JF1145: You’re Near Bankruptcy – What Do You Do? #SituationSaturday with Scott Meyers
Scott was in the checkout line at Walmart when his debit card stopped working. He had hit rock bottom. Lucky for him, he had the support of his wife, family, and other mentors to help him through this tough time in his life. Losing all his money was due to the lending practices that were going on in the early 2000’s, Scott had 80 houses he was renting out – but the tenants were now able to go buy their own house with just a signature. Hear how Scott was able to get through this time and build his Self storage business. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Scott Meyers Background:
-Owner at SelfStorageInvesting.com Founder of Self Storage Profits, Inc. that syndicate, acquire, develop, and manage
-Self-Storage Facilities Nationwide With over 5,200 units and over $30M
-We will also continue to grow our Information and Education Company
-Based in Indianapolis, Indiana
-Say hi to him at www.SelfStorageInvesting.com
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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any fluff.
I hope you’re having a wonderful best ever weekend; because today is Saturday, we’ve got a special segment like we usually do on Saturdays called Situation Saturday.
Here’s the situation, Best Ever listeners… You’re near bankruptcy – what do you do? We have a returning Best Ever guest, Scott Myers, who has been through that and now he’s got over 5,200 units valued at over 30 million dollars of self-storage facilities.
How are you doing, Scott?
Scott Myers: Fantastic, Joe. How about yourself?
Joe Fairless: I’m doing well, my friend; nice to have you back on the show. Can you give the Best Ever listeners a little bit more about your background and then tell us your story?
Scott Myers: Sure. The story begins – at least on the investing side – once I got into… Well, I was working for a Fortune 500 company, I moved to Indianapolis and started looking into ways to invest for retirement, as dad told me. So what I was looking into, not only maxing out my 401k with my company and doing the things that you should be doing, but I was looking for a hedge against that, so I started looking into real estate. On the whole, what I found was that the richest people in the world (let alone in Indianapolis) had not created their vast amounts of wealth in the stock market, they had created in real estate, so I began to get more interested and then also shifting, instead of focusing so much on maxing out my investments in the stock market… I started looking into real estate, so I bought a number of rental houses, followed the Carlton Sheets method that had gotten me started in this, and before we knew it, a few years later we had teenie houses, and then we got into apartments and bought a 400-apartment unit, but didn’t have the freedom and the extra cashflow that all the gurus had talked about at the time, we just had a lot of tenants, toilets and trash; a whole lot of folks that were leaving us high and dry, and the courts wouldn’t do much about it, because… They don’t. The eviction laws are to protect the tenants, so something had to give. I didn’t wanna get out of real estate, but it certainly wasn’t what we had hoped for, so while we were looking at other forms of real estate we found self-storage, because that doesn’t have tenants and toilets and trash, which was the main cause of my lack of free time and lack of extra cashflow.
So I bought a self-storage facility and the light bulb came on, the eyes were opened, and when somebody doesn’t pay you, you simply lock them out and then you sell your stuff and you get paid back, and there’s really not much to destroy because it’s a metal box on a concrete slab and you don’t have anybody living in it. So for those two reasons and the fact that we had the protection of lien laws versus evictions laws, which totally benefits the investor, not the tenant. So we sold off all our houses and all our apartments and we ramped things up on the self-storage side. We continued to buy and develop all across the country.
Along the way, we started this information/seminar business as well, and we began teaching people, starting with a local real estate investor association I used to run. Then it kind of blossomed from there and I got asked to speak on a number of different stages and different venues, and with the trade associations. We turned professional, if you will, and then ramped up that side of the business, and now I have a number of folks working underneath me and operating a full-blown information business where we create partners for ourselves in the future, so that these folks will go out and buy and develop self-storage facilities and then down the road we have an opportunity to partner with them on deals and use our equity partners.
To come full circle, it’s been a fantastic ride, and now we do have the extra time and the extra cashflow to live the life that we wanted when we got into this real estate game to begin with.
Joe Fairless: Well, you skipped over the near bankruptcy part.
Scott Myers: Oh, yeah…
Joe Fairless: Come on now… You just gave us the elevator version, but I asked about the near-bankruptcy part.
Scott Myers: Yeah, we can do a whole podcast on that.
Joe Fairless: Well, that’s what I wanna do. Tell us.
