The Return You're Bragging About Doesn't Actually Exist

Howdy folks, I'm willing to bet the number on your spreadsheet and the number in your bank account have never once matched, not even once. And tonight we're going to show you exactly why and why the return you've been told about and maybe even bragged about doesn't actually exist. Like a lot of you, we've worked the W-2s, we tried residential, and we learned it the hard way. And so here's the question: how do people like us replace that W-2 income without buying ourselves another W-2 income? That's the question we're going to tackle every Monday night. I'm Joe Downs. With me is Kristen Blanc. Welcome to the Monday Night Storage Mogul Show. Whether you're watching on YouTube or listening on this podcast, we're glad you joined us, and hopefully you will be— you will be As well. Kristen, how are we doing this evening?

Doing fantastic, Joe. Always enjoy our Monday nights together.

Well, we'll see by the end if that's truly how you feel, but, but good. Okay, so folks, um, for those of you that missed last week's show, Kristen, would you mind giving them just a quick recap of what we talked about?

Yeah, happy to. For those of you who listened to last week's show, uh, we discussed my Indiana house, which you know was a disaster. For those of you who weren't able to join us, feel free, please log on to YouTube and follow Storage Moguls, and you'll be able to follow or listen to our show from last week and the weeks before. So I bought a property sight unseen. It took 9 months to evict a tenant, $19,000 in rehab once I got them out, and 6 months later, after the repairs and finding a new tenant, we got hit again. This new tenant stopped paying after 2 months, and I had to evict them as well. On their way out, they destroyed the property and I had to put in another $35,000 just to get it rental-grade ready. These 2 rehabs practically cost me what I paid for that house. And honestly, that's what a drawn-out eviction does to you and 9 months of no rent. And then you turn it around and put all the money into repairs just to get it rented again. Now on the storage side, it's a whole different ballgame. In most states, when a storage tenant stops paying, we can actually auction off the unit in about 45 days. You heard me. That's 45 days, not 9 months. Of course, you know why I like this asset class. And we covered that legal process in day 88 of our Storage 100 series. And tonight we're going to pick up right from where we left off.

Boy, that sounded painful just reliving it. And quick—

Reliving these, these painful—

I do it to torture you. I do it to torture you. A quick credential here too, folks, and then we'll get into it. Between Kristen and I, We've worked the W-2s, we've done over 500 residential transactions, we've closed north of 25 actual self-storage deals with real numbers between us. So when we say a number's wrong, that's not a guess. We've lived the residential spreadsheets in the past, and now we live these self-storage models and we do it every day. So, uh, Kristen, where— or actually, what should folks lean into for tonight? I know you know what's coming up, but where do you want them to focus and pay attention?

Well, I would say lean into your own numbers. Tonight isn't about us making fun of a spreadsheet or anyone's spreadsheet. Joe and I have done this. We've, we've built those spreadsheets. We've operated from those spreadsheets too. And we believed in them like most people do, right up until the numbers, the real numbers show up and tell you that everything on those spreadsheets were not Real. And I will tell you, I will tell you that Indiana is a perfect example of that. It was a Section 8 property, so the rent was supposed to be guaranteed every month, and we believed that it would be. And it was the number that I was counting on. It was the check that I was counting on every month. And the number in the bank, well, that's an entirely different story. You heard my story. I just recapped it just a few moments ago. In the first stretch, we collected only 2 months of rent. That was only $1,800, and we had already spent $19,000 to make the place rentable again. And that's what actually happened. And we got another tenant in and had to spend $34,000. So here's the thing, none of those numbers were lies on those pro formas and on those spreadsheets, but those spreadsheets were just missing critical information and details. And these are the details that happened to us in real life.

It still blows my mind. Um, all right, so, but so let's talk about the life— I'm glad it blows your mind though.

I know.

Let's talk about the lifestyle aspect though, um, of self-storage.

The—

because it's obviously, it's one of the many reasons we love this niche. But separate the math and the returns from— and the wealth that it creates from, from the lifestyle in particular. I think you have a cute little name for what you, you call your little lifestyle now. I don't mean to say little lifestyle, but you know what I mean?

Well, I want the word full in front of it soon, but right now I call it quasi-retired. And it's not because I found the secret. It's that I had intentionally built a business around self-storage and designed it so that I'm not chained to a desk or to a phone. And I'll be truthful, it took real work to set it up. And once I had it in my mind, once I knew how I wanted my life to be, Um, it took me grinding and finding the deals and evaluating them and underwriting them and finding financing for them, and most importantly, learning how to operate them and run them.

Right, which is the point of tonight, right? So because the lifestyle only works if the numbers underneath them are— and the, and the, and what you're trying to set out to do, whatever that is, it only works if it's real, right? So here's a little exercise you could run yourself. And I'm saying that because we all— anyone who ventured into residential, I always, I feel like the need to say this, I commend you. We all did it. It's the first step and it seems like the most logical step, right? But you have to be real with yourself, right? So here's an exercise that you could run yourself. Pull up all the deposits in your bank account for your residential property over the last 12 months. Just the real deposits, and divide that by what you paid for the property. And then ask yourself a few things. Does that number match what you thought it would? Are you happy with the number? And then after you subtract all the capital and operating expenses that were not on your magical pro forma, ask yourself, are you still happy with that number, assuming you were before?

Well, let's think about this, Joe, and we're going to walk through this. We're gonna show you how to find that number in just a few moments. And if you watched it last week, I'm gonna— mine wasn't pretty. I, I'm sharing all of my pains with you all. So I'd like to move on from my pains, Joe. Maybe next episode we can talk about yours, not mine.

