REIA 264 Scott Lewis: Storage

Welcome to Real Estate Investing Abundance, the show for busy, fulfilled professionals like you to learn how to develop financial independence built on solid passive real estate investments. Now here is your host, Dr. Allen Lomax.

Hello, enlightened investors. Welcome back to the show. I, as always, I am delighted to be back with you again today. We're going to take a look at the self-storage segment of real estate investing. And with us today is Scott Lewis, who is the co-founder and chief executive officer of Spartan Investment Group. And he has led several successful real estate developments ranging from single-family flips to raw land development. As the chief executive officer, Scott is responsible for developing business strategies and plans Ensuring their alignment with short-term and long-term objectives. He leads the Spartan team by overseeing all operations and business activities to ensure they produce the desired results and are consistent with overall strategic mission. Scott, we're so glad to have you with us today. Share with us an experience that helped you to be who you are today.

Thanks, Allen. I don't know if it's an experience per se, but kind of a, I'll say kind of an environment growing up. You know, my dad, there was 2 things that I think that he did that would then kind of take me to kind of a strategic choice in my late 20s that probably built a lot of the kind of the who I am today. And those 2 things for my dad was number one, he would always put out the American flag every morning. He'd walk out, kind of, you know, put it on our little porch thing and then, you know, take it back in in the morning. And that was it. Like no ceremonial or anything, just put it out, bring it back. And the other thing that he did is my dad fought in Vietnam and he for the 1st Cav Division. For those viewers that are unfamiliar, it's the big yellow patch. If anyone's seen We Were Soldiers with Mel Gibson, that's the 1st Cav Division. There was an Air Cav in Vietnam, and my dad was actually part of that division. And he would, he had that big patch framed on his desk, like in the home office when I was growing up. So I would see it, you know, anytime I walked in there. So Kind of a, you know, he, as I mentioned, he fought in Vietnam. So, you know, he was drafted, but he didn't volunteer, but still had an affection for the military, really kind of helped him kind of turn him into who he was. And when 9/11 hit, I was a senior in college and I was, I had a job lined up and everything, and I almost quit that and went into the military. And he said, you know what, look at it this way. Army, not going anywhere. It'll be there. Uh, but this job might. So do the job. If you don't like it, guess what?

Join the Army.

Well, that's what I ended up doing. So I did the job for a while. I'm a big integrity guy and stuff happened at some of the more senior levels of the organization that I didn't agree with. So it was time for me to look for something else. And that flag in the, the 1st Cav patch kind of reared its head. And that's what I did. I quit that job and I went active duty. for 4 years, kind of in my late 20s. I think I was 27 when I joined. And then, you know, that experience as an infantry officer in the military and deployment and the training and all the Army stuff really kind of built a lot of skill sets that I didn't have prior going into the military. So that's probably, that probably, if you were to ask people what kind of defines me, that's probably what they would reference.

It's got an interesting trajectory there and pretty unusual. Most people don't go into the military in their mid-20s. It's usually in their late teens or early 20s. And certainly most people don't go into the military after establishing themselves in a profession. So very strange trajectory there, but obviously has been beneficial to you in your, certainly your entrepreneurial endeavors. And I hear that a lot of times that the military is terrific at actually helping to develop leadership skills. You've done a lot of things in real estate investing from fixing and flips and various different things, you ultimately decided to focus your attention on self-storage. How long has your focus actually been on self-storage?

So in late 2016, we were still doing house flipping at that time, and we use a methodology coming from the Army called the Military Decision Making. We actually call it the Spartan Decision Making Cascade inside of, inside the company. It's an adapted version. Kind of de-armies it a little bit and makes it more palatable versus civilian consumption. We use that methodology to make very big strategic decisions. And in late 2016, Q3, we made a decision that residential house flipping, not really for us. We didn't enjoy it. We weren't all that great at it. We did okay. It's actually what funded the company, but it was time to move on to something else. So we knew we wanted to move into commercial and kind of get into that space. So we used that process and a key part of that process is coming up with evaluation criteria. So we came up with 3 and then looked at a bunch of different asset classes, made the decision. So for Q4 of 2016, we did nothing. We just took a knee and we read and we digested as much as we could as a team for 90 days to build as much of an educational and training foundation as we could before we started actively going out into the market in 2017. So that's when the self-storage journey really started was 2017.

