buying out Jim, Bob, and his cousin who were running their storage facility, but answering their phone once a week, didn't really care if they were making all the collections, would collect payments in cash.

Now you have more sophisticated owners that are buying these and have systems in place. So that also increases rental rates. Now, obviously, there's a ceiling, especially in these smaller towns, people are only going to pay so much. And in towns that I'm in, I'm still one of two or three sophisticated owners in town. So, I'm in the top 8% or eighth of the ownership in that town. But yeah, most of them are still running how they were 10 years ago, which is not the correct way. Yeah, I don't know if that explains everything.

Seth: It sounds like, I don't know if this was a conscious choice or just how it worked out for you, but this choice to pursue facilities that were pretty rural and just places that might not be the average person's first idea of where to start looking, it sounds like that's been sort of beneficial, right?

Jon: 100%. I owe that all to Mike Wagner. By the way, shout out to Storage Rebellion. It’s his company.

Seth: Yeah. I'll link to him in the show notes. We've interviewed him a couple of times on the podcast as well. I actually did a consulting call with him this past year though. He's a great guy.

Jon: Oh, nice. Yeah, he's awesome. When I found storage and was like, “Okay, let's try this out”, I bought a list and tried to do a marketing campaign. I live in Columbus, Ohio. I tried to do a marketing campaign in Columbus, Ohio. Guess what? No one called me, no one cared. Then Michael's like, “Well, I buy all my facilities in small towns, rural towns, whatever. So why don't you try that?”

I was kind of reluctant at first, but I was like, “Yeah, it makes sense.” In my mind, I'm still kind of thinking residential rentals. I'm not going to get appreciation and all this other stuff. But you're buying a business. It's not appreciating the same way. It's appreciating the way a business does. I'm not going to get a four cap where I'm buying. But yeah, that changed everything for me, going in these smaller towns. And again, no one else was looking in these small towns. No one else wanted to invest in these small towns.

Seth: Yeah. And you just mentioned four cap. I know that cap rates and that kind of thing is something, some people, depending on which niche of real estate you're in, that's very familiar and for other people, they're like, "What? What is that? And why does it matter?"

Cap rates. If I understand it right, a high cap rate basically means your return is pretty good. But maybe there's more risk associated with that deal. Like a competitor could show up right next to you because it's more rural and that kind of thing. Whereas a low cap rate, the return isn't as good, but there's also, I guess, more certainty to the deal. Maybe competitors can't show up just at the drop of a hat. I don't know, what is your assessment of cap rates and how important they are and why they matter? That kind of thing.

Jon: To me, they matter when I sell. When I buy, I don't even look at it. And a cap rate is basically your return on your money if you pay cash for the entire deal. And it's changing because interest rates are changing. But the areas where I'm at, I could probably sell at best six and a half cap, six and a half to seven and a half cap price, somewhere in there.

Yeah, I don't look at cap rates going in. I may take a look if I'm bored. I don't judge what I'm buying off a cap rate at all. Actually, a deal I bought this year, I probably technically bought it, at their numbers, I probably bought it around a four cap, four to five cap and it's in a smaller town. But I knew there's value-add there to where I can go in day one, and I did, go on day one and raise rental rates. So, to me, it wasn't a four-cap. I was buying it at, whatever, probably a 10-cap because I was raising rates day one.

Seth: Yeah. And in terms of knowing that you can do that, that's just a matter of looking at occupancy rates and rental rates of the competitors in the area.

Jon: Yes.

Seth: Is that what it boils down to?

Jon: Knowing the market, knowing the competitors. Yeah. Well, and I was talking to somebody the other day about this. And everyone's got their own strategy, I don't want to say there's no right or wrong. Now that I've learned, I'll usually find whoever's highest in the market, which is probably a REIT. And then you've got your next class underneath that, called B class. I try to follow their rates. So, if someone's running the 10 by 10 for $75 and the REIT is at $105, I'm going to come in day one, raise my rates to 75. And then you still have people that are still charging $50, $60, but I'll go to that kind of second-tier rate. That's where I'm going to put my current customer's rates at. And then my street rates are going to be higher than that. Probably close to the REITs.

Seth: Do you order feasibility studies for all these things before you buy them or ever?

Jon: I haven't. No. I think that's more important when you're developing or doing a conversion, in my opinion. Because I'm buying technically cash-flowing facilities, it's cash-flowing for me for day one. Someone built that facility for a reason, unless there's a bunch of development in the area, I'm not worried about that.

Seth: Yeah. And for those who don't know what a feasibility study is, I bought one or paid for one about a year ago and it’s $7,000. But they basically go in with all their tools and technology and look at the local market, figure out how much storage is there. What's the price of everybody's units, what's the occupancy rate? And I don't even really know how they know occupancy rates other than just calling them and asking them “What's your occupancy rate?” If a person doesn't want to tell you that, do you just guess at that point?

And also, what they did with mine in a way was they put together a cost assessment of what it would cost to build what I'm trying to do, which is just an educated guess. But it really just gives you a third-party assessment of, “Is this a smart move or not? Is this a good or bad market for you to try to do this in? Or maybe if you're planning this, maybe you should consider this instead, because there's no climate-controlled storage yet, just cold storage. So maybe you should go this other direction.”

But like Jon was saying, when you're building something from the ground up or adding a bunch of units that aren't there yet, it's kind of a speculation move. You don't know that. So that's why it's important to really look at this. Whereas if it's an existing one, you already have proof that it's working or how well it's working based on the current rent roll.

In terms of competition, I know we've talked a little bit about this with the REITs and that kind of thing. Has that ever been an issue or a concern for you? Are you ever worried that it will be? Because I know competition is one of those big things. It's one of the very few things that storage owners really don't have control over. I can't control if somebody is going to build a huge thing right next to me and that will definitely affect me if they do. So, is that ever a concern in your mind or do you not lose sleep over that?