But before we do, let's, let's do the residential version first and let's keep it honest. So, Kristen, start with the real one. What, what did the Indiana house actually do? And not the whole story again, we got that last week. It's in the episode if you want to go back and watch it, folks. on YouTube. Just give us straight up numbers.

Okay, the numbers. So we bought it Section 8 with the tenant in it, sight unseen. They moved out just a few months after we bought it, after living there for 8 years. They were in there for 8 years and we bought it and they decided to move out. When they moved out, we found out it wasn't taken care of and they left us with a $19,000 rehab just to make it rentable again. Because of that, we decided we weren't going to do Section 8. We re-rented it, not in a Section 8 program. The rent collected on that was only $1,800, and that's it. First month's rent, we, uh, which went to a leasing company, and then they paid their second month's rent, and then that was it. We had to evict them. They intentionally destroyed the house on the way out. We paid $35,000 more to rehab it again so we could just sell it. I just wanted out of this property at this point in time. And you add that up, we had $1,800 of income and $54,000 going out. We were more than $50,000 into the hole, and that's before the mortgage payment or taxes or a single legal fee. And we had several legal fees, right?

Point of order, you told the story again, and, uh, that's on you. That's on you. I did not ask you to tell it again.

I just want— I want it ingrained in everyone's head.

I just want to be absolved. Um, but the, the number the deal was supposed to produce though, right? The, the one that made it look smart was a very different number though, I'm guessing, right? So for the Indiana house, right? So let's talk about how that— how does that gap form? Like, where do things go wrong? And, and to do it so you don't have to relive this again, let's use round numbers so you can follow along and run it, you know, in your own house. If that, you know, if you own a residential rental and you're watching, or, um— and again, to be clear, this is just an example I wanted to run through. It's not one of— it's not my deal, it's not Kristen's deal, just a simple one. So let's say you buy a rental house for $100,000. It rents for $1,200 a month. The advertised return there is $1,200 a month times 12 months, which is $14,400 a year. You divide that by the $100K you paid for it, you get a 14.4% rate of return. That's the number in the listing. That's the number maybe your friends quote. That's the number on the spreadsheet, right? And by the way, it's not a bad number, but that number assumes It's rented all 12 months. Nobody leaves, nobody stops paying, nothing breaks. Kristen, you've owned these, I've owned these. I don't think that's really the number you're going to end up with. What does an ordinary year actually look like on that house? Not a disaster house, not an eviction house, a good year, like things go relatively smoothly. What does it really look like?

Truthfully, there are some properties that stay rented 12 months out of the year.

Every year?

Not every year, no. They leave at some point in time for one reason or another. So honestly, what an ordinary year looks like is that a tenant leaves and it takes about 2 or 3 months to get the next one in. So you're only really collecting 9 or 10 months of rent, not 12. So let's say out of what, the $12,000, $14,000? I, I, whatever numbers you said already went out my head, Joe. I'm sorry. So let's just— I might make up my own numbers now. So let's just say we collect $10,800 when you're supposed to collect—

I think that's good enough. Sure.

Am I there? Am I recalling? $13,000, $14,000?

So $14,400. So yeah, $10,800 would be 2 months.

Okay, perfect. So I wasn't too far off. So then you have the cost, right? You've got the property taxes, you've got the insurance, which probably run about $2,400 on a, on a house of that value. And then you've got the property manager, which they take about 10% of what's collected, so roughly $1,100. And then you have the leasing company, so you're going to have to pay a month's rent for a leasing company to find a new tenant, so that's another $1,200. So between prepping the home, between tenants, Plus repairs, it's probably about $2,000 to $5,000 depending on how much you have to do. And you add that up and that's approximately around $9,500 going out. And I said, I think I said $10,800 coming in using our example. So depending on your repairs, you're keeping between $1,600 and $3,500 on a $100,000 home, and that's before your mortgage payment. So if we break that down into percentages, that's approximately 1.6 to 3% you get to keep for your mortgage payment on this example.

Yeah, and, and I'm reminded of the last true single-family rental that we had. You know, we have Airbnbs now, but the last true, you know, annual lease type of 3-bedroom, 1-bath single-family rental, I think I managed that thing. It was my wife's old house. She refused to sell it. Um, so of course I had to manage it. I want to say if it wasn't 15 years, it was 14 years. But I think the only time I was rented for 12 months— it happened twice where there were 12 consecutive months of, of payments— was when I did 2-year leases. Twice I did a 2-year lease, and actually one of them broke the lease early. So, but so probably one full year now that I think about it, where there was 12 straight months of payments. And I— were there repairs? I don't remember. Um, every other year, every other time you had turnover. The longest I went vacant was 3 months. The shortest I filled it was 2 to 3 weeks, and I only did that once or twice. Usually it was 30 to 45 days that it was vacant on the turnover, and we probably had an average of 500 to $1,500. So let's say average of $1,000 every turnover. I think I was lighter on the turnover. We never had any—

Joe, your story is much more boring than mine. I'm just going to tell you flat out.

I never— well, I'm just thinking it through.

We—

but we did have a roof in that time. We had a washer and dryer be replaced. So roof was like— it's a 3-bed— it was a twin 3-bedroom. So, you know, not huge, but it's still like $6,500, I think was the number I remember for the roof. You had gutters. We had to patch a sidewall once. We had washer and dryer. And this is during the rental. This is not at the end. At the end, it was about $12,000 to $15,000 to get it ready to sell. I'm not including that because that could just be CapEx for the sale. Like, that's not, you know, part of the management. But I would say over those years, we probably put in Easily $15,000 just in maintenance of the property, uh, over that, you know, call it 14, 15 years. So there's $1,000 a year right there. And I think we were clearing, you know, the, the hope was $250 a month to $300 a month. So that's $3,600. So like, yeah, as I'm running through this math in my head, I was probably down in the, uh, in the 3 to 5% range. So, so I was doing pretty well actually compared to, I think, what most are. And that's a good year, right? No eviction, no, just no destruction, no 9-month fight like you had in Indiana. So why do you think the numbers never really add up or match, Kristen?

