The following Q&A was completed as part of our conversational Commercial Real Estate FAQ Interview Series, we hope you find it helpful.
Delving into the highly competitive self storage world with John Manes shows the ins and outs of forming professional relationships, how to build an excellent professional support system to drive you to success, and how to approach your investments in a non-conventional way. John touches on seeking out your particular niche area for your asset class, how to build a trust-based reputation in the industry, and how to be open to potential deals from all angles for a consistent and successful deal flow. John’s insight provides a guidebook for those looking to break into the self storage commercial real estate investment space.
Richard Wilson: Hello everyone. My name is Richard C. Wilson, I’m the founder of CommercialRealEstate.com and our sister company Family Office Club. I’m here today with my friend John Manes who is the CEO and founder of Pinnacle Storage Properties. They have 19 different self storage facilities right now, over $100 million in assets, and they’ve accomplished all that growth in I think it’s just about 5 years or just under 6 years. So, welcome John, thanks for being here.
John Manes: Thanks for having me. Good to see you.
Richard: Yeah, you too. So do you want to add anything to your background or to my description of Pinnacle just to make sure I have it right?
John: We’ve actually been in existence for 4 and a half years, we haven’t even – March will be our 5th year anniversary. We have over 1 million square foot in storage. We’ve done a total of 25 deals, we’ve recycled 5 of them and we have one ground up deal in Ground Rock, Texas so a total of 25 deals in a 4 and a half year timeframe. We’ve raised over $32 million in private equity in that timeframe at $50,000 a shot, so it’s been a little bit of work.
Richard: Yeah, I’m sure. Well there’s a Podcast called “How I Did It” which is about building big companies like Starbucks. I think this is kind of like an episode of “How I’m Doing It” if anybody wants to see somebody building a billion dollar organization over a 10, 15 year period. You know it seems like you guys are on track to have big numbers in the future, so I appreciate you taking the time to do this interview and kind of go through…
John: For those of you watching on video, I had real pretty hair like Richard does in that screen before I started this whole thing, so that’s how I did it – I lost all this hair.
Richard: Right? Only cost you your hair! So, it could be worse I guess. Still have your beauty at least, so.
John: Yeah, oh jeeze, yeah.
Richard: Alright, so, my first question here is now that you manage over 100 million dollars in self storage assets, what do you see from your particular view, first, that most investors and investment firms don’t realize or is not obvious?
John: I mean, for somebody starting out trying to do what we’re doing, I think the biggest thing is, what I see, is knowing what type of relationships you want to deal with, and knowing what type of money you want to deal with is really helpful. Like for us when we started we had a general concept of the type of equity that we wanted, or the type of debt that we wanted, and we explored those and explored is probably a good word, actually probably experiment is a better word, because, you know, we made some mistakes along the way of different relationships that we’ve gotten into from an equity standpoint and from a debt standpoint. That had we known all of that in hindsight we probably would have done it a little bit differently, and through that education we truly know what we want now, and we focused more on that than saying “Okay, let’s try this.” We focus on what it is we actually want now.
Richard: Right, great. What has lead to your momentum in closing over 25 self storage asset transactions very quickly while many other people I know from our investor club are doing one to four deals a year and patting themselves on the back – I mean, how have you been able to get all these assets done when some just do one deal a year?
John: That’s a great question because, you know, the lead up to that question in all of this is “we’ve been an overnight success”, and we haven’t. So people would think that’s a big accomplishment in a four and a half year timeframe but I’ve been in storage for 15 years now. You know Robbie, and Eric, and all of us combined have almost 30 years of experience combined together in the storage industry. So it looks like we’ve had this overnight success but in reality it’s been building year after year, and for me being the face of the company I started that face piece 10 years ago. Started getting out and speaking about storage, not only in the storage industry but in the investment community and things like that, so it was a lot of seed planting over and over and over again. Like this podcast in itself, I’ve probably done, in the last 4 years I’ve probably done 700 of these or something, it’s some crazy amount of either magazine articles, blogs, podcasts, YouTube videos, LinkedIn, all of that kind of stuff kind of works together in harmony that if you Google John Manes Self Storage, you’re going to find a hundred different things that I’ve done.
So, the momentum that we’ve built prior to us starting the company from a recognition standpoint of who John Manes is, and who Robbie Dunn is, and who Eric Osterhaus is all started prior to that 4 or 5 years. Then you take the three of us with that synergy, you put that together and now you have a really big momentum, right? So I think it’s a combination of starting earlier, and then having that all start to gel really really well. And you know this – I don’t have it on today, but I wear those funky looking jackets at every conference and stuff and we get known for who we are. We’re a little bit goofy, we’re pretty much blue collar type of guys in a white collar environment and when people approach us we’re just common people. So, I think that’s likable as well.