Jon: Yeah. And I know why you're asking this question, because we talked about it before the call. But no, the deal that I bought this year, it's actually in my hometown where I grew up. I already own a facility in town. The deal that I bought this year were two facilities. So now I've got three facilities in the same town, different areas of town, which to me is beneficial. I was super nervous. I'm still a little concerned because I have, I think it's two owners that don't know what they're doing and just building storage because they're like, “Oh, storage is cool. I'm just going to keep building.”

Seth: Oh, no. Yeah, that's scary.

Jon: Yeah. Fortunately, one guy is on the other part of town where, I don't want to say he's not competition because I could pull some renters from there. But yeah, he's kind of in a different part of town. The other guy is a competitor of mine. Doesn't know what he's doing. Again, neither one of them. I won't say they don't know what they're doing. They're just shooting from the hip. They're not doing feasibility studies. I guarantee it. They don't do rate management. They don't do anything that you see that sophisticated storage owners do.

So yeah, I am a little nervous. I have to work a little bit harder in that town to rent my units. For the most part, I'm still okay. But we'll see over time if demand drops what's going to happen. Yeah, we'll see.

Seth: Yeah. On that whole issue, has low occupancy ever been a problem for you or even if it hasn't, but if it becomes a problem in the future, what levers do you have to pull to fix that? Is it basically advertising, lowering rent? The first month is free rent or anything like that? How do you resolve the occupancy problem? Especially if there's a huge competitor near you?

Jon: Yeah. Price wars. Yeah, right now I do have a special actually in that town, half off first month. Actually, the one guy that just built a ton of units in there, I guess he's doing, what was it? I think it's half off for six months. I don't know why he jumped to that. That kind of explains to you, he doesn't really know what he's doing. But yeah, price wars. You can go into probably any big city, especially areas that are saturated and just look at what those storage owners are doing. $1 first month, half off for the first three months, whatever. Yeah, you just run specials, you start dropping your rates.

Occupancy is the biggest thing because especially the big REITs, they just want to get you in there. Because guess what? Month two, month three, whenever your special ends, your rates are going up. So, you just paid $75 for that unit for month one. However, now it's $125 month two. That's what they do. I don't know if they do it that quick, but yeah, they raise your rates all the time. They just want to get you in there.

Seth: Yeah.

Jon: Because they know you're going to stay. It's a sticky business. Most people probably that rent storage probably say, “Yeah, I just need it for a month.” 20 years later now they've got three units. It's just what happens. It's sad. But it happens.

Seth: Yeah. What are the most effective ways to trick people? Like that first month is free. I've heard somebody say, they raise their rent $5 every month. So, it doesn't ever really feel like anything, but $5 month after month after month. I don't know. Is that a legitimate strategy people use?

Jon: I haven't heard that, but yeah, especially if they're set up on recurring payments. We all have some type of recurring payment, right? $5, we're not going to cancel anything for the most part. I'm sure there are people that do that. Yeah. I don't know. I usually raise rates. It depends on occupancy, but I usually do it maybe two to three times a year.

Seth: Yeah. I know when we were talking a few weeks ago, something that struck me was deferred maintenance and how much it's not actually a huge problem apparently. At least compared to multi-family residential properties. So, if you have a facility that's kind of run down, maybe it doesn't look that good. How important is it for you to get on that? Like paint the whole place, put new doors on. Does that really matter? Does that give you the ability to raise rent or is it smarter to be just like, “It's not a huge problem. It still works. It's just a storage room, who cares?” I guess, does the market respond much to that either way, or do people not really care? They just want a dry place to store things.

Jon: It's all about market demand. That's the basis. It's all about market demand. If there's a ton of demand and no units available, it doesn't matter what your facility looks like for the most part. You can get full, you can keep raising your rates, whatever. If doors don't work, that's a problem. You're going to have to fix that. Actually, I was at one of my facilities yesterday and I'm just looking around and I'm like, the colors are ugly. I'd love to paint it, but I just had an auction. So technically I'm not full, but my guess is in a month I will be full again. And not having to do anything like that. I do put more stone down. I try to make it look the best I can, but I was looking around and I'm like there are tons of corners that are bent, damaged, folded.

And this facility is ugly. It's brown trim, yellow walls, and then the doors are white and everything's faded. The latches are rusted and we're replacing the latches as people move out. But it's crazy. And this facility actually has interior walls that are wood, OSB. Very interesting.

Yeah, there's a ton of demand. Demand is the whole thing.

Seth: How much is it if you wanted to repaint that? How many thousands of dollars would that be?

Jon: One of my good friends owns a painting company. However, he lives three hours away. I think he did give me a quote for that facility. Everything, but the doors and that's 30,000 square feet. I think he was around $15,000 maybe, which to me, I want to do it. He just didn't have time. He did paint my second facility. It was all block. It needed it just because paint was crumbling off. It's actually a concrete block. I need to seal the concrete block. So, he did paint that one and it looks a lot better. But yeah, as far as renting, as long as there's market demand, it doesn't matter. Like you said, it needs to be safe and dry. That's the biggest thing.

Seth: When we talk about the management of these things, I know something that you have done, correct me if I'm wrong, but I believe what you've done is you've hired boots on the ground for each individual facility. A person who checks in, like, is there, I don't know how often they're there, how long they're there, but basically a person to keep the place tidy. If any issues come up, they can take care of them. They can clean out units. Is that accurate? Is that how you're handling it?