A lot of things to unpack there, Scott. What I'd like to explore just a bit more is you were doing fix and flips and you obviously had a team that you had in place to do that. You said you didn't like it and then overall you were doing okay at it, but you really weren't that good at it. Why? What was it about fix and flips you didn't like?

The residential nature of it. It's one of the reasons we don't do multifamily either or any, anything residential. The residential market is very fickle. It's based on people's tastes. So you get the color wrong in the kitchen, and I remember talking to our agent on an $800,000 property and somebody walked away because they didn't like the color of the kitchen. And that's just, to us, just was not an environment that we wanted to operate in. It's just not something that was important to us. So we wanted to stay away from that. And then secondly, I believe in honoring contracts on both sides. And I don't believe in government intervention in enforcing those contracts. So if one of our customers doesn't pay us, we want the ability to evict them and quickly. That was one of the key things for storage is there's no government regulation mostly that bars eviction. During the pandemic, we were still able to evict people and not being able to do that kind of on the residential side just didn't really fit with our values. So that's really what kind of made us not have interest in any of the residential stuff.

So the fickleness of having to deal with people in their residential settings and situations and the quick eviction processes were what attracted you to self-storage. I certainly understand that aspect of fickleness in real estate. It can drive a person crazy. What was it about the fact that you had decided that you really weren't that good at it? Was it just because you didn't have the passion or Or were there other aspects there?

That's really it. Didn't have the passion, didn't enjoy, you know, on the residential flip side, on the small stuff, you can't work with the best teams because the margin just isn't there. You've got to go out and kind of scrape the bottom of the barrel for architects and stuff like that unless you're going to really scale. And on the flipping side, it's really hard to scale that. Very, very, very hard. Some people have done it very successfully and that's their thing. It just was not ours. So we just didn't really enjoy the teams we were working with. We kind of have a margin minimum and we couldn't meet those, especially as flipping kind of came onto the mainstream with HGTV and all that other stuff. And anybody can go raise $100 grand. That's pretty easy to do. So the competition down there for the single-family flips just got really kind of a red ocean market. Just not interested in doing that. So that's why we wanted to scale up into big numbers that There wasn't a ton of people that could be doing it and we weren't watching people drive around with a magnet like thrown on the side of their car with like, I don't know, Bill Buys Houses or whatever it is. So there's no interest in competing down there.

Yeah, it is definitely a glamorized aspect of the market and probably one of the toughest markets in which to be competing and to ultimately be successful for all of the reasons you just mentioned there. Scott, you had a team together in conjunction with your residential flipping business and From what I gather here, you brought most of that team with you into the commercial real estate business and into self-storage. What kind of team did you have together in your flipping operation?

We actually didn't. There was just me and Ryan and everybody else was external. So there's actually, there isn't a single person from those flipping days that we still do business with. We like, it's one of those things, we pivoted away and jettisoned those third-party folks. who were providing that. As I said, they weren't the top and best in class, so we really had no interest in continuing to like work for them as we grew. The vast majority of our team now is new and focused on self-storage. And I say new, I mean some of 'em 3, 4, 5 years old, right? So we actually pivoted away and didn't keep that team.

Well, Scott, you said you didn't do that well in self-storage, and yet you did well enough to give you seed money to start your commercial real estate investing. business, plus the fact you had sufficient funds to give yourself 90 days to bring all of your thoughts, efforts, and focus into your next step there. During that 90 days, what was it that you and Ryan were really doing to prepare for the next step?

