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$13M in Equity from One Deal & Cash Flowing Despite Being Comatose with AJ Osborne

The BiggerPockets Podcast
63 min read
$13M in Equity from One Deal & Cash Flowing Despite Being Comatose with AJ Osborne

Ever have a conversation that is just impacts your life so powerfully you wish you could share it with everyone? That’s exactly what our conversation on today’s episode of the BiggerPockets Podcast is! Our guest, AJ Osborne, shares an incredible story of building his real estate business — which focuses on self-storage facilities — as a way to transition his family from rich to wealthy (and yes, there is a difference!) This show is packed with insight from AJ, including:

  • How a loss on his first deal directly led to millions of dollars in later profit
  • How to find underperforming real estate deals
  • How he made $13,000,000 in equity from a old Kmart building
  • And the medical emergency that put his real estate to the ultimate survival test while AJ fought for his life (this story will shock, amaze, and inspire you!)

This show is one of the most powerful episodes yet of the BiggerPockets Podcast, and we’re excited for you to dive in!

Click here to listen on iTunes.

Listen to the Podcast Here

Read the Transcript Here

 Brandon: This is the BiggerPockets podcast Show 286.

“Once I came out of my coma, and once I finally got able to talk and able to talk and able to move and everything like that, my assets all made more money than they did when I went into the hospital. They were worth way more money than when I went into the hospital and I didn’t do anything. I literally just lied there. I couldn’t do anything”.

You’re listening to BiggerPockets Radio. Simplifying real estate for investors large and small. If you’re here looking to learn about real estate investing without all the hype, you’re in the right place.

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Brandon: What’s going on, everyone? This is Brandon Turner, today’s host of the BiggerPockets podcast, here with my co-host, Mr. David Greene. What’s up, David?

David: What is going on, Brandon? It is another beautiful, sunny day in California and we have a super cool and unique podcast today.

Brandon: We do have a super cool and unique podcast today and it is not sunny here in Washington, which is pretty normal. That’s all right. But today’s show is fantastic. This is going to go down as one of my top three or four shows I think we’ve ever done. I actually ran into this guy in Hawaii, that’s how we met. And he is just crushing it. But even more than crushing it, he has one of the most incredible stories.

In fact, while we were actually recording this—we were recording this episode, right? And David and I, we take notes of the things that we talked about so we kind of have an idea of where we’re going when we’re recording—David wrote this phrase to me. He wrote, “This is one of the most incredible stories I have ever heard”. Like, you wrote that to me, right?

And I told you it was incredible when I heard it—we don’t talk about that until like a good three-quarters of the way through the show, so do not leave the show about hearing the story about his coma. He had a tragic medical emergency happen that almost killed him and it’s an unbelievable show and how it ties into real estate as well so stay tuned for that.

Make sure you also—he talks a lot about the difference between being rich and being wealthy and yes, there is a difference. Picking a wealth vehicle, like the difference between a Ferrari and David Greene comes in strong with the analogy for you know—you’ll see that. Also, just his entire niche of self-storage is fascinating. And it all applies. Whether you care about self-storage or not, it doesn’t matter.

This stuff applies all across the board but yeah. It was super, super powerful stuff. And lastly, make sure you listen for his K-Mart story and how he built $13 million dollars in equity in one deal. It’s completely nuts. I can’t even say it. You guys, this show is so good. You’re going to love it. So without further ado, we should just get into it.

But before we do, it’s time for today’s Quick Tip.

David: Today’s Quick Tip is—

Brandon: I was waiting for you.

David: Yeah, I know.

Brandon: I was holding it until you got in.

David: You gave me a chance. I just missed the train on that one. A little too slow. You guys will get that later.

Today’s Quick Tip is don’t forget that real estate is a relationship business and the best deals come from the best relationships. Today’s guest talks about some of the ways that he finds deals. So we’re talking about a person who created $13 million dollars’ worth of equity on one deal, right? Relationships are very, very important.

Brandon: Yeah, from relationships. So good.

David: Absolutely. And he just is not afraid to get out and knock on doors, talk to people. Meet people, become friends with them. He’s not looking for some software that’s going to take the work out of real estate investing. He’s okay to roll up his sleeves, get his hands dirty, and make insane wealth doing it.

So if you’re someone who’s not comfortable with technology or you wonder why people keep looking for the easy way out, you’re right—building relationships, getting out, talking to people, telling people what you want does work. It will build you wealth and you should be doing it.

Brandon: Deep, deep. I like it. All right well, make sure you guys subscribe to this channel as well or this show, whatever podcast app you’re watching this on or if you’re on YouTube or whatever. Hit the little ‘Subscribe’ button. I’ll give you a little virtual high-five and let’s hear a quick word from today’s show sponsor.

Today’s episode is brought to you by our friends at RealtyShares.com. I love these guys. RealtyShares is a real estate crowdfunding platform that allows accredited investors to invest in pre-vetted real estate deals online. So investors can browse and then invest in both residential and commercial properties that yield returns 8-16% annually. As a Realty Shares member, you can passively invest in professionally managed real estate investments in a variety of asset types and geographies for as little as $5,000, all from the convenience of your living room. So to learn more and to get started with a free account, just go to BiggerPockets.com/RealtyShares. That’s BiggerPockets.com/RealtyShares.

All right, and the last thing before we get to the interview that you guys, I know you’re going to love. But the last thing—we’re doing a live webinar again this coming week. We do them every week but I want to encourage you guys to attend them. This is a second Quick Tip. People constantly are e-mailing me, telling me how much they love the webinars we are doing every week on BiggerPockets so I want to encourage you guys to come hang out, ask questions, work on this stuff together.

Every single week, we do a live deal analysis together as a group. You’re going to ask questions. You could even suggest what city we’re going to go and look in. So sign up on BiggerPockets.com/webinar and I’ll see you there. And with that, let’s get to today’s show. Again, today we’re talking with AJ Osborne. He is a self-storage hero. He’s my self-storage hero and you’ll hear why. It’s an amazing story. Absolutely crushing it and this guy has a really good heart for teaching as well, this stuff. So you guys make sure you stay tuned until the end with that. Let’s get to the show.

All right, AJ, welcome to the BiggerPockets podcast. How are you doing?

AJ: Doing good, can’t complain.

Brandon: Good. So we have a funny story about where you and I met. We were at the Disney Aulani Resort in Hawaii and I was sitting there walking with my buddy Enzo, we were surfing that day and we were at the Disney resort watching the sun set and I’m walking down this street in front of the water and somebody turns around and he’s like, hey, I know you. What did you say? I know you.

AJ: I was like, do I know you?

Brandon: I was like, I don’t know. It turns out you did know me from BiggerPockets so that was one of those weird times where somebody actually recognized me in person out in the wild, which made me feel like a celebrity.

AJ: And we got to spend a romantic evening together in Hawaii. It was wonderful.

Brandon: It was, the sunset and holding hands. It was fantastic.

AJ: Love at first beard sight.

Brandon: There it was. You had a much more epic beard back then. Apparently now you’re looking more professional. I don’t know, apparently you do real estate on a fairly large scale so you know, gotta impress the people. But that’s what we’re talking about today.

AJ: It was actually the wife that I was trying to impress. She made me shave it.

Brandon: I know how that goes. I have been resisting the wife’s hints like hmm, that beard’s getting kind of long. How long are you going to do that for?

AJ: Isn’t that itchy?

Brandon: It’s scratchy, isn’t it? And I’m oblivious, right? I have no idea what she’s hinting at. We’ll see how long that lasts. Anyways, David Greene is here too and David was not in Hawaii that day. So you didn’t get to meet AJ but I don’t know—I want to hear your story again and go a little deeper into your real estate. You have kind of a fascinating story, a journey, but why don’t we start with how did you get into real estate? What got you into that business?

AJ: Actually, that’s kind of funny because I was always in the insurance world. We ran a large insurance brokerage firm that my dad had started a long time ago and we worked with consultation and we had clients and we had a lot of employees but we never really were in the real estate game. We kind of looked at it from time to time but things just didn’t make sense. We didn’t see a lot of opportunity there, had purchased a few small properties, just for a little cash flow, a little hedge. And in fact, we’re in self-storage but our first self-storage deal that we did didn’t really make money. So it was kind of funny that we’re in this world a big way, but it really didn’t.