Jon: Pretty much. Yeah. Boots on the ground. Most of my guys are retired, semi-retired. Some of them are still working. Their main duties are, when someone moves out, they need to go get the unit rent ready. So, sweep it out, spray the springs. And then we put a combination lock on the unit. They pick up small trash around the facility and then anything on top of that, I'll pay them extra. If I need them to empty a unit, because someone left a bunch of junk behind, I'll pay them extra for that.

But yeah, two main things are getting units rent-ready. Letting us know if they find another unit that was emptied that we didn't know about, the person didn't call in. And then picking up small trash. Then I'll use vendors to mow, take care of snow, fix any maintenance issues, stuff like that. My boots, they have a pretty simple job. It’s to keep an eye on the place. And I try to overpay them for that so that they take some type of ownership in the place.

Seth: And what does that look like? How much do you have to pay them for this?

Jon: For the smaller facilities where I have lower turnover, they're there maybe once a week, like quick in and out, just picking up little trash. They're getting around $100-ish, $150 a month. Some of the guys I've gone to more of an hourly rate because it's higher turnover, and it makes more sense for both of us to do that. So yeah, it's probably anywhere between $150 and $350.

Seth: Say when they're cleaning out a unit, can they just keep whatever they find? Is that part of their compensation or do they have to just chuck it into the garbage or how does that work?

Jon: If it's an abandoned unit, yeah, they can take it because it's abandoned, we can throw it away. If it's an auction unit, they don't even see it. Right now, I'm actually doing the auctions myself. But yeah, if it's abandoned, yeah. It's technically trash and more likely it truly is trash and they don't want anything in it.

Seth: With this auction process, how does that work? How much money do you make on those? Is there a website you do this through? Walk us through that process.

Jon: There's a few websites, storageauctions.com is the one that I use. Every state has its own lean laws that you have to follow. For me, in Ohio, I believe it's 60 days. And then you can start the auction process. I usually wait until I have a decent amount of units. We'll call it double digits basically. And then I'll do an auction. I don't want to do an auction for two units. It's just not worth my time or anyone's time.

Yeah, I'll usually wait till double digits. I have to send out a certified letter. I think I got to give them a month from the time I send a certified letter, give them a month to pay. If they don't pay, cut their lock, put it on the auction website, auction it off. It's pretty simple. We call them, we text them, we email them, we try to get ahold of them the best we can for them to pay. Most people that start going down that road, they are never going to pay. Yeah. And as far as banking, I don't make much. I've had one unit go for a significant amount. Everything else is like $20, maybe $80, here and there.

Seth: Oh, really?

Jon: Yeah. So not much. When I started, actually one of my boots on the ground is an auctioneer and I had him doing in-person auctions and was making, I don't want to say a decent amount, probably making at least three times what I make now. But it was such a hassle and you'd have like 50, 60 people show up at the facility. It was too much. But yeah, in-person auctions, I was making a lot more money. Just wasn't worth the hassle.

Seth: Has anything of significant value ever been found in one of those abandoned units? Like bars of gold or anything like that?

Jon: I wouldn't know. About the only store I have, I thought it was an auction unit. I went to cut the lock, open up the door, and there was like a 1980s Jaguar car in there.

Seth: Oh, nice.

Jon: And I was like, “Oh, I don't want to auction this off.” Long story short, I was able to track down who the owner was. He had another unit. He didn't realize he had two units. He was an older gentleman. He was paying for one, wasn't paying for this one. So, he caught up on payments. Everything was fine. But yeah, that one would've been… Auctioning vehicles is a whole different animal.

Seth: And that was just you being a nice guy, right? You had every legal right to just take that car if you wanted to?

Jon: To auction it off I would've to go through the process and would've found him eventually.

Seth: Oh, I see. Got you.

Jon: Yeah. I found him before I basically went through the entire auction process. I thought it was an abandoned unit. So, when I was cutting the lock, I didn't think anyone was even renting it.

Seth: With the locks? So, do people bring their own locks or do you provide locks for them?

Jon: Yeah, for my facility I have people bring their own locks. Yes.

Seth: Okay. But earlier you were saying, when they clean out an abandoned unit, you have your boots on the ground put a combination lock on there when it's cleaned out. So, when the new tenant comes, they just take that off and put theirs on it? How does that work?

Jon: Correct. Yeah. They're basically chintzy combination locks that I have found over time to be useful because we're locking vacant units. My first deal, I had squatters. People living in my units. I would go there to open up a unit because there's no lock on it and there's someone sleeping in there. I was kind of tired of that. Now yeah, it's a real simple combination lock just to lock those. Unfortunately, some people do continue using that lock. That's on them. I'd rather them not because then I have to buy more locks, but yeah, we recommend everyone bring their own lock. And we put those just on vacant units.

Seth: Do you make people sign up for renter's insurance or something or at least give them the option to?

Jon: The option. A lot of people are trending towards forcing it. I haven't done it yet. Something I probably need to do, I just haven't yet.

Seth: And forcing it why? Just because they can make more money from it or is there a liability on the owner in some way if they don't get the insurance and something bad happens?

Jon: Talk to your attorney, but there's basically no liability for the most part, as long as your lease is in place for the storage owner. But yeah, tenant protection helps the tenant, protects the tenant, and owners also make a cut of it. So, it's another value-add piece that if you're making even a dollar per unit, you're forcing people to sign up, you're making money. Now you're making people sign up, you're making more than that. More than likely. Or if they're not signing up, they have to provide proof of renter's insurance, some type of insurance that covers them.

Seth: How much is that for them to get renter's insurance?

Jon: Renter's insurance, I'm not sure. For TPP, tenant protection, it varies. I want to say between… I think it starts at $6 or $8 up to like $20-ish, I think. Somewhere in there.

Seth: On that note about people living in the units, do you have security cameras at all these facilities currently? Can you see if that were to start happening, you would know and you could stop it?

