There’s no great success in simply buying a self-storage facility. Any idiot that can write the check for the down payment can accomplish that. Instead, the real trick to buying a storage property is to make money with it. But that can be more allusive than many people think, particularly those that want to follow the same old, tired paths or to think like the herd. In this episode of the Self-Storage University podcast we make the case for focusing on profitability and not convention, and to having the strength to think independently of the herd of idiots out there.
Episode 4: Any Idiot Can Buy A Storage Facility – And Many Do Transcript
Any idiot can buy a self storage facility and many do. This is Frank Rolfe, the Self Storage University Podcast. We're going to be talking about the fact that it isn't any glamorous undertaking just to buy a self storage facility. The whole trick is to actually make money with it. That's all it means. So don't let yourself get in a mode in which you think that the whole goal here is to buy a self storage, because if it doesn't make any money who would want it? So let's first talk about why people do that. Why do some people buy self storage facilities that are doomed to never make any money? And the kids because they like to follow the herd, they don't like to think independently. They always have this kind of FOMO, fear of missing out. So what they do is, they kind of reactively follow what everyone else is doing.
If you Google up the self storage industry over the last few years, you'll see there are certain markets that they talk over and over again as being attractive places to buy self storage. Markets like in Austin, Texas, and around Denver, Colorado. And the problem is those probably were hot markets years ago, but today it's not working very well at all. Often the markets that are determined to be hot and they're publicly advertised as being hot, well, you know where that happens. Massive overbuilding, massive over paying, and pretty soon, whatever you just bought is worth less than what you just paid when you take out commission. And the reality that the broker didn't tell you that actually the occupancy and the rents are on a downward decline. Also, you've got to acknowledge that the self storage industry has many different niches. It's not just one big happy family.
When people talk about self storage, they invariably think about the good old public storage with the orange doors, on a single story complex right there in the heart of the city. But that's only a microcosm of the roughly 48,000 self storage facilities in the United States. They come in urban styles, they come in suburban styles, there's climate control. There's multistory. You've got to be able to pick the right niche. You have to think for yourself and not listen to what everyone else is saying. Years ago, people said, "Oh yes, if you want to succeed in self storage, you've got to have climate controlled facilities." And they proved to be completely wrong. Many people liked climate control, but did not want to pay extra for it, nor did they think the things they were storing needed a climate control aspect. So basically people horribly overbuilt and many of those climate control facilities ended up in bankruptcy.
So the key is, don't follow the herd and also acknowledge that there's many different sectors and you need to pick the right sector for you. Don't pick the right sector for other people. The one that will actually work for you and your investment. Also, be very, very watchful over, over supply. Self storage is a unique industry. It's not hard to build self storage facilities and most cities will let you build them nearly anywhere. What you don't want to do is to buy or build a storage facility in a market where everybody else can too. Here where I am in Missouri, if I just go up the highway about 15 minutes, I see this painful confluence of storage facilities that all went up at the same time, one after the other. The first one went up and I thought, "Well, okay, that looks like not too bad a location."
And then one went up right across the street. And then one went up across the highway on the same corner. So three of the four corners all have brand new self storage facilities and this is not in a very large market. So they now all have big ads that say, "Rent one month here, get one free." The next one says, "Rent one month, get two free." You know how that's all going to end up. So you have to be very careful that you don't buy into a market that has an oversupply wrist. And what are those markets? Well, you can simply Google them up and you can see online the markets that have built too much space. The industry built like 2 billion square feet of storage, new storage construction over the last couple years. As a result, some markets are absolutely poisoned. Don't buy into those markets.
You'll also see, it's interesting worthy of note that if you look at those lists of markets that are now overbuilt, which have declining rants and declining occupancy, those exact same markets match to the articles that are a few years older than that talking about the hottest markets to build in the United States. Again, it's that same feast and famine, cyclical nature of people. When you have people who like to develop storage with unbridled enthusiasm, it often turns into a gigantic mess. Also, you have to do great due diligence. Some of the idiots who buy self storage facilities don't even probably know how to spell due diligence, but due diligence means you have to look through the revenues and the expenses, you have to verify those. You have to do all the things necessary to make sure that you are not gambling your investment dollars. If you want to be a gambler, there's great places to go for that.