That's a good question. Uh, I, I believe it's because the advertised return uses the rent that you hope for, the rent that they tell you you're going to receive, right? And not actually the rent that you're truly going to collect. And they don't match the expenses either. So I, I've never had those 2 numbers match on any deal that I've ever looked at, even in, even in storage.

You know, I'm going to be honest here for a second, and I also think it's because we come into residential real estate, a lot of us, maybe not all of us, so maybe I'm not talking to you, uh, Very naively.

Yeah.

Whereas in storage, we start with, oh no, there's going to be a vacancy rate and you're going to plug that number in right here. And in residential, I feel like we maybe in one model we say, oh, it'll be— yeah, sure, it might be vacant, you know, one month a year and that's all we account for. And then we just assume, but that's only going to happen once or twice. It'll always be rented for 12 months. It's never rented for 12 months, folks. Never rented for 12. The only way you get that happen is the multi-year lease, and then you're sacrificing lease bumps. Or you might, you might write one into the lease, but you're, you're set. What you're doing is you're sacrificing the market lease bump, right? And there's definitely times where, you know, that house was— I remember when we first started renting, it was $1,500 a month. By the time we were done, it was $2,000. But there were times where we went backwards. We went from $1,900 back to $1,850 because that's all I could get it rented for. And there were times where I was in a 2-year lease at $1,600 and it went to $1,650 when the market was at $1,800. And I missed that. And you don't have that in storage. But to be fair, storage has its own version of this. I mean, it isn't magic. This, going back to the beginning here, the sellers, when we look at deals, the sellers show us their GPRI, which is gross potential rental income. So what the facility would earn at 100% occupancy at current market rates, right, which is not realistic. But in storage, we go in knowing that. I feel like in residential, we're just naive to it, or we just don't— we think we're invincible or something. Um, and then what the buyers really need— when you're the buyer, what you really want or need is to model the EGI, which is the effective gross income, right, which would be after the vacancy, right? So what it actually will collect in rent after factoring in the appropriate, you know, vacancy rate Any concessions, um, you know, any delinquency, right?

We've—

in storage, like, it's part of the education. Like, you— there's no way we would let you go into a deal assuming, you know, the top rate, 100%, every unit full all the time, right? So, Crystal, where do sellers' numbers usually go wrong on the— that's the ex— the income side, sorry. On the expense side, where do the sellers' numbers usually go wrong?

That's a great question, Joe. And before I answer that, I just want to say I agree with you. I feel like for residential, most people probably don't have— when they're getting in, they don't have the knowledge, the experience, the education to really understand what those true expenses could be to do a true pro forma, right?

Yeah, you're right. We, we go in very naive because we haven't been trained formally. I mean, I was— I mean, I I actually obviously did.

Look at our mistake, right?

I'm embarrassed to admit I was. I paid for a course and then years later, you know, for— I ended up flipping, not really renting. So I, I, I did that too, but I was naive to the whole rental, to, to the, to the process. And, and, and I had rose-colored lenses on my glasses, right? We all do.

And I think that's where we differ in what we teach, right? We teach people how to break down the expenses and the percentages and what they should be expecting and how are they going to run their facility so they can do their pro forma the right way, right? And so going back to your question, what I found on the extent— on the expense side for storage is that sellers provide incomplete information. And honestly, I don't think it's because they're being dishonest. I— dealing in residential for so long, coming over to storage was a breath of fresh air. These storage owners were so nice. They wanted to talk to you, right? They weren't— most of the time they're not distressed. They don't have to sell their property. So it's just a different a different ball game overall. But, you know, I want to just give you an example of why I say their information is incomplete. And for— so if you just take a mom-and-pop who manages, they don't show a management fee. If you're going to operate or you're going to hire a third-party management, you need to add about 8 to 10%, um, of your income as an expense. So on a $200,000 income-producing facility, that's about $16,000 to $20,000 a year that isn't currently on the seller's P&L, but it's going to be on yours if you're going to hire a third-party manager. And the same thing with the work, right? So if the seller currently mows, if the seller fixes the gate, if he answers the phone himself, there's no boots-on-ground guy there doing it for him. He's doing it. And so that expense isn't showing up, but I can assure you it'll probably be on yours if you're managing your— like I do. I don't live near our facilities, so I have a boots-on-ground guy. You also need to account for the repairs. So you are going to have some repairs every year, and we average about 3 to 5% Um, of expenses for that. And same thing with the credit card fees, because we try to get everybody on autopay. And so now we have to pay the mercantile fees, which is another 2 or 3%. So there's a lot of expenses in there that we show you that you need to start accounting for when you're projecting your numbers and when you're looking at buying a facility. And then there's the one that always tricks up people and that they always forget, Joe, and it's caught us a couple of times even though we know the game. It's just there's so many different taxing authorities, you're just not sure who all of them are.

Yeah.

But, um, I can assure you that in most places a sale triggers a reassessment for real estate taxes. So the tax bill that you're seeing is going to be usually higher than what the current owner is paying. So I say this because you can't take the seller's net operating income, you can't take their P&L for face value. You have really got to dig through that, really understand how you're going to operate, and you have to put together your own numbers. So that's, that's really where I find the differences and where I'm more educated now, and I know what these expenses are and I know how to account for them.