Jon: I do have security cameras at all of them. When I started, I watched them way too much. I almost watched them like a sitcom.

Seth: Yeah. I could see myself doing that.

Jon: Yeah, I don't anymore. I'll get on if I need to check on something. I don't say it's easy to find someone living there, but for the most part, you find out pretty quickly. Boots will tell us. Yeah, there's a bunch of different ways to find out if someone's living there. You just find out.

Seth: What kind of security camera system are you using? Do you like it?

Jon: I've got three different kinds. I've got a really good installer that I met at my first facility and he travels. He travels the nation. So, if you need him, anyone else needs them, let me know. He's really good. Right now, the latest ones he installed are Lorex that you can just buy at Costco. But I've installed Swann, Reolink. I think mainly of those three.

Seth: Which of those three do you love the most and least?

Jon: I had issue with Swann cameras. For the most part, the DVRs, the apps are relatively the same, but the Swann cameras seem to take on water more and I've had issues with that. Reolink, knock on wood, that was my first facility that I installed, Reolink. I've had no issues with those cameras. Even the Lorex, I think I've had a couple take on a little bit of water. Yeah, they're all relatively similar but Swann, and I don't even know if Swann is really making any more. I know their customer service is awful. I tried getting the camera swapped out under warranty and couldn't get ahold of anybody.

Seth: I have the Nest Cam thing for my house. Is it a similar thing where like there's an app, it records events that happen like if there's movement or something, you can watch a history of it. It stores it in the cloud. Is that what Reolink and these others do?

Jon: Yes. But you don't have to pay for it. So, you're paying upfront for the cameras and DVR system. But you're not paying a monthly subscription.

Seth: This DVR system…

Jon: Yeah. It's recording.

Seth: Got you. The DVR system, do you have to store that somewhere or is it stored in some cloud somewhere?

Jon: It's in the cloud somewhere. Yes.

Seth: Okay. Got you.

Jon: Cameras are nice to have an extra eye on your property, and it is good for security, but there's not… How do I word this? I've had break-ins and the cameras don't really help. I can kind of see, “Oh, this is how they broke in” and then kind of correct the issue so it doesn't going forward. But other than that, you're not going to see someone's face on the cameras. At best, maybe you'll get a license plate. But otherwise, yeah, they've got a hoodie on and you can't see anything. You can see what units they go to. But they're nice to have. I like them, I'll always put them in, but they're not a necessity.

Seth: Got you. Sounds like you've had a couple of crazy stories with people living in their units and people breaking in. Any other bizarre stories that the average person wouldn't believe or anything like that?

Jon: You name it.

Seth: Really?

Jon: You name it. I've had everything.

Seth: What's some crazy stuff that's happened? Because I think a lot of people think of self-storage as a drama-free business. But it sounds like maybe that's not the case.

Jon: You have to get kind of callous to it. And I will say Reynolds helped me a little bit just with kind of getting to be callous to dumb things people do. I bought my first facility in June of 2019, somewhere in there. We went on vacation a month later. Fortunately, I had my boots on the ground, my local person already in place. But while I was on vacation for that week, I had three or four break-ins. Our boots found two people living in units and drug paraphernalia all over the facility. I thought that was like the worst thing in the world. How is it ever going to get worse than that? Well, this year, I, unfortunately, had a long story, but I had someone take their life in one of my units.

Seth: Are you serious? Oh my gosh.

Jon: Yeah. It can't really get worse than that, but that was, yeah, that's obviously awful. That's as bad as it's going to get.

Seth: Did you have to discover that or your boots on the ground did?

Jon: The sheriff called me and they kind of knew what was going on, I believe. They wanted access to the facility, so I gave them access and I was watching the cameras. More cops showed up, not a lot was happening and then the ambulance showed up and kind of figured everything out from there.

Seth: Oh, man. That does sound horrible. I can't imagine it getting worse than that.

Jon: That's about as bad.

Seth: I mean, maybe it can. That's horrible.

Jon: You see everything, that's obviously super rare, but as far as people live in units, it happens. People break in, it happens. Drugs happen, especially if you have an undated facility and it's dark and people realize that and they'd go by one facility, that's what people would do. It was a dark facility, not gated. And people would go to the back of the facility and sell drugs or do drugs and or all that stuff.

Seth: You said that was not gated.

Jon: It was not at the time. Yes.

Seth: Does the gate and the fence, does that solve many problems or is it just like a perception of security when it's not actually that secure?

Jon: It definitely does. In fact, when I have a gate go down, I have many panic attacks. Because it's like, I need that gate working now. During the day, not so much, But at night, yeah, definitely. Obviously, people can still get in, they can hop the fence, they can cut the fence and I've had that. I've had someone literally cut down the post, I don't know what they're called, but then cut the fence. Just the links that attach to the post, peel back the fence and roll side by side out. So, people will get in if they want to get in. But the gate definitely deters the majority of stuff.

Seth: I've heard that, there's actually a guy, one of my neighbours, he does commercial property management for a company that handles it. Anyway, he was telling me that gates are the number one biggest maintenance issue all the time when they exist. Just because they go down and everybody is stuck. So, what causes a gate to go down and how do you get it fixed? Could that really screw things up for days on end possibly? Or what does that look like?

Jon: Great question. I don't know. I need to find out from my gate company why my gate keeps going down.

Seth: Is it like snow or something or it just breaks by itself?

Jon: Snow can, ice can. There are so many reasons. You can get condensation on the reflector and or the photo light that shoots the beam across the reflector. Sometimes you just need to reset the breakers to reset the software. I don't know if it's software, whatever, reset the mechanical system and then it'll work. But yeah, snow and ice are a big thing. Especially if you have freezing rain, it'll get all over that chain and you literally need to melt the ice off the chain.

Seth: Like with a hair dryer or something? How do you melt that off?