Richard: Right, right, yeah it’s pretty rare to find anyone with a sense of humor in the industry. So that alone just sets you apart from 95% of everyone else bumping around at conferences in their starched suits and they’re acting very robotic, so it makes you stand out.
John: I’ve said this to you before, but how do you stand out in a room of navy and grey skinny suits, right? You come bald, old, fat, and you wear some funky looking jackets. And you stand out, right? And that’s what we do!
Richard: Right, right, yeah. That’s great, appreciate that. How stable and reliable is self-storage when you compare it to multi-family? What are the trade-offs?
John: Well, I mean now is the perfect test and the perfect time, right? With the pandemic and everything like that and the only thing I can say is, you know, back in January before everything started happening, I, internally we were talking about, I kept bringing up over and over again we need some type of correction. I mean, there’s so much money being thrown at everything and people with no storage background are just building storage anywhere, and they’re building these 120-150,000 square foot properties and they don’t know how to run them so they don’t know revenue management, or marketing, or anything like that – that was making me way more nervous back in January than when the pandemic hit and all of that relates to the question you just asked and that is – the pandemic hit in what I’ll call early March, we had our best March ever, we had our best April ever, we had our best May, June, July, August, we’re having a great November. I mean, when you add all that together, in the realm of storage versus multi-family, when all this happens I heard and saw a thing today that another 762,000 people applied for unemployment today, I mean when they can’t pay their rent, like in multi-family, or when they can’t pay their mortgage like in single-family, what do they do with their stuff? They put it in storage, right?
And here you are, and it’s a perfect example of what can happen in a major catastrophe type of environment, like a pandemic, that storage outdoes everybody. I mean, look what’s happening in retail, right? I’m driving by and seeing “Now renting” signs and vacant on brand new stuff, and two year old, three year old stuff, because all these retailers are going out of business. Your small office buildings, everybody is working from home, so you’re starting to move out of those. Your large office buildings, everybody is working from home. And what do they do with all that office furniture? They put it in storage!
John: It’s just, I mean, from a common sense type of application is when they get rid of everything else, they always keep the stuff, and the stuff goes in storage.
Richard: Right, right, yeah. Good point. I have heard positive things from everybody in self storage, and that’s a good point – even if the multi-family space got hurt worse than it is now, that it might still help storage slightly or even out storage. You know, a couple percent more bad accounts, but double the new clients coming in, who knows, right? So, it sounds like you guys are doing quite well through the pandemic, right?
Richard: Yeah, great. In your experience now working with banks of all types and sizes, what are the three keys to getting bank financing in the self-storage industry?
John: I’m going to go back to your first question where I said people need to pick what they really want, right? So a lot of my peers in the industry love CMBS style money or what I call Wall Street type of money which is non-recourse and you’re only signing on carve outs and stuff like that, that’s that waters that we had to wade through early to try to figure out what it was that we wanted. We realized that’s not what we wanted, and in the end it actually worked out pretty good for us because, tying that back to the pandemic conversation, CMBS style money instantly dried up because of what happened and we were still buying deals. I bought a deal in June, and got it financed, right? So, a couple points that I would make there is – 1. Pick the horse or the style of the bank you want. We like local, mom and pop, credit unions, those type of things because of the flexibility in some of the terms, you know you can get better interest only, interest rates might not be as competitive as CMBS style money but we have the flexibility of either refinancing, or getting out in 3 to 5 years where CMBS style money is 10 year. So, some of those things are key to understanding what it is you’re trying to accomplish. For us, it’s all been credit unions, small banks, relationship style banks.
As far as getting the actual loans, having somebody that can sign on the mortgage. First deal that Robbie and I did, we didn’t have enough signing power so a buddy of mine had a doctor, so we gave a piece of the pie away and he became our partners and he signed on the debt with us and what we did for him as a trade off to that, not only did he get a piece of the pie, but when we went and refinanced it after we gained enough net worth to sign on our own debt, we took him off the loan and left him with his same percentage. So, he took us to the dance, we’re going to be loyal to him for taking us to the dance. And that was the first deal Robbie and I did is – we had no net worth. We didn’t have any money. How do you get it done? You bring in people that can get it done, and you don’t be greedy and you give away stuff in order to get it done.
