Ep28 Self-Storage in Tumultuous Times with Guy Varble

[00:00:00] Are Your Competitors 100% Full? If they're 60, 70% occupied and you're buying a facility that's 60 or 70%

[00:00:06] occupied, don't buy that. You get to choose in the scorecard. We get to score that area, we get to

[00:00:11] score the deal and say is this worth it especially compared to all of the other deals we're looking.

[00:00:17] From cornfields to high rises, office to industrial, houses to hotels and every other asset

[00:00:22] class in real estate, we cover the people, the projects and the profit. Welcome to The

[00:00:28] Investing in Iowa Show. This show is for go-doers, action takers and business owners. It's for people

[00:00:35] like you who are sick of Uncle Sam taking a huge bite of your apple. If you're looking to get ahead

[00:00:41] of what's taking place in Iowa, learn who is doing what and how you can get in on the action.

[00:00:46] You're in the right place. Posted by Neil Timmins, an Iowa native who has been involved in

[00:00:52] over $300 million in real estate right here in Iowa. Recording in studio from West Des Moines,

[00:00:59] here's your host Neil Timmins. I've got Guy Varble here on the show. Guy, welcome.

[00:01:05] Thank you for having me today. I'm excited to hear. Hey, say for the audience to say,

[00:01:07] who are you? Where are you from? What do you do? Guy Varble live in Irmendale, Iowa. We do

[00:01:11] self-storage facilities and pretty much anywhere in the country. Self-storage. How in the world

[00:01:17] did you get into self-storage? We thought we would be interested in it for a long time. In 2017,

[00:01:23] we really started doing some research in 2018 about our first facility and really got into it and said,

[00:01:30] we're out of everything else. We started selling all our other assets and

[00:01:34] actually just sold our last personal single family unit. So we're now officially have no

[00:01:39] personal residence. Yeah. Yeah. Yeah. So you had a portfolio and a bunch of other things and

[00:01:44] when this was it, you decided to go all in. Yep. Yep. Reminds me of Rockefeller Redistory. In

[00:01:50] fact, I actually listened to a podcast founder, one of my favorite podcasts. Listened to that on

[00:01:53] Rockefeller when he decided to go into steel. He pretty much abandoned everything else, including

[00:01:58] the stocks that he owned because he didn't want to distract him on a daily basis when he would

[00:02:02] get his newspaper and have to go look at his stocks because he thought that there was too

[00:02:06] much of a mind distraction. I could see that. Well, part of the reason was when we finally

[00:02:11] understood the value, the impact of the ability to force valuation in self-storage versus the

[00:02:19] residential side of the business. We used to flip a lot of houses, made some good money,

[00:02:23] flipping houses, made some good money owning rentals, not so much on the cash flow, but

[00:02:27] on the appreciation over time. Yes. Right? The depreciation on that kind of stuff,

[00:02:30] that was really good for us. But when we got into self-storage, it kind of moved the

[00:02:34] decimal point over one. Everything moves slower, numbers were bigger. Yep. And you're

[00:02:39] able to accumulate a larger number of units. And so we'll just use this number, for example.

[00:02:44] If you have 4,000 units and you bump rents by $15, people typically just won't move out.

[00:02:51] Right? But that will influence the value by about $12 million. So the value of that asset

[00:02:58] will go about $12 million. So the question is, how many times can you do that over the next decade?

[00:03:02] I don't know what your number is, but that's a pretty big number to me.

[00:03:05] Yep. So when I started to really understand that you could really impact value on a self-storage

[00:03:10] facility, like you can with multifamily for sure. If you've got a significant number of units and

[00:03:15] you can bump rents by $150, I mean, that's the same kind of concept. It turns out though that

[00:03:19] inflation is our friend in self-storage. And so it allows us to be able to grow that.

[00:03:24] And then the other thing I really learned was if things go really bad in the economy

[00:03:28] and people start losing their houses right and left, we don't celebrate that. We're not

[00:03:31] happy with that. We just realize that self-storage goes to 100% occupancy.

[00:03:35] So it's more of a recession resistant kind of product. And then if people are making

[00:03:39] money hand over fist, which we love in the economy, then we go to 100% occupancy because

[00:03:44] they have a C2 in one unit and a snowball bill in the other. That's just how that works out.

[00:03:48] And so that recession resilience, that ability to sort of impact and force appreciation

[00:03:52] over time, the fact that tenants are typically sticky. A couple of the main portions of tenants

[00:03:57] are really sticky. And so they're not super price sensitive. I mean, everybody's price

[00:04:02] sensitive but not super price sensitive. And we have no tenants and landlord-tenant

[00:04:07] liability issues, right? That's a really... Yeah, they don't pay. It's easy to get rid of

[00:04:11] their stuff, not them because they're not there. Right. Yeah, that's the value. So all of those

[00:04:15] combined and as I looked at all of that and I looked at all of the headaches we had in the

[00:04:20] company and all of the stressors that the employees were having and everything they

[00:04:24] were looking at, we decided let's just sell our multifamily single family units and focus in on this.

[00:04:29] On this. And that's what you've done ever since. Yeah. You do it not just in Iowa,

[00:04:33] you do it through the Midwest and it sounds like it will... Through across the country and

[00:04:37] largely because you've identified some of the drivers that... What it takes to identify a good

[00:04:41] market and then inside of there, it's how does your property situated in the marketplace?