Jon: Anything. Or wait a few days. You're up in Michigan. So, you get worse weather than I do, but yeah, this last winter we had at least two or three… Well, no, maybe all the gates at one point were frozen shut. Now, during that time, as long as it warms up within a day or two, you're not going to have anyone go out there anyways. And that's what I was banking on, the sun to come out, melt the ice and it'll work.

Seth: Yeah. And I guess that was my other question was like, how big of a problem is it if all of a sudden nobody can get in or out? Is it the end of the world or is it like, “Ah, that's inconvenient, but whatever, we'll be fine?” Is that usually how people treat it?

Jon: Mostly, it's just inconvenient. In my mind, it's the end of the world, but it's just inconvenient. Because yeah, people too will complain to complain. And also, I kind of hope that they get, “Well, give me half off for the month then since your gate's not working.” We'll get that which will work with people. But yeah, I think it's more of that. There are very few people, unless you're running a business out of that storage facility, there are very few people that need in there right now.

Seth: Yeah. Because I remember one time, I was helping my brother move and I had to drive like hours to get to the place where his stuff was stored and the gate was busted and it was a huge problem because I'm not coming back here, this needs to work now or you're up a creek. I was replaying that scenario in my head. It actually is a huge problem if it's broken, but it sounds like most of the time it's probably not a huge issue.

Jon: Yeah. Most of the time it's not. And I don't want to say all of them, most of them have a safety feature that if it's stuck closed, you can push it open.

Seth: Oh, I got you. Unless it's frozen.

Jon: You still can, you just have put some muscle behind it.

Seth: If you are Arnold Schwarzenegger or something like that.

Jon: Right. Yeah.

Seth: I know you've definitely gone through a journey, anybody who starts something like this, their first facility, first time dealing with all these different issues that can come up versus somebody who's been sort of callous to it and they've been in it for several years and they've kind of seen a lot of what's going to happen. So, when you go back to your first year, what was the hardest part of the business in that first year? And then fast forward to now, today, what are the hardest things about the business with your current situation and your current mindset?

Jon: Yeah. To tie both those together is when I started, I didn't have systems and processes. I did, but I was the business plus the property management and the software, but any issue that came up, I had to either take care of it or delegate it.

Now I have systems. So, for example, when I was on vacation, when I had all those break-ins, all those issues, fortunately, my boots were there. However, I didn't know how to take care of the situation. I didn't know the system to take care of it. Neither did he, so I couldn't delegate that to him. So, I had to take care of the issues when I got back. And that's when I found out, “Okay, let's lock these vacant units.”

So, over time I've gotten these systems and processes in place. I now have an operations manager that takes care of it, he delegates everything, the boots on the ground. He communicates with them. He deals with emails from the property management company. I'm kind of overseeing all that. So yeah, systems and processes, taking yourself out of the business is huge. And you can't scale if you don't do that.

Seth: Yeah. How many units did you need before you could justify hiring this guy to basically replace you?

Jon: Everyone's got a different answer.

Seth: I know. I'm just thinking, like your situation, when were you like, “Okay, now it makes sense to do that?”

Jon: Here's the thing. Over time, my rates keep going up. My income also keeps going up. So, it's more based on that than units. But yeah, I could have on my fifth facility. I hired someone technically when I got my sixth facility. And that was about six months after I got my fifth facility. And it's a part-time gig. The way I run everything, it's not full-time. It’s part-time. My current guys may be doing 10 to 15 hours a month, maybe. Technically, he's kind of on call dealing with emails, but he's got his own business. He's able to take care of both at the same time.

Seth: How much do you have to pay that guy?

Jon: It varies. Since I've taken on new facilities, he's around $1,500 a month. For his time, he's making good money. I'm also giving him more work, and then I pay him hourly for that extra work. I'm trying to have him grow with the company too, to put some things in place there with that.

Seth: Yeah. And to manage him, what does that involve? Just kind of standing over his shoulder at various times to be like, “Is he doing what he's supposed to be doing?” How much do you still have to communicate with your individual boots on the ground if he's supposed to be doing that?

Jon: My operations manager is awesome. He was our first mastermind. I've known him for a while. He's younger, he's mid-20s. But we have similar personalities and he's going to find a way to get it done. That's what I found. I had an assistant technically last year for eight to 10 months. She was a great person, did great work, but as far as figuring things out, I had to answer a bunch of questions. With my current person, when he took over, I may have answered one question in the first two weeks.

Seth: Wow, man. How do you find a person like that?

Jon: It was more seamless. He's going to figure it out. If he can't figure it out or doesn't want to completely screw something up, he'll reach out to me, but it's still rare. He figures things out. That's the biggest thing. And I think that's also missing in this world today. Just people being resourceful, just do it, just go figure it out. Don't ask me. I have faith in you, do it. Even if you mess up, we'll figure it out.

Seth: Yeah. The only thing that should be standing in your way is gravity and law enforcement. Otherwise just do what you got to do to get it done.

Jon: Right. Yes. And it's hard to find those people.

Seth: In my own experience, kind of just being self-critical on that. I think one thing I've learned is that the person standing in my shoes or in your shoes in this case kind of has a role to play in that too, in terms of empowering them to do it. Say, if they do something and your response is, "Oh, you should have talked to me about that." Then guess what? They're going to ask you about it next time. They're going to make it a lot harder. So, if the person at the top is a micromanager, they're going to make it much harder for themselves and for that person to get the job done. It probably has a lot to do with the tone that the person at the top sets and the expectations.

Jon: And how you train them. With my first person, I did not do a great job training. I thought I covered most bases. I didn't cover everything and I needed to cover everything times 10. I didn't. With this person, I knew going in what questions and issues he may have. So, I covered that. I basically gave him a small training manual, but more or less a FAQ page. If this happens, do this.