So, first, finding the right types of banks, secondly finding the partners that can help you get it done. Third is once you do find those banks, continue to be loyal to them and build relationships with them. And I realize some of them only have like a $6 million limit, or a $10 million limit, so what we do is we refi them out after 3 or 5 years, take somebody else that’s willing to do that loan, and then we do a different loan with them and we stay loyal to those kind of banks. Most of our banks are depository banks, so where we possibly can, because we’re an operating business as well, all of those deposits go into their banks. So even when we skip the loan and refinance it, we still send them our deposits knowing that we’re going to go back and still have a relationship with them later.
Richard: Right, right, yeah that’s great. I love how you pointed out the need to be creative and not have anything skew, so like “Oh, I’m not worth a lot of money so I can’t do anything.” You guys rolled up your sleeves and figured it out, and you just make it seem practical the way that you put it like that. You know one of my marketing mentors early on was Frank Kern and he would come into a conference with people all in their suits and he’d come in his flip-flops and his board shorts and he would say “Look, if I can do it, you guys can do it. Because I’m not some fancy Wall Street guy.” It’s not that hard, it just takes a lot of hard work, and it reminded me of that when you talked about that just creative ways to get the deal done, I think that’s awesome. What’s the number one smartest due diligence question a new investor could ask a self storage investment firm when getting to know them?
John: That’s a great question. Probably the number one thing, probably try to understand how they underwrite. So, in self storage it’s an operating business, right? So, because of that I can plug in pie in the sky type of increases and so on, and get my numbers to work. So a lot of times you’ll hear “Well, I’m looking for a 18% or a 20% IRR or better.” Well I can plug anything into my model, and make it say 18 or 20%, – I mean, so? So, understanding how they underwrite. We, and this is to a fault, we underwrite from a conservative nature and a consistent nature from deal to deal based on operations and what we think we can do with that property, but we try to hedge in negative ways wherever we can. So if we know payroll for a store is $60,000 a year, we plug in 70. If we know that the late fee revenue average for that particular market is 3%, we plug in 2. So understanding how they underwrite to get to their numbers so that if they’re presenting you with a 16 IRR, are they going to overachieve that number or are they going to underachieve that number? In our case, I’d rather under promise and over deliver than vice versa. And that’s the – if I was an investor, that what I would want. If I’m going to give you my money, I would want to know how you underwrite. So I would ask, in storage, all different operational questions on how to underwrite. What they’re putting in into their underwriting model.
John: I’ll give you another great example. A lot of people talk about cap rates, and if you’re entering on a 6 cap, and you’re a 5 year exit, what are you exiting at? Well if I put into my model that I’m exiting at a 6 cap in 5 years, which probably is going to be the case based on how interest rates are going right now, then that’s not as conservative than if I exited at a 7 cap. And so if the interest rates stay the same, and I exit at a 6 cap, we’re all going to make more money, right? So understanding what numbers they plug into their model to get there – like a lot of people will buy on a 6 cap and exit on a 5 cap and their numbers look great. Well if you look at my model, I buy on a 6 and exit on a 7, and my numbers look okay, but I’m probably going to exit on a 6.
Richard: Right, right, yeah. It’s the true hallmark of an amateur when they have like really rosy estimates of everything across the board. Just makes you roll your eyes. Or like the last property that I acquired they were selling on a proforma cap rate, but I had to do the work. They were saying “Oh, no, it’s this, this is the cap rate.” Well, no, the current cap rate is so god awful you would never put it in writing, so proforma cap rate is not how you value something. So, yeah, that’s a great comment to make to avoid…
John: I found one today that is being sold, a storage property in Huntsville, Texas which is the kind of markets we like. We like secondary, and suburban, and some tertiary markets, and it’s more of a secondary market. And like we’re buying it anywhere from $40 a square foot to $70 a square foot in better markets than Huntsville, and they’re asking $88 a square foot and a 5.5 cap rate on the broker’s proforma. And I was like, “Huh?” So I was like “Overpriced!” and two, on the broker’s proforma? He doesn’t know how to operate these things.
Richard: Right. Right, right. We’re in the same situation right now in one asset, and I told my broker I was like “Well, the listing broker has got to sell and we don’t have to buy, so we’ll come back in a month and when he hasn’t sold it, then he won’t think we’re so crazy.” You know?
John: Right, exactly.
Richard: What is the number one thing that you look for in due diligence on a self storage facility that determines if it’s worth your time?
