AJ has built up a $100 million portfolio in real estate. He took a lot of the skills from his previous job as an insurance salesman. Hear why he decided to leave that job behind and venture into real estate, and how he built up such a large portfolio. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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AJ Osborne Real Estate Background:
- Built a $100 Million real estate portfolio then became completely paralyzed for months
- Turns under-performing storage facilities around by focusing on operations, policies and procedures
- Based in Boise, Idaho
- Say hi to him at www.cashflow2freedom.com
- Follow him on Instagram @ajosborne
- Best Ever Book: Ego is the Enemy
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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 of that fluffy stuff.
With us today, AJ Osborne. How are you doing, AJ?
AJ Osborne: Doing great.
Joe Fairless: I’m glad to hear that. A little bit about AJ – he built a 100 million dollar real estate portfolio. He turns underperforming storage facilities around by focusing on operations, policies and procedures. He’s based in Boise, Idaho, and you can say hi to him at his website, which is in the show notes page.
With that being said, AJ, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
AJ Osborne: Yeah. It’s actually funny, I haven’t grown up in the real estate world; I actually grew up in the insurance world. I ran a brokerage firm, and sold health insurance. It was through that experience and a lot of events that happened that led me to say “I need to change our model, I need to change what we’re doing, and get into something more secure, reliable, but more importantly, something that can compound, something that I can build”, so I got into real estate in a big way. It was from there that I really started (about five years ago) to really get into real estate.
Joe Fairless: And what was the first foray into real estate?
AJ Osborne: How I happened to transition is when I was working in insurance, I thought that I was secure, I thought that my income was secure, because I was supposedly my own boss. I went out and sold to clients, I got revenue from that, and I could spend my own time doing what I wanted, and it was actually a great life. I got paid really well. But at the end of the day, what really happened is I just got a lot of bosses. Instead of having one, all my clients were my bosses.
I had an experience where we’d made an acquisition of a company, and they came back and stole all that revenue, and we lost a lot of money. I realized “I’m not in control. I don’t own this revenue source.” And where I thought that I was living independently, I realized actually I wasn’t. I just had a lot of bosses.
It was from there that I thought “This isn’t providing any security. In fact, I’m on a treadmill, just like anybody working a 9 to 5. The only difference is my treadmill is going really fast.”
I came up with a plan. I really thought “I need to get off this treadmill. I’m running in place, and I’m running as fast as I can, but I’m just not going anywhere.” With real estate, I found that I can apply what I learned in business and consulting clients, and improving their capital expenditures – I could apply that into real estate and I could take underperforming facilities and turn them around. That’s why we went into storage, because storage is a little more active management. It’s not as passive as one might think. There’s a lot of things going on, but yet I still own it; I own that revenue source, and once I put my systems and procedures and policies in place, I don’t have to actively do anything. So it truly could become passive, yet it held an opportunity for me to increase the value, increase the cashflow in a way that I could never do consulting or working in a job 9 to 5.
Joe Fairless: And you said “we.” Who’s “we”?
AJ Osborne: It’s actually my father and I. We were the ones that were running the business. Then of course, when I started up my real estate company, we hired a lot of people to come on and help us as we’ve grown, to build what we have today.
Joe Fairless: What was your first one?
AJ Osborne: Our first entryway into the storage world – it was actually a very small facility. And it’s funny, this is a great lesson on learning and growing from your mistakes, and not giving up. Our first entry into real estate made us no money. We bought it, it was full, it was great, there was revenue, but then as with a lot of people, the financial crisis hit, we lost a lot of value, and we got out of it at breakeven. Actually, it was about $20,000 less than we’d put into it… But we took that and we rolled that facility and we learned from our mistakes, and said “We need to get a little bigger, we need to have a little more volume”, and we rolled that facility into another facility in a bigger metropolitan area that was not doing very good. We turned it around, and in six months we netted a million dollars.
We took that million, threw it into another facility, we turned it around, increased rates, policies, procedures, hired new people, and immediately that today is now — we have about 4-5 million dollars of equity in that, and it cashes over $150,000/year net profit to us.