Yeah, true. And I'm just thinking about that, about going back to residential real quick, is I, I think we act like the, that mom-and-pop storage seller who's mowing the grass themselves. When we're looking at buying a house to rent it out, we go, oh, Be easy. And maybe we remembered that, you know, we might need a landscaper, or maybe we're planning on telling the tenant that they have to mow the lawn, but then are you providing a lawnmower? Like, little things like that. We just— we overlook all these little things that add up, and they're not real. And then we also— oh, we'll just paint it ourselves on the tenant turnover. And by the way, I did do a lot of that work myself on the tenant turnover, but guess what? That's time and money. That's— and, you know, we— that sweat equity that we just we assign $0 value to on the resi side, when it comes time to, you know, 5 years from now, 10 years from now, you don't have the time because you now maybe you have kids and, you know, you're doing other stuff, or you want to— or you're trying to go on vacation and it has to be rented. This is like I'm pouring my soul now out. I'm reliving my old— my own old PTSDs here right now. You're paying somebody to do that stuff. Well, that wasn't factored into their pro forma, right? In the pro forma, I was doing it. So, and that's— I'm saying all that to say, when we, we teach people how to buy storage, we don't allow you to make those mistakes. That's why when people come to us with the first deal that they fall in love with, and we're like, no, this doesn't work, here's why, blah blah blah, and they get upset with us, it's like, well, because you missed all these things. You, you're not going to run it like a mom-and-pop. You can't. We're not going to let you do that. So anyway, the skill isn't—

Later though, some of the best deals are the ones you don't buy. I've learned that.

They do thank us later.

Yeah.

Um, so the skill isn't believing storage is better. Trust us, folks, when we tell you it is, it is. The skill though is learning to read the numbers honestly, know what's missing, know what's real, know what's not. So Kristen, show them what honest looks like, or honest numbers look like, uh, on a real deal, a real storage deal like one of yours.

Okay, fair enough. So honest means that I didn't use the seller's numbers when I was underwriting Stowaway, our first facility, Stowaway Self Storage. I already knew roughly what my expenses were going to be and how I was going to operate it. So when I built a pro forma, I used what I would actually be paying, not what the seller was paying. I didn't use their numbers. Then I looked at the income side, and I could easily see, doing a market evaluation, that their rents were 37% under market. Made me super happy. So I knew I could raise them. And here's the part that really mattered to me. And even before I raised a single rent, and this does not happen all the time, I can assure you, but this one it did, and I'm very happy for it. Running it with my own expenses, it still cash flowed $2,000 a month from day one. And that's not typical in a lot of situations because you've got to build the equity, you've got to increase the rents, um, you're, you're buying it with higher expenses. So I was cash flowing on day 1, $2,000 a month, and I knew that with the rent upsides— and keep in mind, this is a very, very small facility, and today it probably brings in around $4,000 or $5,000 a month. I know that that is not life-changing, but it certainly, certainly helps, right? So that— so the $4,000 or $5,000 a month cash flow, it's about $50,000 to $55,000 of NOI a year. And at a 6.5% cap rate, that's around a $750,000 value. And if you listen to our story last year or last episode, I purchased this for $320,000, so only with $64,000 down. And those numbers are from the bank, they're not from the listing.

Yeah, um, and the 9-month fight in Indiana doesn't exist in that math either.

I almost paid more in rehab than I did for the down payment For this facility.

That's true. Yeah, $54,000 versus $64,000.

And I can assure you, most of my fix and flips were $100,000 to $200,000 of rehab budget, not $64,000 down in equity.

And, and back to the 9-month fight, said differently, our way— my, my, uh, last 9 months of the residential property we had, uh, was with zero payments, zero income. That wasn't even a fight because it was COVID, so we couldn't fight. We just— they just got to stop paying, and we just got to enjoy no income for 9 months until we finally got them out. And then that was a whole disaster. But— and the reason, folks, it doesn't happen in storage is because when a storage tenant stops paying, it's weeks, not seasons, away from getting them out. And that's the part that keeps the, the true return close to the, to the numbers you, uh, underwrote. Are you underwrite for each deal?

Yeah, because I can't these units, so you can get them out.

Yeah, exactly. And and there's one lever that residential mostly doesn't give you. And in storage, rents are month to month, so you can actually manage the number. I mean, we teach that in the Storage 100 series. Day 96, which here let me throw that up actually. Do do bear with me. Here we go. Yeah, so, um, as you can see, it's the Day 96, the rate optimization strategy. That's a mouthful, try to say that fast. Um, that adds 15% NOI. Um, and it's a strategy we use across our own portfolio, and I'm gonna put up a few slides here, uh, or flip through some slides here, um, so you can see it. So you told us Stowaways rents were 37% under market. So let's show them what it costs an owner when every unit is priced the same amount, because flat pricing means every unit is the same price regardless of size or demand. This is not how we manage our units. This is not how we teach you to, but we do run into this.

Doing it like this though, Joe.

What's that?

I said we hope to buy facilities Oh, 100%. Find facilities that are operating like this and buy them.