[00:04:47] Right. Talk to me about some of the key factors that drive both the geographic area,

[00:04:52] so the city, let's call it and then more down to granular level, this particular property on

[00:04:57] this particular block. Sure. So, sub storage is very localized. Right. So people will drive 45 minutes

[00:05:03] to two hours every day to their job. They want to be within five minutes of their self storage

[00:05:08] and so many. It's almost like a gym. They don't want to drive across the city to go to a gym.

[00:05:12] They just want to be close to it. It's kind of that concept. I don't understand all of the

[00:05:16] socio reasons that people do that, but that's kind of the function there. And so

[00:05:20] it's a very localized area. We look at three miles and five mile areas and if it's uber dense,

[00:05:25] like 200,000 people in a three mile radius, really, really dense, then we might go down

[00:05:29] even to one mile radius. So it's very, very localized is what we talk about on self storage.

[00:05:36] So if this five mile radius doesn't work, we'll go down the road 10 miles,

[00:05:39] see that five mile radius works and then five miles. Right. So you have these five

[00:05:43] mile spots. Biggest factor that we look for, change in population, change in jobs,

[00:05:47] change in population. We want to see increasing jobs, increasing population.

[00:05:52] So some areas of the country might be losing people due to taxes, due to state government,

[00:05:57] due to whatever reasons and they're moving to other states and other areas because

[00:06:01] jobs are there to be it's sales tax, property tax, income tax, like all of those things. So to

[00:06:07] make for a better environment for that person. And with COVID, we saw a lot of people able

[00:06:13] to realize that you could work remotely. So you could now work pretty much anywhere in the country,

[00:06:19] you live there and work at your old job. That whole mindset has really opened up

[00:06:24] people transitioning across the country. We underwrite maybe, you know, 10, 15 deals a week.

[00:06:30] And so we're looking at that five mile radius and we look at job change, we look at population

[00:06:37] change. And if it's if we're losing people and we're losing jobs, I don't care if it's

[00:06:41] not interesting, I'll go find something somewhere else.

[00:06:44] All right. And you're identifying an asset. Is there a certain size threshold that it must be

[00:06:48] in order for you to go? Yeah, we've got some minimum standards here, more maximums perhaps.

[00:06:53] Yeah, there's no maximum standard. So it depends on whether I'm buying it with my own cash,

[00:06:58] my own stuff, if I'm syndicating the deal with other investors, whether or not

[00:07:02] I'm giving some sort of returns over a three-year period, five-year period,

[00:07:07] each of those factors come into play. Let's just start at the premier product.

[00:07:11] This is a product that's going to be 80 to 100,000 at rentable square feet. We're going to build it

[00:07:16] ground up. It's going to be the 800 pound gorilla on the market. We're going to control pricing

[00:07:20] from the sense of we're going to be able to dictate, here's what we think the market should be

[00:07:25] and we'll be able to drive that. It doesn't mean we have like a monopoly or anything like that,

[00:07:29] but when you have size and quality and newness to an industry in an area, you really can impact

[00:07:37] because you get to choose where you're going to be. Right. We're stuck there.

[00:07:40] So that upper limit, that's what the REITs want to buy. They want to buy these bigger

[00:07:47] facilities. Now there used to be no upper limit and there are some upper limits now for the REITs.

[00:07:52] They don't want to buy these sort of really huge facilities. And so we kind of look at that

[00:07:57] minimum 65,000 to 115,000 square feet. That's about the size we want to be if we're looking

[00:08:03] for a real estate investment trust to go ahead and buy us either at certificate of

[00:08:08] currency or stabilization or that. And the reason we want them to do that is they've got a lot of

[00:08:12] cash on their balance sheet and they got to move that cash otherwise it burns a hole in their pocket.

[00:08:17] So if they buy an asset that's appreciating in value and generating cash flow,

[00:08:21] that's super valuable for them and they're willing to pay for that on a discounted cash flow model

[00:08:26] on a basis. And so that's what's good for them. And then as we start to step down into

[00:08:31] projects, why are we buying it? Are we going to buy it to keep it forever? Are we going to buy

[00:08:35] to turn around and sell it? Are we going to buy it for just a small interim piece of time?

[00:08:40] Do we have investors that are looking for cost segregation or some sort of deferred

[00:08:44] aspects like there's an important aspect that comes to that. This 25 to 30,000 number is a pretty

[00:08:53] interesting size because it's going to put you at this 250, 300 unit size and that's going

[00:08:59] to impact whether or not you can have a facility manager on site. As you know, facility manager

[00:09:05] is expensive and I'll just tell you that if people don't answer the phone, you don't get the customer.

[00:09:11] That's right. They just move on to somebody else. That's the issue. So you need to have

[00:09:15] somebody who's got the ability to answer the phone, represent you well and basically close

[00:09:20] on the deal as the customers are coming in and get what they want. I will take a class A facility

[00:09:26] manager in a class B facility any day over a class B facility manager in a class A facility.

[00:09:33] Personal touch is very, very important. So what ends up happening is if you get into smaller

[00:09:37] units, you might lose a little bit of that personal touch. It's going to be more of a call center.

[00:09:41] It's going to be more phone. You don't have a lot of this face-to-face time going on.

[00:09:45] So that becomes more of an issue and if I'm buying a facility that is maybe in 20,000s,

[00:09:53] people in a five mile radius and it's got a couple hundred units, I'm going to want to make

[00:09:58] sure that where I fit in that market relative to all of the other competitors, if all of the

[00:10:04] other competitors are about like that, then I'm in the mix. But if I'm at the bottom,

[00:10:09] meaning I'm gravel and everyone else is paved or I've got old doors and everybody's got brand

[00:10:14] new doors or I've got a bad pain job and everybody's that or they're all gated and I'm not gated.