Scott Myers: This was back in 1999… That’s about the time when most of this started, which was the recession that we all forgot about because of the massive one that began in 2008. In 1999 there was a tech crash, and at that point, that is when I decided actually to go into real estate. I saw my 401k blow up; I wasn’t making as much on an hourly basis as I was in real estate at the time, so I decided to leave my job and become a full-time real estate investor.
Well, shortly after that is when — that recession, we didn’t come out of that within about a year to a year-and-a-half, and at that time, that’s when the government came up with this wonderful program where they would [unintelligible [00:05:31].03] a loan from anybody that could walk into a bank and fog a mirror; you could roll in all your debt into those loans, and people were getting houses with a signature… So all of our tenants were leaving – we had 80 houses, 400 apartment – and who could blame them? This was the best time in history for anybody to be able to buy a house, regardless of how crappy your credit was, and if you had no cash, the government would just take care of it… Good old Santa Claus.
So they did, and all my folks left, and so that left us with a pretty large gap in our income and then a pretty large ship to be able to turn. So every spare dollars that we had, we were putting back into our houses to rehab them to sell to these first-time homebuyers. And as you know, Joe, a $3,500 rehab to rent something is far different than a $10,000-$15,000 rehab to get something ready to appraise and sell.
Joe Fairless: Right.
Scott Myers: So we were doing our best to sell all those off, and we were in a huge cashflow pinch, and we really battled that for about two-and-a-half to three years. By all means and by all accounts we probably should have filed bankruptcy, but we spent all our savings, we pulled everything out of retirement to right the ship, and lo and behold, at the end of three years we were able to sell off all those apartments and all those houses to others investors. We got through that stage and lived to fight another day, while simultaneously ramping up our self-storage holdings… But it’s an ugly day when you’re in the checkout line at Wal-Mart and your debit card doesn’t go through, because then it’s game over.
It’s one thing when the credit cards don’t go through, but when the debit card doesn’t go through you know you’re in trouble, and that’s the place that we were. [unintelligible [00:07:01].11] my wife and I were in a pretty dark place in the business, because this wasn’t what we signed up for, and it certainly wasn’t what she signed up for, and about the worst place that I’ve ever been — not about, it is; that’s the worst place I’ve ever been, because when you can’t provide for your family, then it’s the worst feeling pretty much, at least for most of us guys [unintelligible [00:07:20].06] I know there’s things that are worse, but that was pretty much the bottom.
Joe Fairless: How did you mentally get through it?
Scott Myers: Good question. Fortunately, I had a supportive wife. There’s many folks that I’ve seen in the past that go through financial troubles; 50% of all marriages in this country end up in divorce, and 80% of those are due to financial problems. I am very fortunate that my wife and I are both very strong in our faith, and we prayed together and we were rowing together, praying for land and rowing for shore together, and that’s what got us through. If I had not had the support of her, as well as several other smart people in real estate and in business (masterminds and groups that I was involved in, then it would have been even darker than it was). At the end of the day, the only thing that we can do is move forward. It really wasn’t an option. At this point I have not only a family to support, but really what else are you gonna do? You can’t curl up in a ball and wait for the worst or the bottom to fall out of it.
We would see the fruits of our labor, and we had faith that our creator was gonna get us through this and that he will provide, and He did. We learned a lot from that.
Here’s the thing, Joe – I wouldn’t want anybody to ever go through that, and I certainly wouldn’t wanna go through it again. There’s an awful lot of folks that I secretly – and I mean this in a positive way – wish would go through that, because the lessons that you learn about how to fight and how to scrap to see what you’re made of, and also to rely on someone else – and no matter what you believe spiritually, but also your partner in the business and perhaps partner in life – to go through something like that. Those are lessons learned that I would never trade.
Again, it was difficult, but man, there’s blessings on the other side of that and I’m sure any of these listeners out there that have been through this will probably agree. It just makes you a better person all the way around, versus somebody who goes through life and never has any adversity.
Joe Fairless: What skillset do you think you honed most within that time, that you now apply to your self-storage business, or just as an entrepreneur?