But when, at some point in time, I think we all get to a point in life where it just became a treadmill. We had to work every day. We had to go run out and get clients. And the clients brought in the revenue. But clients can fire you anytime they want and they do. And so when trying to project out our revenue and looking at mergers and acquisitions, it was unsustainable really. And unreliable for a firm. We had no venture capital. We had no big money backing us. It was just out there working.

And it got to a point, I think, where we were like, this can’t go on forever. And so we started looking at alternative options and we started looking at different ways that we could do business and where to put our money and at the time, real estate became very advantageous. I started looking at it really seriously in about 2012, 2011, when obviously during that time, there was a lot of market inefficiencies. And people were looking at money when cash flow is at very, very high value. And hard assets, they were attributing very little to any value at all.

And so we kind of looked at this and I started coming up with this plan thinking we can move out of a high-risk asset class, which was this business where 90% of our assets were people. They went home every day. We didn’t control or own our revenue. That was all controlled and ran by clients. And so it was fairly high risk. It was high cash flow. And we were paid well. We got paid well for our time but at the end of the day, it was trading time for money.

I mean, I referred to it as a treadmill. I woke up every day. You had to go. You had to hit it hard, really really hard and the moment you stopped running, the money stopped coming. And it was like, at what point do you stop running? That’s inevitable. It happens to all of us. We all reach a point where we can’t work to earn a wage anymore. Every single person.

Brandon: I love that you say treadmill because even when people are doing successful—you’re being a successful whatever, real estate agent, insurance guy, celebrity—you’re a musician or whatever. It doesn’t matter. It’s so much of a treadmill. You have to keep performing and keep doing your best and keep being awesome all the time. You’re always on. And you might be making the world’s best money, but at the end of the day, are you free or are you just trapped in a lifestyle?

AJ: Exactly. I think being rich and being wealthy are two very, very different things. Being rich means you earn a high wage. That could be millions. That could be $200,000-$300,000 a year, where wealthy means you don’t have to earn a wage. And I started looking at myself saying listen, my family—we’re rich. But we’re not wealthy. This game, this could end at any time.

And that risk for me, I was young and I was looking at where do I want to be when I’m 40, 50, 60 years old and I didn’t want to be running that hard. I mean, I was killing it and waking up at 5:00 all day, all night, and I loved it. I love working hard. I love getting up early and I love going all day long. But the problem for me was, this was not a compounding action.

As in this was simply trading time for money. The only difference was I was trying to increase my value. So if I could incrementally increase my value that people would pay me, or that time being traded, I would earn more. But I couldn’t take that capital, return it, and get the same return on that capital. It didn’t exist. So basically, you’re trying to take that money and you’re trying to stash it away in a bank account for hard times, which at that time, the government’s taken half.

So immediately, your wage that you’re earning is cut in half and that’s a hard game to play. And for me and my aspirations, with what I wanted to build, I knew that that couldn’t take me where we were going. So I wanted to find a—I call them financial or wealth vehicles. The thing that’s going to take you to where you want to go.

And I knew that that vehicle, kind of like a Ferrari, it could go fast but it would die hard. It wasn’t going to run very long. And I really wanted to compound my wealth. I wanted to build something that was sustainable and can run without me and every year, it would grow both in incomes and actual value.

Brandon: Just real quick, I feel like, so David here is the king of analogies. I feel like there’s got to be analogies somewhere in there with like a Tesla self-driving but a Ferrari is like a wealth vehicle that will go fast and then burn out. David, do you have any good analogies here? I’m putting you on the spot.

David: I was thinking of one right when you said that actually. What he’s describing is that he took his time to build something that started very slow but would be able to run on its own for a long time, probably more like a train. So it’s a long time to get going. It’s a lot of effort to get that thing. But once the momentum is going, it doesn’t take much energy at all and it’ll just coast for a very long time with very little work as opposed to the sports car which is what most of us who want to be rich do and its high performance is going very quick but it takes all of your attention.

You’re completely focused on driving that car and keeping it on the road, getting the most performance out of it. It’s very easy to crash whereas a train—shoot, it’s on a track. Where does it go? It goes in the same direction all the time. Once you have it moving, you can put your attention on something completely different and not worry about it. That’s what AJ has done.

Brandon: Do you see that? Analogy king.

AJ: Yeah, that’s great. We knew we could depend on David for that.

Brandon: We knew we could depend on David for something.

AJ: It’s a good analogy, right? I mean, trains aren’t sexy. They’re not. But that sweet sports car, that makes you look good and feel good and that’s what everybody wants. For me, I always looked at it like looking rich is nice but I really wanted to be wealthy. I didn’t care about how I looked or how others perceived me. I wanted to be able to leave on vacation any time I wanted, and go and not even have to come back.

So I started to create a business model that would be conducive for those circumstances, that I would be able to have better control over capital allocation. So for example, in insurance, when we gathered up our capital, we couldn’t deploy it and get the same return or a known return at that rate. That didn’t exist. So how did I get a return or a higher return? I worked harder.

But I wanted to create a machine that when I took in that capital, I could allocate that capital out into the marketplace and get a known return. So every time I deployed that capital, that capital would do the same thing. Therefore, it would compound and build upon itself. And frankly, I could deploy that capital without even being there. And that was a hard switch because getting trains moving—the slow ones—it’s a hard switch to go through.

At the end of the day, for me and my story, it kind of got proven. Brandon, I told you about, because sometimes you weren’t able to run on the treadmill anymore and I wasn’t. I got stopped in a very, very real way a while back and so it’s really kind of made it so I can survive challenges in my life and kind of get through things. It saved my family’s financial life by making that move that was hard, risking everything that we’d already made and risking everything that my family had done.

David: So AJ, let me ask you. You went from the sports car to the train but what was your train? What vehicle did you choose to make this move?

AJ: This was actually tough when you started looking at it because now you’re talking about, I have a financial vehicle that I know works. It’s a Ferrari. I want to sell the Ferrari and get something else but I know that it works. I’m trying to purchase something and I’m trying to build something that I hope works and for me, if you look at assets and if you look at trying to drive income and drive wealth, there’s kind of a simple formula.

And you can increase wealth by two actions. You can increase the amount of revenue that you gain or you can make that revenue more secure. That’s pretty much all that you can—increase benefits, shareholders, or secure benefits that are coming out to shareholders. When you have something like the Ferrari, it’s easy to get management to get involved, really supe that puppy up and go.

With hard assets, that change on the business model tends to be harder, right? There’s not a lot that I can do because the value is placed more upon market conditions than it is management team. I was just being very hands on and running a business and I didn’t want to lose that ability. So we tried to get the best of both worlds. I really wanted my cake and I really wanted to eat it, too.

So we moved into a real estate asset class that ran more like a business. Then we felt that we could apply our skills and our talents of running businesses into a real estate asset and make a change. And that was self-storage. Because when we went into it, it acts more like a retail business than it does any kind of real estate asset. You have customers.

It’s about revenue control and revenue management more than it is about real estate investing. And that was something that we excelled in and that was something that I knew I could drive valuations. I knew I could increase income, deploy more capital that can be returned to me, and then do it again. So we settled on the self-storage industry.

Brandon: So that’s interesting because I don’t think I’ve ever met anybody else who like started real estate investing and go, you know what? I think I’m going to buy some self-storage. I feel like that’s like 20 years into a person’s investing, they get into that kind of niche. But you started there and you said it was because it had revenue control and revenue management, I think is what you said. What does that mean?

AJ: So we bought some small facilities a long time ago and it was funny—we bought our first facility in a place called Bonner’s Ferry, Idaho. You don’t know where it is. Nobody knows where it is. I don’t think people in Bonner’s Ferry knows where it is.

But it’s up by the Canadian border and it’s a little facility that had no real way for us to change the value outside market conditions. We bought it in the first part of 2008, right? Perfect timing. We bought it as a safe place to go. And when we sold it, we sold it for like $50,000 less than what we bought it for.

