Clint Eastwood’s “Dirty Harry” character once said the classic line “a man has to know his limitations” – and that’s equally true for self-storage facility buyers. There are simply some things you can’t fix regardless of your talent and effort. And it’s very important that you separate these “can’t fix” items from those you “can fix” in order to embrace opportunity and stay clear of certain failure. Essentially, you have to choose your battles wisely, and in this podcast we’re going to help guide you in that decision.
Episode 16: A Person Has To Know Their Limitations Transcript
Remember that classic line for the Dirty Harry movie, a man has to know his limitations? Well, this is entirely true with self storage as well. This is Frank Rolfe, The Self Storage University podcast. We're going to be talking about understanding what you can fix from what you can't fix. This is a very important topic because many people get in a lot of trouble buying a property that is not performing well or buying a property that seems to be performing well at the moment and not fully understanding what the key drivers are to turn that thing around. There's things out there that you do have the capability of solving and there's other problems you can't possibly solve.
Let's jump into the first things that you can fix with a self storage property. Number one, you can fix the rent level. You have the capability of raising your rent. So if the rent is $100 a month and you want to change that rent to $120 a month, you can do it. Now, as you'll be successful at it, but you definitely would have the capability of doing that, that's one thing you can do. And if you've done all your market research properly and it shows the market would support it, then there's no reason why that would fail.
Number two, you can definitely change your occupancy. There's a lot of storage properties out there that are run by moms and pops who know nothing about the internet, internet marketing, or search engine optimization, or really much of anything like that. And you can often do a drastic improvement in the occupancy by similarly bringing it up to modern standards. So once again, occupancy is something you sometimes can fix, it's within your capability.
Number three, appearance. Every property out there can always look a little better, whether it's painting something, cleaning something up, a little bit of landscaping, maybe even some asphalt repair. Whatever the case may be, that's something that you can fix. You can hire a contractor to come in at a certain amount of money and make those alterations. So that is within your control.
Number four, security. If you want to make the property more secure, if you think it's important to get more occupancy, you can do that. You can install fences, and cameras, and gates of all sizes and descriptions. So there's no limitations to what you can do if that's what you want to do as far as increasing security. So that is totally within your capabilities. Then cost cutting. Yes, you can do cost cutting. You can lay people off, you can go ahead and get that lesser expensive manager. There's any number of items you can do in order to make that possible to reduce those costs. So that's something that is well, well within your control.
So if you want to go in there and reduce the hours of the manager or change the manager with lesser expensive one, whatever the case may be, yes, you control that. As the owner, you have the ability to sign the agreements, to spend the money as you see fit. So that is something that you can fix.
Now, let's now change to things that you can't fix. Number one, you can't fix demand. If there's no demand for your self storage units, then no matter what you do or how hard you try, you will never be able to solve that riddle. So if you are buying a self storage facility in a bad market, what you're going to find is no one really wants what you have to offer. And like any other business, when you have a product that nobody wants it, what happens? You don't sell enough of it to hit your budget, and therefore you are unable to pay your mortgage or maybe even keep the business altogether. So you cannot fix that, that's why it's very, very important during due diligence that you gauge the level of demand, the level of occupancy in the market, because once you've bought it, you're stuck with it. And if you've chosen incorrectly, there's nothing that is going to save you.
Number two, bad positioning of the facility. If you have a facility with no visibility at all, be the setback behind three other very large buildings and you cannot see it from the street and you can't even find it. I've seen some storage facilities that I don't know what they were thinking, the guy that built it thought, "Well, maybe we can get away with it," but in reality, it never worked, you literally cannot even find the entrance.
Well, that's never going to be fixable by you. You can't make those big buildings disappear. You can't change the road system, you can't change where the exit is off the highway. So once again, you've got something you can't fix. So if the property has bad visibility or bad positioning, that's not going to work well, that is well beyond your ability to change that.
Next, survey issues. Now, some survey issues can be resolved, but many cannot. If you have some kind of easement running across your property, if at one time the city got an easement back in 1925 to build a road through there, there's nothing that you can do to fix that. And then well make the property despite the fact that it exists, make it impossible to get new debt on it or to ever find a buyer on it. So when you have a survey issue, it's not something you typically can fix.
Environmental issues, you can't fix those either typically. And if you can, it would cost so much money you'd never be able to afford it. So if at some point in the movie, somebody on their property, maybe before it was a self storage facility, let's just say they started burying trash on the property, well, they created what's called an unofficial landfill. It might cost you millions of dollars to fix that. At the same time, it makes your property not marketable. You won't be able to get a loan, won't be able to find a buyer and you can't fix it. It's not something that you can just wish away, it's not something you can just slap some paint on top of. So that's an item you can't fix. When someone tries to sell a property with environmental contamination, that's not something that typically most buyers can solve.
Title issues, you can't fix it. Now, if someone doesn't have full and clear title to the property and you're going to buy it, well, you won't have that either. And you can't typically build a time machine and go backwards in time and solve many of those problems. Now, some of you can, there's some title issues that can be resolved maybe with the careful plan of an attorney or even litigation, but that's not something you typically are going to want to get involved in. So once again, title issues, you don't want to do it.
And then the big one, the 800 pound gorilla in the room is if you pay too much for the property, you can't fix that. Once you've done that, the die is cast. Pretty much when you're buying a storage facility, how the movie ends for you, whether it's a success or a failure is based on what you do on the front end of what you pay. If you overpay, it's never going to work. No one has enough magical skill to shepherd something that was paid far too high and ever make any sense of it.
The only exception would be if you're buying something that's a turnaround mode with lots of vacancy to fill, but even then, you factor that into the price. But if you are simply overpaying, if you're going out and buying a facility that's pretty much full market read at a 3% cap rate, well, that is never going to probably result in you making any money nor is that going to be a successful purchase.
So what's the key to it all? If you ever read any books of General Bernard Montgomery of World War II, he was a leader and he was revered by the troops because he never got them involved in battles he couldn't win. Now, he was also criticized by many others in the government that he would never get involved in any battle they asked him to because he would never make any commitments until he felt he had everything he needed to win because he only focused on things he could control, and that's very important to think about.
So his theory was, you have to pick your battles very wisely. Now, he didn't have that luxury in World War II to pick his battles too much, sometimes the enemy came at him from many different directions, sometimes he didn't have enough men, didn't have enough planes, didn't have enough tanks. But you do have that luxury, you can pick your battles wisely. Every property you look at buying, you have two roads you can go down, you can buy it or you can pass on it. And sometimes the smartest strategy is to pass on it.
Sure, we're all out there saying, "Well, we want to buy stuff, we want to invest stuff, we want to go ahead and make good purchases," but sometimes we get lazy because we're not finding what we want fast enough to please ourselves. So we say, "Oh, well, let's just try and make this thing happen." There are certain cases where you should not do that. Sometimes the smartest thing you can do is not to buy that storage facility because it has problems that you cannot fix. And if you get involved in a battle that you can't win, then the only possible outcome is to lose and nobody wants to lose.
So understand what you can fix, understand what you can't fix, accept that, embrace that. As Dirty Harry would say, know your limitations, it will keep you out of a lot of trouble going forward in your self storage investing career. And it will also make you happy because you won't be involved in negative aspects of life like trying to solve difficult problems beyond your control, spending money trying to solve them and still probably failing, and then trying to explain to people why you got in that mess to begin with. This is Frank Rolfe, The Self Storage University podcast. Thanks for listening, talk to you again soon.