There's Las Vegas, there's many other casinos, but no one should be a gambler in the self storage arena. That makes absolutely no sense at all. And you don't have to be a gambler. Diligence allows you to overcome the typical risk associated with buying a property and to make a much more educated selection where you've mitigated the rest so that you know fairly well what might occur and what your plans are if in fact it does occur. Ben Franklin said in about 1778, I believe, that diligence is the mother of good luck. And he was exactly correct. Those who do good due diligence, seldom have to rely on raw luck to succeed because they make their own luck. Now, it doesn't mean there isn't some element of luck in life.
Certainly if you find that one self storage facility for sale that no one else was ever able to reach the owner, or you're the person who called the guy about buying it., it just so happened on the very same exact time that he was going to drop the price by half. Yeah, there's some luck out there, but by and large, we all create our own luck. And we do that by being smart and applying good due diligence. I don't know anyone in the storage industry who's ever succeeded by not doing good due diligence. I know some people who have lucked out maybe on one facility and then lost it all on the next year on the third. So you've got to do great due diligence. Another item you have to do, if you don't want to be a self storage buying idiot is you have to acknowledge the law of risk and reward. Now, what is risk and reward? We all take risks every day. Every time you pull out of your driveway in your car, you have risk.
You might get hit by a drunk driver. You might not have the ability to see through the oncoming sun and hit a pole. Maybe your tire will go flat. Maybe your engine will die and leave you stranded, but that's the risk we all have to take to move forward. So often you can't make any progress without risk. In fact, there's an old saying that behold the turtle to make forward progress, it has to stick its neck out. And we all have to do that. We all have to stick our neck out to some degree. But when we take risks, there has to be a reward for that. You're not going to pull out of your driveway and drive down the highway just for fun. Some people might, some people might do that just to take their classic car out to the Sonic. But for most people, no, there has to be a reward for doing it. And for most people, it's going to work.
And so they're getting in their car, and driving somewhere and taking risks in order to get paid. But there's a theory called risk and reward. And basically what it means is you have to have a healthy relationship between the two. So if you take high risk, you have to get high reward. If you take low risk, you're happier with a lower reward, but you would never want to do a deal that has high risk and a low reward. That simply will not work for you as an investor. Sam Zell, the largest owner of mobile home and RV parks, office buildings and apartments. He wrote an entire book on this topic called, Am I Being Too Subtle? It's a great book. His entire life has been geared towards the analyzing of risk and reward.
And everything he's done in his career ... bear in mind, he's the only one in American history to be the largest in three separate real estate sectors. It's all about risk and reward to him. He tells everyone who works at his company, "Always do deals that have low risk and higher reward and never do deals that have high risk and low reward." In fact, I think he has it printed on the back of his business card. The bottom line is you've got to have that healthy balance. If you're looking at buying a self storage facility that has lots of risk, maybe the market is over saturated, maybe the Metro is too small, it has to have huge reward. You will never ever want to take lots of risks without a compensatingly, healthy reward. Finally, you just have to dare to be different. What happens to a lot of people who make idiotic purchases out of self storage facilities is, they follow what everybody else tells them.
The broker, the media, whatever articles that they can Google up, but that's not what smart people do. Smart people like to be different. Look at the foundations of the storage industry itself. You have a guy, [inaudible 00:09:35] who decides that there's something that can be done with storage, this new and exciting with those orange roll up doors. And there's many other pioneers, frontiersman of real estate who decided it was worthy of the investment dollars to go ahead and make something of this strange, weird industry. Be those people. Be different. Don't listen to other people. It's your dollars and your time at stake. You don't want to go ahead and do what others tell you to do and risk your money and rely on other people, because at the end of the day, they won't be there to help you or to bail you out if they're wrong.
And if you can't make that decision, if you don't know whether this is the right storage facility to buy it or not, don't do it until you can. Educate yourself. Learn more. Look at lots of them that are for sale. Look at the costs. Look at the markets. You cannot get enough information. Your brain is a giant supercomputer. The more information you put into it, the better decisions it will make. But when you've made that decision, even if everyone around you says, "No, that's wrong." Even if the broker says, "No, no, this is a better deal." Don't listen to any of them. They're not stakeholders in your final decision. They're not going to do a thing. Whether that decision was smart or not smart, you're the one who has to live with it. And you've got to dare to be different to succeed.
This is Frank Rolfe of the Self Storage University Podcast. Hope you enjoyed this. Talk to you again soon.