The competition can be fierce in the heart of the city, with self-storage facility prices that often make no sense as an investor. But that does not mean you have to sit out the current environment. A better alternative is to venture farther out, where the competition is lesser and the profitability is higher. But how can you tackle this larger territory and when have you pushed too far out? That’s the topic of this Self-Storage University podcast.
Episode 61: When In Doubt Press Farther Out Transcript
0:00:31.9 Frank Rolfe: The world's a big place, but most people focus too much on a tiny little pinhead of what's available out there. This is Frank Rolfe with the Self-Storage University Podcast. We're gonna be talking about the fact that when deals aren't compelling, you need to push farther out. Don't hinder your quest to buy a good storage deal by sticking with just that little tight city center. There's so much in the world than that, and you'll typically get better pricing in terms the further out you go. Let's start off talking, initially, about where cities come from. So if you just take out the map and look at any city in America, I don't care where it is, typically, you'll see that one city center, let's just take the example of Dallas. So you have Dallas, the City of Dallas, and it's got a population of a little less than a million people, but then what do you see around that? You see this congregation of additional cities, which we call suburbs, and it might be such as Duncanville or Glenn Heights, it might be Ennis, whatever the case may be, these things all butt into the City of Dallas.
0:01:37.7 Frank Rolfe: So Dallas is the nucleus, but you have all these surrounding areas, and then even beyond that, you have these other small towns that are even farther out, and the sum of all of that leaves what we call the metro area. Now, the metro area of Dallas is about seven million people, but it's formed around the nucleus, the city center, the place where you find Downtown Dallas, which has less than a million people in it. So a city is kind of like this construction, like this art form of all these different areas, they're all gloved together into one big blob, but for some reason people don't accept this, so when they look at looking at stories, they go just to the downtown area, right to that epicenter, because someone told them, "Oh, you gotta be in the downtown area to make money with storage. You have to be downtown to have any purpose to what you're investing in." And that's simply not the case. Because what happens is not only that center section, but all the suburbs, and even what we call the exurb, which is the ring around the suburbs, they all enjoy the same employment as the metro.
0:02:43.9 Frank Rolfe: So that's where the jobs are, but people don't necessarily like to live next door to where they work. They like to live in areas that are predominantly residential, that are farther out. They have more privacy, bigger yards, bigger homes. So if you focus just on the center, urban core, which you can, you're missing out on so much of the footprint, so much of the map of the United States. So then the question is, well, how far out can you go? If we say the center, that urban core is not our target, we're gonna be flexible to go farther out, then what are the limitations on that? Well, the first thing is you gotta know how metros are constructed. Metros or metropolitan area, or even metropolitan statistical area, those are all created and derived by the federal government. They set the rules on what is and is not in the metro area. And you can see this play out. If you go to the website, bestplaces.net, and you put in the ZIP code of anywhere in America, then you'll be able to see on the bottom of that big box, it tells you the population and the home price.
0:03:46.9 Frank Rolfe: It'll have a link that says Metro: And if it has a name of a metro and you click it, it'll tell you whether you're in that metro or not. And you'll see that sometimes things you think should be in the metro aren't, and things that you think shouldn't be in the metro are... And you're exactly correct, because it is not in any way perfect. I'll give you two examples. In Anderson, Indiana, which had a population of a 100,000, one day, they changed the population, the metro of Anderson, which had no metro, to be into the metro of Indianapolis, which rocketed the metro population of Anderson from 100,000 people to almost 2 million people. That's a pretty big jump. Right? How did that happen? Just overnight one day. Well, good question. The government just decided to change the map, even though probably no one has ever lived in Anderson or working in Indianapolis or vice versa. And even crazier examples, down in Cape Girardeau, Missouri. So Cape Girardeau, Missouri didn't have a very big metro, but the government so wanted to have a bigger metro, so what they did is they decided to combine the metro of Cape Girardeau, Missouri with that of Paducah, Kentucky.
