JF2475: Building $160M in Assets Through Self Storage Investing with Scott Meyers
In this episode, Scott Meyers talks about his journey through self-storage investing. What started as single-family rentals quickly turned into self-storage for less hassle and more freedom. He discusses the market, underwriting tips, and his secrets for adding value.
Scott Meyers Real Estate Background:
- Full-time real estate investor for 3 years
- Portfolio consists of $160 Million in Assets under management – 13,000 self-storage doors, 2.2M Square feet in 39 facilities nationwide
- Based in Indianapolis, IN
- Say hi to him at: www.selfstorageinvesting.com
- Best Ever Book: Traction
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Theo Hicks: Hello Best Ever listeners and welcome to the Best Real Estate Investing Advice Ever Show. I am Theo Hicks and today we’ll be speaking with Scott Meyers. Scott, how are you today?
Scott Meyers: I am doing fantastic, Theo. How about yourself?
Theo Hicks: I am doing well. Thanks for asking and thank you for joining us today. I’m looking forward to our conversation and talking about self-storage. Scott is a full-time self-storage investor with over 27 years of experience. His portfolio consists of 160 million dollars in assets under management. This includes 13,000 self-storage doors, which is 2.5 million square feet in 39 facilities nationwide. Scott is based in Indianapolis, and you can learn more about him and his company at his website, selfstorageinvesting.com. Scott, do you mind telling us some more about your background and what you’re focused on today?
Scott Meyers: Yeah, I focus 100% on self-storage today. By way of my background in real estate, like many folks, I started out in the single-family rental business. My first home study system that I ever purchased to get into real estate was the Carlton Sheets, a home study system. Some of the folks out there may remember Carlton and his program. The model was to buy a house with an assumable mortgage if you can find it, and I did, I found a house that had an assumable VA Mortgage. I purchased that facility with a little amount of cash that was needed to get into it, rehabbed it, rented it out, and then moved on to the next. Refinancing, and move on to the next. So the BRRRR method before it was called the BRRRR method. Then I bought two more and then continued to grow that side of the business.
I made about 75 houses and realize that this wasn’t the business that I had thought it was, and Carlton didn’t talk about all the hassles of tenants, toilets, and trash, and I didn’t have all the freedom and cash flow that I had wanted. I thought, “Well, economies of scale will fix this.” So I started buying apartments and we got up to about 400 apartments in Central Indiana. At the end of the day, a good asset class, but I found that it was still a little too labor-intensive, even with property management companies. So if I wanted to stay in real estate but get rid of the hassles of tenants, toilets, and trash, I’m left with either self-storage or parking lots. You can’t really build a lot of value into a parking lot, so I began looking into self-storage. What I saw was very intriguing, very interesting, and very enticing. The more I got into it, I realized that this is the path I wanted to take. I bought my first ever facility, and the rest they say is history.
The ability to, when a tenant –and it’s not really a tenant– a client does not pay, we lock them out and then we sell their goods off to pay for the back rent and late fees. There really isn’t a turn like we had in our apartments with carpet, drywall, and paint; we just blow it out with a blower. It’s a concrete slab with a metal box around it and we move in with the next person waiting in line. We very quickly moved into that asset class, sold all our houses and apartments, and have never looked back. I’ve been in self-storage — the first facility I bought was in 2005. So for the past 15 years, I’ve been involved in self-storage, of those 27 that I’ve been in real estate.
Theo Hicks: Perfect. Thanks for sharing that very detailed background. You kind of went into some of the advantages of self-storage when it comes to that hassle. Was that really the only reason why you transitioned from multifamily to self-storage? Or were there other reasons besides that kind of hassle of the turn aspect? Was it financial reasons where you can get a better return with self-storage, or really anything else?