100%. And they are out there, folks. Because, and there are facilities where popular units like a 10 by 10, which is our most popular unit size in self-storage, could command more, maybe even more than a 12 by 30. But like a slow one, a 12 by 30, which maybe depending on the market you're in, isn't— there's not a lot of demand for it. If it's priced the same as the 10 by 10, it might be priced too high. So sometimes you end up underpricing the winners, the, the, the units that are in high demand, and overpricing the ones that are not in high demand. Kristen, you have any thoughts on that, or—

I do. I think I always have thoughts, Joe. I think flat pricing is lazy, and it's for people who don't really want to put forth any time and optimize their income. And if every unit is the same price no matter the size or how fast it fills. Like you said, they're, they're underpricing your winners and they're overpricing your losers at the same time. And the popular size, it could carry a much higher rate than what they're charging, and the slower ones sit empty for months because they're priced too high. So at Stowaway, which was one of the facilities I bought, like I said, the rents were 37% under market, so there was room to move there from day one. And, and they weren't pricing their units accordingly. They were doing mostly— it was flat pricing, honestly. Which I loved.

Yeah. So the question is then, how do you actually decide when to raise a rate, when to hold it, and when to lower it? Kind of sounds like the, the song The Gambler. Know when to hold them, know when to fold them, know when to walk away.

I like that song.

And know when to run. Uh, and we teach you that too, because, because guess what, folks? Every facility in every market's a little bit different, and you need to know that. And we'll teach you that at storagebubbles.ai. And on top of that, we're— we didn't even talk about Dynamic pricing, right, folks? A 10 by 10— 2 10 by 10s, I should say, in the same facility might be priced differently based on where they are located in the facility, depending on demand for that unit size. So it's the core of rate optimization. It's how you turn your demand into dollars. And so, and here, let me flip slides here. Imagine a 200-unit facility. All priced at $100 a month, right? A new operator comes in and implements this, this, um, is this pricing adjustment formula, right? They raise high-demand units to $120 and they lower the slow movers to $90, right? So everybody was $100 and now we, we bifurcated it to $120 and $90. If all we did was that— this isn't about being greedy, by the way— a strategy increases revenue by $3,600 a month, which is a 15% improvement in NOI income, net operating income. Over a 95% occupancy, you raise the rate, you raise the price of a unit 5 to 10% maybe. If you're between 80 and 95%, you might hold steady. Again, this is all gonna be market-driven and market-dependent. And then under 80%, you might need to lower it to get occupancy, right? You might need to lower 5, 10% maybe. And then you review and maybe adjust every 30 to 60 days. It's— it isn't about raising everything. It's about adjusting to what the market will bear. Kirsten, you want to jump in? Any comments on that?

Well, it's, it's a simple rule based on occupancy, and it's letting the demand set the price, which, which I really like.

Yeah. And now for—

You increase when the demand's there, you bring it back when the demand's not. And right.

Yeah, it's all about filling up occupancy so you can drive rate. And for the, for the novice or newbie question that everybody always has, what about the tenants who are already in there at the old rate?

You don't jack them up 30% from the get-go, Joe.

No. And again, remember, it's not about being unfair. It's standard practice across every industry. You know, you don't, don't, don't go into this apologizing for maximizing your revenue. It's just good business. Existing tenants can stay on legacy rates when you're doing this. And you have the new tenants pay the optimized rate, right? And then you slowly and gradually close the gap between the existing— the old tenants, let's say, and the new tenants, right? You do it over like 1 to 2 years. Again, it depends on the demand, it depends on the market, it depends on the facility.

I think they stay where they are. The, the existing tenants stay where they are. You stabilize the facility, you understand who's in there, what you have, what you can push, what your markets are, and that's fine. And So you change your street rates when you get in there. So the new tenants who come in pay the new rates, and you slowly close the gap on your existing tenants gradually over a year or so, whatever the market can bear. So nobody gets hit with a huge jump and you have a mass evacuation, right? It's a slow and steady, and it moves, it moves towards the market and with the market.

And then, you know, why does this matter, right? to what the building's worth? What's the relation there? Um, well, you know, regarding rate optimization, it's— once you understand the critical shift in mindset, it's, it's honestly, it's the easiest revenue improvement you can make to a facility. Uh, if you own a facility and you're watching, you should start doing it today. Um, so wrapping it up, put a little bow on this. In short, you're gonna price on demand, not cost, review and adjust every 30 to 60 days. Um, can I add to this, Joe?

Yeah. Because last week we talked about, um, our formula, right? Value equals NOI divided by the cap rate. So this strategy, what we just talked about with the rents and optimizing them, can add 10 to 15% to your net operating income. And on a 6.5% cap rate, that isn't just 10 or 15% more in cash, It's 10 or 15% more in value. And that's the part that a resident— residential lease cannot do for you.

And again, folks, just as a reminder, that's day 96. If you want to watch the whole thing, we just gave you a couple slides from that day. That's day 96 of the Storage 100 series. You can go watch the full video if you want the whole framework. All of it's available for free inside the Storage Muggles community, which can be found at storagemuggles.ai. Okay. So normally this is where we go.

I see your face again.

I was— we were both on the screen there.

Oh, were we? I didn't see it.

Yeah, so don't, don't do anything weird when the slides are on. You're still on the screen.

Thank you for pointing that out.

Yeah. All right, so folks, normally this is where we, we would go into the residential horror story. Um, uh, you've heard ours though, so— but this week—

They've heard mine. You need to come up with a few.

I kind of told you mine a little bit there. And maybe I'm just better at this, Kristin. Maybe I'm not as bad.

I know you've learned some lessons along the way.

So I have definitely learned lessons along the way. So this week's Exhibit A, though, is the same lesson from the other side. So Kristin, how does, how does this formula or playbook play out with TNT? You talked about StowAway. Walk us through TNT.

