TMBA 604: Is Real Estate the Endgame for Entrepreneurs?
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Nick Huber has been on a wild ride since we last spoke to him in 2019.
Nick is the host of a podcast called The Sweaty Startup, and last time we talked, he was running a business called Storage Squad, a storage company that helped students store their belongings at universities all across America.
Covid threw that business for a loop, but Nick was able to make some fast decisions that allowed him to sell that company and pivot a new way, to a multi-million dollar real estate private equity company called Bolt Storage.
Nick joins us on this week's podcast to share what happened when the coronavirus pandemic shut down most of his business, why he has decided to pivot into the real estate business, how he uses Twitter (as a 'late adopter') to help find investors, and a whole lot more.
Listen to this week's show and learn:
What happened to Storage Squad when Covid hit. (6:09)
Nick's strategy for acquiring self-storage properties. (13:40)
Why Nick believes in real estate as an "endgame". (31:55)
How Nick's Twitter strategy has changed his life. (41:40)
Nick's biggest piece of advice for people considering a "sweaty" startup in 2021. (49:22)
Mentioned in the episode:
Before the Exit - Our New Book
Partner With Us
The Dynamite Circle
Dynamite Jobs
Dynamite Deals
Tropical MBA on YouTube
Post a Remote Job
Dynamite Jobs - Remote Recruiting Sales Page
Let's Talk High-Level Podcast Strategy for 1 Hour
Nick Huber
The Sweaty Startup
Bolt Storage
CrowdStreet
Fundrise
Moses Kagan
Enjoyed this podcast? Check out these:
TMBA509: The Difference Between Value and Money
TMBA513: How To Get Rich Without Getting Lucky
TMBA592: An Entrepreneurial Approach to Investing
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Cheers,
Dan & Ian
Full Transcript
Nick: If you're a venture capital fund, and you don't have a serious presence on Twitter, then you're going to miss out on almost all the deals, ‘fin twit’ is where things happen.
Dan: Hey, you, welcome back to the pod today is one of my favourite kind of episodes, just invite somebody who I respect who is incredibly intelligent and business on the show and just basically turn the mic over to him. So today's guests once said something that really stuck with me, he said, ‘The end game for entrepreneurs is always real estate’. And we're going to talk a little bit about that ‘endgame’ today. But how it was arrived at through service businesses through hustle, and in part through social media and Twitter. So today's guest has truly been on a remarkable ride, you can see his progress happening in real time on the web.
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Yes, we're talking about Nick Huber, formerly of ‘Storage Squad’, which was a company that packed in storage student belongings over the summer. And you'll hear about how COVID affected that business and how Nick managed to get through some really dark days there. Now he's running a multi million dollar real estate private equity company called ‘Bolt Storage’. And we're going to get into the nitty gritty of how he leveraged his money and tax advantages to do that, plus how Twitter has basically been life changing to that end.
So we got a tonne to cover, I had a blast talking with Nick, I hope you can get as much out of it as I did. This is definitely one of those interviews that instead of waiting for the interview to air, I called Ian directly after to share some of the things that Nick shared with me, I hope it has the same effect on you.
Dan: I want to start with this: you big timed me a few weeks ago, you're like, ‘I got to reschedule this interview’. And you're really polite, as always, you're awesome on email. ‘I apologise for the inconvenience, but we ended up getting a larger portfolio under contract, so I'm gonna have to be hitting the road on short notice’. Take me to that story. What does that mean? What happened?
Nick: We are scouring the Northeast right now to buy self storage facilities. So since we last spoke in early 2019, we've sold our company, we have shifted gears totally. We went from six employees in the real estate side of things six months ago to now 17 today. And we are using every bit of capital we have and resources from our network to buy as much self storage as possible. So we are constantly having a lot of owners of self storage facilities portfolios on the hook to hopefully sell their properties to us.
Dan: Can you describe what it is that you're buying?
Nick: Mom and pop self storage facilities in small towns and tertiary markets, meaning not the life storage, public storage, extra space storage Cubesmart that you see in the major cities like Austin, more like, you know, Uncle Joe's storage sheds out in, you know, Elmira, New York or wherever it may be. Those are the ones that are right for us - 20,000 square feet and up. So not as small as we used to buy. Our average acquisition is around $2 million. And we're constantly trying to close property. So when I sent you that email, I was about to get on a plane and go see some properties that we had just gotten under contract. The business has grown really fast.
Dan: I want to roll back to tapes before we get to some of your ideas around this and stuff. Because the last time I really heard from you was like, I was like the number one fan of your podcast during COVID. My life was super weird. I was living in an RV and Ian's backyard. And your life was intimately portrayed on your podcast on a weekly basis, you just flip on your phone, it was astonishing.
Sweaty StartUp 148
Nick: We're extremely worried. We are basically rushing here to salvage our business. This is all of our livelihood here. And we just have a couple of days here to figure it out. So I'm basically doing this podcast as a little bit of a cry for help here. If you live in Champaign Illinois, State College Pennsylvania you know,Ithaca, New York. Ithaca, New York is a huge one. I'm actually heading up to Ithaca tomorrow morning. I'm recording this on Tuesday night at 11pm. But tomorrow morning, I'm getting in the car with my family and heading to New York for three weeks. We missed about 400 calls before lunch today because we're the only option at several of these schools. There's no other competitor that is going to be able to even come close to servicing these customers on this much notice. But we don't have any employees hired yet. We don't have any trucks rented yet. We don't have any boxes yet. It's a nightmare.