But what we did is we learned a lot of things. We learned about that at that small level, we didn’t have a lot of control over the revenue, that we kind of needed to beef it up and we needed a larger size. But herein lies the beauty of real estate. So when we purchased that facility, it was 17,000 square feet. That facility, we bought for $665,000. We put down $275,000. We sold it at $625,000. So we made a loss on it.

But we knew where that money needed to go. So we removed it, we deployed that capital into another area, which was the suburb of Boise, Idaho, where I live. And we used that down payment because we had been paying off debt, we took out $295,000 and we put into an asset about $1.4 million. Within six months, we went in, and we made a bunch of changes to the rental agreements, to how management handled things.

We looked at vacancy. We increased street rates. We increased the actual customer rates. And we drove that thing within six months all the way to a $2.2 million dollar valuation. We turned around and we sold it for $2.2 million, netted basically a million dollars, then we turned around and bought another $4 million dollar facility. With that, did the exact same thing. Now that $4 million dollar property is worth approximately $7.5 million and we have about $4.7 million equity into it.

So we were able to actively change $250,000 into $4.7 million in ten years on just that one asset. That’s what we were looking for. I wanted to really, really, really drive both revenue but the valuations, I wanted to have control over that.

Brandon: So here, there’s like a lot of stuff I want to unpack in there but first of all, one thing I find fascinating is that that first deal, you lost money on it, right? So it’s like, well that sucks. So now I’m going to quit real estate and go sit on the couch and watch TV because real estate doesn’t work, right? I love that you took that attitude of great, I learned something—you know we’re going to take that money and we’re going to take the knowledge that we learned and we’re going to go put it in the next deal.

I would say, I was actually telling the guy yesterday on Instagram this, that if you do your first deal, the point of the first deal—we talk a lot about this on the show—the point of the first deal is not necessarily to get rich. The point of the first deal is to build three things—knowledge, experience, and social capital, which is like people knowing that you’re in real estate so you can eventually raise money or whatever.

So you built all three of those things. So yeah, the fourth thing that would be nice is money but that’s far less important than knowledge, experience, and social capital. Which is what you did. And then you took that and you dumped it into the next deal. First of all, nice job on that. I mean, I love that—I love hearing stories of people who struggle with the first time into real estate, because we all do. Almost everybody struggles.

AJ: Not just the first time. We struggled through a lot.

Brandon: Okay. I want to get there, too. But what was the difference between the first self-storage—and I do want to revisit exactly what that even means, a self-storage, so maybe we can hit that, too. What about that first deal that didn’t work out so good was different about the second deal which netted you a million dollars? That’s drastically different. So what can you say the difference was?

AJ: Okay, so the difference is to me, simply. It’s volume. We all have to start small, right? And then you have to build your way up that but you’re trying to go from an investment to a business. Everybody is. You’re trying to scale, right? I think people want to invest in real estate, love to have a duplex, but really, people want 800 doors.

I want three apartment buildings, I want to have enough cash to do whatever I want and keep going, and I want to retire. That’s really what people are wanting to build an empire. And that, or simply, they’re trying to get enough to hedge or to retire on or whatever it is and that’s not one duplex. You need more than that.

So getting from point A to point B is a very interesting topic forming. And when looking at it, when we came up with financial plans and when we were kind of looking at how to go through this process, there’s a lot in that. And we knew though, we didn’t understand how it was going to work out. We just knew.

I came up with all these financial rejections. We spent months and months. I planned this for like a year and even when we pulled the trigger, it was like, there’s so much that I don’t know that I don’t know. It’s just like infinite of what I don’t know.

We knew that our premise was true and we knew that it could be done. And we felt confident in our skills to do it. And we dove in. We knew that our investment theory was correct. So when we looked in and we wanted to create a real estate business and transfer, I knew we basically needed a few things. In investment, you buy and it pays you some cash. That’s secure, right?

But if you want financial independence, you need to move over and you can really do that—let’s say I have ten duplexes and that creates some financial independence, right? But if I want financial freedom, I really need an operating business, which means a couple of things. It has to drive revenue. It has to be able to pay me. But then it also has to give excess revenue that I can take back and deploy at a known rate of return, right?

The only way to get there is through volume and our margins on the less doors you have, the smaller your margin is, because the operations of a ten-door apartment complex are basically the same as a 50-door. It’s the same with self-storage. Whether I have 200 doors or 800 doors, my expenses associated with that are fairly fixed. The difference isn’t that big. The only difference is my margin.

I knew we had to get as quick as possible to a larger margin business model to where we could have more cash to deploy quicker to scale our business faster. And that was why we made the switch. The first one, we knew that the economy, only when we’re looking at the market and the business model, we have a value add strategy, right? We look for underperforming businesses that we can take and apply our model to. It will increase the value and we believe increasing the value is done through increasing the overall revenue from the business, right?

So I need markets that are conducive to drive the revenue growth. I also need assets that are underperforming, in comparison to their peers in the market, so I have a bench mark of where I know that the revenue can be met. So I need to—this isn’t guess work for us. We want to know exactly where that asset will end up and how far we can push the revenue from that asset.

David: AJ, let me jump in here. I want to make sure our listeners understand exactly what we’re describing because we’ve given a lot of reasons why self-storage works but we want to talk about what it is. So basically, you are buying big buildings where people go and say, hey I want to rent this space to put all my junk in. That’s the gist of what you’re doing, right? People rent the space from you to keep their things.

And those things are valued very similar to how we value multi-family commercial properties. They generate a certain amount of income, they have a certain amount of expenses associated with it, you get a net operating income, you divide that by a cap rate. Boom. That’s how much the thing is worth. Am I correct?

AJ: Exactly. Right on.

David: So what you’re describing when you talk about the economics of an area is that this is a scenario where people are likely enough to have a disposable income and have enough items that they’re not going to want to keep in their garage, but they’re going to want to rent a space from My Self-Storage. Am I correct with that?

AJ: Yeah. Self-storage demand there goes into a lot of things when you get into self-storage and demand. First of all, you know about storages. We talked that it’s more like retail. The reason it’s more like retail is we sell lots of different products. I mean have 15 different units, sizes or types. So different customers come in with different needs that we’re trying to meet.

I also sell other things like products, I sell insurance, to our customers. So there are lots of different aspects of demand in the self-storage industry. One of the main ones being that we are businesses. With lease rates rising and home businesses on the rise, lots of people, they don’t want to build. It makes no sense to build a $250 a square foot when I can rent at a fraction of that. So a lot of people are moving towards running their business out of self-storage facilities.

So we try to offer lots of options for those individuals. When we look at a market, we look at our customers that are utilizing storage and lots of them, we don’t like. So we will purchase underperforming vacilities and in lots of cases we’ll kick out 30% of the tenants. Because they are not the tenants we like or that we want to be. We’re trying to target in on those high-revenue customers that also give us the least amount of headache. Because we have people coming in every single day all day long. Does that make sense?

David: So tell me, what do you look for when you’re looking for a low-performing property, like an underperforming property? How do you know that? How do you recognize it?

AJ: So we look at the curb appeal, if it’s glass set, we look at the technology that is being used, not only within the property management system, but also the marketing strategy, how that’s being deployed. We also look at the management as far as an employee level. So is this a hands-off owner that’s letting the employees do everything and they’re not doing a whole lot? We’re trying to find those types of assets that are really looked over. They’re underperforming.

The current management isn’t very interested or doesn’t know how to properly run it, which makes it—we have higher vacancies. We have what I call unrealized revenue, which is units that are occupied but the people aren’t paying, which there can be a huge—we’ve had 10-15% of occupied space that drives no revenue at all.

So for us, those are all—and once again, too, are they selling other lines of service? Do they sell tenant insurance? Do they sell boxes? Do they sell all those kinds of stuff? If not, we can go into that facility, we can benchmark the other ones around it. But we know how our storage facilities perform, right? So I have an overlay of what my current facility is doing and I take the numbers of that existing facility, I overlay it with our numbers and it spits out my value. Because for us, value is relative, right?

And there’s a lot of ways that people come up with values. Most, as brokers say, the value is because Bob will buy it at five million. That means, that’s what the value is. We disagree with that completely. That does not attribute—price and value are not the same thing. They are not the same thing.