Sure. So TNT was another false— can I talk tonight? I don't think so. So TNT was another smaller facility. It was 117 units. It was purchased at $430,000. The previous owner had 40 units sitting. They were occupied, but he was not collecting rent on them. He was too busy driving a bus. He loved being a bus— school bus driver, and he also fixed lawn mowers. So, and he didn't take credit cards, so everybody had to pay in cash or check. So he was too busy to chase down the rent, and because of that, those 40 tenants were sitting there without paying for many months behind. I, um, called everyone. We closed on that deal. I called everyone, every single one of those tenants, and all but 3 paid. And Joe, do you want to listen to something? They were excited. They're like, oh my gosh, I'm going to get a monthly invoice? Yes, why sure you are. Oh, I can set it up on autopay? Why yes. Yes, you will. And they were elated, honestly, just to pay their rent or to have a system in place that they could easily pay their rent and be reminded when it was due. Um, so I— this is interesting because this was $14,000 in back rent that I received in the first month that I never put into underwriting. I wanted to underwrite it conservatively, so I didn't account for capturing that back rent. In fact, I, I counted that I was probably going to have to process auctions on the majority of them and then fill them up, but that didn't happen. Only 3.

Yeah, you know, uh, that— I still can't get over that. We still have not experienced that either. And I want to walk back something you said.

No, though, only that once.

I know, I was gonna say that this is what you— is not normal. I'm gonna walk back something you said earlier. You said cash flowing at your numbers earlier, and I meant to jump in there. Isn't normal. Well, I'm gonna push back on that only in that I would agree with you based on how far below market your rents were, because truly astronomical that it's still cash flowed at that. Um, we don't— we haven't found any that were pushing 40% below market. Our bogey's always been around 20%. Um, and they do cash flow when you're fine, when you find those. Um, but $14,000 of back rent, zero, nada, never happened to me. I'm still looking for it. Um, that, that to me is more than—

You need to do more deals with me then.

Yeah, well, that's the unicorn. Um, so, but what's funny is your spreadsheet was wrong going into the TNT deal, but it was wrong in the good direction. So when you put Indiana next to TNT, what's the lesson you, you learned there?

Well, in Indiana, the money that I thought was coming absolutely never came. In fact, I had to shell out a lot more. And at TNT, there was money sitting there that no one was collecting. So I mean, it's the same lesson to some degree. The number on the page, right, in our pro formas, in our spreadsheets, isn't necessarily the money that's going to be sitting in your bank account, and it isn't going to look the same on both ways. Yeah, I've had both opposite spectrums there.

Yeah, uh, but I'll take— I'll, I'll take more of the TNTs, please.

I think anybody would.

Um, uh, and folks, here's something we want to do more of on the show. I know Kristen's, uh, uh, really, um, aching to get, um, and pushing to get my— more of my horror stories told, which I, I will do, but I'd much rather talk about yours. Um, so send them into us because, you know, we know we're not the only ones. If you got a rental horror story, the tenant stopped paying, the property manager disappeared, the repair that came out of nowhere that you— that wasn't in your pro forma, you never expected, email it to us, info@storage moguls.com. You know, give us some material to talk about here. Um, It's okay to admit it. I won't say your name if you don't want me to. Um, again, info@storage moguls.com. Tell us what happened. What did it cost you? What, what did you do differently, or what would you do differently now? And, uh, yeah, we'll, we'll share them, diagnose them, and we'll talk about if we'll compare that to storage. Like, whatever that example is, we've got an example in storage and how and why it's just a little bit different or better or whatever. So, uh, love to do that. All right, Kristen. What does somebody, uh, do with this starting tomorrow morning, right? So after listening to this whole thing, what's one thing or the first thing that they should do with this, hopefully this new lens that we've given them to now look through?

Yeah, good question. Thanks for putting me on the spot, but I'll answer it. I think if you own an investment property or investment properties, one of the smartest things you could do is calculate your true return Just on one property. You can start with one property and then you can do it for all of them. By doing that, you should pull at least 12 months of your actual bank deposits from your rent that you've collected, and you need to subtract what you've actually spent in repairs and turnover and vacancy and property management fees and legal fees and leasing fees. And you need to divide by what you paid plus every rehab dollar since, and then that's going to show you what your true return is on that property. So if you compare it to the number you've been saying it out loud, if, if it— if they're close, then you're ahead of most. You're definitely ahead of me, especially in the residential side, for sure. Um, if you're not, then I would say don't beat yourself up, but you've just learned from— in one afternoon, one evening, one Monday night, um, what took me $50,000 to find out. So I always like to learn from other people's mistakes. I like to learn the hard way as well, but hopefully most people on the show are smarter than me and learn from other people's mistakes and not the hard way.

Not me. I like to do it the hard way first too, and then share it with everybody. And if you're looking at a storage deal, do the same thing. The seller's numbers, ask them for the trailing 3, 6, 12 months and then rebuild the expenses yourself the way you're going to operate it, the way you're going to run it. And deal needs to work that way.

All right.

Before we open the floor, I want to do a quick spotlight on a very excited Kristen, I hope you still are, uh, about an event happening this coming Friday. Folks, this week, if you want to go further than a Monday night conversation with us, we are 4 days away from our live in-person workshop this Friday, October 16th, at the Hilton Garden Inn in White Marsh, Maryland. Kristen, what up? And then we got the QR code on the screen.

Awesome.

Yeah. Kristen, what, uh, What are we actually going to do that day? Tell people why they need to be there. And by the way, we are running out of seats, so tell them why they need to be there and grab one of those last remaining seats.

Well, is this not a good time to tell you that I just purchased a ticket to Spain to visit my daughter, so I'm not going to be there?