John: So we buy undermanaged, under enhanced, under expanded properties. So what I look at is whether it’s undermanaged and under enhanced first. So, and if it’s too small I look for the under expanded piece of things to be able to expand it and get the numbers to where they need to be to support the infrastructure that we do. But I am not a buyer of 42nd and Main downtown New York self storage property. I buy off of existing cash flow knowing that it is undermanaged, so for me I can do back of the napkin kind of stuff knowing the different markets knowing what their revenue per month is versus my expenses, and be able to look at it and see if it has some hair on it that gives me a value add type of play. So for me it’s I love the bruised banana type self storage properties, and what I mean by bruised banana is that worn out tan with the chocolate brown doors that they did back in the 70’s, I want to buy those properties. So when I see that, I get all excited. I’m like “Oop! That’s got some opportunity!” because we paint them pelican tan and bright red doors, so they pop out in the community where that bruised banana just looks so worn out and drab. So that’s the kind of stuff I look for before I even get the numbers. Like, I don’t buy anything that’s cinderblock, I don’t buy anything that has drywall inside the unit, and not that you can’t make money on those because you can if – one you’re not going to pay a 6 or 7 cap for them, you should pay an 8 or 9 cap for them, but so if you buy them at an 8 or 9 you can make money off of them, the difference is you’re not going to exit them at a 6 cap. You’re just not. So, for me, I’m trying to build a re-portfolio with undermanaged stores, I clean them up, I make them pretty, I group them all together and sell them in one big shot to somebody. So, because of that, the rete quality VCs or the actual retes or these large pools of money, they don’t want cinderblock buildings or drywall inside the units, or stick built. So when I ask those questions, and the answer is yes to concrete, stick built, or drywall, I don’t even bother looking at it.
Richard: Right, right. Saves a lot of time. What metrics drive the success of the self storage business?
John: Something as simple as your conversion rates online, you know, your – you’ve got to have a great website, you’ve got to have a marketing company, you know. And you know we’ve partnered with Fineview Marketing and they drive those results and those metrics for us so being able to not only drive the clicks to your website, but the click throughs and how they convert to actual reservations and actual rentals and/or phone calls means a lot. The revenue management, so what I know is 6.9% of your population moves out at any given time for whatever reason, and when you send rent increases 7.2% of the people move out with rent increases. So the difference in your delta is like .03 when you send rent increases. So knowing that, I always say revenue management is a fear based program, so if you fear that you’re going to drop occupancy, or you fear you’re going to lose revenue and so on, go to the numbers and you know that the medium is call it 7%, so if you send a bunch of rent increases and 18% of the people moved out, stop sending rent increases. If you send a bunch of rent increases and 3% of the people moved out, you weren’t aggressive enough, send some more. So these kind of metrics are what we look at on a constant basis. What our volume is, what our conversion rate percentage is, and then that’s on new customers, and then on existing customers if you send them rent increases what that new conversion looks like.
I could throw all kinds of statistics at you. The industry is $6 for every move-in on merchandise, we average $20. I mean the industry standard is 1% on late fees, we average 3%. So what I look at when I’m looking at a deal is if they have a $10 late fee on the 10th of the month and no other late fees? I’m like “Yeah, baby! Let’s buy that store!” So I look at all those kind of averages knowing what we do and then knowing that we do 3%, but I budget 2, so that I have a little wiggle room and they’re only getting 1%, I know I can make money on it.
Richard: Right, right. How much of self storage is really an operational game versus a real estate acquisition process? For example, hospitality and senior living – heavily operational. A parking garage a big warehouse that you don’t have to visit more than once a year is heavily non-operational. Where do you think self storage lands on that?
John: It’s funny you say that because you know this – I’m the operator on our team, right?
John: And I’ve always said, in this industry, that operations doesn’t get enough credit because everybody is financially focused from an asset standpoint, but not from the operations. But the reality is is that operations is what drives that revenue which then gives the value to the asset. So, in this industry, I would say that it’s not as heavily move in move out as a hotel would be, because you get daily rentals which is a lot of churn, but it’s as operationally heavy as a hotel would be other than the move in move out on a daily basis. You still have to clean property, you still have to maintain your curb appeal, you still have to have a good brand. Like in the hotel industry, you can stay at a Motel 6 or you can stay at a Hilton, and you’ve got two different qualities, right? Well what brand are you trying to create from your curb appeal and all that kind of stuff, which requires capital, and money, and things like that. You can run a mom and pop type of self storage property operationally, and not pick up your trash, and not fix your gate when it’s broken, and all the stuff that your motels do, or you can run it like a Hilton, or you can run it somewhere in between. We try to be the Hilton, and we go in and we take the motel and we fix it up to be the Hilton. So, operationally, I think it’s probably in line with the hotel, it just doesn’t get enough credit that it’s in line with the hotel.