[00:10:20] Like if I'm at the bottom of the list and there's really nowhere for me to move, then

[00:10:25] it's probably not a great opportunity. But if I'm in the mix and we have the ability to go

[00:10:31] ahead and increase safety and security, which are the two main things that tenants are looking for

[00:10:37] because through lights and gates and cameras and that kind of stuff, then we would look at these

[00:10:41] smaller and lower units. We could look at that because you're able to secure the facility.

[00:10:46] People feel comfortable going there at night. They've got lights, they've got cameras,

[00:10:50] they feel like they're protected. They have ease of use of the gates and the doors and all that

[00:10:55] kind of stuff. We'll look at some smaller units. I will say that when you get below that 100 unit

[00:11:01] mark, you probably need to be living there. You need to live in that area. You need to manage

[00:11:05] yourself and that's fine for some people. But that's not fine for a doctor or dentist or car

[00:11:10] proctor. That's right. An IT exec or whatever. They've got a real job doing what they're

[00:11:15] really great at. They don't have time to be answering the phone for $45 a month unit.

[00:11:21] It's fair to say or would you agree it's fair to say that it's not only just real estate,

[00:11:27] it's a consumer facing business. Oh, absolutely. And I tell everybody this, I say it's like,

[00:11:31] I know you use Subway. I've never owned a Subway but you need to have a marketing plan.

[00:11:34] You need people to come through the door. You need to have things clean, can have sticky

[00:11:39] floors. I mean, it's a customer facing business. Customer reviews are a big deal.

[00:11:44] People find you on their phone. They check your Google reviews, they check your yelp,

[00:11:49] they check these other things. It's a big deal. And if you're not responding to dissatisfied

[00:11:55] customers, both logistically, you have to respond to them. If they're dissatisfied with

[00:12:00] their facility, you need to fix whatever the issues are. But if you're not also responding

[00:12:04] to them in the social media market, then you're really doing a disservice to yourself.

[00:12:10] So it truly is a customer facing business. You really do need to be aware that real estate is

[00:12:16] where it sits, but the real value is in the net operating income, the cash flow. And cash flow is

[00:12:22] directly impacted by customer satisfaction. Directly impacted by customer satisfaction and

[00:12:26] that largely impacts the occupancy of the units of the product. Historically, the number one

[00:12:31] threat to self storage facility was another self storage facility. Meaning, right, you just

[00:12:36] literally go one block away and build a new one. And all of a sudden, you know, I have 50 or 80

[00:12:40] or 100,000 square feet is a direct competition down the street geographically. Right. When you're

[00:12:45] looking at a deal, how do you give thought to that or do you as part of your due diligence

[00:12:50] process to go? Is this something we want to fight off on? We want to be the one who's

[00:12:55] building that idea. Yeah. That's what we want to do. So when we go and look at a facility

[00:12:59] and we look at an area and I think, okay, am I already competing against two extra spaces

[00:13:05] of Cube Smart, public storage all in a five mile radius? What else am I going to add that they

[00:13:10] already don't have in brand recognition and all that kind of stuff? I don't know if anybody knows

[00:13:16] this but a lot of times those buildings are not owned by those companies. Right. They're just

[00:13:19] marketed. They're just managed by them. Right. And they're owned by companies like us

[00:13:23] who build them and have an investor group that invests in and then we just keep them over time.

[00:13:28] So that's a big deal. It's a very big deal. So when we go and we look at the analytics

[00:13:33] of an area, we say not only what's happening in that area from job growth and population growth

[00:13:38] but what's happening in that city? Do we see a last word movement and we're on the far east side

[00:13:43] where everybody, all the newer houses is getting built out there. All the multifamily

[00:13:47] is getting built out over there and we're on the edge of the stretch in the wrong direction.

[00:13:51] That's a big deal because eventually you're going to get a big player

[00:13:55] out on that side of the city. So if we're buying an existing facility,

[00:13:58] we want to kind of be in the path of growth. We want to be really close as we can to multifamily.

[00:14:05] It's a very symbiotic relationship with multifamily and self-storage.

[00:14:09] We want to be there. We look at what's called storage index number or the supply of square

[00:14:14] footage per population, right? So per capita in an area. National average is about eight,

[00:14:20] eight and a half right now. Eight and a half. You're largely talking about

[00:14:22] square feet available per person within a one, three, five mile ring.

[00:14:27] And in the country, it's about eight and a half. So all the square footage of the country,

[00:14:30] all the people in the country, that's about the number. That's a supply number.

[00:14:34] That doesn't tell you if demand is great or not. Right. It just tells you if supply is good or

[00:14:39] not. So demand is the other function. That's the main function of that. So are your competitors

[00:14:45] 100% full? Do they have a wait list? You got to know that. And so if they're

[00:14:49] 60, 70% occupied and you're buying a facility that 60 or 70% occupied and there's

[00:14:55] two deals in the pipeline that are going to be built, don't buy there. That's the great thing is

[00:15:00] you don't have to buy that. You get to choose in this scorecard, right? Like I talked about.