But anyway, as I finish my thought here, Boston, Philadelphia, Washington DC and Atlanta, Georgia, if you go on storage, quad COMM And you are anywhere near any of these locations, and you want to make decent money to come drive a truck, load boxes, get a look at what my business is, maybe manage a warehouse. Please send me an email Nick at Sweaty StartUp dot com. If you're the right person and you have driving experience, and you're physically fit enough to load boxes for a while, we'd consider flying you and putting you on an aeroplane to get you where we need you to be. We're pretty worried, we're pretty worried about the future of our storage business here. So we're all working on the clock, but we're also extremely nervous and extremely scared.
Dan: Much respect to you for doing that. Maybe you just give a little bit of the story about what ‘Storage Squad’ was and what crisis you encountered when COVID hit.
Nick: ‘Storage Squad’ as a pickup and delivery student storage company. We spoke about it on the episode a year or two ago. So, on the ground pickup and delivery storage for these students. So when they go home for the summer, we pick up their stuff, we store it, and we had six full time employees. And every busy season we have 200 people on the payroll because we have a lot of part time employees, a lot of travelling managers, a lot of people to actually physically move these 7000 students that we move in and out every year. Well, 2019 hit or 2020 it was I guess, and it was March and we didn't have anybody hired yet. We were way behind schedule. We didn't have our warehouses leased. And all of a sudden all the colleges sent all their kids home over about a three day notice. Some of them were much more aggressive about it like Harvard was first to get everybody out right now, SEC schools a week later, pretty much. But it was a whirlwind for us because our livelihood was on the line, right? We have people to pay families to feed. And all of a sudden that went from Okay, you know, we're gonna have a good year like always in store 7000 kids, and this is what we can expect to, ‘Holy cow, they just sent everybody home, we are not going to get any business a month and a half from now, we don't have any resources to get business now. What the heck are we going to do to survive?’
Dan: We tend to be optimistic as entrepreneurs, but your business kind of just looked or maybe felt like it evaporated overnight. When did you realise that? Do you remember sensing that?
Nick: As the news around COVID was coming up in the stock market was crashing, I mean, that was one thing. And we're like, ‘Oh, you know, this could be a big deal. We don't really know what to make of it’. And then, when Harvard sent the tweet, and the Instagram post on their accounts, everybody had to go home right now. We're like, ‘Okay, if Harvard does this, some other schools might do it. And still, the optimism was like, you know, the SEC schools won't do it, and these other schools won't do it’. And then a day, within 24 hours, it was just a whirlwind of us freaking out because every school got sent home all at once. So we were in our office being like, ‘Okay, what are we gonna do now?’ We basically made the decision that, hey, we're gonna go out and try to scrounge together as much business as we possibly can.
So it went away from contracting the individual students and operating in the background of the school, to putting ourselves on the forefront of these schools, when they were at these meetings, trying to save their business, too. I mean, we were dealing with schools who, hey, they were worried about their own business. So that's when we put our sales hat on and just cold called every single school trying to get hold of everybody sending cold emails all over the place. ‘Hey, who can hire Storage Squad to come in and pack up this stuff?’ Have you ever packed up a room? No, we had never done it. So we had to, you know, act like we knew what we were doing and try to sell that that we were going to send in a bunch of employees that we didn't have to pack up dorms, and store them in warehouses that we didn't have yet. So we were taking a lot of risk really, what we were doing
Dan: And then you did a great job of sharing that That kind of story on the pod. And then I sort of lost touch with the story. I don't know whether you stopped publishing in it or you just went back to more traditional episodes. But then all of a sudden, you sold the company in January of 2021.
Nick: We'd been in talks in 2019 with a company that wanted to buy us but the price wasn't quite right. We knew we were leaving a lot of meat on the table, we had a pretty rough year in 2019, with some growth, and we hired some extra overhead. So our numbers didn't look that good, even though we believed in the business more than ever. So 2020 hit and, to make a long story short, we travelled to four major colleges. I'm not going to disclose them, because it was pretty intimate what we were doing with those schools. We flew into major cities. 45 employees through our networks contracted with moving companies brought them in, found storage when the world shut down. And everybody got scared that we had one advantage and that we were the only ones doing something. So the event companies, the companies that put on major events for graduation, they had a bunch of staff, the caterers,the restaurant employees, we just got really resourceful and hired some of those people to train them up and background check them. And the next thing we knew we were inside of dorms, packing up people's intimate items on FaceTime with students.
So got that all done, packed up all the boxes, got it all in the warehouse and stepped back in June and realised that we had had our best year ever by three times. But you know, even the little things like not processing a credit card fee of two and a half percent to every single employee, instead of having a university cut your check. You know, those little things add up just the economies of scale of operating big operations in three cities instead of small ones in 12. We had our best year ever.