Scott Meyers: A couple of reasons, and good question, Theo. First of all, self-storage is an asset class. In this sector, it’s very recession-resistant, and it’s also inflation resistant, that’s just by nature of the business. When times are good, when things are going well in our economy, people buy more stuff, they move, they upgrade their houses, and anytime that we have a transition in somebody’s life, they typically need that storage. If they just rent out a room for all their stuff, that goes into storage.
Conversely, when we have a downturn in the economy, which is what we’re experiencing right now and what we have – this will be the third recession that I’ve gone through, we see again another rush to self-storage, because businesses are downsizing, individuals are downsizing, they’re moving in with each, businesses are moving inventory in or additional office equipment until the economy turns around again. So the industry, the asset class in self-storage actually benefits from a downturn in the economy. It actually does better during a downturn than it does during good times.
Whereas we saw our apartment values and home values go down during a recession, and with a lack of financing, we see the inverse for self-storage. So it’s just much easier to be able to navigate through both economic cycles and have a steady up and to the right returns. Whereas with other asset classes that we’re in, it continues to go up and down with the economy. For that reason, self-storage has the lowest loan default rate on commercial loans, compared to all of the commercial asset classes. That, in turn, makes it easier to finance self-storage facilities when we have lenders that love to have self-storage facilities on their balance sheet because it is the most stable asset class. Our private lenders, our private equity partners that we bring into the projects that we syndicate, they too, they’re looking at the exact same indices, information, data, and statistics that we have on the industry, and that is that it has the lowest loan default rate, it profits more, and it does better during these economic cycles to weather a recession than any other asset class. That makes it easier for us to get lending and also to get private equity partners to come alongside of us. For all those reasons, we made the switch to self-storage. We wanted to be in the asset class that put us in the best position to win, and this is it.
Theo Hicks: Do you do new development, or do you buy existing facilities, or both?
Scott Meyers: The easiest way to get into the self-storage business is to buy one. So it’s easier to finance if you’re a first-time investor, if there’s an existing facility where the bank can look back on the historical returns and look at the occupancy, the P&Ls, and make a pretty darn good guess. Not really a guess, but they can follow the trajectory and they’re not really taking a chance on you because they’re looking at the asset. But now that we have several facilities under our belts and several years of experience, we’ve gotten into development. So we have a fairly healthy balance of development activity, as well as still buying existing facilities. The existing facilities obviously provide the cash flow, whereas the development, it does provide some income in terms of fees that we generate along the way, but it takes a couple of years before they begin to really produce a cash flow of any significance. Then obviously, the profit is more on the back ends, versus the existing facilities.
Theo Hicks: What are some of the things that we need to think about whether we’re buying an existing facility or developing an existing facility? What type of things do we think about when we’re looking at the actual location? Can I do this anywhere in the US? The answer is probably no, or maybe it is yes, I don’t know. But if the answer is no, what are some of the demographics/economical information we should be looking at in the markets?
Scott Meyers: First of all, the answer is self-storage does work everywhere, but that doesn’t mean it works in every market. When we call a market, really what we’re drilling into is, if I’m looking at a site or a piece of ground to develop a facility on or even an existing facility that may be struggling that we’re looking to create value in, then yeah, we dig into the market and we look at who the competition is, how much square footage there is in a three to five-mile radius of this site or this existing facility, to see whether it’s undersupplied or oversupplied.
In our industry, depending upon who you listen to and who you talk to, the breakeven point or the place where supply meets that demand is somewhere around six and a half to seven and a half square feet per person or per capita. If you’re at three or four square feet per person or per capita, then it’s an undersupplied market, and obviously over six and a half to seven and a half, it’s an oversupply.
There is a demand factor that goes along with that as well. Even in markets that are at eight or nine square feet per capita, like say in Florida, where there are no basements and there’s a lot of zero lot line neighborhoods, those facilities may still be full and they may be raising rates. We dig into that aspect as well. But those are the first items that we look at. Is there growth in the market as secondary as well? Are there people moving into this market in and around it? Is it in the path of progress? Conversely, we don’t want to be in the rural markets where there’s just no activity, there’s no growth, it’s been stagnant, and the facilities that have been there had stayed at the same occupancy for extended periods of time. In terms of development, we do have an additional challenge and that it costs more per square foot to be able to build a self-storage facility than it is to buy an older facility.