[00:15:05] We get to score that area. We get to score the deal. We get to score the community. We

[00:15:09] get to score all of that kind of stuff and say, is this worth it, especially compared to

[00:15:15] all of the other deals we're looking at? Yeah. Just because I see this a lot and a lot of

[00:15:19] people talk about this, hey, this thing's 30 or 40% vacant. We've got tremendous upside

[00:15:23] opportunity. Maybe. Maybe not. Maybe not. Maybe everybody has overbuilt the area and your 40%

[00:15:30] vacancy is good as it's ever going to get. Well, and that's one of the things that we

[00:15:34] check for. Like okay, if you're at 30 or 40% vacancy, what's your website look like?

[00:15:40] Bright. What's your Google AdWords spend look like? Are you working with some of the

[00:15:44] aggregators out there that aggregate and then sell space? Like where are you doing,

[00:15:48] what's your relationship with the local apartment managers? What's your relationship with the

[00:15:52] elderly folks homes that you get some transition that is happening in there? Like what's your,

[00:15:57] what we call sort of grassroots marketing efforts happening? And we'll find, like we're looking at

[00:16:02] this story right now. They inherited it from their dad who owned it for 25 years. They've had a

[00:16:06] couple years in Joe's family. So I look at that and I'm like, okay, you have no website. You've

[00:16:10] got no, you don't answer the phone. Right. Well, okay, now I know we can add value.

[00:16:14] Right. Simply by putting up a website, actually taking credit cards as people who don't take

[00:16:19] credit cards. Like if you tell me I don't have a website, I don't take credit cards and I want to

[00:16:23] be 100% occupied all the time. I'm like, sign me up. I'll pay you whatever you want because I know

[00:16:28] it's probably worth twice as much as you're going to get. Hey, Iowa investors. This is Ava

[00:16:32] Bowcamp, chief of staff at Legacy Impact Investors. Have you thought about adding real estate to

[00:16:37] your portfolio but don't have the time or desire to play landlord? At Legacy Impact Investors,

[00:16:42] we do the heavy lifting. Our team finds the deals, manages the properties and

[00:16:47] handles all the day-to-day operations. Our select group of qualified investors co-invest with us,

[00:16:52] gaining ownership equity without opening a tenant email or responding to a maintenance call. They

[00:16:57] just share in the income appreciation and tax benefits. These opportunities aren't for everyone.

[00:17:03] They are for qualified accredited investors only. If you want to learn more, please visit

[00:17:09] LegacyImpactInvestors.com to apply. There's a couple of asset classes out there in this

[00:17:13] country where it was predominantly owned and operated by mom and pops. Self storage comes

[00:17:19] to mind, mobile home parks come to mind. There's a couple other things. The small

[00:17:23] empty departments come to mind and there's tremendous consolidation taking place over a

[00:17:28] period of time. Certainly in the self storage facility area, given certain sizes,

[00:17:33] you got to have some size, you got to have some mass because all the REITs that are out

[00:17:37] there, they want to roll this stuff up. As you said, they've got money in their

[00:17:40] pocket brain hole. One of the things I read some time ago was that the president of UAL said,

[00:17:45] when we buy a facility, we don't have to make money for five years. That's right.

[00:17:48] But when I read that, that is a scary proposition that you're going to go to battle with somebody

[00:17:52] like that. How do you interpret that? And then I guess, how do you give thought to that

[00:17:56] when you're looking at a deal relative to where they are in the marketplace?

[00:17:59] That's probably Joe. This is the one thing. If you go to self storage at the Association

[00:18:03] conferences, you got to meet these guys. Have a drink with them, have a dinner with

[00:18:07] them, a meal or whatever. They're regular people. They just have a job to do and their job is

[00:18:12] different than my job. They're looking for good quality assets as a matter of fact,

[00:18:17] they've got a property that UAL backed out of. It's going to be a great deal for us. It's

[00:18:21] been a great deal so far and we're going to build another 80,000 square foot on it

[00:18:25] and eventually maybe we'll sell it back to them. It's because of that kind of concept.

[00:18:30] UAL's interest is interesting because I think it's been a number of months since I looked at

[00:18:34] their balance sheet, but I think they've got $2.4 billion of cash and cash equivalents on

[00:18:39] their balance sheet. That means they got to move money. That's a big deal as opposed to some

[00:18:44] of these other rates that maybe have less cash. So here's the thing. If I'm going to buy a piece

[00:18:49] of land and I'm going to build on it, it's going to take a year. I buy it and that's assuming

[00:18:53] that I'm ready to build a day one. If I've got a code, it's going to be an

[00:18:56] entire month process. That could be another six months, 18 months. So I buy the piece

[00:18:59] of land, I'm going to go ahead and build it and then I've got some other thresholds.

[00:19:03] What's my occupancy requirement to break even on operations? Not including interest,

[00:19:08] just operations. I want to know what that is. And then what's my next threshold, which is

[00:19:13] debt service coverage of 1.0. So the facility now is covering all of the payroll, all the expenses,

[00:19:20] and it's covering all of the interest payments to the bank, whether it's principal and interest

[00:19:25] or interest only. There's that. And then we get to the debt service requirements of the bank,

[00:19:29] which is typically 1.25. So these are three thresholds that we look at and then we look at

[00:19:34] stabilization, which is that 85 to 93% occupancy. So we look at those numbers. So the question is,

[00:19:41] and I don't know about you all's approach, but if they're buying land that's not entitled,

[00:19:48] right? That's just land banking. All you're doing is you're buying land,

[00:19:51] you're land banking it, and I don't have that ability to just throw money at land and

[00:19:55] wait for the city to grow into price. I don't have that. I'm just not that big of a guy.