Joe Fairless: So the original one, you 1031-ed two times on, and the last one is the one you currently have, where the sale netted a million… So now how much does it spit off in cashflow?
AJ Osborne: The equity in it is around four million, and the net cashflow is over $150,000. It generates about $300,000+ a year. We like to hold everything we own for the long-term, but sometimes there’s opportunities to really take that capital and deploy it in a way that is more efficient, and this was one of those times. But we still hold that asset, but we did 1031-exchange it twice, and essentially took $200,000 for the first one, and rolled into the second one, took a million, put it into the third one through a 1031 exchange, and now we have 4+ million dollars of equity in that one.
Joe Fairless: What are some of the policies you’ve put in place that enhance the bottom line?
AJ Osborne: This is a really important issue for people that are trying to move into real estate investing, to really get into financial freedom and really create passive income that is meaningful. You have to go from investing in a duplex into having 40-50 doors, and in order to do that, you really do have to act like a business. As you’re expanding and as you’re growing your portfolio, you have to create – especially in self-storage – policies and procedures and systems that are automatic. You don’t wanna be running it.
For example, we have an entire book of policies and procedures, and we train our managers that they have to use certain technologies; they can never give away rent rolls. We have certain targets and points that we need to hit, we’ll also bonus them… But when we go into an underperforming facility, we’re looking for a few things; we’re looking at low rent rates, that’s within its own market. We’re looking at inactive managers or owners that have neglected it, that have kind of walked away from it and are just living off of the cashflow, and then we look for good areas.
We’ll go in and we’ll almost always — we’ve only kept I think two managers; we probably had almost 100 managers and we’ve only kept two of them, because they have bad habits. They need to wear a uniform, they need to present well, they need to be good at sales… We upsell everything, from boxes to all sorts of different items that they can use in assistance with moving, and including insurance, which we get paid on. So when a person comes into our facility, we always invest usually about $100,000+ into making it look nice. We’re changing the entire customer’s experience.
From there, they walk in, they see a professional, someone that’s dressed nice, that has our logo, and they come out, they greet them, and they walk them through the whole process, and they treat them — it’s [unintelligible 00:10:54.06] We’re looking for the right product to fit them, and what their needs are. Then we provide them with the supplies that they need to do so.
There’s multiple lines of revenue in most facilities that we buy in, that the current owner – he’s just not using, he’s not even asking the tenants for… And that is such an easy thing, to walk in and switch on. We have property management systems, we have online auctioning systems, so we take that out of our manager’s hands… We really try to streamline the customer’s experience to the use of technology and allow our managers to be hands-on with them, and we see a massive, massive jump in revenue for that quality.
We bought a facility at an auction for around 4 million. We came in, we changed everything about it, we completely redid the office, we repainted, we added a robust online marketing system, we changed the auctions process, we used a new property management system, and we trained the manager really well, and we upped prices within three months by an average of 70%, but in some cases up to 120% or more, and we are more full than when we purchased that facility today… And essentially doubled the revenue on that asset.
Joe Fairless: Wow…
AJ Osborne: And that all happened within a six-month period of time.
Joe Fairless: That is incredible. You mentioned some of the income streams… you said one of them was upselling boxes, another is insurance; what are some additional income streams that you put in place that some owners don’t have in place?
AJ Osborne: When we view income streams, we can also partner with move-in companies, and negotiate percentages, work on business for special use of the product… Or, like one of our facilities that we just purchased – we bought a bankrupt Super Kmart, and we turned it into a storage facility where we blew out the walls, and you can drive through the middle of the Super Kmart; there’s two-lane automatic doors that come up and down, and there’s a pull-off period… And everything is completely automatic. That individual can go online, rent a unit in California, come to our facility in Nevada, open it up with their app (the doors), walk in, and then they can open up their unit, open up all the doors, have complete access all by an app on their phone. The door is controlled by their phone. So the customer experience has been extremely streamlined.
With that, we automatically issue insurance into that, and we charge a much higher price per square foot for that ease in use for the customer, particularly businesses that need to get in and out and use quickly, and they can give permission on the app to all of their workers.
