Self storage is a hot asset class today, but with so many people interested in buying or building it, how do you add value to a facility? How do you differentiate from the competition? Clair Hoover, an experienced operator with over 20 years managing self storage facilities shares some golden tips.
Tell us a little bit about you.
I live in South Central Pennsylvania, in Lancaster for those of you know that area, I've been married 32 years, have two sons and two daughter in laws, and happy to announce our first grandchild on the way. We share our house with two shitzu dogs who actually run the place. As far as hobbies, I like anything with horsepower, fast motorcycles, cars, boats, trucks, anything that gives me a little adrenaline rush and other hobbies, I do a lot of scuba diving with my sons, we are surfers, sailors, and try to get out there and enjoy as much of life as we can.
What is the state of the self storage industry today?
The self storage industry, I believe is one of the hottest asset classes out there right now. There are a lot of different reasons for it. I think the most recent that we can point to I self storage went through two very challenging times. The 2007 and 2008 recession, and whatever just happened here in 2020. I don't even know what to call it, it might have been the shortest depression we ever had. However, self storage had the least amount of downturn and the fastest recovery of almost every asset class. It passed two big tests for me. And it's an incredibly hot asset class right now. A lot of dollars chasing very few properties and a lot of people wanting to get them because of the performance.
The cap rates are very compressed for self storage, how do you go about purchasing them nowadays?
You do what everybody has had to do in tight times and in every part of real estate, you end up looking at more properties and bidding on less. I would say a year ago, for every 20 properties we looked at, we would put an offer on one. I'm guessing right now it's closer to 100 properties that we look at before we find one that we think to even barely buy. It's a challenging time. I think patience is part of it. But also we want to keep growing. So we keep sorting through every haystack we can find, trying to find some bargain buys.
I heard the best real estate jokeI think I've ever heard. There was a real estate agent that just got done showing a house to a young couple. And he looked at them and said, if you'd like to see something in a higher price bracket, I can show you this one again tomorrow. I love that, it's kind of scary, but that's the truth. A year ago, we were not seeing that in self storage. Today, we're actually seeing multiple offers within hours at times, a lot of them cash only offers, a lot of them above asking price. So all of that pressure that we see on the residential market, we're seeing entering the commercial market, it's really crazy.
What are some value add methods for self storage facilities, since you have so much experience there.
When we buy a property we like to see what we call the triple play. We like to see upside on rate management, we like to see upside on occupancy, and we like to see upside on expansion opportunities. We will settle for two out of three, but we rarely would buy something that doesn't have those opportunities available.
The biggest mistake we probably see today would be under-managing rate management, there are so many opportunities there, you will actually find people in self storage who brag about 100% occupancy. They'll brag about the fact that they have the lowest price option in their market. Think through the math on what I just said and what they're laying on the table. I love meeting people like that I love making an offer on their property, a lot of upside on rate management.
Another one is, a lot of people are missing admin fees, it's become customary, in our markets at least, to be charging admin fees. It covers some of your costs to put a client in and it's accepted by the market. So again, you're just letting money on the table. And you mentioned cap rates, when you started talking about $2,000 a year or even 10,000 in admin fees, you take out a five or even a four percent cap in some markets, that's serious cash being left on the table by not maximizing that.
The other two upsides I mentioned already were occupancy. If you're low occupancy, I would invest in marketing, you've to fill that facility up, that's dead dollars on the table. The last one, a lot of people say is not available to them, but it often is, and that's expansion capability. If you're on a five acre parcel, and it's maxed out, you're not thinking outside the box, there has to be some land within a mile or two of you somewhere that you could add more storage to and you probably don't need to increase your labor costs. You can probably run both facilities out of one office if needed.
Another one is tenant insurance. I've had 22 years and self storage experience, and when I got in the business, I would say that the rule of thumb was that about 80% of homeowners policies or apartment rental policies would cover a self storage unit. Today that's at least reversed, and in some markets almost non existent. Insurance companies have gotten very clever about writing out certain pieces. So today, if you're not selling tenant insurance, there's a good chance your tenants aren't covered. And it's not a matter of if, it's a matter of when you're going to have an issue whether it be a fire, or a flood, or wind damage, something's going to hurt your tenants belongings. And there's no insurance policy that you can buy that covers your tenants belongings, it has to be a tenant insurance policy and there's profit when you sell that to your tenants. If you're not doing that one, you're probably one of the few on the market that aren't, you're leaving money on the table and you're also putting your business at financial risk during any type of disaster.
Do you have a good insurance company that you recommend for that?
I deal with three of them. I'd rather not give out one name because they're all very good in different markets. I would tell you do your research, ask around. If you don't know who you would want to get, you can call any of your competitors and pose as a tenant and ask them who they use for insurance, you'll get the information pretty easily.
We also have a ton of self storage facilities popping up in a lot of markets. How do you differentiate yourself from other facilities in order to increase your occupancy?
It can be different in different markets. I would say automation today is probably the best way to differentiate yourself. Somebody told me recently, if you're trying to buy self storage facilities, whatever effort it takes, find a Yellow Pages, drive to a phone company today, and you can probably still get them. And look for the largest ad in that market, and buy that person out, they're spending $1,000 or more a month on the yellow pages or spending anything on it. It's been five years since I've looked at Yellow Pages, maybe longer. My sons are in their mid 20's and they don't know what I'm talking about. They've never heard of the Yellow Pages. And as far as my sons, if they try to find a business through any traditional method, if they don't have a web presence, they write them off as non existent.