[00:20:00] So if they're including the entitlement process, that totally makes sense. But if they're paying 100%

[00:20:05] cash, then they really only need to get about 30, 35% occupancy and then they're hit their

[00:20:11] break even on operation. So depending on their debt structure and these bigger rates,

[00:20:15] they got some really great debt structures. Correct. You go and look at their reports.

[00:20:20] They tell you when their debt's changing and stuff like that. And they got much lower

[00:20:24] debt than I do. I mean, the reality is, is if they've got that ability to wait, that's fine.

[00:20:29] What they do have is they've got shareholder responsibilities. They've got to get some sort

[00:20:35] of cash flow, some sort of return, some sort of growth and equity and some of the other bigger

[00:20:40] rates really are focused mainly on growing their management aspect of their business.

[00:20:46] So if you go and you look at their stated requirements, they have a certain number of

[00:20:51] facilities that they're supposed to grow into by management. Some of their supposed to grow

[00:20:56] into by building or buying some of those supposed to grow into and maybe different areas. So they

[00:21:01] have different numbers that we need to look at where that benefits us is when we go and build a

[00:21:07] facility that they need to buy or manage, it's a pretty big deal. Yeah. Right. Then that meets

[00:21:11] their needs, which is not the same as our needs. So that's how we interpret that.

[00:21:16] Right. They don't need to make money for five years. That's because they have other

[00:21:19] needs they need to meet. Profitability on that specific facility may not be the most important

[00:21:25] aspect where it is for me, so we're not really competing necessarily on the same thing.

[00:21:30] Publicly-trained companies have many different levers, don't they?

[00:21:32] They do.

[00:21:33] And responsibilities.

[00:21:34] What are you most excited about this year?

[00:21:36] Well, I mean, on a personal level, me, the kids are doing well and my wife's doing well

[00:21:40] and all that's great. So I mean, we have a saying which is we do business to live,

[00:21:44] not live to do business. And so I think that's the deal.

[00:21:49] It's an interesting time. We've got a lot of volatility right now with interest rates being so

[00:21:54] high relative to what they were two years ago, three years ago. That's an interesting issue.

[00:22:01] It's caused a lot of players to sort of pull back a little bit that are dependent on debt.

[00:22:06] That's allowed for a lot of sort of shovel-ready deals to come on the market.

[00:22:11] We're actively looking at different debt products all the time. We actively are looking for investors

[00:22:17] all the time. One thing I don't think I've told you yet, so we used to syndicate deals one at a time.

[00:22:21] Yep, we've created an equity fund. Then the equity fund allows us to structure it's more of

[00:22:27] a customizable fund. One PPM and allows us to put equity, debt, preferred equity, bridge,

[00:22:34] hard money, like whatever we wanted to, we could create those types of deals and then

[00:22:39] flow them out into the market. That allows us to do is bring in investors and have them

[00:22:46] choose which deals they want to be in as opposed to being even clumped into all of these.

[00:22:51] And some people may say, hey, this is that. So that's been exciting for us to sort of get

[00:22:56] into that process that's been sort of new. I would say I'm hoping that something happens

[00:23:03] well with the insurance markets because the Gulf Coast all the way into Florida,

[00:23:09] anywhere where we've got these hurricanes and floods and that kind of stuff like we're having

[00:23:13] right now. Insurance has tripled in the last 14-15 months. And when you have that tripling of

[00:23:19] that expense, it's a really big deal. Correct. So what that's caused us to do is sort of

[00:23:24] stop riding in those areas, other riding in those areas and push us into other areas

[00:23:29] of the country. I think the ability to have that flexibility, to know that and understand that

[00:23:35] because we underwrite so many per week. Right. We are, I feel like, have our pulse on the market.

[00:23:40] That is neat. It's neat to have that and understand. So we'll look at a deal, we'll say,

[00:23:46] man, trends are down 20, 30% in the last 12 months in this area. And we'll come across

[00:23:52] a deal where they're up 12% or after 3%. We're like, that's exciting to us. Let me find those

[00:23:57] types of opportunities. That's exciting, I feel like that. How are you navigating

[00:24:01] debt in today's market? Yeah, so there's all kinds of things that you need to think about.

[00:24:06] Right. So let's talk about it from like a syndication sort of limited partner, GPLP kind of

[00:24:11] mindset. You might have to drop your limited partner returns a little bit

[00:24:17] because you're going to have to drop your debt as a percentage of overall capital.

[00:24:21] So what ends up happening is you may say, look, I'm going to give my limited partners

[00:24:26] 15% IR or 18% IR or whatever it is. And then you might have to say, okay, well, we're only

[00:24:32] going to do 55% debt or 60% debt and then we're going to bring in a bridge or pref or mezzanine

[00:24:37] or something like that. And then we're going to bring in our common equity,

[00:24:41] so that's the concept. I'm talking to a group right now they're doing about 90%.

[00:24:47] They'll do 90% on construction. And so yeah, they're going to be 9.5%, 10.5%. But if I'm paying

[00:24:54] 18% IR to my investors at 35 to 65 and debts at 8.5 or a weighted average cost of capital is 12 or 13,

[00:25:03] I mean the numbers are still working out okay for us. We have to be very careful.

[00:25:08] Like the biggest thing for me is making sure that we protect our investors like above all

[00:25:13] things. People give us money and they don't give us money to give us their future. It's their

[00:25:18] retirement kids is college fund, it's their travel plans, it's the money they need to take care of

[00:25:22] their parents when they get older. You can't screw that up. Right? Like you just can't.