And so we come up with a value on that facility that we’re willing to pay and the difference between its performance and our performances are a margin of safety. And when we buy it, we want it to be a wonderful, great performing asset. But we expect it to just be awesome when we’re done. I’m looking for a 20% cash on cash return and a lot of them, I’m wanting to pull my money out within two years and deploy it elsewhere. So we’re looking for pretty big changes in that facility to drive the revenue.

Brandon: I love that. One thing I really like that you said here because it applies to everybody, whether it be self-storage or your first single-family house or duplex is that there is that difference between price and value. Somebody will say how much is the property priced at, like what’s the price at? That makes no difference to me, really, other than kind of gauging how competitive it might be.

But I want to know what’s it worth to me? I call it the homerun number. Every property has a number that makes it a homerun, that gives me my cash in cash return that I want, that gives me my overall IOR or whatever. Every property in the world has that number. Now, if you’re in Detroit, there’s a lot of those negative numbers.

But still. There’s like a number everywhere. So our job as investors is to get good at finding that value. We know how to identify what that value is. We can then go after it and we’re going to get rejected left and right, all the time. But we stick to our value. We stick to that number that we know and we get it. Is that kind of how you run your business then?

AJ: I just could not agree more. When we look at it and people are trying to tell us the price and value, we basically are like, you give us your numbers—I don’t really care. I’ll come up with it and then I will give you the price and whether that’s okay or not. And we don’t buy any on-market deals because I don’t believe that markets accurately value assets.

Brandon: Explain that.

AJ: Okay, traditional theory is you have like EMT, Efficient Market Theory, where all assets are priced according to the value of its worth any given time because it’s simply whatever the demand is. The problem with that that we have, those markets aren’t efficient at all. That depends on market sentiment. That depends on future. That depends on capital—is there enough capital in the market to make a market sufficient?

And to say that an asset that I buy is worth $2.5 million and three years later, it’s worth $10 million—that doesn’t make sense. It’s just a ludicrous way to attribute value to anything. That’s not how I buy my home. That’s not how I buy anything. When I look and I value a property, this value to me depends on what I can do. And this is important because when you have other buyers in the market, their value may be totally different than yours, right?

Brandon, when you buy a property, your price that you’re willing to buy property for may be totally different than my price because we are doing totally different things and we need totally different things. Perfect example. When we went into an auction, the state was having an auction because they took over and bought a storage facility. It shouldn’t have done it. It shouldn’t have bought it. It was competing with other businesses and so they got in a lot of hot water and they had to sell these things at an auction.

So everybody came to this auction and there was a lot of people competing for this asset. And we knew right where everybody was going to be at because they had an appraiser and the appraiser sent in saying it was worth about $3 million. Well, we went in and got a bunch of banks in a room and we told them, listen, that is incorrect. And they’re like, what do you mean? So we showed them.

We took what the asset was doing at that time, which they had not had a rental increase in over ten years—we had a similar asset a mile down the road whose revenues were at 60 plus percent higher—the exact same asset. And so we went in and said this asset’s value is much higher than that and we’re going to come in and purchase it at x or this is where we’re going to go.

We went in, we won the auction, and everybody is like, how can we get so much higher than the valuation that they gave us? Well, that valuation is not our valuation. Of course, we bought it. The next month, we upped rates and in some cases, it was 150%. So it was 60-150% the next month, immediately added millions of equity onto it and when you know what value is to you, that’s when you find deals.

So if I know what I’m looking for and what I can do, how I can turn that asset around, then I know what to look for. But if I don’t, then I’m simply waiting for brokers or banks to tell me what things are worth or what I can buy. I never let banks tell me what I can buy, how much I can lend, and never let brokers tell me what an asset is worth ever. It should be me because I’m me. I know my bank. I know my strategy. And I come up with an evaluation because I’m the one that’s going to own it.

Brandon: I love that. There’s so much in there. I want to kind of take it from the self-storage again down to like something that a lot of our listeners, maybe like a duplex, right? Or a single-family house. Here’s how I see that in the same kind of way. Like let’s say I go out and buy a single-family house.

One of my little tricks that I do if I want to buy a single-family house, I look for a single-family house with only two bedrooms that has over a thousand square feet because in my opinion I know that I can easily add another bedroom in there somewhere.

So in other words, the value of that house to everybody else is what a two-bedroom house is, but to me, the value is what a three-bedroom house is. It doesn’t matter, to go back to the price value thing, it doesn’t matter what they priced it at. An agent is going to price it as a two-bedroom house because that’s how they think but I think what could it be? Could we raise the rent? Could we change something? Could we rehab it? What value makes sense to me?

When you look at deals that way like you’re doing, like you said, that’s how you find deals, is by thinking outside the box, trying to figure out a different way to give value or maybe a different way to do the deal. In fact, I know one of your stories that we’re going to get to here in a little bit is about the K-Mart. But a perfect example, I think of that. But before we get to that, I don’t want to get too far yet—

AJ: I think I kind of want to hit on what you’re talking about, right? It’s a good point. When people ask me why I don’t invest in single-family homes or duplexes, I say it’s simple—it’s because of how the asset is traded in value. We’re looking at housing right now but it’s multi-family. I want ten plus units. The reason being is when you have a duplex or a single-family residence, that asset is traded on whatever the market deems it’s worth, not on what it makes.

So it’s because Suzy just loves the trees in the backyard. That’s wonderful for Suzy but that has nothing to do with me as an investor. Now, Suzy is not going to buy a ten-unit apartment complex. I tell people, you need to get in, buy good foundational assets, but you need to as quickly as you can, move out into a more commercial asset basis.

That’s where you’re going to find the deals. Because that’s where you can manipulate the value. I don’t even want to say manipulate but you can change the value. You can increase the revenue. Because those markets are trading based upon the revenue, not based upon how somebody feels or what they want. And that’s a hard market to be in.

And people that have got that down are really good at it, but all of a sudden, when markets change like in today when there’s lots and lots of buyers, prices skyrocket and they are unable to find deals very well. Well, in my market, it’s still easy for me to find deals because this storage facility makes x amount. That’s how much everyone wants to buy it. So if I can make it make 30% more than that, I’ve increased the value.

Brandon: That’s why I love multi-family. That’s why I even bought mobile home parks and things like that, because I love that idea that I can add that value. I can find a way to add, increase income, decrease expenses or whatever. I can pay market rate what every other investor is paying but if I’m good at finding those hidden value things, like we have an offer right now on a 61-unit mobile home park and the units aren’t sub-metered. The owner is paying all water, sewer, garbage.

So first thing I’m going to do, switch over and make sure the tenants pay their own water, sewer, garbage. Instantly adds half a million dollars in value. Boom. That’s why we like those larger properties. I know you had a question, David, but I’m also wondering—I want to know how you are finding these deals and then I’ll let you ask yours, David. How are you finding them? Auction is one of them. 

AJ: We’ve gone a few different routes. We do have a connection with the broker that I made, a really good friend of mine, we sat down years and years ago and we just talked about what we’re talking about today. We’re talking about valuation, how values come up. And I mean, first meeting, we had four hours.

And he knew, first of all, I knew what I was talking about. He knew that we could do what we said and I let him know very clearly, this is what I’m looking for. You bring it to me, I buy it. You put it out on the market, we’re not having that discussion because that’s not how I value assets. It’s not what other people buy.

So when you come to me and say it’s worth $7 million because we’ve got four buyers with $7 million, I say who cares. I’m not them. That doesn’t matter. So he brought me off-market deals.

But two, where a lot of our assets come from, it’s knocking doors. We’re literally going in the city and going from facility to facility. Hi, AJ Osborne, I love your facility. Why don’t you talk about the industry? Why don’t we talk about the market? Let’s go to lunch. We met with banks that had underperforming assets and we met with short guys that were having to short-sell.

There were so many different avenues that we’ve gone but most of it is really hitting the pavement. It’s going and meeting with people. It’s talking to other people. And also, as you guys kind of said, you do deals so people know you’re the real deal. If you’ve never done a real deal, most people that have deals are not going to talk to you because they don’t even know if you can pull the trigger.