Richard: Right, right, makes sense. For self storage commercial properties, are there any special tax credits or areas of the tax code that you guys navigate? Or is it simple cost segregation in many cases that you guys do? Or what does that look like?
John: Simple cost segregation is what we do. I’d hate to give you like a one word answer, but that’s the answer.
Richard: That’s what I thought, that’s what I thought. Okay, cool. I’m not the expert there, so I’m just making sure I wasn’t blind to something else that was special about the space. But I’m guessing with a good NOI on a property, you get a pretty good 25 to maybe 30% on a write off that first year under depreciation with those studies I would guess typically, right?
John: Right, yeah, and you’re getting cash flow at the same time, and then negative K1 which is a beautiful thing about our tax code.
Richard: For sure. What have been three big lessons learned while building a $100 million plus investment firm that you can share with others that are just getting started?
John: First lesson is pick the right partners. I, as you know, I’ve got two great partners. I mean the camaraderie, synergy, all the fun that we have, everything like that – we’re allowed to call each other’s kids ugly, I mean, all of that stuff. Picking the best partner is key. And I always say that what dissolves partnerships is when one feels like they’re working harder than the other one. Or one feels like they’re taking more risk than the other one. That’s what dissolves partnerships. I’m a workaholic, and when we started this thing I was concerned that they couldn’t keep up because of how much I work, and those two outwork me all the time. And that’s impressive, right? So, picking the right partners.
Secondly being an operational business is building the right team. So we have currently now 15 home office people and each of them not only have their own roles but they play in each other’s sandbox all the time, too. Building that right team of people, getting the right people on the bus, getting them in the right seat, all of that I think is something key.
The other thing is the marketing machine that we’ve created is – If you’re going to bootstrap stuff like we’re doing then you’ve got to have a good marketing machine. And I don’t mean a marketing company, I’m talking about you’ve got to be out there, you’ve got to be front facing, you’ve got to get people to know who you are. And coming to your family office conferences, you know this, is by the time we leave there everybody is talking about us. Because of them damn jackets, right? So, that’s the marketing machine that I’m talking about is getting out there, getting people to know you, having good solid conversations, following up when people call you, posting on LinkedIn – whatever avenues that you utilize blogs, videos, etc., a combination of all of it – get that marketing machine out there and get people to know who you are. The more success you have, other people want to be part of success, right? So they see your success and they go “Oooh Oooh, wait, wait…” and I go “Where were you three years ago when I was busting my ass?” right? And now you want to play with us? Ok! Now I can listen, right? So, that combination of getting the marketing machine out there makes your telephone ring all the time. Like I just, I was just telling you we closed three deals last week, and the two deals that I raised $1.4 million on, I raised $1.4 million in 10 days.
Richard: Wow. Phone calls? Or an e-mail out to your list? Or what?
John: I didn’t even e-mail blast it. I had a list of people that I had been talking to, I picked up the phone, called them, sent them the deck, I raised $1.2 million that way. And then I e-mail blasted to about 40 people and the last 200 was gone. Just like that. So, that’s what I mean by that marketing machine. Like right now we’ve got like 13,000 people on our distribution list and believe it or not, I’ve probably physically talked to 7,000 of those people over the last 4 or 5 years. And that’s that marketing machine, right? So the third point I would say is if you’re trying to do it in the way we’ve done it, is get out there. Don’t be shy. For the record, I got 13,000 people on the distribution list, I only have 130 investors, right? So that’s a lot of no’s. That’s a lot of people telling me no. They haven’t told me no, they just haven’t voted with their wallet. But I’ve had a lot of conversations to only get 130 people. But those 130 people generated $132 million worth of equity. There’s the machine.
Richard: Right. Got it. What is the most expensive mistake that you have had to make the hard way that you can help other avoid by sharing it here in the interview?
John: Well, I’ll give you one of the first mistakes that we’ve made. I don’t know if it’s the hardest one, but one of the first ones is we got an LOI from a company out of New York that they looked at the katy project that we had three and a half or four years ago, they gave us an LOI, we liked what we saw on the paper, we paid them $8,000 in underwriting fee to underwrite the project, then we paid them another $38,000 for a application fee to get it rolling and so on. So a total of $46,500 bucks I think was the total tab. And the most expensive lesson I learned there is that the LOI piece of paper is not worth the piece of paper that it’s written on. Because in the end they told us it was 6-7% interest rate on a construction loan, we liked that, and in the end they came back and told us 9%. And we said “Well, that’s not what you said in the LOI.” “ Well, yeah, but my investors told me that they wouldn’t do it for less than 9.” And we literally lost $46,000 like that, and we lost it when we had no money.