[00:25:27] And so we want to make sure we structure deals that are properly structured so that if something

[00:25:32] goes wrong in the deal, the investors are covered. And if it goes really wrong,

[00:25:37] then we've got the ability on our side to give away some of the general partnership equity

[00:25:42] so that we can make the limited partners whole or at least you know brought up to a point of

[00:25:47] we've never been in a position where we've lost anybody's money that way or that kind of stuff.

[00:25:51] So I don't know what that would look like, but we are what I would call risk managers. Like it's

[00:25:57] my job to de-risk the entire project and we look at risk all across the spectrum and debt

[00:26:04] is one portion of that risk. Right? And the ability to refinance. I mean what happens if

[00:26:10] interest rates go up? I mean, I don't know anybody who goes oh yeah I think interest rates are going

[00:26:13] up. Right? I mean you look at all of the Fed shares and you look at the averages of all that kind

[00:26:17] of stuff there's a couple of them that are a little bit outlier. Correct. But at the end of the day,

[00:26:22] you have to say okay I'm gonna structure this deal and you can't be pollyanna-ish right?

[00:26:27] You have to be pragmatic. Yes. And you have to be able to say well what happens if these

[00:26:33] things happen? Is the deal still worth it? Right? Is that risk adjusted return I'm going to give

[00:26:39] to my investors? Does that make sense? Do I have a back ability to sort of backfill into that

[00:26:46] if I need to? Can I give up equity on my side? I mean one deal right now where we are 10% owners

[00:26:53] and 90% is the LP and I won't do that again because that's just I don't have anything to give up.

[00:26:59] Right? If the deal doesn't work out as strong as I wanted it to what and I'm going to give

[00:27:03] right? But if I've got a different structure than I've got more to give

[00:27:06] and I like the flexibility. If you're a house flipper, execute the birth strategy

[00:27:10] or do double closings and are in need of money. Little Guy loans is your go-to lender here in

[00:27:16] the Des Moines area. Time is money. Loan approvals in 24 hours. Closings in five days. Little Guy

[00:27:24] loans was founded by Neil Timmons an investor just like you. Since he has been in over 10,000

[00:27:30] homes in Des Moines there's never an appraisal. Houses, multifamily and commercial property

[00:27:35] loans up to 1 million. Check out www.littleguylones.com. Where does that back? That thought process

[00:27:43] relative to risk mitigation relative to understanding the debt, the capital stack,

[00:27:49] the stress testing in the ultimate way and saying those other deals. Where does that come from?

[00:27:53] Well I think it comes from a lot of different parts of my life. So some of it's education,

[00:27:56] some of it's practicality. So I'm my undergraduate degrees in economic and business. I've got

[00:28:00] a master's in business administration. I worked for Procure and Gamble. It's a huge company

[00:28:04] and they did a lot of that kind of stuff. I was a banker, commercial lender. So that's another

[00:28:08] aspect of things like when we would lend money. I mean what I learned early on is that a banker's

[00:28:13] job is to not get fired. It's not to not lose money right? You know what I mean? It's to not

[00:28:18] get fired right? Well how do you not get fired from a bank? You need to do all of the things

[00:28:22] you're supposed to do and sometimes that includes not lending money. I checked up all

[00:28:27] the boxes and all the boxes were a guess except for one no so I can't lend the money. So

[00:28:34] they're kind of okay. And so I looked for bankers who actually have a real practical sense of

[00:28:40] they need to move money. The real need of a bank is to move money and they have to move it

[00:28:45] and they need to get fees for what they're doing so they gotta move it and then they need to get

[00:28:48] an interest rate spread and then they're probably going to swap it out with the credit

[00:28:51] default swap or something like that. Then they need to get their actual money back.

[00:28:54] Then they eventually need to be back but if they do then they need to get it back

[00:28:57] and so I would say this. I think that my sort of risk a verse management process came really

[00:29:04] heavily in my MBA program as a banker right? Because you really got to look at things to say

[00:29:09] well how is this going to go wrong? You got to look at the industry and we liked to lend to,

[00:29:13] we were asset based lenders right? So we would lend to companies that made widgets and stuff

[00:29:16] like that. So you know you had to really understand the industry. You had to really

[00:29:20] think through all that kind of stuff and you know just sort of practically look at whether

[00:29:23] or not this was going to be not only a good deal because the operators were good but the

[00:29:28] personal financials and all that other kind of stuff but that the industry or sector was also good.

[00:29:33] When I was a banker in California and we had some long-sermon strikes, there were like a lot of

[00:29:39] ships in sitting outside of Long Bay with all kinds of product on it some of which we had lent on.

[00:29:45] So our borrowers were like I can't pay you because it's sitting right over there. I mean

[00:29:50] it's on the water. I can't get it right to sell it right? And so that was an interesting product.