Seth: You just have a quick auto reply that just says “Figure it out” and that's your reply to every question.

Jon: Yeah. Right. Basically.

Seth: No, those are really good insights. So, how many hours per week do you have to work now? How busy is your typical week? It sounds like this is pretty hands-off for you, right?

Jon: Do I have to work? Technically I could put one person. I could hire my CPA and say, take care of my QuickBooks and I'm out. I enjoy what I do. Every day is different and I'm trying to get in some other areas too. I remember talking to Mike Wagner, first one or two times I talked to him was I enjoy rental real estate. However, it's almost too passive. I enjoy running a business too. So, that's what I like about storage. It's both. It's real estate and it's also a small business. I enjoy keeping my hands on things, dealing with rental rates, rate management. I enjoy all that stuff. So, I still have my hand on things, but yeah, if I wanted to, I could go away for a month and nothing would change.

Seth: And just to recap, I don't even know if we talked about, when was it that you bought your first facility? What month and year was it?

Jon: June of 2019.

Seth: Okay. And we are in July of 2022. Was that three years? Yeah. Dude, so, in three years you went from basically nothing in storage to a full-blown legitimate business that you are not stuck in the day-to-day of. You don't have to get into specific numbers, but when you look back, when you were just working your job, when that was your main income and whatever dollars and cents were coming up from your rental properties, versus your financial situation today, how does that compare? How much better off are you now versus then?

Jon: I can't compare. I can't even compare. And I made pretty good money at my 9-to-5. Yeah, I really can't compare. I've even gone through a big cash-out refinance that we bought our house and the house that we can probably call our dream home. Yeah, I've been very fortunate. Timing was right. A lot of things lined up. But yeah, I can't even compare income compared to what I made before. And the freedom. The freedom is the biggest thing. And I'm sure you can speak to this. To me, the income is great, but the income is for the freedom.

Seth: Yeah. Are you making like three times more, five times, 10 times?

Jon: I've done a big cash-out refi, which changed things a little bit. Because then my monthly expenses went up for my new loans. It's over three times as much. Yeah, maybe four.

Seth: When you say cash-out refi, you mean for one of your facilities you basically refinanced and pulled much cash out?

Jon: I did that for five of them.

Seth: Five of them. Okay.

Jon: I went pretty hard at this. I sold everything off basically and used all my bolts in my chambers for the most part. I was equity rich and cash poor. I had to do something. I've gone about a little bit different than some other people. Some people syndicate private money, I've used all my money. So that changed things. I needed to pull some cash out for a rainy day and yeah, not to be so cash poor. So yeah, I did a refinance, pulled cash out of five facilities.

Seth: And was that for what purpose? Buy more facilities or just to get your equity out of your properties and have the cash? What are you doing with the cash?

Jon: All that. I bought a house in cash. The down payment for the deal I bought this year. And yeah, hopefully to buy more deals too.

Seth: What does this do for your tax situation? Do you have to pay a lot in taxes or do you write a bunch off at appreciation with all these facilities?

Jon: Yeah, a lot of depreciation. The cash out refi was tax-free money. All the money that I took out from that was tax-free. Yeah, depreciation is great. I could go further with it and do a cost seg. I haven't done that yet. Because at some point you're going to pay it anyway. I'm okay with where I'm at right now with the tax bill. Well, relatively okay. Never okay paying taxes, but yeah, relatively.

Seth: But you're not paying zero taxes, right? You still have to pay some income tax. Got you.

Jon: Yeah. Yeah. And I hear real estate investors all the time say “You shouldn't be paying any taxes.” Well, you're coming from a multifamily where you're not getting the returns that I'm getting. You're not making the same amount of money, and I'm not saying in an egotistical way, but it's completely different. You may be making, what is it? I think the general rule of thumb is $100 a door if you're buying an apartment. Well, the returns, I can't even compare the returns with storage. So maybe I'm making 10 times that in storage. Of course, I want to pay some taxes on that, unless I do the cost seg. If I did the cost seg, then yeah, I wouldn't have to pay taxes right now.

Seth: Got you. What is your plan at this point? Do you want to buy more facilities or do you want to just kind of coast and get into some other business altogether? I don't know, what do you see your one or three- or five-year plan looking like?

Jon: I definitely don't want to coast. I've struggled with this. Because you hear some other people talk about “Well, you get to a certain point, you don't have to worry about income. You don't have to worry about finances and you can just enjoy life and spend 100% time with your family.” I love my family. I want to spend as much time as possible, but also for me to be a better person and to be better for them, I need to also fulfill myself by growing my business, helping people. I enjoy helping people. I enjoy talking about this stuff.

So yeah, I just want to keep growing personally, professionally. It's hard to sit still and just do nothing. I've done that. I tried it because I was listening to the other people kind of, and I'm like, no, this is horrible. So, yeah. I just want to keep growing, whether it's in storage. I still look at small businesses. Yeah, I just want to keep growing.

Seth: Yeah, I know what you mean. I've experienced this probably not quite the same as you, but this idea, what sort of informed or motivated me to make certain business decisions years ago, was to get to this place where it's like, “Okay, I'm comfortable. I'm secure, the money is there. I'm all warm and cozy. This is what I dreamed of.” But you get there and it's like, “Well, this doesn't really fulfill me.” I guess it takes care of my needs, so to speak, but this isn't everything. I'm not actually happy about this. There's got to be more than just getting to a place and then just sitting there. Because it's like, “Hey, where is my purpose now? I want to feel like I'm growing, like I'm doing something, like I matter still. I'm still relevant.”

So, I can totally relate to that. Not that I've gotten to a place where I'm just sitting around, but I don't know, it's kind of just this realization that what you think you want, may not necessarily be exactly what you want. It's just not that simple.

