John is the CEO and Co-Owner of Pinnacle Storage Properties and Pinnacle Storage Managers. John gives an example of how he looks at a deal and determines if it’s worth his time and money. His goal is to buy a storage property that can run without the necessity of him being there. You will learn the formula John uses to evaluate each property he finds before making an offer.
John Manes Real Estate Background:
- CEO and co-owner of Pinnacle Storage Properties and Pinnacle Storage Managers
- Has been involved in self-storage since 2005, has raised over $35 million in private equity to build a $100M+ portfolio
- Based in Houston, TX
- Say hi to him at Pinnaclestorageproperties.com
Best Ever Tweet:
“Can you be successful? Yea, but you’ll trip over yourself doing it and your going to make mistakes that might be very costly” – John Manes
TRANSCRIPTION
Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast where we only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, John Manes. How are you doing, John?
John Manes: Doing great, Joe. How have you been?
Joe Fairless: I’m doing well as well, and I’m glad to hear you’re doing great. A little bit about John – he’s the CEO and co-owner of Pinnacle Storage Properties and Pinnacle Storage Managers. He’s been involved in self-storage since 2005, has raised over 35 million in private equity to build a 100 million plus portfolio. Based in Houston, Texas. With that being said, John, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
John Manes: Sure. I started my career in retail, spent 17 years working for people like the Walmarts and Kmarts of the world. Got burned out on that, and applied to a job with self-storage as a district manager, with this little tiny storage company called Uncle Bob’s self-storage, the fourth largest self-storage company in the United States, and who are now Life Storage.
Ended up doing so well they promoted me to regional vice-president. I started with them in ’05, got promoted in ’08, and from there I went on to be the COO of a privately-held self-storage company here in Houston, that had 55 self-storage properties. I did that for about five years. Four years ago I went out on my own, create Pinnacle Storage Properties, and currently have 20 properties under ownership, two that we’re raising money on right now, and we’re getting ready to partner on eight others.
We have ground-up development on top of that around Texas, and a conversion deal in Temple, Texas. So by April we’ll be 32 properties.
Joe Fairless: Wow. The conversion deal – what are you doing with that?
John Manes: So we’re buying a 25,000 sqft. single-span building that used to be a youth sport building. We’re putting a mezzanine in it and an elevator for two stories, so it’ll be a 50,000 sqft. footprint right off the bat. It comes with four acres of land, it’s right on I-35 at the exit, in Temple, Texas, just north of Austin.
We were brought that deal off-market. It’s under contract – the building and the land – for $18/sqft. So we can’t build it for less than $35/sqft. It’s one of those ones that you find every now and again, and it was brought to us by another storage operator that was able to do the conversion, but not raise the equity or be able to sign on the debt, because it’s such a large project… So we partnered with him, and here we go. We’re already in the process of permitting and everything like that right now.
Joe Fairless: The youth sport building, from the ones I can think of, I wouldn’t think that a conversion would be too much to do, because a lot of times they’re just boxes with some dividers, and maybe some nets and stuff. Was it tough to do? I know the other operator was involved on that more so than you, but do you know the details?
John Manes: So we haven’t started construction yet. We’ll probably start construction in the next 30 days… But to your point, it is a single-span building, which means there’s no pile-on posts in the middle. It’s just one big, huge, open room. The challenge to that is we’ve gotta put a second floor in the middle of it… So you will end up with those posts and everything on the first floor. But we’ve got some great construction people that we’ve dealt with for the last ten years, that have done all that kind of stuff. So from that standpoint, it’s a matter of getting the right engineer, the right architect, and then getting the right construction guys, put all them in place and let them do their magic. Rely on the people that know what the hell they’re doing, right?
Joe Fairless: Yup.
John Manes: So the painful part of that is going through rezoning and permitting and things like that, because you’ve gotta get it switched to be storage zoning versus an operating business like a sport athletic center would be.
Joe Fairless: In this case, when the operator came to you all and said “Hey, I have this opportunity. Here’s what I need”, what are the first five or so questions that you asked the operator, to just quickly assess if you should have more conversation about it?
John Manes: That’s a great question, because we do some creative things on partnerships, and we get approached a lot on these types of projects… And mainly the reason people approach us is because they want somebody to help them raise equity. So to me, I always say “If you’re just looking for me to raise equity, I’m gonna raise equity on my own deals.” So if you’re looking to operate it afterwards, or you’re looking to just put non-recourse debt on it with no risk on debt…
They always say there’s four components to a deal – you find the deal, you raise the equity on the deal, you sign on the debt, and then you operate the deal after it’s done. If you’re looking for me to just raise equity on the deal, it just doesn’t have much interest to me, because I can do that for my own deals, and I have 100% of the deal.