You may have a company that has five guys that have the app on their phone, and they use that as a business. We get a much higher price per square foot. Then they come in and they buy boxes, locks, [unintelligible 00:14:11.18] wraps, insurance… We basically mandate [unintelligible 00:14:14.09] and we increase the price per square foot of our storage; it’s double on some of our facilities that don’t have that, and we have people lined up to get in.
Joe Fairless: What is that called, that feature?
AJ Osborne: That feature is called Nokē. It’s by a company that we use. The company that we use is called Nokē, and they’re teamed up with [unintelligible 00:14:36.24] They’ve come in and helped us build this out. We’re actually only the second one in the United States to ever do this. It’s been an absolute incredible feature that people can use.
It’s best when you are doing a conversion or a new build to put in this, because for existing facilities you have obviously tenants already, and this is built into the facility. So if you’re converting something into a storage facility, you’re doing a remodel or you’re building one from ground-up, this is a fantastic way to do it.
It’s also a fantastic way for those that have some money, if they’re wanting to get into storage facilities, but they really can’t get into a large facility. They need to start like we did, in a small facility; maybe they have $200,000 to put in. Well, at that level, you can’t hire a manager because it’s not big enough where the economics don’t work… So it’s not big enough to really drive any revenue with a manager, because you’ve gotta pay him. Well, with these kinds of features, you can have a fully-automated small facility where you don’t need to pay a manager. Well, right there you’re adding $30,000 on the small facility’s bottom line. That facility now becomes economically viable, whereas before it was really not.
Joe Fairless: This is really good information, thank you for sharing your approach. This will be very helpful for not only self-storage investors, but just value-add investors in general. Earlier you mentioned you look for three things – low rent within its own market, inactive owners, and good areas. Can you quantify each of those three, just so it gets a little more specific in terms of what type of low rent you look for? We’ll start with that, and then we’ll go into the other two.
AJ Osborne: Yeah. In self-storage, this is a little of an art and a science. I’ll approach it from the science point… And this is very important — I don’t care if you’re in self-storage or any other kind of real estate asset class… It’s being able to really quantify your change. Let me elaborate. So when I go to look for a storage facility, if I like the location and I see it looks beat down, so the [unintelligible 00:16:55.18] so I know I can come put some more money into it and I can make the curb feel better; I don’t care what the cap rate is. I don’t really care about any of those things, because what I do if I take the facility, the amount of units that it has, the square footage, and I apply that to my model, and that spits out a total revenue for me, then I take that revenue and say if I’m trying to get a 20% IRR, this is what I can pay. Then I go and say “This is what I’ll pay.”
What the buyer is selling it for or what a broker says it’s worth means nothing to me. Brokers and bankers don’t tell me what I can buy and what assets are worth; that doesn’t even make sense… Why do they even matter? Because what it’s worth to you and what it’s worth to a REIT or what it’s worth to a mom-and-pop or whatever it may be – those are all different. I only care what it’s worth to me.
I never let bankers or brokers tell me what I can buy and what something’s worth. I overlay my financial models, so what I know I do and how I can perform, over their overall square footage and the rent, and that shows me how much revenue buying this asset or business will produce, and that’s what I pay for it.
So when I go into a market, I look for a good location, because I can’t change that.
Joe Fairless: How do you determine if it’s a good location?
AJ Osborne: Now, this is different for everyone. For me, I specialize in second-tier markets. I don’t go into L.A., because I don’t believe that I can compete as well in that market. So I’m in second-tier markets, like Boise, Reno, Tri-Cities, up in the North-West, Spokane – those kind of areas where I can come in and deliver a great customer experience that they may not have.
I’ve been in really third-tier markets, and when there’s no growth, anybody can build a facility and it will decimate your performance… So I don’t like to go into third-tier markets. I want a good, healthy, glowing market, so there needs to be economic incentive for people to move there, and the numbers have to show that that’s happening, that there’s actually people moving to this area, they have standard growth. That means I’ll get growth increases in my tenants’ rate over the long haul.