Yeah, so at that time we actually brought on 2 additional folks, my wife and Ryan's wife, both with very appreciative skill sets for what we were doing. My wife came from the intelligence community, so she came on as our director of business intelligence, and Ryan's wife Jackie used to run hotels for Hilton, so she came on as our operations person. So we kind of built that kind of initial team of kind of strategy, capital intelligence, and operations. And really what we did is we went to conferences, podcasts, books, anything we could get our hands on. There's an ideology that I hear kind of thrown around in some of the real estate realms of, yeah, you don't want to just sit there and aim and aim and aim. You know, it's ready, fire, aim. Generally, I find that that's from people that have never actually used a weapon to achieve a means. Because I can tell you, as somebody that has, ready, fire, aim will get you killed because you'll just use all of your ammo and you won't have anything left, and then the enemy will kill you. That's how that will go down. So I also agree that sitting there and aim, aim, aim, aim, aim, and never pull the trigger, that's also bad because that will also kill you. So it's one of those things you have to balance about getting ready, figuring out the fundamentals of marksmanship if that's what you're doing. Aim, get a good solid breath, steady position, and then pull the trigger. And you have to do it in a way that is coordinated and hits the target. So that's kind of what that is. So when somebody asks me, somebody, if they're asking for mentor advice or anything, generally 90 days is a good timeframe to digest a lot of information if you are incredibly diligent about it and you have your team and you have a way to aggregate that information into something useful and so that you can make decisions. But that's where the kind of the 90 days came up. That was enough that we thought that if we did, if we were very diligent across the team and focused for 90 days and just studied as much as we could, we could build a foundation, learn some of the history, kind of learn some of the new stuff, go to meet some people, to be enough to kind of get dangerous. And then, you know, I say we weren't very good at house flipping. I mean, we made some deals with 150%, 160% return. It just wasn't something we enjoyed. It wasn't something that we wanted to scale or anything else like that. So that's why we pivoted to storage.

Scott, you've got a wealth of knowledge and experience. Share with our enlightened investors what it is you can offer them and how it is they can take advantage of that.

Yeah, I mean, I think it's one of those things whenever you're, if you're a passive investor and you are kind of doing due diligence on a sponsor, you're trying to determine how or who to invest with. A lot of folks get really tripped up by the deal that they chase. A deal, they'd like, they see these returns that are amazing and this deal they can't lose and all this other stuff. And I'll tell you right now, from personal experience, I sued my cousin because it was a deal we couldn't lose on. It was a raw land development, amazing returns, super fast-moving deal. Those were words that were actually used. Well, 4 years in, in a lawsuit, we got most of our money back, which was lucky. However, like what we didn't do is we didn't really dig into the sponsor. Like, what do they bring to the table? My cousin's not a bad dude. It just was him and his partner and it just didn't go very well. So it's one of those things when you are a passive investor kicking the tires on a sponsor, really look at the total experience of the team. So when you look at Spartan, you look at the experience of kind of our team, It's really wide. You know, for me personally, like I'm a military officer. I will put my ability to plan an operation against anyone's out there. And that really matters. There's a lot of ideology out there that if you haven't experienced it, you're not any good at it. Well, there's been people that experienced a lot and they still suck at what they're doing. So I'll say that you have to make sure that you have The right experience. And that doesn't necessarily mean you've gone through a bunch of stuff. So because what you went through before, not necessarily today. And I say all of that because when people were digging in, there's a lot of tangential skill sets here of strategic planning, project management, risk management that we bring into the fold, not only through training and education, but also experience. So, you know, if folks are interested in investing with us, we do have a self-storage fund. We do focus solely on self-storage and you'll see some like tangential stuff, and that's just because when you buy big portfolios, you get a bunch of stuff that's coming in there.

Scott, you've an interesting term here. You mentioned that your wife was an intelligence officer, and so you brought her into the company as your intelligence officer. I don't think I've ever heard a real estate investment company that has an intelligence officer. So what does an intelligence officer do in real estate?