So the questions I ask, most importantly, is what are their needs? What are you looking for? What do you need help with? And I know you’ve been doing these for a long time, and you’ve probably had storage people on your podcast, but the reality is not everybody knows how to run and operate storage like they would in single-family or multifamily environments.
So they come to us for those needs. If I ask them the question of what they need and they need help operating it and they need help raising the money, then I perk up a little bit more. So I try to find out what their needs are. Because we’re a full-service shop, right? One of my business partners, Eric, handles all of our construction-related stuff, and he’s navigated the cities probably 15 times already… So he’s got those reps that have been painful to other people for the first go-around. He knows how to navigate those. So if they need help with construction, that gives us an idea. If they need help with raising money, that gives us an idea; or if they need help signing on debt, or if they need help managing it when it all said and done… Those kinds of things – that’s really when I perk up.
Joe Fairless: That’s helpful to know. So that’s from a partnership standpoint. What about from the deal standpoint? What are some main questions that you’ll initially ask or information you’ll initially ask just to get a sense of the opportunity, or if there is not an opportunity?
John Manes: I ask the basics – what do they have it under contract for, how many square feet is it… You asked earlier what is our specialty – our specialty is buying under-managed, under-enhanced, under-expanded self-storage property. So we buy the mom and pop. That’s what we’re known for. We’re not known for ground-up development, we’re not known for conversions, things like that. We’re known for fixing the mom and pop up, and running it better, and adding value that way.
So my questions generally revolve around “How many square feet is it? Is there room for expansion? What type of sales volume are they doing on a monthly basis? Why type of ancillary income do they do?” All the basics to see — because we’ve underwritten 350 self-storage properties in the last 14 months, so we can look at a deal and do the math in our head to find out whether that’s a good deal or not… So by asking those basic questions, we’re not class A cashflow buyers that have a self-storage property at the corner of I-10 and 45 in Houston. That’s not our bread and butter.
So when I ask the basic questions, “Where is it at? How big is it? What’s it doing per month? Is there room for expansion? Who owns it?”, those are all the basic questions that I ask right out of the box. On the conversion deal, I wanted to know how many square feet it is, how much land comes with it, what’s the potential for doing expansions; then if we do expansions, do we have to have detention, do we have to put a detention pond it, which eats up an acre, an acre and a half of your land… All the things that allow you to know whether the purchase price equals the amount of revenue you can create.
Joe Fairless: Okay. For the detention pond, when would you not need one, versus need one? Generally.
John Manes: We focus on secondary, suburban, and some tertiary markets. So because of that — I live in Katy, Texas, which is a suburb of Houston. Almost everything around here is going to be required to have a detention pond to it, because of all the flooding from Hurricane Harvey, and things like that… So they want you to hold back as much water under your property as you can, for a temporary amount of time, so it doesn’t flood your neighbor’s property.
So when you’re dealing with suburban markets, chances are you’re gonna have to have some type of detention. When you get into the secondary markets, it becomes a little looser, and it’s not 100% of the time that you need detention… But in those areas, they might want you to have a fire hydrant on your property instead of detention. So if you have a fire, they can put it out, things like that. But then when you get into the tertiary type of markets, there’s so much–
Joe Fairless: Wild West?
John Manes: Yeah. There’s a lot less regulation. But everything’s relative. Inner city environments, urban core, you’re getting $1,50-$2 per square foot on rental rates, but you have a lot heavier cost in detention and things like that. Then when you get to suburban areas, you’re getting $1,10-$1,20 per square foot, and you’ve got a little bit less. You go to secondary markets, you’re getting a dollar, and you have less… And then you get out to tertiary markets – you’re getting $0.75, but it’s kind of a free for all. But to go build out there, it’s harder to make your numbers work, because you’ve still got the same building costs… So this is what you do downtown, urban market. Your buildings will cost you the same amount of money.
So it’s all relative to how you buy, how you build, how you expand, but it all plays around what the zoning and the cities will allow you to do or not allow you to do.
Joe Fairless: When you’re initially qualifying a deal and you said you can do the math in your head, if it’s a good deal or not and just run some rough numbers by asking those questions about what’s it under contract for, square footage, room for expansion, monthly sales volume, other income… Would you just run through an example? You can make it up, or a real one, and I would love to hear the thoughts that are going on when you’re thinking about “Hey, here are the numbers. It does work/doesn’t work based on this.”
John Manes: Okay, but I’m warning you, Joe, you’re getting inside of [unintelligible [00:12:31].23]
Joe Fairless: [laughs] Well, as long as we can exit out of it… We’ll exit out of it quickly thereafter.