So we did have a little experience, even though the experience was not making money. We lost money on that first deal. But we knew what we were talking about and we were players in the market. So we were able to have those kinds of conversations with people to try deal flow. And most of them are organic, even with the broker that’s bringing us off-market deals. I went out and found him. I made the call. And I built that relationship.

But other than that, I’d say probably 50% of all our deals were us. It was knocking doors. It was meeting and shaking people’s hands and getting to know the market and once again, we passed up endless amounts of deals across our desk.

David: AJ, how many deals have you guys done since you got started in 2010?

AJ: Not a lot. 12?

David: You have about 12 properties now and they’re all self-storage?

AJ: Yeah. So we currently have 11 properties so we’ve done actually more than 14-15 but we sold a few of them. It’s kind of an example that we’ve had before. We’ve had 11 properties which is just over a million square feet and we have like 5,500 doors, four states, Idaho, Oregon, Washington, and Nevada. And two, when you’re talking about how we find deals and where we go, our underlying investment theory or philosophy has changed dramatically and is continuing to change.

How we find deals today is nothing like how we found them four years ago. We’ve had to evolve completely. If I’m trying to get my return that I know that I need to meet, I’m having to do things differently which kind of comes back to the Super K-Mart thing that we were talking about there on our romantic evening on the beach.

David: Yes, well I think your struggles are very similar to every other investors’ struggles. That’s what Brandon and I talk about in today’s market, you usually need to make a deal. You’re not just going to find a deal, right? So it’s not like going shopping. Like oh look, it’s on sale. I’ll buy that one. You’re hunting.

So I want to hear about the K-Mart but before we do, can you briefly walk us through a hypothetical example of how you would find a deal, how you would fund it, what you would do to improve its value, what you would expect it to be worth, and then we’ll talk about the Super K-Mart.

AJ: Absolutely. So let’s say that I’m going into a market and for me, these things would exist in commercial. This would exists in multi-family. This would exist in storaging. We’re looking at those other kind of deals. I’m going into a market where I believe I can be competitive. That’s the first thing. I’m not walking into L.A. from Boise, Idaho being like, I want your best deal. Talking to brokers—I’m not in that market. I don’t know it. I don’t know how to compete with those people. I stick to where I know how to compete and where I know that my model can drive that value.

So when we started out, we went looking in strong second-tier markets in our area. So we’d go into a market. We’d list all the good locations and then we would try to find all of the owners that were basically offsite owners, right? They had no idea—a lot of them lived in California. They hadn’t even been to the site in four to five years. That’s exactly what we want to see. That’s the first thing.

Then we looked for untaken care of assets. Most of the assets we’ve purchased, we put $100,000 into them right after we purchased. We want it to look rented out. We want the curb appeal, good location but not a very good curb appeal. Then we want stagnant rates. We love the guys, when we walk in and somebody is like, we’re 100% occupied and we’ve been 100% occupied for five years. We’re like, can we buy you now? Like I want to buy you right now.

Because what that means is you’re totally uncompetitive in the market. You should never be at 100% occupied. And so, we walk in and I’m like I would much rather be at 90% occupied with 40% higher revenue than 100% occupied. And then we look over and we say, how does your collection process work? And they’re like well you know, a lot of these people are my friends and we do this but we want a really loose collection process. And we want basically no online presence.

So when we’re looking at it, how are you getting your customers? The question is, they walk in. That’s what we’re looking for. Like you have no strategy. And then we look at like sales process. We look at overall process and procedures. Do you have a manual on how you handle things and when all those things come back is no, there’s usually no extra lines of revenue, any of that.

That is a prime, prime target for us. So then we list them. I put them in a database. And it’s from there, then we find out who the owner is and then we start contacting them and reaching out to them. And a lot of times, we’ll say listen, I’m going to pay you more than what your asset’s worth. Because it’s true. If I’m going, I’m paying a 5 cap when I should only be paying you an 8 cap, but that’s because to me, it’s a 12 cap. So I know immediately it’ll be a 12 cap.

Brandon: You know, that brings up a really, really good point. Whenever I talk about any deal, if it’s a larger multi-family or I bought an apartment complex or a mobile home park or whatever, people are always asking, well what kind of cap rate did you get on it? I’m like it doesn’t matter what I got. It doesn’t matter at all what cap rate I got because that’s not the cap rate I’m going to leave it at. I might pay a 2 cap or a zero cap, it doesn’t matter.

AJ: Exactly.

Brandon: Good point.

AJ: When looking at this, and this is important—we always talk about occupancy and cap rates don’t matter. The only thing that matters is revenue. How much money you make and how much money you keep. That’s it. So when I look at a property, how much money can I increase the revenue by at whatever price I buy it for, and then how much does that equal under my pocket? I don’t care what a broker says its value is, I don’t care what other people are willing to pay for it and I don’t care what cap rate it is. I come up with my number.

So we run it through a system and overlay it with what we know we can do and I say, this is what we pay you. And some guys are like, this is like a 4 cap. Done. I’ll take it. But then other times I’ll do that and I’m like sitting there going, whoa, you’re asking so, so high that it doesn’t even make any sense and that’s nowhere to go with this and we passed those off all the time and we see those eaten up all the time in the market. So we don’t care.

So we look a underperforming, business model that we can come in. Then kind of vice versa, when we talked over the facility, changes are made almost immediately. The personnel that’s in, we rarely leave it and the main reason is they’re used to having an underperforming business and they are the on-site personnel that most of the time is at all the control because the owner is a hands-off owner living somewhere else. That’s not how we do things.

When we come in and what we apply is usually too strenuous for them or they don’t like it. So we need to get rid of bad habits. So the first thing is, we almost always replace the personnel. We bring them in and we train the new people coming in. We have policies, procedures, manuals that we go over with them.

We have a trainer that comes in and trains them and we immediately come in and put a robust marketing strategy in because we know we’re about to evict a lot of people. Not all tenants are created equal. Not all customers are created equal. We know how it works. If you have people that are looking purely on price. You have people that are looking for convenience and then you have people looking for quality and what they’re willing to pay is very much associated with those three things.

We’re looking for convenience and quality. We want all the priced people gone. And so we usually get rid of all those people and then we’re bringing in new people that care about what we’re doing. We’re turning the asset around. We’re making it look better. And we systematically raise the existing rates of the current existing customers, not just the street rates. We go in and we start raising existing rates they want to get them back in line with the market.

Brandon: You know, I have never heard it quite put that way before but I love that you said there’s three types of people, people who care all about price, convenience, and quality, right? And that totally applies to every aspect of rental property investing as well. I mean like, single-family houses, duplex, apartment complex or whatever.

There are people who value different things so what do you want to be? Do you want to be an investor who focuses on price? Then great, that’s probably going to be the slumlords, right? That are offering the $200 a month rent by the hour. So for every convenience, you’re located in a great area or quality. I feel like I’ve shifted from price, which was where I started. The cheapest rentals I can get. Keep them as low as possible.

I’ve shifted to quality, doing the best work I can because I realized there was a void in my area for good quality rentals. I was like, what if I was the best rental? What if we made our houses look like HGTV? Would there be a market for that? And I found there was a tremendous market for it because people were really looking for that, the husbands wanted to impress their wives and the wives wanted to live in a nice house, whatever. We found that.

So again, I think that everybody should just rewind that last five minutes and listen to that again because again, it applies to everything here. Super, super good.

I want to move onto the K-Mart thing but before we do that, can we get your story first, because that kind of plays into it. I don’t know which came first, the K-Mart or the story of your medical thing. But I want to hit that. So yeah, take it away. I want to hear about that.

AJ: Sure. So yeah, my story. It’s actually funny because it’s not even a year ago, almost a year ago. But I was living in a pretty good life at the time. I was running our state’s largest brokerage firm. They paid me very well to do that. We got to travel. We lived a great life. We were building this huge real estate business.

In one week, we’re down in Naples. It’s the PGA Tour. We’re taking clients down there and we’re doing business meetings. It’s just awesome. We’re flying back and forth and we’re going around the country. I’m hitting my best friend’s wedding and one of my best friend’s wedding and just partying. I’m coming back and doing yard work with the kids. Life’s just great.