0:04:56.0 Frank Rolfe: Paducah, Kentucky is about an hour from Cape Girardeau, and I guarantee you, no one has ever lived in Paducah and worked in Cape, or lived in Cape and worked in Paducah. It makes absolutely no sense. Look at the map. They're not even in the same state. They're not even in the same side of the Mississippi River. So what happens is the government, is itself, not the greatest decision maker on what is and is not a metro area. Sometimes they make big flawed decisions and sometimes they do it because there's money involved, in the case of Cape Girardeau, they wanted to gain a higher population base toward a casino that they wanted to build there to try and bolster the economy, and they found they couldn't build the casino there, unless they had a higher population, so they just falsified basically the metro population to make it fit what they needed. So when you look at that and you say, "Well, gosh, you know, it looks to me like this whole metro population thing the government provides is not truly accurate." You're correct. Often, you will have to make the decision on whether you are within the confines of the metro and whether or not people live in that suburb or exurban, work in that metro or not.
0:06:02.5 Frank Rolfe: Now, when you push farther out, what you're gonna find are these type of storage investments are going to change. The first big change you'll see, are mostly the facilities are smaller. Of course they're smaller, the populations aren't as large, therefore people do not build as big a facility, now, that doesn't mean you can't increase it.
0:06:22.5 Frank Rolfe: Many smart storage investors have bought those smaller mom and pop facilities, so they simply add it on. Sometimes they double them, sometimes they triple the size; it's just based on the fact that Mom and Pop, when they built it, which was probably decades back, the population was one kind of thing, but now it's rapidly changing. As we all know, thanks to COVID, people keep pushing to live farther and farther out. That was one of the big trend, started in 2020, that people are trying to move in search of greater privacy, greater freedom, greater isolation, and they found they really liked it. So they keep pushing farther out. So you can have a storage facility that's relatively small, but the demand still warrants for much more. You'll also find that a lot of those kinds of storage facilities are completely full. In fact, everything that's surrounding them is completely full, and that's because no one has yet built enough units to accommodate the demand for storage.
0:07:18.5 Frank Rolfe: Often you will find, since they're smaller, they also do not have any type of on-site management. You'll probably wanna continue on with that. Now, how will you manage without being there? Well, because they stay pretty much full and the people renew endlessly, it's really not that hard to manage them because all you do is collecting in rent. But that being said, you still wanna have greater control, so you will have to learn how to use technology to your favor. Through the use of cameras and kiosk, many of these storage facilities in more remote areas can still be successfully supervised. But the big item you'll find as you go farther out is you'll find the deals are better priced. That's the whole reason you wanna go and push farther out because in that urban core, they don't make any sense at all.
0:08:04.1 Frank Rolfe: A lot of these storage deals that I see, if you really look at the numbers and put it in any reasonable expectations of such things as repair and maintenance, they just don't even make any money, and I don't even know how you would cover the mortgage, and if you did, you would have no money to spare. But when you get out into the suburbs and the exurbs, you'll suddenly magically find that Mom and Pop's pricing is very attractive. There's plenty of money to make the coverage ratio on the loan and still have cash flow after your mortgage payment is paid. So that's one thing you'll find is better pricing. The other thing you'll find is seller financing. There's nothing more fun in buying real estate than when Mom and Pop will carry the paper, because you then avoid the entire dreadful step of having to go down to get bank financing, which no one really enjoys. It's very pressured, everyone would much rather prefer that Mom and Pop extend the financing. You will not find that in the urban core. No one does sell or financing in the urban core, but in the suburbs and the exurbs, they frequently do.
0:09:01.3 Frank Rolfe: The bottom line to it, is, when deals are not compelling to you, when you're looking at things in the city center and you say, "Gosh, this still don't make any sense, I wouldn't wanna buy one, I guess I'll just wait it out and wait for the next recession which we're in here now." No, that's not smart. Just give up on the urban core, just push farther out. That's the direction America is heading. Everyone is leaving the city, they're leaving it in droves, and those who are remaining in the city typically aren't rich enough to have anything to store. So go with the trend. Go with that mega trend, push farther out. Go to the suburbs. Go to the exurbs. That's where the money is today. This is Frank Rolfe with the Self Storage University Podcast. I hope you enjoyed this. Talk to you again soon.