As long as it's starting October 17th, that is totally fine with me.

I'm just kidding. I'm gonna be there. This is a day that I wish we had when we were starting out. Joe, we started out similar time frames. I think you were a year ahead of me in the storage game, right?

I think that's about right.

Yeah. So we, um, it's gonna be a full day. We're gonna walk you through the whole thing. We're going to show you how we find deals, how we underwrite them, uh, which is exactly what we did tonight. And we are going to put real deals in front of you. We're going to show you how we can finance them, how we negotiate them, how we close them and how to actually run a facility. And then my favorite piece, because I don't like sitting in seats all day, and we are actually going to take you on to a live tour to a storage facility our team owns. And when we come back, you're going to hear from a banker from Live Oak who specializes in this asset class. The ticket is $349, and that covers you and a partner. It covers lunch, it covers cocktails, and it covers Appetizers, so I'm excited. And it's gonna be small. It's gonna be intimate. I am looking forward to connecting with everybody there and getting to know them and and helping however we can.

Yep, and and we are keeping the room small on purpose, so it's useful. So it's not gonna be 300 people, you know, watching a bunch of slides. So if you'd like to take the first step towards achieving whatever goal brought you here to this show, whether it's building wealth in real estate, being able to quit your job, planning for college, or just I don't know, building something for yourself, uh, you can register at— oh geez, am I really going to read this? go.storagemoguls.ai/white-marsh-md. Just the QR code's on the screen.

And last week, Joe, and I could not, I could not do it.

So if you, if, if you really would prefer to type it in, it's go.storagemoguls.ai/white-marsh-md for Maryland. But I would use, I would use the QR code. And if you're not ready for that yet, Well, that's what the free community is for. So get in, get oriented, and join us for a future workshop when the time is right. And to do that, just go to storage-mobiles.ai and join for free. No big deal. All right, uh, before we close this out, we want to hear from you. So if you have a question, drop it in the chat now and we'll, we'll take a couple live questions.

Do you want me to read them to you, Joe? And then I know we have a few more, so Is this your way of getting out of answering them? Yeah, yeah, you put me on the spot. Well, actually I shouldn't because you went on a 20-minute rant last week, so— but yes, it's your turn. Max says you're using a lot of acronyms. What do those mean? He feels like you need to create a dictionary or a code book. Any comments to him for that?

Um, that's a great, great idea. Um, I think for each acronym we did actually, um, Uh, not spell it out, but tell you what the words were. Um, but we should create a, uh, that'll be a great, um, that's a great thing to actually— we have that in the Storage Moguls community.

We already have a—

what am I talking about?

All of it.

We have that, Max. You need to join Storage Moguls and you will have an entire index of it. Yeah, great, great question though.

Another question is, can you get the government to pay for your storage like with Section 8?

Hmm, not that I know of, but that would be an interesting thing to lobby some congressmen because we could probably meet the standard code or whatever the Section 8 code for storage would be. Yeah, you know, the door works.

Government-funded projects, like if you're creating a storage or you're revitalizing a certain area, there's certain Money, government money.

Well, so you could— we, we could build them or buy them, I guess, in what's called opportunity zones, but that's not— that doesn't help with your rental income, you know. So Section 8, you have the government paying the rent for the tenant. I know of no program where the government would pay the storage rent, though I would be mildly interested In in them coming up with that, but it would be purely selfish because I can't as a taxpayer. Yeah, that would just bother me as a taxpayer. But as a storage owner, I'd be conflicted because I wouldn't mind receiving it. But no, I don't know of any programs like that. I don't either.

I don't either. And after my experience, I'm not sure I'd want to try it. Yeah. Dallas has a question: When adjusting rates based on demand, which metric? Do you prioritize beyond occupancy, move-ins, move-outs, competitor pricing, or rent velocity? That's a great question, Dallas. When—

let me, uh, can you read it again, or can we throw it on the screen so I can see it? Uh, because it was a longer one. Let me get the chat up. Here we go. All right, when adjusting rates based on demand, which metrics do you prioritize beyond occupancy? That's what I was looking for. Uh, move-ins, move-outs, competitor pricing, or rental velocity? Hmm. When adjusting rates based on demand, be honest. So if I've got— so then I need to assume my occupancy is, uh, is good if I'm ignoring occupancy. Um, you know, your move-ins and your move-outs are— your occupancy is going to be a net result of your move-ins and your move-outs if we're looking at it at the end of the month. So that Kind of throw that out. Yeah, I think, um, I think competitor pricing. I would say what's the market doing? Um, you know, if like for instance Kristen was at, uh, well actually let's talk about what your facility— so when you took, when you took over, um, let's go Stowaway, you were 37% below market. What was your occupancy again?

That's a great question. I feel like it was probably around 78%.

You're at 78%. So according to the slide we threw up, you should have been considering lowering your—

Oh no, you know why?

Why?

This is amazing too, Joe. The, the, uh, owner, the seller was doing my job for me. When I got it under contract, it was 78% occupancy occupied. She was renting units left and right. So by the time I got it, I— it was probably closer to like 85, 86%. And it was really a marketing situation. They didn't have a website. Um, so I understand why you're saying I should have been reducing my pricing. It was a marketing issue as to why it wasn't occupied more.

Uh, there's a lot to unpack there, but, um, And we— I feel like maybe we will do a debrief on this actual deal.

I don't—

I'm done. Not tonight, uh, maybe, maybe in a future episode, because I think that would be very instructive and useful to walk through. And maybe we'll even talk about it a lot this Friday. But, um, okay, so where do I want to go with this? The, the question is, uh, let's, let's assume she didn't lease up. Yeah, you were still at What'd you say, 78% occupancy?