I just had a new baby. Our new baby was like five months, right? And just the best baby, cutest thing ever. So I was at the top. I was just like, life can’t get much better than this. I had four kids and life was going really good. So I had a late night and then we had been planting all the trees so I wasn’t feeling at the top of my game anyways. So I was sick but I didn’t think it was much. But that night, I can’t even explain it. I was not doing good. I was feeling really sick.

So I was like, honey, you’ve got to take me to the ER. This is crazy. No doctor’s offices are open. It’s like 10:00 o’clock at night. Went to the ER and I’m in there and I’m like, something is really wrong. They did all these tests on me and everything and sent me home, said there was nothing wrong. So I went out to the parking lot, puked in the parking lot for a while, then went home. That night, my legs were just killing me so I went and got in the tub to just try to soak them because they were so achy.

And I was in there for a while. I think I may even have fallen asleep. But I went to get out of the tub and my legs didn’t work. So I crawled out of the tub on my stomach, pulled myself out, and I called for my wife. She came in and picked me up and drug me to the car and got all the kids in the car and rushed me down to the hospital where I sat for a long time as doctors argued over what was wrong because I was in perfectly good health. There was nothing wrong with me besides the fact that I could no longer walk.

And long story short, very soon I lost my ability to do anything including breathe, within a matter of hours. They had to trache me, put me under, and I was put into a coma. And when I woke up out of my coma, I was paralyzed from head to toe. I could not speak. I could not do anything. I was living off of tubes and the hospital was doing their best to keep me alive. And I sat like that for ten weeks of not speaking and they were on life support for three months where I was breathing out of tubes and everything like that because I was totally paralyzed.

And I slowly got stronger and was trying to cut my weight—what it is, is I had something called Guillaume Barry. My immune system went nuts and my white blood cells attacked my nervous system and it ate it. So I could feel everything. You think you’re paralyzed and you can’t feel. No, in fact it was the opposite. My nerves were on fire. I felt like I was being burned alive and crushed all at the same time and I laid paralyzed, staring forward, screaming in my head trying to tell people I’m dying. But I couldn’t speak. I couldn’t say anything.

And this nightmare went on for weeks on end. I couldn’t sleep. I couldn’t function. I couldn’t do anything because of the amount of pain. And you know, the stories that are important to me, obviously the reasons to change my life. But I lost my ability to work, right? So that treadmill that I was running on that was just awesome—I was great, I was on top of my game running into that. It ended. And I had no control over that.

And I was a completely healthy guy. I’m a big outdoors guy, big backpacker, skier, fly-fishing. I am out all the time, getting up at 5:00. I go a hundred miles an hour all the time. I wasn’t used to not only not doing anything but my life as I knew it stopped. It ended. We were just lucky I didn’t die. And my treadmill ended. I lost the ability to provide for my family.

But out of all the people, and we reached out across the United States—it’s a fairly rare disease this happens—not a disease, but it’s a fairly rare thing that happens to people and one of the biggest concerns everybody has is that what am I going to do now? How am I going to make a living? And will I get better in time? And honestly, real estate saved my family’s financial life. My wife didn’t have to go take a job. She could sit in the hospital and take care of me, four kids, and she didn’t have to worry about that. And when I came home, she spent time making sure that I got better.

And that can’t be put into words. Trust me, that’s better than any Ferrari you could ever have. This stuff that we’re talking about, it’s real and it’s really, really important. It’s something that everybody has to do. Financial freedom isn’t a good thing. It’s not a choice. But sometimes your treadmill will stop. I don’t know if that’s 62.

I don’t know if that’s whenever but how are you going to live when your treadmill stops? People think because they are in their 30s or in their 20s, that’s something that they worry about later on in life. That’s not how investing and how these things work. So I’ve gained a whole new passion and a whole new view of passive income and getting off that treadmill. Let’s just put it that way.

Brandon: That’s remarkable. It sucks that you had to go through that but it is a very strong demonstration that everyone’s treadmill does stop at some point and hopefully it doesn’t happen to our listeners the way it happened to you but—

AJ: I agree.

Brandon: But you had that backing. You could survive and I think that’s such a powerful illustration. But you’re doing better. Obviously you’re here. Are you walking and all that?

AJ: I’m doing better than when we last saw each other on the beach.

Brandon: You were in a chair but you stood up at some point.

AJ: I had a scooter. It was like that colorful red scooter, yeah.

Brandon: That’s right, yeah.

AJ: I stood up a little bit but I’m pretty much out of my wheelchair completely now. I’ve got braces around my legs but they’re coming back. It’s coming back strong so I’m back to doing things I love and working full-time now and I’m just wanting to hit it all the time. I’m getting back slowly but surely. I’m doing much better.

Brandon: That’s fantastic. All right, let’s go to the K-Mart story because this is something that just fascinates me with what you did there and it’s something that I totally want to repeat this exact same thing. So I’m going to learn from you. So what is the K-Mart thing?

AJ: Okay, so this was a very unique opportunity that we had. One of the things that we look at when we’re going out and we’re trying to cultivate opportunities to invest in, we’re once again looking at ways to drive the returns that we need and market conditions. This just becomes harder. Now, there are some good things though about the market conditions like demand is super high. We had done one a few years ago but we’re not developers. That’s not really what we do.

We believe we do a good job running businesses and we believe we do a good job at turning around failed assets, managing, that kind of stuff. But we had an opportunity. I met a guy named Reed and he was out in Nevada and he had come up with, I’m not even exactly sure how he found a Super K-Mart that had gone bankrupt. And he was working with the city to permit the thing and change the zoning for storage.

And he came and he was like hey, do you want to come in? Do you want to do this with me? And immediately we started looking at the area and this idea of a conversion had interested us a lot. How to repurpose a type of asset that is no longer needed. Well, for a facility this size, we’re talking about 163,000 square feet. We could purchase this bankrupt Super K-Mart. We sold off the parking to apartment developers that are going to build 400-doors. And we could do this for $3 million.

We purchased the whole thing for structures existing and then we blew out the walls on the side of the Super K-Mart. We made a road that runs through it with dry miles that you could pull off to the side, unload your stuff, take it down through. It has an office, the works, it has back-in RV parking. It’s really cool. We had to install this huge ventilation but all in said, this huge facility, we got this thing in and done and it probably was about $7 million, all said and done.

But at a 90% occupancy at the rates that we’re currently charging and starting to fill up at people now, it’s worth $20-24 million. So it’s a rare opportunity that you could find. It’s right on the side of a ginormous freeway and the population density around it is astronomical and when we were looking at the demand of the market, we were going to our competitors which weren’t very good. They not only had no availability at all, when asked to be put on a waiting list, they said no because I’m never going to call you. They just had too much room and were never going to have any kind of availability.

So it was a very rare opportunity to purchase a distressed asset, convert it into a very high used asset, and we could drive a lot of revenue from it. And in an area that had super high demand. So it was kind of the perfect scenario for us. So we dove all in and we’ve been working on this thing for a last while. And they worked on it a lot while I was in the hospital. But I just got back from being down there and it’s looking amazing. We’re super excited about it.

We’re looking for more opportunities to convert retail space that is now mostly unused. People aren’t building big box stores and now cities have these massive empty retail centers that they don’t know what to do with, that the city doesn’t know what to do with it, investors don’t want it. It’s not like Toys R Us is going to go buy it, it doesn’t exist anymore either. So now all of a sudden, how you utilize this huge empty box that nobody wants.

And we’ve got a pretty good option and alternative for the cities. It looks nice. It’s really, really well-built. They were very happy to let that in. And Reed, the guy we worked with, he did all the permitting and worked on it. That’s key for us. You’ve got to find the partners you can work with. That’s not our strong suit. I’m not good at the zoning and the permitting. He lived there. He had the opportunity. He could do it. He needed somebody that knew storage and could run it and that wasn’t him. He didn’t own storage facilities. He couldn’t run it. So it turned out to be a pretty good partnership.