I also look for areas that cannot be over-saturated very easily. So I’m gonna come into a market and look for an area where they couldn’t build five facilities in my two-mile radius. So there’s already infrastructure there. That protects me from things that I can’t control. So when I’m buying, I look for the things that I need to protect me that I can’t control, and then I overlay what I can control; that shows me where I should be and how much I should pay. Does that make sense?
Joe Fairless: It does. It absolutely does. In terms of inactive owners, how do you quantify that, if you can at all? Is that just finances?
AJ Osborne: It’s all about the experience. I look at the financials, but I also walk in. When you walk in, there’s nobody there… They may have a website, but it’s a crappy website; there’s no marketing strategy… The manager’s sitting there, they’re just like “What do you want?” and you can just tell nobody’s running this thing. We’ll ask “Where is the owner?” Lots of times for us it’s out in Southern California; that’s an immediate green light for us.
You look at the shape and the feel of the office. Then we go in and we ask for just the amount of units that they have and what their standard rate is, and that can tell us what the financial performance is usually gonna be. Then once we dive in further – this is very important – we look at what their street rate is, and their actual real rate.
Lots of times you may come in and say “Oh, this 10×10 is worth $60”, but when I look at their overall financials, half of their 10×10’s are at $40, because they never increased those tenants. So they don’t have an active strategy for rental rate increases. That’s what I look for as immediate potential. I can walk in, I can change the existing rates to the street rate, and immediately take that unrealized revenue in for me, yet I’m not paying for it. So that’s where it’s really big. The unrealized rental potential is huge.
There’s another way we find unrealized revenue, and that is through — people will let non-paying tenants sit. So they won’t send them [unintelligible 00:21:36.09] and they may have a 10% in their facility which they show is occupied by people that aren’t paying. We immediately evict those people. We get them out, we put new people in, and we capitalized on that unrealized revenue.
So those are the two ways that we look for how we can immediately come in and raise the revenue, and that is subject also to what we can do in the market. If I look around and say, if you’re at 50 cents/square foot, but all your competitors in the market are 80 cents/square foot, that’s the revenue that they’re driving out of that – I immediately know I can change, and capitalize on that revenue.
Joe Fairless: This is not only helpful for self-storage, but also value-add investors in general. What is your best real estate investing advice ever?
AJ Osborne: Know your numbers, start small, and grow into it. Build a strategy around what you’re doing, and then move up from there. Don’t go all-in on a big project and cross your fingers and pray. That’s a strategy that never works.
Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?
AJ Osborne: I’m ready.
Joe Fairless: Alright, let’s do it. First though, a quick word from our Best Ever partners.
Break: [00:22:52.14] to [00:23:31.03]
Joe Fairless: Okay, best ever book you’ve read recently?
AJ Osborne: That’s a good one. There’s lots I’m currently reading. I think Ryan Holiday’s books. I’ve been diving into them, and any books that he has, like Ego Is The Enemy – that’s a fantastic book that mentally puts you in check and make sure that you’re in control, and realizing what you’re good at and what you’re not… That’s a huge, huge part of success, I believe.
Joe Fairless: Best ever way you like to give back?
AJ Osborne: That I like to give back?
Joe Fairless: Yeah.
AJ Osborne: I had a bunch of health issues that left me paralyzed, and things like that, and I like to spend a lot of time with other people that went through the same things that I went through, because I can relate to them and really help them out. That, and me and my wife are very active in our church and giving to church.
Joe Fairless: Best way the Best Ever listeners can learn more about what you’re doing?
AJ Osborne: My website, it’s my blog. I put up information, my contact information is up there, and I’m trying to help other people build residual income that they can get off the treadmill, just like I’ve been fortunate enough to do myself.
Joe Fairless: And the website is in the show notes, so Best Ever listeners, you can just click through and check out the website.
AJ, thank you so much. You gave us a crash course on self-storage… I mean, such detailed information… I am so grateful that you were on the show and talked to us about what you look for in a property, and then how you execute on the value-add business plan, and having a plan, and being able to execute on it, first and foremost… And then also how you built your portfolio, from that first property to now… Thank you so much for being on the show, really grateful. I hope you have a best ever day, and we’ll talk to you soon.
AJ Osborne: You too. Thanks, I appreciate it.