Scott Myers: By nature, I’m a trusting soul, and I give everybody the benefit of the doubt, and perhaps to a fault. And the people around you, including your bankers and partners – it’s funny what happens when money gets in the way or when money begins to dry up, or expectations aren’t met. You need to vet your partners, and if you’re going into partnerships… I look at not only the paperwork and the contracts much differently, but now I don’t know that I would ever go into a partnership in which — I’ll be a 50/50 partner with somebody so long as one of us is silent and the other one is the driving force. But when you get into a partnership where both folks or three folks or four are equally splitting and making the decisions in the business, I think it’s a recipe for disaster.
Most of the partnerships that we have right now are syndication and forum, as we talked about briefly before we started this call. I’m the promoter and the syndicator, and everybody else is silent, period. And I have control.
So at the end of the day, I don’t know that I’ll ever get into a partnership where we have equal decision-making – that’s the first. Second of all, I learned enough about banks that I don’t like…
Joe Fairless: Yeah, agreed.
Scott Myers: And don’t get me wrong, they are partners in your business as well; they’re truly partners. And if you use a bank, and the LTV is 65%-75%-80%, don’t kid yourself that you own the property; you’re a minority partner in that property, and they have the control. So not only do you have your real estate and attorney look at your promissory note when you close on this, but just — I try to avoid banks at all costs now. That’s why we were forced to look at private equity and doing our deals when the money dried up, and that is a useful lesson in itself. That has taught us a lot and allows us to, quite honestly, get into bigger deals and better deals that we weren’t able to before, because if it wasn’t bankable we didn’t do it.
So that has helped as well, but going back to the lessons learned, we don’t like to knock on the door of a bank if we absolutely don’t have to. And if we are going to do it, we’ll have a clear short-term exit strategy in mind. We’re not gonna go down the path – never say never, but I don’t see us going down the path of looking at 15-20-30-year mortgages and having a bank as a partner during that timeframe, because during that timeframe you’ll go through at least three recessions and the banks have the ability to change on a dime and really not give you an option if they decide to do something different with their business, that they own and you’re a minority partner in, if that makes sense.
Joe Fairless: With your syndications you said you’re the lead partner, and then you’ve got passive limited partners in the deals… Are they able – and this is a very granular question with how you draw it up, but are they able to vote you out at all?
Scott Myers: Yeah, we have that stipulation in there. I am the majority; we also appoint one person, and I allow — once the syndicate is closed, essentially we have all the partners that are gonna be in that, that become partners going forward. We get on a webinar — we do multiple webinars in the beginning, and then usually once a month for a while, and then once a quarter, to keep everybody up to speed.
But after those first few calls, we will have somebody who will either volunteer or I will volunteer someone to be the lead voice for the investor group. And I ask them, I say “Hey listen, follow behind me; you have access to everything in a Dropbox, and all the numbers and everything. Shop the properties, shop the property management company and keep an eye on anything that’s going on on my end, but also you can have meetings at any time to discuss my performance as the person who’s driving the engine of this thing and who’s moving the needle.” If you don’t like it, then by two-thirds majority they can vote me out as the managing member.
Now, they don’t dilute any of my ownership; I preserve all of that or any of that should that ever happen, but by unanimous vote, the quorum I believe — I think some of the LLCs are a little bit different, but it’s either two-thirds or a quorum… I think sometimes that’s one and the same. If they don’t like what I’m doing, they think I’m doing a crummy job, then yes, they can vote me out and they can put in another managing member in my place.
To date, we’ve been doing this for quite a while and nobody has ever done that, nobody has ever threatened or I haven’t heard wind of it… But they have the ability to do that if they don’t like what I’m doing.
Joe Fairless: Got it. And in that Armageddon scenario, you’d still maintain your ownership… So since you’re not being diluted, they’d basically be saying “You’re doing such a poor job”, they will choose to dilute themselves in order to probably compensate whoever they’re putting in.
Scott Myers: If they would — in most cases, they would be hiring a different management company, or perhaps a consultant or somebody coming in, and either it would be paid a fee out of the property if they wanted, or it could be a dilution of somebody’s shares or their shares.
Joe Fairless: Anything else as it relates to being near bankruptcy to now having a company with over 5,200 storage units that you wanted to mention?