Brandon: That’s so cool and so many good points there. I mean, there are a lot of problems with these retail stores, left and right, they’re going out of business because of Amazon and online shopping and all that. And you are able to find a way to use one of these assets for something that I can’t imagine going away. I mean like, people increasingly have more and more and more junk all the time. That’s not getting better from what I’ve seen.

AJ: And two, if you look at other markets like secondary markets like Nevada and things like that compared to first-tier markets, the discrepancy of price per square foot for building and buying everything like that is astronomical. So as these second tier markets have lower wages and prices that are going up, we’re actually seeing higher and higher rental use. We’re seeing people are building smaller homes because you can no longer—a dollar doesn’t go as far as it did. And people are downsizing. But yet, at the same time, things are getting cheaper, right?

So it is way cheaper to buy consumer-oriented items today than it ever was in the ‘90s or the ‘80s, right? I mean there was no special financing for your motorcycles. There was no financing for a new fridge. None of that stuff existed. Where now you can finance everything and two, we make it wherever, China or somewhere else and it’s cheaper. It’s even cheaper now because of Amazon, so our consumption is actually rising.

And two, it’s easier to start businesses with the advent of the internet and people don’t want to go and lease really expensive space so people are using storage facilities where we can do it on a large scale and you get the volume discount. You get the benefit of that. So it’s actually a really good model for people coming in.

The downside to self-storage is it’s not incredibly passive as most people would like it. It’s an actual business model that’s running. We have employees in our holdings company that have to run all the managers. I mean, we’re up to 30 something employees. So we’ve got to run a business. But if you put the right management team and the right policies and procedures, then you can leave.

Once I came out of my coma and once I finally got able to talk and able to move and everything like that, my assets all made more money than they did when I went into the hospital. They were worth way more money than when I went into the hospital. And I didn’t do anything. I literally just lied there. I couldn’t do anything.

Brandon: I think we’re going to call this the coma test. It’s like if you went into a coma for ten weeks in your business or for six months, if you went into a coma, would your business thrive? And I think 99% of our audience would say no, it would probably fail. And I think that’s a really good thing to aim towards.

Let’s say it’s the coma test. That’s maybe insensitive. Like that’s where we want to get our businesses to. I love working. You love working. David loves working. We like working. But we need to have the ability to go into a coma for six months or go travel the world or spend time with your family or your friends, kids, whatever.

AJ: Again, you need to be able to get the return on your time and return on your money is what this is all about. You’re trying to get more for the time that you’re spending. So I love working but I just want to be able to compound. So my time is more effective. Every single year, I want my time to be effective. I want my returns to expand and grow. When I was on that treadmill, that changed very little and I can’t run that treadmill anymore, quite literally. I cannot run on a treadmill. But I can’t do that anymore.

But yet I can still maximize my time so I can still maximize my return. I built a financial vehicle that when it pays me, I can take that return capital and deploy it again at a known rate of return. It’s not like, well now I’m going to invest in the stock market and I hope it goes up. No, that’s not how it works. I know when I take how much of that return I’m going to get, when I’m going to be able to pull my money out, and reinvest and do it again.

I can compound my time and that’s really what I want. I want to be able to grow exponentially. I am a huge believer in progress. And when you’re on that treadmill, man, does that really get frustrating when you’re running and you’re running but you’re not going anywhere. And that wasn’t the case for me. I wanted to move. I wanted to go further in life.

Brandon: Yeah, so good. So good. And I love that you mentioned exponential growth. I just did a video I released a few weeks ago, depending on when this episode airs, but I released it a few weeks ago on the BiggerPockets YouTube page. It’s all about some people grow linearly and that’s fine, but if you want to achieve like financial freedom fast, you’ve got to grow exponentially so everybody go check it out on BiggerPockets YouTube page, YouTube.com/BiggerPockets.

With that, I want to transition. This has been unbelievable. Your story is fantastic. I am learning a ton off this self-storage stuff. I’ve never done self-storage. Now I want to. It’s like the shiny object thing. I get it every time. But super cool. So all right, I want to transition to go to the Fire Round which today we’ve got some questions that are related to self-storage. So let’s head over there now.

It’s Time for the Fire Round.

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All right, let’s get to these Fire Round questions. Again, these come direct out of the BiggerPockets forums so they are real life real estate investors that are in our forums asking questions and specifically, let’s get some self-storage questions.

Number one, this is related to a storage thing, but what are conditions that make for an ideal development opportunity for self-storage? Is there a pro and con of just buying an existing facility versus just building one? How would you approach that?

AJ: The thing you have to remember with self-storage. And the good things about it is you can really drive value. The bad side about it though is value and erode really quickly. It’s not like an apartment once you fill it up, you have leases, right? Where these people are in for a certain time so you have just guaranteed cash flow. Self-storage is month-to-month. So people can come in and they can leave that next month. And you could even give them a month free and they can come in and leave.

So when you’re developing, you need to be very, very knowledgeable about what’s coming up around you because if you develop and three other projects come up, well you can either lose your existing tenants or never get them at all. Demand is finite in self-storage. If you look across the board historically speaking, on average, self-storage demand has never really gotten to 10% and never really gone above it across the board. That’s just never changed.

And there’s a lot of economic reasons why but when you’re going to develop a storage facility, you need to analyze first of all, the demand, and then you really need to understand those market rates. Because today you’re buying and you’re developing at a cost basis that is much higher than the people surrounding you than they did. So you have to charge a rate that is higher than your competitors to make the same returns that they are.

The question is can you? Is there enough demand that you can drive that rate and not sit empty? And so when I look at it at market, that’s the first and foremost. I’m looking at high demand and I’m making sure that I’m going down and I’m talking to the city and I’m saying, what areas are permitted for self-storage? What areas are zoned for this and who’s looking at it? Do you have anybody that’s building now?

And I’m getting really cozy with the building department and the city, trying to understand what’s going on. And I’m going and I’m talking to all the competitors. Are you building more? Are you expanding? What’s going on? The last thing you want is to be at a cost-basis that’s much higher than your competitors. You wield and you’re not filling up.

And that’s a dangerous trap that self-storage people can get in. Too much building goes on, then you have a massive contraction in that local market. And you have a massive increase in vacancies and you then have to also cut your rents to try to increase your occupancy and your revenue starts to really go downhill.

David: Yeah, that’s a good point. On that note of vacancy being a problem, can you talk to me about the abandonment rate? What is your abandonment rate and that’s being defined as how often do folks put stuff in storage, pay for the first quarter or year and then disappear?

AJ: So abandonment rate, that really varies massively. Ours is at high. So I look at it as what amount of revenue are you not collecting? Ours is at 3-4%. When we started, it was like 6-10%. And a lot of facilities are even higher than that. So those abandoned units, that unrealized potential revenue that you’re not collecting, that can be high depending on your tenant.

Now we have very strict guidelines for fall season procedures for our managers that they have to abide by. And our late fee policies are very strong. I mean, you’re coming in and we’re hitting you hard with late fees. We do not want that kind of behavior. The main reason is we always lose. If someone abandons their unit, no matter how much late fees we charge them, we always lose.

The reason being is we can only collect the rent due. Anything above that, we actually have to give back to the tenant. You don’t get to keep that. So if we sell off their unit and we only collect $1000 but the rent due to us is $200, we get that $200 but then we have to clean it out, we have to evict them. Our manager has to spend all the time.

And then we have all that unrealized potential revenue when it could have been rented out to an existing customer. So trying to lower that down as much as possible and being very actively involved and having policies and procedures that are set in place and having contracts that are really, really strong and have strong language on that will really, really help you out. You really need to drive that number down into the low single digits. It really needs to be under 5% of uncollected revenue.

Brandon: And that advice applies to everybody, landlords as well. If vacancy and evictions and people just not paying rent, all those things will kill your business. I see it over and over and over. Landlords who are not strict enough. They don’t have the processes and procedures, they don’t have it written. They don’t have a good system for collecting rent and so they just let things slide and you do a little bit more and a little bit more and a little bit more and before you know it, you lose all your property to bankruptcy because like you have to be strong about that.

The nice thing is that it doesn’t take that much work to set up some good systems. Once it’s there, they just kind of run. You’ve just got to do it. It’s like the biggest difference I see between failed investors and good investors. The one major difference is they have good systems and processes or they don’t. That’s really largely what it comes down to.