John: So, it hurt twice as hard. By knowing what I’ve learned is LOIs and term sheets mean nothing. Their execution is what means something. It’s like you giving your girlfriend a promise ring, right? While you’re dating some other chick. That’s what the LOI and the term sheet is.
Richard: Right, right.
John: It’s an expensive – it was a $46,000 mistake for us.
Richard: Yeah, yeah. How can someone start out in commercial real estate brokerage and stand out, and kind of earn the business of someone like yourself and do better than most others in the brokerage space?
John: Create a good brand, credibility, honesty, you know, likability; we have this motto internally that we deal with people we like, trust, and respect. I think the biggest thing is there’s so much greed in the world, and it can correspond into this industry that you just can’t go in being greedy or wanting to do it just for the money. You’ve got to go into it with having a good heart, and a good soul, and dealing with people that you like and you trust and you have respect for, you know? We’ve walked away from over a billion dollars worth of equity in the last 4 and a half years and it’s because they haven’t fallen into those three categories. So creating that brand for yourself, but having the brand that has credibility and honesty and stuff behind it, I think is really the best advice I can give to somebody if you’re starting out as a brokerage from scratch. You’ve got to be somebody to rely upon, and as stupid as it is, to return somebody’s phone call or something, you know? That means a lot in today’s world, in the world of 3,000 e-mails a day, it’s nice to get a response back from somebody sometimes, right? So having that type of credibility and putting yourself out there with that good type of credibility is probably what has made us the most successful. Because people trust us.
Richard: Right, right. For a niche like self storage, we were chatting before the video started about working with a lot of different brokers, so I’m curious – are there any brokers with a really unique fee structure? Like for example is there a broker out there that will take half their fee in equity in the deal instead and just charge you less fees and you like that? Is there any other creative stuff that brokers are doing to win your business and be more aligned?
John: We’ve done all kinds of stuff. I mean so that’s what I said before, it sounds like we’ve been an overnight success but the reality is it’s all based on those relationships of trust. So if you’re getting into a conversation with a commercial real estate broker and you say to them “Look, if you find me a true off-market self storage deal, and you bring it to me and we buy it, I’ll give you a couple points on the deal or I’ll make you a sponsor right along with us or whatever the case is.” Well you better damn well do that when they bring you the deal, right? And that’s the problem with this industry is “Ah, well you know what? I told you that but there’s not enough to share here, so I was going to do that but I really can’t.” Well, tell them that in the first place, right? So we’ve done a whole bunch of that. We’ve got different brokers that are partners on our deals, we’ve got different brokers that have left their fee in the deal, and we’ve got different brokers that we strictly funnel free deals through so that they can be part of the deal. There’s – we’re loyal to a fault in that way. And through that I like talking to young, hungry brokers that are trying to not only get into the industry but are trying to build wealth for themselves and I tell them just that. If you bring me true off-market deal, I’ll cut you in. They go “Really?”, well yeah. And they go “Wow, okay!” and I’ve probably done 5 or 6 of the 25 deals like that since we’ve done them. 25 deals.
Richard: What’s the standard in the self storage industry for a brokerage fee and what’s the standard if they’re getting equity instead of a fee?
John: I don’t know that there’s a standard. I think on a brokerage, like if you’re selling a property, the fee is anywhere from 1 to 5%, sometimes maybe 6, and how that typically works is the larger the property in dollars the smaller the fee, the smaller the property the larger the fee. And it really comes down to what the broker feels his worth is in getting the property sold. So if you’re going to bust your butt for a property that’s selling for a million dollars, you’re taking 5% which is $50,000, or you’re going to bust your butt to sell a $10 million property and you take 1% which is $100,000, you see the difference, right? It’s the same kind of energy and effort, but you’ve go to get paid. So I think the standard there varies based on the size of the property.
When it comes to helping them, it depends on, you know, how you syndicate your deal. Like for us, because we use $50,000 checks and not a VC capitalist type of company, and because we do mom and pop type of debt where we sign on the debt and we’re at risk on the debt, we take a bigger piece of the back end. Call it 30 or 40%. Where if you deal with a VC type of company, you’re going to get 10% or 20% of the back end. Well if I’m taking 30 or 40% of the back end, I’m going to give that broker 5 points of that or something just for bringing it to the table. So when it comes to that kind of stuff, we’re pretty generous because we want to get things done.