Scott Myers: Yeah, there are things that happen in the economy, in our industry or any industry that sometimes are beyond your control. And as I looked at it, the noble thing to do was to burn all my 401k money and savings and absolutely every last dime to preserve my credit with the banks, and also… We didn’t have equity partners at that time [unintelligible [00:14:07].24] ultimately saved my credit, because that’s our lifeblood. As I look back, I will never do that again. If the economy tanks and we haven’t foreseen and prepared for that – which we are now; we’ve been through two of these recessions, we know what we’re doing, and we’re gonna take advantage of it instead of being a victim or lose anything or any value at this point… But should we have another financial Armageddon or something in our economy, something that’s beyond our control and is just a function of what’s happening in our country and economy, we’re not gonna burn through all of that.
I will be getting the keys back to the banks (if there are any) from our equity investor; we’re all in this together, so we’ll do what it takes at that point… But when it comes to any money that’s out there [unintelligible [00:14:48].04] but should I ever decide to take that out again, I will give them every last dime and leave myself with nothing at this point… Because no matter how you look at it and though many people may disagree with me out there, we have a reset button in this country that’s called Chapter 11. If that should happen again, we’ll do a Chapter 11 and we’ll work with our lenders like we did the last time and find a way to come out of it without bankruptcy or damaging our credit.
Now, again, we didn’t have to do that, but I burned through a lot of cash that I probably shouldn’t have done so [unintelligible [00:15:16].20] that we probably should have taken a different look at what was the smarter, wiser thing to do, because we were set back several years as a result of that.
Every situation different and every person is different, but I’ve talked to through that time, and I’m sure you probably have as well, Joe… There’s a whole lot of folks that used to be real estate investors in 2008 that aren’t.
Joe Fairless: Absolutely, yeah.
Scott Myers: I don’t think there’s one of those of us that are on the noble side that decided to do that, versus there’s three groups: those who do everything to avoid that, there’s those that just didn’t have any money left and they were forced to file bankruptcy, and there’s those that were smart enough to file a Chapter 11, and were in a position to work with the lenders and work with whoever they needed to to come out of that without their credit totally damaged and doing the right thing.
That’s what we’ve learned – there’s ways of bowing out and winding down a business where you don’t damage your credit as much, your credibility, and you live to fight another day. Does that make sense?
Joe Fairless: Yes, that does make sense, and of you talking through this and sharing the lessons learned, and I’m gonna summarize them in a second, but before I do, how can the Best Ever listeners get in touch with you?
Scott Myers: If you google “self-storage” and my name, you’ll find me. Our main site is selfstorageinvesting.com, but beyond that I think we’ve got more sites and hits (over 40,000) out there anyway, so if you’re looking for anything self-storage around investing, you’ll run into me. But the main site, with all our tools and free resources and to learn about our events and our partnerships and deals that we’re doing, selfstorageinvesting.com.
Joe Fairless: Outstanding. Scott, thank you for being on the show, thanks for talking about what it takes to go from near bankruptcy to over 5,000 self-storage units. The four lessons that I learned during our conversation is:
1) You’ve gotta have supportive team members; in your case, you’ve got a supportive wife, with an aligned vision.
2) Professional support, in terms of team members and mastermind group; you’ve got to not only have emotional support at home, but also the professional support where others who are doing similar things or have been in similar situations can help give direction that you need.
3) Well, the bank thing. Banks are your best friend in the good times, and when things go South, they could be your worst enemy. We are in a very favorable market right now in terms of acquiring debt, so dinners and drinks and everyone’s giving each other high fives, but talk to someone who has been in the situation that you’ve been in and have seen the other side of the banker, when things aren’t going as well, and ask them how did the bankers they were working with handle the situation at that time, and you might get a different perspective. It’s just important to know, with all of our business ventures, there’s one or two things that if they go wrong, then everything could be different, and we’ve just got to protect ourselves along the way.
4) Your overall approach of hey, you’re not gonna put your personal finances as much on the line as you did before; you’ll take a different approach. You’ll look at it on a case-by-case basis, and you said you have set your business up so it likely won’t happen again. But should you come across that situation, then that’s how you’ll approach it.
Thanks for being on the show, Scott. Best Ever listeners, if you want to check out Scott’s first conversation he had with us on this show, then go back all the way to episode 109 – yes, that’s like over 1,000 episodes ago; it aired 20th December 2014. That’s how long ago when I first met Scott.
I’m grateful for our conversation, Scott. I hope you have a best ever weekend, and we’ll talk to you soon.
Scott Myers: Thanks, Joe. Take care.