AJ: I agree. Once again, it’s the difference of running a business or simply investing. Which one are you doing?

Brandon: Yep. Really good. All right, next question for the Fire Round. I’m taking the cursory—how do you say that? Cursory look at a boat and an RV storage facility. So far, all the numbers look fine. I’m waiting for the due diligence, etc. The only thing I’m concerned about is the distance from my home city. The facility is three hours from my house. Is it practical to manage a facility of this type from that kind of distance?

AJ: Okay, that depends on the person. So for us, we have four facilities that are probably within an hour. All the rest of our facilities are basically fly-to-them. I would always take a better deal that is farther away than a not-so-good that is close. Always.

But once again, I have the structure to manage and handle that asset, that storage facility. So if you have never done this and you really don’t have any policies and procedures, absentee owners and owners that live in other states are hugely the ones that we purchase from because they are getting used and taken advantage of a lot. So you really need to be able to have a close eye look in.

We see managers that will be onsite that will be renting out units and then they are paying the manager. They’re not paying the business. So the manager has got ten units that they’re making money on every month and the owners don’t even know it. One of the hard things with boat and RVs too is that it’s harder to keep track of. So depending on your system of how they access, how they leave, and how they keep track of that, are they putting four cars in or are they putting one? How much space have they rented out?

You really need to look at how you’re going to manage that. How I would do it is I would find a local business and I would contract them to do all the onsite management. So you have eyes and ears on the ground that can go over and they can do inventory, say we have this much space rented out, and they literally walk around and check all the numbered spaces. And they say yes, all these spaces are occupied and the ones that aren’t occupied don’t have cars sitting in them.

Brandon: I was going to say I don’t think I’d ever get into that but then again I never thought I’d ever get into self-storage or mobile home parks. And I’ve done a mobile home park, now I’m going to do a self-storage. So yeah. Good deal.

All right, we’ve got to move on and we’re going to shift gears here and head over to the last segment of the show which we lovingly refer to as our Famous Four.

And now, let’s get to the Famous Four. These are the same four questions we ask every guest every week. We want to see what you’ve got to say. Number one, what’s your current favorite real estate related book?

AJ: So this is kind of a tough one because it’s not really real estate related but I think it is. It’s Essays on Warren Buffet and the reason why is it goes a lot into valuation and it looks into the metrics of how you valuate any asset. I don’t care if you’re buying a business or what not and I really like the breakdown in there and his discussions on how to develop investment philosophy, how to stick to it, and how to understand what value truly is. And for real estate investment, that’s the name of the game. So nothing else is more important than that.

Brandon: I like it. What is your favorite business book?

AJ: I think right now my favorite business book is The Obstacle is the Way by Ryan Holiday for obvious reasons. I’ve had a lot of obstacles lately and I’m trying to really look at how those play into my life and my business. And how to really take those things and develop strengths out of them and move you to the next level. So yeah. I think right at this moment, I am going to go with The Obstacle is the Way.

Brandon: And Ryan Holiday was actually a guest here on the BiggerPockets podcast, I don’t know, six months ago or maybe a year ago. If you guys want to check out that episode, just go to the Show Notes for the show. You can get there at BiggerPockets.com/Show286 and then I’ll put a link in there to the interview with Ryan Holiday. Or just type in ‘Ryan Holiday BiggerPockets’ into Google and you’ll find it.

All righty, but yeah, I love The Obstacle is the Way. I actually just got finished with Ryan’s other book, Conspiracy, which is about the Gawker, Hulk Hogan, Peter Teal, like the mess. It’s an unbelievably good book because it’s fantastic. It reads like a John Grisham book but it’s true. Anyway, I highly recommend it. It’s called conspiracy. But anyway, really good.

Number three, David, your question. I don’t want to steal it. I don’t want to steal your thunder.

David: What are some—I appreciate that. You’re quite the thunder stealer at that.

Brandon: That’s what they call me.

David: Brandon ‘Thunder Stealer’ Turner. What are some of your hobbies?

AJ: So I like anything outdoors. A big skier, backpacker, line fisherman. Right now skiing and backpacking are on hold until I figure out how to walk again. But I have been getting out there and doing some fly fishing. But those are the ones that I like to get out in the outdoors, get out with my kids. That’s really what I like doing. Get out and spend time with my family and kids and the outdoors seems like a good way to get away from screens and everything else like that and really connect with my family. So that’s what I like doing.

Brandon: All right. Well good deal. Last question of the day. What sets apart successful real estate investors from those who give up, fail, or never get started?

AJ: So you know, I think about this a lot and I think it kind of comes down to grit. You know, I would say desire, too, because you’ve got to just kind of keep going. And it’s not going to be fun. It’s not going to always be what you want and what you’re looking for and you’re going to fail. That’s just part of it. And so the people that are able to just stick with it and learn wants to figure out how to do it.

Once again, when we started out with self-storage, we didn’t know how to really do it. We had a lot of really good investment theories and we had a lot of good ideas but who we are now today, we would just laugh at who we started. We would be like you are so terrible at this. But all our strengths now were because every time we messed up or every time something went wrong, there’s a new policy. There’s a new procedure. And that’s how we got to where we are now. So I think grit, just sticking with it and keep going.

Brandon: Very good answer. Very good. All right, last question of the day. I’ll let you take it, David.

David: Where can people find out more about you and your fascinating story?

AJ: So you can go to CashFlow2Freedom.com That’s Cash Flow with the number 2 Freedom.com. It’s a little blog I have. It started when I was in the hospital because I had nothing else to do so I started looking at things to write. So you can go on there. It’s got my e-mail, contact form, everything like that. Instagram, Facebook, all that. You can find me on there. Just shoot me a line.

Brandon: Very cool. And I think I actually saw your K-Mart to Self-Storage on your Instagram the other day, right? Didn’t you put it on there? I think I saw a video or picture of it or something like that.

AJ: I did. I was putting a bunch of videos kind of showing how it works and the new technology we’re putting into it that is very different than anyone has ever seen so it’s pretty cool.

Brandon: Yeah, that’s awesome. So yeah. Go follow AJ over on Instagram. All right, ya’ll. Well AJ, this was fantastic. Thank you very, very much for this. Good luck to you the rest of the way. You and I are going to run a marathon together some day, I’m sure, and yeah. We’ll see you around.

AJ: Thanks, I appreciate it, guys. Thanks for your time.

David: Good job.

Brandon: All right, that was our show with AJ Osborne, fantastic. I loved that conversation. So many good things in there. So yeah, AJ, you rock. Thanks for joining us. With that, I’m just going to take this episode out. David Greene, do you have anything you want to say before we leave?

David: My mind’s reeling from AJ’s incredibly inspirational story. I mean that was like one of the coolest things that I have ever heard and I’m so happy to see that this person who went through that is now doing so well. Everybody else who’s got excuses, you just lost any validity you had to your excuse after hearing about the person that was bedridden for weeks in complete pain and couldn’t tell anybody. So put that in your pipe and smoke it. And with that, this is David Greene for Brandon “Thunder Stealer” Turner, signing off.

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In This Episode We Cover:

  • His first deal that didn’t go the way he wanted… but the logic behind doing that deal (super important for every newbie)
  • The difference between being rich and being wealthy
  • Picking a wealth vehicle — and the difference between a Ferrari and a train
  • How to find an underperforming self storage building and turn it around (applies to any kind of real estate)
  • The Kmart story that helped him build around $13,000,000 in equity 
  • Price / Convenience / Quality
  • Coma: “One of the most incredible stories I’ve ever heard”
  • Subsequent: Does your business survive “the coma test”?
  • And SO much more!

Links from the Show

Books Mentioned in this Show

Fire Round Questions

Tweetable Topics:

  • “It’s not about overthinking things. It’s about finding things that work and putting them into action quickly.” (Tweet This!)
  • “There’s no way you win in life without having your agenda and being purposeful towards your agenda.” (Tweet This!)
  • “The economic downturn was my lucky break.” (Tweet This!)
  • “Work ethic is not enough.” (Tweet This!)

Connect with Aj

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.