We have to make sure that the rental rates, current rates in the market will support the development of a new facility given the competition, the supply index, and rental rates in the market currently. Because we could get the land for free, or we could get the building for free to convert, but if the rates aren’t there to be able to support the build-out and ultimately the operating expenses, then it doesn’t make sense to build on this site or to buy this building.
That and a number of other factors that we put into the due diligence of buying an existing facility, as well as our development, those are the main ones – the competition, rates in the market, and the supply index, which is the square foot per person.
Theo Hicks: When you’re underwriting a self-storage deal, maybe give us some of the things that people don’t necessarily think about. Most people listening to this might not have ever invested in self-storage before and then I imagine the underwriting is a little bit different than underwriting your typical rental, whether it be multifamily, large multifamily, small multifamily, whatever. What are some of the secrets and the things that you’ve learned? Some of the… I don’t want to say tricks, but what are some things we should be thinking about if we’re underwriting a self-storage deal?
Scott Meyers: First of all, when I made the switch and began looking at self-storage as compared to apartments, almost everything in the apartment world and in the multifamily world is based upon dollars per unit; everything is unit-based or per door. Whereas in self-storage, it’s really based upon square footage. We look at our rental rates per square footage, because we can move walls and doors around in self-storage, and that’s how we compare it to the rest of the market. That was the first thing I had to kind of wrap my head around is how to look at things in terms of square footage versus doors. But then as we get into the actual underwriting, as you mentioned, then yeah, there are some other nuances that we have in self-storage – different baselines, and different metrics that we compare back to as we’re going through this.
I would say that one of the areas where I think many folks make a mistake — this could be in multifamily or in self-storage — is that when they find a facility that they’re interested in and they get the offering memorandum or the package from a broker, or they get the information from a seller, if they really don’t know the nuances of self-storage, they may just plain not realize or recognize that there are certain expenses that go into the operation of a self-storage facility that the broker or a seller has omitted. If they don’t add that in, then obviously, we know what happens, we’ve overpaid for the property if we hadn’t accounted for those expenses.
So it’s really digging forensically into every line-item expense of a facility, making sure that it is a true and real number, then comparing that against a P&L once we get it under contract, and then also looking for those items that may have been missed. The managers are very –typically looking at smaller facilities– they won’t include a management fee, where we will underwrite 5% to 6% or more. They won’t include the lawn care, landscaping, snow removal in the northern states, because their manager does it or they do it themselves. So there are many things that are left off of the P&L that sometimes don’t make it into the underwriting for beginning self-storage investors.
And again, beyond that, it’s comparing against some industry averages, getting a consultant by way of a feasibility study, getting a feasibility study done by a consultant who can back into those numbers, an appraisal on an existing facility where somebody is going to make sure that they vet that, but then there is no mistake for experience where we can take a look at and peel back the onion on a P&L and begin to understand that, “Wow, that numbers way off. They are way understating their expenses and we’re not going to give them credit for all of this income they’ve included for late fees and for stabilized rates.” That comes from experience; there is an art and science to underwriting.
In the beginning, make sure you have some help with the professionals or somebody who’s been in the business for a number of years as you go through that process so that you don’t end up in a situation where you’ve overpaid for a facility.
Theo Hicks: What about adding value? I guess it is particular to existing self-storage facilities. What are some unique ways that you can add value to self-storage? I’ll kind of make it an open-ended question and let you answer however you want.