[00:29:56] I think the other part is that when you as a banker and you start to learn how to sort of

[00:30:01] spread financials and sort of look at all of those types of things, you start to think about

[00:30:05] what's the cash flow process on this loan? Where's this coming from? And so bankers say

[00:30:12] listen I need a primary source of repayment, secondary source of repayment, primary source

[00:30:15] of collateral, secondary source of collateral and I need experience. Like those are the five

[00:30:20] things that I need. So primary source of collateral and self-storage is the facility itself. Secondary

[00:30:25] source of collateral are the loan-garrantors. Primary source of cash flow is the deal. Secondary

[00:30:30] source of cash flow are the W2 from the loan-garrantors or something like that. And then

[00:30:34] the experience is the operators. When you get into non-recourse debt it's only primary and

[00:30:39] primary. That's it. There is no secondary aspect of it. And so that deal has to make sense

[00:30:44] on the face value. And so if it doesn't make sense and the bank's not willing to lend on it,

[00:30:51] then there's probably a reason. I will say this though, not all banks are the same,

[00:30:56] not all bankers the same. Some banks in the area stop lending money for a little while,

[00:31:00] that's what's going on. And so what you try to do is make sure that you're working with,

[00:31:06] like we typically would have three banks that we would work at. So we want to make sure that

[00:31:10] each bank that we made sense to the bank and the bank made sense to us.

[00:31:13] That's right. Because everybody's got changes in senior management,

[00:31:17] they change in processes. I remember when I was flipping houses, I was using said,

[00:31:21] hey, we're no longer flipping houses. I'm like, I had three deals we're supposed to close on.

[00:31:24] Right? Well, we can do one. Okay. So it was scramble time. So I think that the risk

[00:31:30] management aspect of things really came into play. And then as I flipped houses

[00:31:35] and I lost money on a couple of houses that I flipped, that was not good.

[00:31:39] Right? And that conversation with my wife, she's like, Hey, I'm like, yeah, I know.

[00:31:43] Would have been better if I just took a vacation and did nothing.

[00:31:46] Right? So I think when you lose money on deals,

[00:31:52] slap your cross the face. Right? I mean, you really have to understand,

[00:31:56] hey, this isn't just going to work out because you want it to. You have to make it work

[00:32:00] out. Correct. And then when you're flipping houses, you know, it's almost like adult

[00:32:03] babysitting. You've got to work with the contractors, you've got to show up,

[00:32:06] you've got to check mug shots in the morning on Monday to make sure they're not in jail.

[00:32:09] Like whatever it was, like, you know, it just is the way things are.

[00:32:13] And I think the practicality of going through a lot of those deals and just having them,

[00:32:17] you know, you look at the ones that were at Willy Welling, you find out why did they go well.

[00:32:21] Right? Right? Hopefully it was not luck. And you look at the ones that went bad.

[00:32:25] And if they went bad because of bad luck, if there's such a thing, right? I mean,

[00:32:29] do you have to understand that you personally, yes, are responsible? Yeah.

[00:32:34] Even though it was their job to get it done, it was your job to make sure it got done. That's

[00:32:39] right. And so when you take that sort of, I don't know if you read the book, Extreme Ownership.

[00:32:43] Yep. Right? So it's a great book, right? It talks a lot about what are you going to own

[00:32:47] and then what systems and processes you get in place to make sure

[00:32:52] that all of those things are happening. We sort of talked about that managing the

[00:32:55] manager kind of thing. Well, that comes through maybe a little bit of hammer and anvil kind of thing,

[00:33:01] flippant houses and that kind of stuff. So I think it's the education, the banking,

[00:33:06] practicality of having to rush through it and brumble through it. And you just got to hone

[00:33:10] yourself into not falling in love with the spreadsheet. Yes. There's not a deal like

[00:33:16] sometimes the best deal you do is the one you don't do. Like you got to know not all

[00:33:20] investors are good investors, not all managers, good managers, not all money is good money.

[00:33:24] You got to vet all of that. And I think some of that just comes with experience.

[00:33:28] Yeah. Right? I mean, we both have a few years behind us.

[00:33:31] Correct. Yes. It comes with experience. Oftentimes now some of those you can flush out real quick.

[00:33:37] Oh, very, very good. Yeah.

[00:33:38] No, red flag, been there, done that. Do not pass, go.

[00:33:42] Garg, are you ready for the final three questions?

[00:33:44] Sure.

[00:33:44] If you had one piece of advice for your 20-year-old self, what would it be?

[00:33:48] To find something to live for other than self and deeper. Right? Like find something,

[00:33:53] someone when you dedicate yourself to that, then that's bigger than you. Then you have to stretch,

[00:34:01] you have to become better. Right? When you only focus on yourself, then

[00:34:05] kind of get settled wherever you're at. Maybe you never reach your potential.

[00:34:09] Two books that changed your life.

[00:34:11] The Bible was one. I would say that for sure. So I mean, this will include that one as an

[00:34:15] obvious one here. I will say Never Split the Difference by Chris Boss.

[00:34:20] It's a book I will recommend to everybody. Business owners, be careful about recommending

[00:34:24] that you're employees. But it's still a good thing. Right? Yeah. Well, I mean, I had somebody ask the

[00:34:30] question which is what happens if you spend all that money training up your employees and they

[00:34:33] leave? And the answer is well, what happens if you don't and then you stay? Right? So that was

[00:34:38] that. And then the one thing by Gary Keller. That book, it's required reading in the company.

[00:34:45] Like what's the one thing you can do by doing that one thing that makes everything

[00:34:48] us easier? And that's why we ended up selling all over a portfolio. Yeah.

[00:34:52] You haven't seen my office. We bypassed it on the way to the studio room here,

[00:34:55] but the quote is printed tape to my computer. Oh, good. And you know that your team really

[00:34:59] understands it when they mock you? I had somebody say, my one thing today is to get you to do my

[00:35:04] job. Good. You read the book. You understand the theme. That is good. If you were cast

[00:35:10] away at an island for a year, you could only get three pieces of data about your business

[00:35:14] each and every month to know how your business is right. What three things must you know every month?