Yeah, so her previous career, she was an intel kind of specialist for one of the military folks. So that there's a certain skillset with understanding data, finding information, those kind of skillsets. So she came in as our director of business intelligence. And, you know, business intelligence is incredibly important because there's so much data out there. You know, if you're a small company, maybe you don't have data, maybe you don't have that much data that you have access to. But if you're a big company, big data is a huge thing. There's a lot of insights that can be that can be gleaned from that. And data is meaningless unless somebody can manipulate that data to turn it into information that can influence decision makers. And that's really what she did. She did our initial feasibility studies by grabbing all kinds of environmental data, market data, demographic data from all these different sources and aggregating them in such a way that it could be presented to us and we could make decisions off of that data.

Well, thank you for explaining that, Scott. That is such a critical part of an investment endeavor, and there's all kinds of information out there. And just the aspect of pulling it together is a task in and of itself. Making it digestible and understanding is a step even above the gathering of that information. And I can see why your organization is so critical because, I mean, it's been so successful because from the get-go, you actually had somebody who was totally and completely focused upon that. That's another thing that I have appreciated about the conversation that we have had today. And that is, I think you've used the term focus, oh, maybe a couple of times, but I can see that in everything that you've done from the first 90 days that you and Ryan, your wives, came together, you were very, very focused upon what it was that you were doing in the present moment, as well as you had a very focused idea of the direction that you were going. And that focus is so, so, so critical. We, you know, in the last many decades and years, there has been this emphasis upon multitasking and much research has been done lately in terms of the behavior of psychology and what have you. And we have really come to discover that multitasking diminishes productivity considerably and that focus is a major aspect of really being productive and really getting things done. You had mentioned that in 90 days, if you're focused, you can really do quite a lot. I think it was, I can't remember who said this, but I think it might've been Bill Gates that we overestimate what we can do within 1 year and we underestimate What we can accomplish in 10 years. So take us down this trajectory of 90 days to 2022.

Yeah, so it's one of those things, like, as you mentioned, focus. I'm with you. Multitasking isn't a thing. People who multitask generally don't do anything well. They just do a bunch of stuff mediocre. And if that offends some people, yeah, I don't care. It's simply the truth. And I think that's one of the reasons why Spartan has been successful is we focused, relentless focus on just building our team And storage. We get stuff all the time. Hey, you want to do this? You want to do that? And occasionally we'll kick the tires on it. We've done one JV. It turned out really well to build a mobile home park from scratch. That was a really unique opportunity. So we did that. But for the most part, we say no to everything. No, we won't mentor you. No, we won't JV. No, we won't do an office deal. No, we won't do multifamily. No, we won't fund any of this. And that's really the, I think that freedom to say no because we're focused. And one of the things that we did in 2015 during our kind of flipping days and then pivoted it and refreshed it in 2017 is we built a strategic plan. It's on our website. We give it away. Like people can read it because taking that strategy and actually executing the tactics, that takes discipline and focus. And there's one other level of planning in there, and that's operational planning that aligns strategy and resources to achieve means through tactics. If you don't understand to do that, there's nothing you can do with our plan. So we do 3-year plans, and that really enables us to stay really focused because it's really easy. We all agreed to the plan, and is it in the plan? No. Is it this amazing 10x opportunity that we need to pivot to? No. Okay, don't. Do it. Just stay focused. And that's what we've done. So we rewrote it in 2020 for a new one, 2020 to 2022. We have completed that plan. We have achieved everything that was in it. We've exceeded most of it, and we are now in the process again to write the 2023 to 2025 plan. We generally find 3 years is long enough to achieve a strategy and short enough to allow some flexibility there. And then we do annual planning, quarterly planning, and then individual planning. So there's a lot of planning that goes on here at Spartan.

And I'm sure all of that planning is what has contributed to your massive amount of success in the last 4 or 5 years here. Scott, why is it that you decided to go into self-storage in the first place? What was the big attraction to that after your focus of 90 days? What was it that decided your focus from here on is going to be self-storage?