Richard: Right, right. So you’re giving a piece of the upside on the back end, not a big chunk of equity in the deal. It’s like if the deal goes well then you get a little bit of this upside because you brought the deal to the table that was off-market and probably got it at a slightly better cost basis or just otherwise wouldn’t have seen it, right?
John: Correct. Yep.
Richard: Okay, got it. In the self storage industry, is 65-75% debt the typical amount among all of your competitors and peers and is that what you kind of underwrite using that assumption?
John: It depends on if its an acquisition or construction. So after March from a construction standpoint people were like “Hey, I want 50% down to build this thing.” Because the risk went through the roof, right? So on ground up development I’ve seen anywhere from 50% to 65%, I haven’t seen anything higher than 65%. On how we do our acquisitions is typically 70-75% of purchase price and somewhere around 65 to 75% of total cost. So, that’s, you can look at it two different ways, we look at it both ways but how the bank looks at it is not your total cost, they look at it as purchase price. And the purchase price we typically leverage 70-75%.
Richard: Right, okay. What niche or type of self storage assets do you focus on to still make money in this area?
John: So, a couple things. One, and I imagine a couple of it in this conversation, is I look for undermanaged, under enhanced, under expanded properties, right? But I also look for them in suburban, secondary, and tertiary type of markets. Or, I’ll say it a little differently, is I don’t focus on the top 50 MSAs, like that big money that you’re talking about does. You know, they want the NFL cities, they want all the major metropolitans, inside all the loops and all that kind of stuff. I don’t focus on that, I try to stay out of the headlights of those guys. What I focus on is the towns that are just on the outskirts of that, or like a decent sized town that’s out someplace. Like, to me, towns like Savannah, Georgia is a great town or towns like Chattanooga, Tennessee are great towns. Where everybody else is chasing Nashville, Tennessee, I’d rather chase Chattanooga. So, or Mobile, Alabama, or something of that nature. I look at 45,000 population or better, and 45,000 medium income or better, where a lot of those guys look at 90,000 population or better and $90,000 income a year or better. I go down to the other ones. I don’t mind being the class A operator and the highest price in the market because I’m running the property way better than what anybody else in that market is doing.
Richard: Right, right. Makes sense. Okay, great. What lessons have you learned regarding raising capital for commercial real estate from high net worth investors?
John Manes: Some of the lessons I’ve learned which are interesting is you need to educate them about self storage just like you would educate anybody else that’s giving you ten grand. So I’ve always found it interesting that the SEC defines an accredited is somebody that’s worth a million dollars or more in their personal net worth outside of their homestead, and makes $250,000 or more of income. I’ve always found that interesting because money doesn’t necessarily translate into education, and education doesn’t necessarily translate into money, right? So because of that, what I’ve learned about a lot of high net worth individuals is you have to teach them the same about self storage, and how to invest in a different asset class or a different business model than what they’ve made their money in. Because that’s what they know, right? So if they made it in tech, they know tech, they know how many multiples tech trades at after you build up a company, and then you move it over to a hard asset like self storage and they go “Okay, I’m going to start all over. Tell me what I need to know.” The good news is they’re more educated than most, but they’re not fully educated to why storage is a good asset, or how to invest outside of what they’re used to.
Richard: Right, great. Makes sense, okay. How would you do things differently in growing your commercial real estate investment company if you were starting all over today knowing what you know now?
John: I would’ve picked a horse on equity and I would’ve picked a horse on debt based on what I know now back then. One of the things I didn’t tell you is I sourced a VC company out of Dallas early on that wanted to do 200-300 million dollars worth of storage, I created the business plan, I created the brand, I created everything. All the Powerpoint slides, everything for them to go do the dog and pony show like I do now, right? I created all of that and in the end they sent me an employee term sheet and they told me they were going to make me a partner the whole time. So, knowing that kind of stuff now, I ask the right questions now to know what that looks like, right?
Richard: Before you’ve had the baby together, right? That’s something I’m in the middle of right now with a dental clinic chain just about to help them, or advise them, or maybe join their board, but I told them before I do really much of anything we need to have our agreement in place and have expectations on the table, right? Because my assumption of what a partnership looks like might be very different from theirs. Especially after I’ve given them all of the goods of my brain; ideas, just like you did, and hard work, etc. So most people have to learn that the hard way – like us. You know?
John: I’ve learned it a couple of times the hard way.