[00:35:20] So boy, it's going to be top line revenue. Right? So this is going to be called gross revenue,

[00:35:25] right? That number, you got to know that changes, right? Gross profit. So let's just say

[00:35:30] listen net operating income, right? Like that's the number. Do I have the ability to influence

[00:35:34] any of these things or is it just information? No, you're just getting info. Okay. Without

[00:35:38] the ability to change it. So I guess the last thing that really, really, really important last

[00:35:42] thing is just occupancy levels. Like I need to know what occupancy levels are happening on a

[00:35:47] facility level basis. For you, why Iowa? You could go anywhere. You could do what you do

[00:35:52] anywhere and naturally you invest in multiple places including Iowa. But what keeps you here?

[00:35:57] Why are you here? Well, we moved here 20 years ago. Yeah. Bought a house, three houses from

[00:36:01] her mom and dad and four houses from her sister. And we've gotten together every Friday night

[00:36:05] for 20 years. Yeah. And we thought about living a number of times, but why would we move

[00:36:10] away from that? And to where would we move? That's the whole point is family. My kids,

[00:36:17] got to see their grandma the 300 days a year. Yeah. We developed a deep and intimate life

[00:36:21] and relationship with each other. And sure it's got some winners and heats and that kind of stuff.

[00:36:27] And it's not, shall we say that I think of Santa Barbara, which is where I went to college.

[00:36:32] Yeah. And lived there and it's definitely different environment than here. Yes. But

[00:36:35] it's really the relationships. It's relationships with the friends that I built

[00:36:39] and that. And then you can travel and we do a lot of travel. But that's what it is.

[00:36:44] Guy, I've asked you lots of questions. What's one question I did not ask that I should have asked?

[00:36:49] Yeah. So I would say that why is self storage a good opportunity today as opposed to

[00:36:57] maybe other asset classes? And I sort of touched on it a little bit. It's a recession

[00:37:02] resilient thing. Right? It's a recession resilient asset class so that if things start

[00:37:07] to go really bad in the economy and then things go well for self storage. I think

[00:37:12] the other aspect is that it's a somewhat fast moving product in the sense that we just have

[00:37:20] typically either metal or block walls. Like, you know, it's like I tell everybody we have

[00:37:24] a door. It goes up and down. Yeah. And it's got a lock on it. I don't know what else to

[00:37:27] tell you but it's a door. It goes up and down. Right? I think it's totally different than all

[00:37:30] of the other aspects. Correct. So if you're going to go out and build 80,000 square foot

[00:37:35] multifamily, this is a multi-year process of getting that done. Lots of moving pieces.

[00:37:40] Right. And that's okay. You have great operators who can do those and get those built.

[00:37:44] So I think that everybody talks like return on investment. Return investment is always a good

[00:37:48] deal when we start to talk about return on assets. What is the ability to affect the value

[00:37:54] of that asset year over year over year? Right relative to the size of that asset. So it's

[00:38:00] a smaller assets class. The great thing about it being smaller and it's also the hard thing

[00:38:05] about it being smaller is that you don't have a lot of Wall Street money trying to

[00:38:10] dangle their feet in these waters. Right? I mean, the deals are $13 million. That's not even on par

[00:38:16] with anything they want to even think about. Right. And if they want to move $100 million,

[00:38:20] they want to move it in a month, not in three years. Right. And so like it's that kind of

[00:38:25] concept. So I think the return on assets, the fact that it's recession resilient,

[00:38:29] recession resistant kind of product, it's an asset class that built right,

[00:38:34] managed right and in the right location will continue to give great returns over time.

[00:38:40] We talked about it very early on the forced appreciation and the housing world, single

[00:38:45] family rentals or flips, the only ability to do forced appreciation is to go rehab a house

[00:38:50] and just reposition it. Right. Typically speaking on a single family rental side,

[00:38:55] you cannot force appreciation. The only way you actually force appreciation is by kicking

[00:38:59] the tenant out and selling it to somebody else who's going to occupy it as an ownership.

[00:39:03] So even on a rental basis, there's no ability to move the needle on houses. No. It requires

[00:39:09] getting into the commercial world and you've done it here and done a masterful job doing

[00:39:13] this for a long time now. Right. For people who want to find you, they want to follow you,

[00:39:17] they want to connect with you, where can they go, what should they do?

[00:39:20] So I would say just point them towards our website which is momentumwealth.fund,

[00:39:27] momentumwealth.fund. And then if they want to email me, it's guy at momentumwealth.fund

[00:39:32] and can take it from there. But momentumwealth.fund, that's where you'll see who we are,

[00:39:36] our videos and then we've got momentum wealth fund on Facebook and we're deploying ads and

[00:39:42] going to be starting a question and answer series based off of the book, They Ask You Answer.

[00:39:48] What are the questions that people might ask about self-storage and we're going to start

[00:39:51] doing that 15 second to two minute sort of snippets. Yeah. And just putting that out

[00:39:54] so people can have a place to look. That's what you could find me.

[00:39:57] Fantastic. The links are below in the show notes for everybody. Guy, I appreciate being here.

[00:40:01] Thank you very much. Thanks. Thanks for listening. If you're enjoying the show,

[00:40:04] may I ask a favor of you? Naturally, subscribe so you never miss an episode.

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[00:40:43] to get on the calendar and connect. Until next time, keep investing in Iowa.