Scott Meyers: Sure. In the beginning when we began looking at existing facilities on four to five acres that had buildings on three to four of those acres, we would lease up the existing units, raise rates to the market, and then add buildings on, because it’s a very scalable business. We would also look for land that is next door, behind it, adjacent, across the street, or even a quarter of an eighth a mile down the road that we could annex and build more buildings on. That is the best way to be able to create value. In addition to that, the beauty of self-storage is that we have so many additional profit centers that you can add to a self-storage facility by way of selling locks, boxes, and moving supplies, even the administration fee. We don’t collect late fees or a deposit because when somebody moves out, they’re not going to destroy the concrete or the steel; it’s a steel box on a concrete slab. So we offer a $19 non-refundable admin fee and renter’s insurance. In many of our facilities, we mandate that they have a renter’s insurance so that their items are covered, whether it be by us or by their other policy that they may have through their homeowners. If not, that is another additional way to generate revenue.
Beyond that, we’ve identified over 30 different profit centers that you can add to the self-storage facility. We have eBay services, we can do pack and ship services for somebody that has been shipping things out of the facility, adding temperature control to the facility, and then allowing them to store furs, art, other collectibles, and even wine storage and controlling the temperature and the humidity as well. If you’re going to add boats and RV storage, that could be an ancillary income stream. But then, on top of that, detailing services and a make ready or get ready service, like concierge so that they can just pull up, be gassed up, waxed up, air in the tires, and ready to go on vacation. A number of different profit centers that you can add to a self-storage facility, truck rental is the main one that most people are probably familiar with. Adding U-Haul, Penske, or some of the others – that not only adds additional revenue to the facility but also adds door swing and activity into the facility. When people rent a truck, many times they need storage as well. That turns into additional indoor swings which turn into additional rentals. There are many, many ways to be able to increase the value of the self-storage facility with very little cost.
Theo Hicks: Okay, Scott, what is your best real estate investing advice ever?
Scott Meyers: Oh, gosh. The Best Ever, I would say, I was very hesitant in the very beginning, Theo, to bring on partners. I guess it’s just my nature, my personality is just wanting to do everything on my own, perhaps maybe to show everyone, or just because I wanted to have control over everything. But then a gray-haired gentleman early on in my career said “I can’t imagine doing a real estate deal without bringing in partners. I never would have been able to amass the portfolio” –he had a massive portfolio– “to the extent if it hadn’t been for partners.” Really, it was just kind of opening my eyes and basically telling me, “Don’t be so closed-minded, Scott. You absolutely need to have partners.” That is what opened us up to bringing on partners and then syndicating and bringing on multiple partners. He’s right, we never would have gotten to the scale that we are in right now if it wouldn’t have been for bringing on partners and doing this together.
Theo Hicks: Okay, Scott. Are you ready for the Best Ever lightning round?
Scott Meyers: Of course.
Theo Hicks: Alright. First, a quick word from our sponsors.
Theo Hicks: Okay, Scott. What is the Best Ever book you’ve recently read?
Scott Meyers: You know what, I’ve reread and reread Traction. We’ve implemented the entrepreneur operating system in our business, so I’m going through that again. But then also, for the first time getting all the way through Rocket Fuel, which is really the follow up to that and how you get your integrator within the attraction system to make sure that they are optimizing the entire plan and getting things done. I would give two – Traction and Rocket Fuel.
Theo Hicks: If your business were to collapse today, what would you do next?
Scott Meyers: Finally take the day off. How’s that? For starters, I would go back to the folks in my inner circle. Hopefully, we’ve all got some people that we rely on, some smart heads that are in business, in my business, and others. Sit back and take a look at everything that we have, our strong suits, and whether we go in this direction again, with self-storage; most likely we would. But we would definitely take a step back and start something again. I’d be reaching out to my key advisors, the folks that I rely on and who rely on me.
Theo Hicks: Tell us about a time that you lost money on a deal. How much you lost and what lessons have you learned?