So it was actually before the 90 days that decision was made, and then that kicked off the 90 days. Okay. And we used the military decision-making process to make that decision. And part of that process is establishing evaluation criteria. And we established 3, which we now call the 3 E's, or we have called them from then. Easy to evict, easy to maintain, easy to operate. So those were the 3 things that we were going to look at all the different commercial asset classes out there and assess them against those 3 evaluation criteria. And we went through, easy to evict was the number one for us. Easy to maintain was number 2, and then easy to operate was number 3. So when you look across the board, Are there things that are easier to operate? Yeah, there is. Triple net lease on office is pretty easy. The office I'm in now, every time something goes wrong and I ask my landlord about it, he tells me it's my problem. Okay, well that seems pretty easy to operate. Just tell the tenant it's their problem. Cool. But when you look at eviction or maintenance, self-storage is— there's nothing out there that's easier to evict or easier to maintain. It's this concrete box. You know how many people care about the color of their box? Zero. Nobody. So that's really what, that's what the decision was made. All right, self-storage. Then we did the 90 days. Let's study self-storage as much as we can.

And so since 2017, you have been in self-storage. What are the major downside of self-storage and what are the major upsides that you have discovered? I'm sorry.

The major downside is It's pretty easy to build, so the barriers of entry can be lower. The deals are a little bit smaller, so you do have some big deals in the major MSAs, but otherwise, you know, your run-of-the-mill storage facility in a secondary tertiary market could be $3 million. That still gets pretty competitive, especially with so much capital out there. So, and it's hard to operate. It's why we built an internal property management company. It's why we have internal asset management. There are third-party managers out there, Very much so. And some of them are very good. Some of them are very bad, very similar to other places. So you can get that most of the time. The vast majority of those property managers, it's an acquisitions strategy. It's because they want to buy your facility. It's not a bad acquisitions strategy. It's a good one. And for some folks, that's a great way to just make it very easy just to let the property manager buy it from you. It's just not something that we wanted to do. The upside is, I mean, self-storage, it's one of those things that's very sticky. If somebody moves their stuff into a 10 by 20, that's 200 square feet stacked to the top. That's like moving your entire garage. Most people don't want to do that. And it's kind of a daunting task to move out. And we have month-to-month leases so we can track with inflation. We can move our prices up and down very, very, very fast. And people need it in good times because they're buying a bunch of stuff and they need it in bad times because they're losing that stuff. So it's one of those things. It's a pretty resilient asset class out there. And again, it's easy to operate, it's easy to maintain, and it's easy to evict. It is an operating business though, so it's slightly different than some of the other asset classes. It's more in line with, call it the operations of a hotel, not quite as hard by any means, just because of the fickle nature of a guest or a business traveler kind of away from home. But it is not Multifamily. It is not office or industrial. It is, it is far more operationally intensive than those guys.

Scott, you mentioned you could move your prices up or down really within an instant. How frequently do you increase the price on a current tenant?

So we do, we try to do, I don't know, 6 to 12 months. Every 6 to 12 months we generally look at price increases, but we track the market and it's no different. We have dynamic pricing. So it's one of those things, if we have 100 10 by 10 units available and it drops down to 90, that price is going to triple. That's just what it's going to do. It's very similar to the airlines. If you book online versus showing up at the facility, there's a very elastic nature to our pricing ability because it's moving all over the place and we have customers moving in and moving out. That's why I said it's very operationally intensive because you do have a decent amount of your people coming in and coming out, and it's actually what you want so you can move those pricings. But I mean, we move 'em whenever we need to.

Enlightened Investors, another enlightening conversation. Thank you for being with us. I look to being with you in our next episode. Be sure to subscribe to our channel, leave us a comment and questions. We'd love to hear from you. Scott, thank you so much for being with us today. It's been a pleasure having you.

Thank you, Allen. Appreciate it.

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