John Manes: [laughs] So to me it’s pretty easy… In storage I’m gonna use $20,000/month, which is $240,000/year. But how I equate it in my head, pretty easy, and it’s not a perfect math, is if you’re doing $20,000/month, then you’re looking at a property that’s doing $20,000/month, you’re gonna pay around two million dollars for that property.
Joe Fairless: Why?
John Manes: I’ll just use basic math – you have 240k a year, your expense ratio on a small property like that is typically around 50%. 240k divided by two is 120k. If you divide that by a 6% cap, it’s two million dollars.
Joe Fairless: Okay.
John Manes: So basic math on a 20k a month – there’s not ten months in a year, so it doesn’t equate perfectly to two million dollars, but it does equate to a 6% cap. And then secondary, suburban type of markets, like a Katy, Texas, you’re sitting around a 6% cap. Now, if I’m looking at a tertiary market that has a population of 10k people, it might be a 1,8 million dollar buy on that 20k/month, because it’s a 7% cap. So what I do is I start with — if it’s doing 20k, the purchase price should be around two million. If it’s doing 10k, your purchase price should be around 750k. So when you go down in monthly sales volume or revenue, the smaller the number gets below 20k. Above 20k, when you get to 30k, your purchase price is gonna be about a 3.3 million dollar. And the reason is because your expense ratios in storage stay the same, whether you have 50k/month or whether you have 20k/month; they’re relatively the same.
We buy off a cashflow, so because of that, when you’re doing 30k/month it’s not a 50% expense ratio, it’s 42% expense ratio. So because of that, you’re paying more for the property because it has more cashflow that goes along with it, and you’re trying to stay about the same.
So if you come to me and you go “Hey, I’ve got this property, it’s in Tyler TX” and I go “How big is it?”, you go “It’s 40k sqft.” I go “What are they doing?”, you go “They’re doing 33k/month”. I go “Okay. Ancillary income?” You go, “No, they’re not doing any ancillary income.” U-Haul? No. They don’t sell, boxes, insurance? Nope. I go “Alright, so let me guess… You have that property under contract for 3.5 million dollars?” and they go “No, I have it under contract for 4.2.” I go “Well, you’re paying too much.” Just like that.
Joe Fairless: Yup.
John Manes: So to me it’s an equal balance inside my head. You said you wanna get in my head.
Joe Fairless: Yeah. And I reserve the right to exit out whenever I want… [laughter] But did I heard you right, that the expense ratio in storage stays the same, regardless of how many units you have?
John Manes: That’s correct.
Joe Fairless: So if I buy a 100-unit versus a 1,500-unit, the expense ratio is gonna stay about the same?
John Manes: Yes and no. If you brought me a 100-unit property that did not have any land for expansion, that was doing $10,000/month, I would not buy that property. And the reason I would not buy that property is I do not wanna buy a job. So you can get an expense ratio in that property of 25% or 30%. You’re the one answering the phone, you’re the one meeting the customer out there, renting this space, and showing this space and so on, and you have no payroll. And then you have no website, you have no marketing… Right? So all of that expense ratio gets driven down.
But if I’m going to buy that 100-space property and it comes with 3 acres of land, and I can add another 40,000 sqft. to it, I’m going to spend 50k/year in payroll, whether it’s 400 spaces, or… I’ve got a property in Nacogdoches that’s 1,000 spaces, and we run that property with 2,5 people, versus 1,5 people. So we spend about 85k-90kin payroll in that store, versus a 400-space property that has 1,5 people to it and they have 50k work of payroll. So everything is relative, and there is a point that you have to add labor to it, or take away labor from it…
But if you’re looking at running and buying a self-storage property that is an investment asset, like most of your listeners are looking for, then the expense is relatively gonna be the same from a 250-space property all the way up to an 800-space property, which is the meat and potatoes of the self-storage industry.
Joe Fairless: Based on your experience in self-storage, for someone who is looking to get started in self-storage, what is your best advice ever for them?
John Manes: My best advice – and I give this all the time, because we get a lot of people that wanna get into the industry… My best advice to them is find somebody that already knows how to operate these things. I don’t think the operators of self-storage get enough credit against the value-add of these assets.
Let’s say that somebody in your audience that’s listening right now is a finance guy, or a broker that can find these things, or something. Go out and find somebody — when I meet people one-on-one, I say “It doesn’t have to be us, but go find somebody that knows how to operate these things…”, because that’ll make you more money, and it’ll make you more money faster. Can you be successful? Yeah. But you’ll trip over yourself doing it, and you’re gonna make some mistakes that might be pretty costly.