Jon: I completely agree. Actually, myself and a buddy had this talk yesterday, and there's a group out there that I think a lot of people misconstrue. And I'm not going to name the group. We kind of have this idea of we're going to get to a certain spot and now we can kind of coast. Maybe I'll buy a deal every once in a while, once every three years. In my opinion, you've got to find, and everyone's different. We all want to get here for a reason and more likely, it's probably a big reason, it's because of family. We want to have the freedom to spend time with our family. But where's that equilibrium? How much time do you really want to be with your family and give them your all too? For me, it changes day-to-day.

Some days I can only work an hour and be good with my family the rest of the day. Some days I need 6, 8, 10 hours’ worth of work to be able to plug in my family 100%. Every day is different. But yeah, I think we can't just stop, especially anybody that's kind of… “make it” is the wrong word, but accomplish your goal to get to somewhere. You're a producer. You need to keep producing, you need to keep making this world, this place, a better place to live. That's my whole thing. I don't like the fact that there are people out there that are like, “No, I'm comfortable now. I'm good. I'm just going to retire and do nothing. I'm 27.” No, you're a producer. You need to get out there and you need to keep producing and make this place better.

Seth: Yeah. I know people like that in my life whose goal is to do nothing. They cannot wait until they can just sit around and play video games and watch TV all day. And just like that idea, it depresses me just to know that that's somebody's existence. That's really your highest and best use? That is what you aspire? It’s to just sit and do nothing? It drives me crazy, but I don't know.

Jon: And they'll never get there. They'll never get there. Because those people don't have that drive to get there. The people that have the drive are the ones that make it and they may get confused for a little bit and be like, “Okay, I'm retired.” But eventually, they're going to get either depressed or tired. Something. Something is going to kick them in the face and say, “No, I need to keep going here.”

Seth: Yeah. I know when Tim Ferriss's “The 4-Hour Workweek” book that I read a decade ago, that was one big thing he talked about, is how this idea of just retirement in general, doesn't work. And he gives a few reasons. But one of them was that, just this idea that if you're somebody who can make enough money in your working life to get there, the reason you are able to do that well is because you were driven and you wanted to accomplish things. And by the time you get there, it's a paradox. It's like, that's not what you even want to do. So, why would that be your goal? You'll be so bored you'll want to stick bicycle spokes in your eyes, I think is how he worded it. Yeah. It's all making sense.

Cool, man. Well, this has been fascinating. Thanks a lot for doing this. At the end of a lot of our shows, I like to ask three final questions. So, I will ask them now. Question number one, what is your biggest fear?

Jon: Biggest fear. That's a good question. You didn't prep me for these.

Seth: Yeah. And it's interesting because I don't want to speak for you, but given just how much your life has changed over the past three years, maybe this has changed a bit. Maybe your fears today are different than what they were three years ago. But as of now, what would you say your biggest fear is?

Jon: Actually, this is an easy answer now that I somewhat thought about. Something happening to my kids, to my family. That's my biggest fear. Everything else I think you can figure out, but yeah, something happening to my kids. Biggest fear.

Seth: I get that when I'm watching movies or something and something bad happens to a child. Back before I had kids, it didn't affect me that much, but it really disturbs me when I see that kind of stuff. It's interesting.

Jon: You can't watch… Liam, what's his name? Liam Neeson. You can't watch his movies anymore. Taken.

Seth: Yeah, exactly. My kids are currently five and almost eight. Whenever I see a kid in that age range or younger that I've experienced, that's when it really hits home. But yeah, like in the Taken movie, for example, when my kids are teenagers, I'm sure that'll hit home even more. So yeah, I hear you.

What would you say you are most proud of? And this doesn't have to be business, but it could be.

Jon: Most proud of. Well, I'm going to cheat and use my family for every answer here. I'm most proud of my family. That's an easy answer. Secondly, would be to kind of pat myself on the back a little bit, just figuring things out with storage, with everything. It's been a crazy ride and it's been so short so far, but yeah, I'm proud of what I've done and where I've come. A ton of people and you're one of them that have helped me get here. Yeah, it's crazy.

Seth: When you look at what you've been through here, there are a lot of people who want to get where you're at or someplace similar to that, but that's kind of where it stops. They want it, but they won't actually do anything or they don't know how to do it. But when you look at your experience, how much of it would you say is like luck and timing and that kind of thing versus, “No, I actually really busted my butt to get here. I worked really hard and that's why it happened?” What would you say is the mix of luck versus effort on your part?

Jon: Luck and timing will find you if you're putting the work in. I was putting the work in. Like I said, I've kind of fast-forwarded from 2015 to 2020, but I was grinding. I rehabbed the entire house by myself and it took me four or five months. At lunchtime every day I'd be over there, on weekends. So yeah, it's just grinding.

Seth: Interestingly though, I hear you, but that rehab is not really what played such a pivotal role in this. Maybe as a first step to get some equity, but that's not really what moved the needle. When you say grinding, I guess maybe when we start in 2019 going into the storage world, what did grinding look like? How many hours a week was that or how stressful was the work?

Jon: The grinding looked different. That was more physical and a good way to start, but then it transitioned into focus. And really learning where I want to go, how I was going to get there, and also surrounding myself with the right people too, the bigger mindset. And things start to just line up. But yeah, when I say grinding, when I was basically hunting for my deals, my storage deals, I had a plan and I had goals. Goals were probably the biggest thing that got me, and still get me to where I'm going.

But every night, for about two hours a night, once the kids got to bed, I would work out for a half hour. I would then work on either my mailer list, my marketing list, or write letters to these storage facilities. So, those two hours a night I was working out and then hour and a half, I would work on my business to try to grow it. And I was religious about it. Just hammered it and kept grinding.