As far as differentiation, I think you've to be one of the strongest digital marketers in your market. If you're not, you're probably alienating anyone under the age of 40. And quite a few of us over 40 are going to write you off. Automation as many things to it. One of the things they say is that a website never has a bad sales call, 24 hours a day, it is working for you, unlike your phone, which you probably have limited time to pick it up. A digital marketing differentiator is also a huge cost savings, the amount of money that I spend marketing a website versus what we used to spend on Yellow Pages are much more effective, much more targeted. And I think it's probably one of the best ways to differentiate yourself today.
Moving on to the management and actual day to day operations side, what are some questions we should all ask when we interview potential property manager for our facility?
I'll answer that, but I like to take it back to the 30,000 foot level and challenge you on whether you even want to manager. 50% of my facilities have no manager on site. And that started out as an experiment and it's proven, we watched, managed versus on managed as far as on site presence. My unmanaged sites, for many different reasons are outperforming my manage sites.
When I do hire a manager, one of the things I would talk about is a business principle. The business principle is people do not do business with businesses, they do business with people. When you're looking at that manager, if you don't have a people person who you generally enjoy talking to and want to be with, you're doing your business a disservice. I think the highest characteristic is they have to be someone who is likable, and actually get energized by being with other people. Otherwise, you're going to wear him out, people pick up on it very quickly. Though you can have the nicest facility in the area, the best website, you name it, all the bells and whistles, but if you've an unsmiling face behind that counter, you're not doing yourself any favors. A people's people.
The challenge to anyone out there today is Do you need a manager on site. We started testing this about two years ago, we were looking to get into smaller facilities. And a small facility has a big challenge. It's not large enough to cover large fixed costs, and labor is a major fixed cost. As far as your staffing office, you're talking a minimum I would think of $40,000 probably closer to $60,000 in cost to put a manager in an office facility. When I say small, I'm talking maybe 20,000 square feet or less. We looked at automation as a way to get around that, to serve smaller communities and have profitability and upside on these small facilities, it was a bit of a challenge. This is a challenge Walmart had when they tried to get you to check your own stuff out. They put it on the automated checkout lines and some people looked at and said, I'm paying the same price and I'm doing your work for you, there has been a lot of resistance to it.
We saw some of that resistance, however, the big game changer here is Covid, instead of looking lazy and not putting a manager on site we now get to market because we care about you, we offer contactless move in. What appeared to be a weakness became a huge marketing opportunity for us. 50% of our facilities are completely unattended and we're shifting a higher and higher percentage each year. For any of you are trying to hire in today's market, unless you're in a different part of the world than I am, it is very difficult to find qualified people that actually want to work. So automation again has been a godsend for us.
What should people know and consider before investing in self storage?
I believe it is one of the best passive income opportunities available today. What you need to know today is that it's much more complicated than it was five years ago, and with a lot of moving parts. Five years ago, if you would ask me the same question, I would have told you, you could probably get by with a Yellow Pages ad and an answering machine. And I would say maybe 50% of the facilities are affectionately called mom and pop shops. Typically, it was a mom and pop, often a retired couple that were running a small self storage facility. And that's exactly how they did it. Yellow Pages. If you call, they might answer but more likely you get an answering machine, they will return the call maybe after their jobs or whenever it's convenient. Do you have any idea what happens today when a millennial gets an answer machine?
They would never think about you again.
I don't know what the percentage of hang ups are. But I guarantee it's going to be close to 100%. The reality is, it takes a lot more bells and whistles today and a lot more complex pieces to be able to serve every segment of the market. So we've identified five different ways that customers would possibly want to interface with us:
I would start out with a very traditional method where they want to walk into an office, and see a body and talk to you.
Another one is to completely automate things, where they want to be on their smartphone, and want to be able to rent a unit without ever talking to anyone. And we have made efforts to be effective in all areas. But we're moving further and further away from that first one, because it's too expensive for a customer to have that body sitting there.
Here's what I can tell you, unless you are amazing and you're you can build a team faster than I did, a third party management is going to do better than you. And whatever they're charging, you most likely will get it back through increased revenue, they're going to be that much better at what they do. It's very complex business, but there are huge opportunities to be a passive investor, just go out and acquire them, turn it over to third party management and then watch the checks are rolling in.
And that is something that you recently started doing right. Can you tell us a little bit about that?
I actually took a look at turning my facilities over to third party management. And came very close to doing that. It's a strange reason I didn't do it. I have two sons wanting to come into the business. And I wanted them to wake up every morning completely overwhelmed with a lot of work to build character. This generation, we often call them entitled generation. I didn't want my son's to be like that. So we intentionally chose the difficult path. We decided to manage our own things, we have a lot of fun doing it, we're very good at it. And at one point, some friends started getting involved in self storage. And it's exactly what I was talking about. Before their facilities were too small to attract the larger third party management companies and we decided to take a stab at it. And it is very difficult on a smaller company to make it cost effective. But we've perfected our model especially by using automation. And that's how we got into it, we started about two years ago and we are getting a lot of interest in our third party management. We've had a pretty good track record with improving our properties and we enjoy that part of it. It has definitely been a good part of what we do.
Is there anything else that you think is important for our audience to know?
Keep on running units. It makes me happy, it's going to make you feel good. If you have one unit rented today and you rent two, you'll feel twice as good.
Any tips for renting units quickly?
A mistake I see is maybe if you're at 60% occupancy, it's simple math, an empty unit is $0. I would consider some extreme discounting. And I've discounted rental units up to 75%. We typically put a timeframe on it. But if you do the math on it, if I discount units up to 75% for three months, versus letting it sit empty, and trying to get a full rate later on. The math is pretty simple. You're better off doing deep discounting and getting that unit built up and creating a customer that over time you can get back to a normal rate.