Joe Fairless: What are some common mistakes that someone with that lack of experience would make, that an experienced operator wouldn’t?
John Manes: Hiring the wrong website people. A lot of these guys wanna just go to GoDaddy, create their own website, it doesn’t interact with your software, there’s no prices online… Things like that. And Google doesn’t give you any credit for not having any content, or anything. Believe it or not, 80% of our customers touch us online some way, whether it’s they look at stuff on their phone, and then drive to our store, or they look at prices online on their PC or on their telephone… They touch us somehow online. And a lot of them try to be cheap, because they’re doing 10k/month and they don’t wanna spend $300/month on having an effective website. But your effective website drives demand to your property. The more demand you have, the higher your prices can be, and eventually it pays for the $300.
Joe Fairless: What’s a URL to one of your websites?
John Manes: Mystorageplus.com. It’s a many aggregator type of site that has [unintelligible [00:20:24].17]
Joe Fairless: Okay, cool. We’re gonna do a lightning round where I’m gonna ask you some quick-hitting questions. Are you ready for the Best Ever Lightning Round?
John Manes: Hit me!
Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.
Break: [00:20:40].03] to [00:21:30].27]
Joe Fairless: Alright, John, what deal have you lost the most amount of money on?
John Manes: The good news is I’ve not lost any money on any deal, so I can’t answer that. Have some of them gone sideways? Sure. But we’ve not lost money on it, and that’s the beauty of storage. It tends to be recession-resistant. We had a project that we bought 20,000 sqft, we expanded 63,000 sqft, and the construction company was eight months behind delivery on the product. So we were paying the mortgage rate months without having cashflow, we ended up in a lawsuit with them… That’s the bad news.
The good news is we were able to restructure that deal, get an extension of our interest-only payment on our loan, we borrowed an extra $150,000 from our investors in the form of a loan to be able to support the interest-only payment for an extended period of time, and now we’re back on track.
Time healed that wound, and so did increase in occupancy. We didn’t lose money on it, we just didn’t make as much money as we thought.
Joe Fairless: What was the result of the lawsuit?
John Manes: We settled.
Joe Fairless: And knowing what you know now about that experience, when presented a similar situation in the future, how would you approach it a little bit differently?
John Manes: Honestly, I don’t know that I would have approached it differently. I’ve been in a relationship with the contractor for eight years, so… The obstacle became that the construction company grew too fast and took on too many projects at one time, and ours was one of them. So I personally could have never predicted that, particularly knowing the individuals involved.
So doing it differently – I’d have to say pick a different contractor, but how do you know that, particularly when they’ve done a tremendous amount of work for you in the past, right?
Joe Fairless: Yeah, that’s a tough one to identify. Best ever way you like to give back to the community?
John Manes: I have a servant’s mentality. Right now I’m in the process of creating a mastermind group of professional athletes. The reason that we’re doing that is because like myself, most of these guys grew up poor, and all of a sudden they have money, and they just don’t know how to handle it or what to do with it. I like to educate people on how money works, from the simplest form of how to compound your money, to how to create a budget, and all those different things that people like Dave Ramsey teaches.
I love to give back in the way of the knowledge that people have given my and us as a company. We teach our store manager team how to go buy a self-storage property if they want to. So we try to take care of the people that take care of us, at the same time as the people that just don’t know. You hear a lot of people say “If I knew 20 years ago what I know now…” Okay, well, go teach somebody that.
Joe Fairless: Yup.
John Manes: That’s why I volunteer a lot for these podcasts. I have rooms full of people that I teach, not only storage, but basic financial principles around credit scores, and how credit works, and all that kind of stuff. I love giving back through teaching, and the knowledge that we’ve been blessed to be exposed to.
Joe Fairless: How can the Best Ever listeners learn more about what you’re doing?
John Manes: They can call me – 210 818 1496. They can go to PinnacleStorageProperties.com, or they can email me at john [at] johnmanes.com. They can go to my YouTube channel and watch a bunch of my YouTube videos that talks about a lot of this stuff, why storage is a good investment, and all the stories about how me and my partners grew up with nothing, and have created something. All that is on YouTube.
Joe Fairless: Well, John, thank you for being on the show, talking about self-storage, and in particular talking about a deal that you’re working on, and also how you qualified that initially… And then taking a step back, how you qualify opportunities, and the questions that you ask. And then I’m officially jumping out of your head… [laughter] So you can be one with yourself, and I can go about my way, too. But I really did appreciate your conversation, and I’m grateful that we talked.
Thanks for being on the show. I hope you have a best ever day, and we’ll talk to you again soon.
John Manes: Thanks, Joe. I appreciate it, buddy.