Scott Meyers: We sold an apartment complex many, many years ago with a seller carry-back and we did not get a personal guarantee on that. Sure enough, they went under. It was about $180,000 that’ll be carry-back on that and we didn’t see a dime out of that. I don’t think we have sold since then with a seller carry-back, and we certainly wouldn’t do it or recommend anybody do it without a personal guarantee.
Theo Hicks: On the flip side, tell us about the Best Ever deal you’ve done.
Scott Meyers: Oh gosh. We bought an industrial building here in Indianapolis where I live and we converted it into storage. We paid 1.5 million for it, and put 400,000 into it, so we had 1.9 million dollars into it. Then we sold it for 3.9 million dollars in 2007. Just with the timing of that — so better to be lucky than smart, but great timing. Then that facility went through bankruptcy and foreclosure with that owner. We bought it back in 2012 for 545,000 dollars and then we leased it up, turned it back around, and we just sold it again this year for a little over three million dollars. It’s a boomerang property, a project that just continues to keep giving. Who knows, I may end up getting it back again someday.
Theo Hicks: For a third time. That’s a great deal. Thanks for sharing that. What’s the Best Ever way you’d like to give back?
Scott Meyers: We’ve been on several mission trips and went on one where a gentleman took us to build a house in Mexico. We followed his model since then of taking 10% of our profits in our education business and in our investment business. Now we take people on mission trips and we pay for the whole thing. We partner with YWAM, Youth with a Mission, and we’ll take a group of 20 people to build a house. We’re now taking trips of 40 people and building two houses. We do those two times per year, so we’re building about four houses a year down in Ensenada, Mexico. Then we give those houses away. The people that go with us, our friends, family, coworkers, vendors, students, we pay for the entire trip for them, introduce them to the mission field, let them have their experience, and hopefully go on and do something likewise, or mission-minded and focused. That has been an incredible blessing for everybody in our organization, including our family and those who have gone on those trips with us, and of course, the folks that received the houses.
Theo Hicks: Oh, yeah. That’s fantastic. Okay, Scott, the last question – what’s the Best Ever place to reach you?
Scott Meyers: That would be by going to selfstorageinvesting.com. We’ve got a lot of free resources there. Folks that are interested in learning more about the business, that’s the best place to reach me as well, and it talks about all things that we do on the active side of the business as well as the passive side of investing in self-storage.
Theo Hicks: What a great URL, too. Is that hard to get?
Scott Meyers: We had to pay for it several years ago, but thankful that we did.
Theo Hicks: I thought the selfstorageinvesting.com website is perfect. If anyone types in self-storage, it is obviously going to come up.
Scott Meyers: It paid for itself.
Theo Hicks: Yeah, seriously. Well, Scott, thank you so much for joining us today and really giving us an A-to-Z overview of the self-storage investment strategy. You explained in your opening statement why you transitioned to self-storage and some of the advantages and benefits of self-storage compared to other commercial asset classes. We talked about the advantages of new builds versus buying existing ones, a rundown of how to analyze a market, and how it’s based off of os it undersupply, is it oversupply, is there growth in the market, does it make sense to develop based off of the rental rates?
We talked about some of the things that look at when you’re underwriting, mistakes people make. One thing you had to get used to was looking at things in terms of square footage versus units or doors. It’s probably because all asset classes are expenses, so knowing which expenses are supposed to be on there, and then if they’re not on there, making sure you add those to your underwriting.
Then you gave us a list of a lot of different ways that you can add value to a self-storage. A lot of those I would never have thought of before. I really appreciate you for sharing those with us.
Lastly, your Best Ever advice –which I also really like– is in general, not being closed-minded. Specifically, that’s applied to partnering up with people on an active side, but also with passive investors. Your mentor said that he wouldn’t have got as big as he was without those partners, and that has allowed you to open your mind and get to where you’re at today. Lots of great advice. Scott, I really appreciate that. Best Ever listeners, as always, thank you for tuning in and listening. Have a Best Ever day and we’ll talk to you tomorrow.
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