Richard: Yep. We call that being “Wall Streeted”.
John: Right, that’s funny!
Richard: You’ve got to watch out for people when you’re young, so…
John: I’ve done that both on the equity side, and I’ve done it both on the debt side and knowing what I know now, I wouldn’t have done – I would ask the right questions back then to understand where their head was. That’s where I’m at when I said I’ve walked away from over a billion dollars worth of equity, it’s because I know how to ask the right questions now.
Richard: Right, right. Got it. How do you secure off market commercial real estate deal flow in the competitive space such as self storage?
John: I’ve got a couple people just dialing for dollars, that’s one. So they’re not brokers, they’re friends and family, and they make phone calls to different people. I have strong relationships in the brokerage industry like there’s one guy here in Houston that we’ve bought 8 or 9 deals off of already. And then there’s all these fringe relationships that we’ve created, and there’s a couple young brokers that keep giving us volume which is really super cool recently. And I’ve looked at 350 deals in the last 14 months, and we’ve only bought 5, right?
Richard: Last week – so it was a good week, huh?
John: Yeah, great, that was last week, that’s correct! You kiss a lot of frogs, and that’s okay, but I kiss a lot of frogs when it comes to raising equity, I kiss a lot of frogs when it comes to shopping debt, and I kiss a lot of frogs when doing deals but the reality is we’ve created a 100 million dollar portfolio, or better now. I haven’t even, now that we bought those three and closed on one in June I haven’t even added that to the mix, but I’ll bet you it’s probably 110 million or something now. So from that standpoint, sourcing them I’ll take it from anywhere I can get it. Like I see LinkedIn posts and now what I do is I go to the comments, and I tag my financial analyst on it. So he goes and gets the OM and all the paperwork and starts to underwrite it. So I’ve done all kinds of crazy stuff to try to get deal flow. It doesn’t matter; I mean, a deal is a deal to me, right?
Richard: Right, right. For sure. Number one tip you can provide on negotiating the price down on a commercial real estate property?
John: I don’t know because I’ve never really negotiated it down! Relationships I think is probably the big thing. I have a new financial analyst, so we went to look at a property in Lake Jackson, which is south of Houston last week and he said “Why are we driving here? I mean, it’s really not due diligence, so why are we going here?” and I said “Well, we’re going to go meet the owner, the broker can’t meet us there, so we’re going to go meet the owner and we’re going to see if we can build a relationship with him.” So I get down there, we start talking and everything with the owner, and we spent probably an hour and a half with her and by the time it was all said and done, I had her convinced to carry a private mortgage on her property for us. Well, that’s not going to happen through a broker. That’s not going to happen through – well, it can happen through a broker. They want to know that they like you and trust you and things like that, so…
John: The number one tip I would give is its still a relationship business. Get out there and build those relationships, and they’ll prosper. But when you’re out there building it, don’t screw people left and right because you’re going to get a reputation, and you’re not going to get deals done. So go out there, and be honest, and be truthful, and if it’s not a deal for you, tell them it’s not a deal for you and so on. So, the number one tip I could give is go out and build good strong relationships and they’ll pay off.
Richard: Right. If somebody else is listening and they’re focused on their own separate niche area, and they wanted to grow to 100 million in assets as quickly as possible, what would you suggest to them that would help them greatly?
John: Get a good marketing company behind you, get support behind you like I suck at writing, I’m a numbers guy, not a letters guy, so I have a ghost writer. So get good support behind you, I have a marketing company that posts 8/10 of my LinkedIn posts, I post the other two myself. And you know this, they put together my investor packages, because when I was doing them it was a Word document. And now they’re nice and pretty and all that kind of stuff. Get good support behind you. We just hired a really good investor communications coordinator that knows and understands ZoHo, which is our CRM platform, and she’s absolutely amazing with all of that. So I don’t even have to tell her “go do this”, she just goes and does it. So, getting that all behind you just fuels it, it just takes off really really fast.
Richard: Yeah, that’s awesome. Great, yeah, well I appreciate the interview here today. Tons of great insights compacted to an hour interview there, and I’m sure many people are going to benefit from this. What’s some way that somebody could get in touch with you most easily if they had more questions, a way to work together, a property?
John: Sure. PinnacleStorageProperties.com, [email protected], or (210)818-1496. Come join the fun.
Richard: Awesome. Thanks, John, appreciate your time here today.
John: Great to see you. Haven’t seen you in so long, so it’s good to see you.
Richard: Yeah, you too.
John: Alright, bud.
Richard: Take care.