So I got it under contract.

When you got under contract, let's say that's where you bought it. Okay, so you would not have raised rents. You would have put in place the marketing, the website that would have started to fill you up once you got to 85%. Because remember, Dallas, she's also looking at a market where— I don't know, I don't know what the dollar numbers are here. I just percentages. So let's just say $100 is market and you're at, uh, $67, right? Or $63, 37% below.

You—

she would have needed to fill up to where she took it over, 85 or 86%. Just so with just marketing and a website, it sounds like there was enough demand in that market that Kristen would have filled those units. And I'm assuming Actually, that's what the owner did. She did it without a website, but she got you to 85 or 86%, whatever you said. I'm sure at $63, still below market, right?

Right.

So through whatever efforts, or maybe it was just she started paying attention to it, who knows, answering the phone or calling people back, she got there, which is what Kristen would have had to do as well. She might have done it by adding a website and gotten there faster, who knows, right? Then remember, she's still looking at a market that's at $100 and she's at $63, but now her occupancy is at 85, 86%, whatever the number you said. So in that case, if you go back to the slide I showed, she's in that— she's on that border of do you raise or don't you? Well, that far below market, yeah, she can raise. She could put her street rate up to market. And she was still filling at street rate. And she can get herself up to 90+ before she ever touches a legacy tenant. And then once you're there, once you're— which we call stabilized— now she can start to increase rents. You know, maybe it's 3, 6 months later on the existing tenants, the legacy tenants, and start to slowly walk them up to where everybody else is. So that's how you do that. But again, if you also recall what I said Every situation is different. Every deal, every situation is different based on the market you're in. So the deal and the market, they're all different. The competitor— when I say market, I don't mean, you know, Corner Main Main. That's part of it. I don't mean whether you're, you know, in, uh, Radcliffe, Kentucky, where this is. That's part of it, but that's not exclusive. Your market also includes your competitors. What are they doing? Where are their rates? What's the population, right? Not just the address when we say market. So based on all that, that, that's what Kristen would have had to do. But wait, how you ask the question, I would say, what are the competitors? And the reason I wanted to go talk about Radcliffe is because remember that delta, that competitors are at $100, she's at $63. That's a major factor in when, when and how we raise rates.

Yeah, any— uh, you want another question?

No, unless— I mean, sure, if there is one, but I like you answering them.

You're much more passionate about it than I am, Joe.

We'll see next week when you answer them.

What is the biggest mistake a new storage investor or owner can make?

Biggest mistake? Is falling in love with the deal they don't know how to underwrite or purchase. And it happens all the time, including with our students who join our program. It will happen to you if you're, if you're watching or listening. I don't care when. I, I will bet you $100 you will fall in love with your first deal, and we will tell you it's not a deal. And I will gladly pay you that $100 when you bring me that first deal. And it's a great deal.

That's why it's important to make sure you're surrounded in the right community for people who can see that. Exactly. Yeah.

And by the way, just so we put dollars around that, what is the— oh, so you lose. So when you're wrong, you didn't get $100. You think that's the loss? No, we probably just saved you from, I don't know, $50,000, $100,000, $200,000 maybe your whole life, meaning, you know, your whole financial life. Like, you didn't buy a deal, sign on for debt that's horrible, and it ruins you and you're on the hook for it, right? That's no small mistake. Buying a bad deal that's not going to work in a bad market, or any combination of that, could ruin you financially.

Mm-hmm.

So it's not just a $100 bet on the line. That's kind of a fun thing that I'm happy to, to give you $100 cash for. Just being playful. There are real consequences on the line, and that's why I get passionate about it. By the way, we've made mistakes. It has hurt me financially. You don't you don't get to twenty five or whatever four five six deals whatever I'm on without making some mistakes along the way. They're all early, but we made some mistakes. Fortunately, we got out of you know without getting hurt in some cases, and but you know there there was a little pain in some others. So This is not, you know, we're not gurus on stage who haven't done this. We have lived the pain, and that's why we're sharing it. That's why we built this, right? So you don't have to.

And not every deal is going to be a winner. We hope to.

No, but that we can prevent them from being losers. And that's why we say, you know, buying storage with us as your guide is like bowling with bumper rails. Right, you got to bowl the ball, you got to do the work, but we're going to keep you out of the gutter. That, that's a promise we can make.

Yes, you still have to manage it and run it properly.

Yes. All right, so here's the invitation. If any part of tonight made you want to check your own numbers, or if you're starting out and don't want to learn this the expensive way like what we just talked about, come see what the other side looks like. So, Kristen, what do they get when they join?

Well, it's Free, Joe. It's real people. Here we are, real people who've done this. We're buying them. We'd like to buy more. We're constantly looking. We're constantly evaluating. We're constantly submitting offers and closing when we can. But there's no catch. It's just free. And you can there's a lot of free content. You can storage 100. I think that's 100 days of listening to Joe. What more could you ask? Right?

You could ask for a lot more, but it's— you could get through it. You could get through it, folks. It's not that bad.

And you could join us at storagemoguls.ai, and that's where you have access to our free community there.

And don't forget, if you got your own— if you got your own, uh, you know, horror story, or even just if you've got numbers that, that didn't match the story that you thought it would match, send it to us, info@storagemoguls.com. Again, we want the real ones, and we'll dissect it and we'll talk about it. It's okay, it'll be therapeutic for you. Yeah, I'm Joe Downs. For Kristen Blunk, this has been the Monday Night Storage Muggles Show. Thanks for joining us. We'll see you next Monday.

Thank you.