Seth: Yeah. Actually, one more tangential question about that mailing thing I was going to ask you earlier, but I forgot. Your list, for example, when you said you mailed out to 60 people. Were you using some data service for this or were you just literally hunting and pecking for storage facilities on Google Maps? How did you compile this list of people?

Jon: Google Maps. Because if you think about, especially the towns that I was looking in, there are not that many storage facilities. Maybe between 6 and 20. So that's pretty easy to find. Then I just looked up the owner's address and mailed the address. Owner's address.

Seth: And you looked that up? How would you do that? Was that a data service or just the township website or something?

Jon: I use the county auditor's website, which I think most counties in America have and will give you that information. But I know that people are smarter than me that know how to pull that stuff easier, phone numbers, all that stuff. But yeah, that's how I did it.

Seth: Yeah. That's interesting. Because I know a lot of people, at least from the land investing world, they just see a data service as the answer to everything. But there are a lot of times those facilities don't show up, like the zoning isn't right. Or even when you Google “storage facility on Google Maps”, sometimes a lot of them won't show up there either. These people literally do not advertise. It's like their goal is to not be found. So, sometimes they're hiding.

Jon: They are. Yeah. I would even almost drive Google Maps to try to find buildings that look like storage and then look it up and see if it was or not. Because yeah, most of them did not have a Google listing. You couldn't find them on Google. But yeah, in these smaller towns, it's pretty easy to spot the storage buildings.

Seth: Okay. Final question. And it sounds like maybe you're figuring out this answer right now, but the question is, well, we'll see. Suppose you got $100 million dollars wired to your bank account and you're not allowed to stay on your current career path. So, no more storage facilities, no more real estate, but you can do anything else you want to do for the rest of your life, what would you do?

Jon: I'm probably donating a lot of that. Some type of service business, which I've been looking at. Maybe even some type of coaching too, which I'm kind of getting into as well. So yeah, I don't know. I'd chase whatever shiny object that would pop up that day.

Seth: Yeah. When you say service business, what is an example of that?

Jon: Like HVAC, electrician, something like that. And I'm somewhat interested in that. We'll see. I also don't want to lose my freedom, so it has to be the right fit.

Seth: Yeah. There's a company near me, it's a very well-known landscaping and lawn mowing service. If anybody thinks of it, it's like the most well-known brand in West Michigan. And I know a couple of people that work for that company and they were telling me that this guy, it's actually just like a hobby for him. It's like not even a serious business. He just didn't know what else to do so he started this company and it's huge. Like the biggest one. His actual business is a real estate developer. But I don't know, just when I heard you said that, it made me think. Maybe one of these guys who are just like, “I'm bored, I'll start a business, it's going to blow up and be huge. And I'll just make that my little pet project.” Some people are gifted like that and maybe they just get lucky or land on the right thing.

Jon: I think there are more people that are trying through educators and communicators like you. I think there are more people trying to find assets and not a ton of people are looking at businesses as assets. I think that's kind of a big wave that's coming. We'll see. And that's another reason why I've been looking, I kind of want to hit the next wave before everyone else does.

Seth: Yeah. I know we had talked about that a little bit in our mastermind was one of the people in the group was trying to find ways to just squeeze more cash flow out of the facilities he owned. And that was when it occurred to me, I know for a lot of people real estate, it's not necessarily a huge money maker. It's just a place to park cash, get some tax write-offs, make some cash flow, but if you're just going to buy single-family rentals and that's it, it's going to take you a long time to get to where you want to go with that, unless you get super lucky and write a huge appreciation wave.

But if you want a money machine, that's what an active business is, whatever that happens to be. But self-storage, it's a weird hybrid of the two because it is a business, but it's also kind of a sort of passive-ish real estate, depending on how you manage it. So, I don't know. It's just interesting how you'll probably make more than the average real estate investment, but it's also not as much money as you could make if it was serious… Well, I don't mean to say not serious, but a business that exists to create products and just make as much money as possible. So, it's just an interesting kind of hybrid between the two.

Jon: Yeah, yeah. No, it is. Well, yeah, there's some retail in there. You don't need storage. Not everyone needs storage. And that's what concerns me about storage too. Not everyone needs it. You need a house, you need somewhere to live, you don't need storage. So yeah, that's a concern of mine.

Seth: Yeah, man. It'll be interesting to see where the business goes and it sounds like wherever it goes, you've had a good three-year ride so far. So, I'm excited to see where it goes for you.

Jon: I have. I appreciate that.

Seth: If people, you don't have to do this, but if people want to reach out to you or I don't know, learn more about you or whatever, is there anything you want to share like a website or connect with you somehow? Totally optional.

Jon: I'm late to the game, but I'm working on that stuff, but you can find me on Facebook, Jon Farling. It’s pretty easy to find. Probably the only one. Yeah, hit me up on Facebook, I’d love to chat. But yeah, I'm working on that whole funnel, I guess.

Seth: If you do end up, I don't know, making some website or something for coaching or whatever, let me know what it is and I can retroactively go back to the show notes for this episode and add that in there.

Jon: Awesome.

Seth: So, this is going to be episode 138. If you guys want to go to the show notes, it's retipster.com/138. You'll find links to a lot of different things we talked about in this conversation. And if Jon ever gets his act together with his website or whatever, I'll be sure to go back and throw that in there too. But in the meantime, thanks a lot, Jon. It was great to talk to you again and hear about your journey. Yeah, I can't wait to see how things pan out for you.

Jon: Yeah. Thanks for the opportunity and thank you for doing this podcast. You're obviously helping people nationwide, so it's an awesome thing.

Seth: Yeah. Awesome. Absolutely. Thanks, man. Talk to you soon.

Jon: Thank you.