So you fast forward. A couple months later, yeah, a couple months later, we reached back out to the company, they ended up acquiring us. And they said, ‘Yeah, we definitely still interested’, their funding had picked back up, it was clear the world was not going to melt. By about November, the stock market had already almost recovered. Private Equity and mergers and acquisitions were zooming along. This company is making a run to go public, the one that bought us, and just the circles overlapped. But I mean, we sold the business for one times EBITDA right. So not a huge exit in terms of multiple on value, but enough to stock me and Dan to go buy more storage and get really serious about real estate.
Dan: So why was one time EBITDA acceptable to you? Most entrepreneurs would say, ‘Oh, I'm not going to sell unless it's three times or four times’, or whatever.
Nick: I think if we didn't have a clear vision of what we wanted to do, it wouldn't have been. We had bought a couple self storage facilities in late 2019, right before COVID. And like four little small ones with our own capital, and those were all just doing really, really well. So we had five self storage facilities at the time, they were all just performing phenomenally through COVID. It was amazing. The original investors were pinging us saying, ‘Hey, we like the way this is going, can we do more deals?’ And the only thing we didn't have was cash. And my business partner’s bandwidth, because he's a badass when it comes to operations. And he was focused on the student storage business, right? So we just had a clear vision of, ‘Okay, if we take this money off the table, we just had a good year, we have a little bit of cash from that. And if we actually sell the business as well, hey, we're gonna have enough money to buy X amount of storage’. It was a very clear vision of, ‘Okay, sell the company merged into this, it's our exact plan, here's how we go about doing it’. Also, the money wasn't as important as clearing up the bandwidth of me and Dan to go pursue the real estate.
Dan: So the strategy that you laid out is basically - you got these tertiary cities with, you know, Mom and Pop investment as a storage space. They often have payroll or overhead expenses of say, you know, $50-$90,000 a year. And you're coming in with your fancy tech and your forward thinking, and you're saying, ‘Well, let's make it $3000 and drop it all to the bottom line’. And essentially, we're going to perform better as operators than the people we're competing against.
Nick: Exactly right. What we actually learned over the past six months is that an even more valuable aspect of it is that these owners like to operate their self storage facilities at 100% occupancy. They like to charge let's say, $50, for a 10 by 10 unit, and be all full all the time. That's the way they think they're maximising the value. Where we know from following the big players and studying the space that you don't want to be full. You always want to have some spare units and if you don't, you're not charging enough money. So we found that these operators hadn't raised rents in 10 years for some clients. Maybe they're charging $50 for a 10 by 10. But we know the market rate is $77, for a 10x10, or something along those lines. And Self Storage is such a small expense for these people who rent it, that yeah, you can raise rents 20 to 25%. And virtually nobody will move out. So you can get value there, too.
Dan: I'm so curious about, you know, I've always been so conservative with money. And I don't really understand how it works at a larger scale. So you had gotten to the point where you had put all .. I mean, what percentage of your personal net worth would you say was in it while you're running ‘Storage Squad’? And then how do you diversify that across outside money? I'm kind of curious about how you think about that.
Nick: I think 90% of my net worth is in this storage portfolio that we've built over the past year and a half. And then of the other 10%, 5% is in public equities that are not correlated at all to self storage, like tech stocks, basically. And then the last 5%, we keep idle and cash because we need cash if real estate hits that is the shitter.
Dan: How do you raise funding to buy more places?
Nick: This is where Twitter changed my life. I mean, we haven't talked about that yet. But since we've last spoken, I went from 300 followers to 130,000 followers on Twitter, and a big thriving real estate community is evolving there. So how you raise the capital for a storage deal is what's called a real estate private equity structure, meaning, you need - say - to buy a million dollar self storage facility, you need $300,000 in cash, because the rest is going to come from a local bank to finance it. Of that $300,000. That's going to come from what's called the limited partners, I'm the GP, I'm the general partner who puts together the deal.
The LPs are the people who put in the cash to buy the deal. Now I put in 10% of that $300,000. So I put in $30,000, it's called a ‘10% co-invest’. The other 90% comes from outside investors, like if I were talking to you, Dan, ‘Hey, Dan, if you throw me $100,000, you're gonna be in on this deal, you're gonna own a big chunk of it. And you're gonna get what's called a preferred rate of return before me, the sponsor gets paid’ - 8% on your money, the first 8% of profits on this deal, go to you, or whatever it is, you can make that number 10% 12%, whatever it is. And then after that, if it performs well, the sponsor and the LP split the capital in some way, maybe 70/30, maybe 80/20, maybe 50/50. But the GP starts to get cut in on profits, if the asset performs well.
Dan: You get to draw up that contract, as the GP?
Nick: The GP draws it up. But it's a market, right? If I can't raise the capital, I need to make the terms a little bit better for the LP, so it's all about supply and demand. If there's a lot of demand for my deals, then I can get aggressive and I can charge a 50% promote, which means anything over that 88% hurdle, I get 50% off half of the upside. If it's a bigger deal, a much larger deal, or a more risky deal. It may be at 20, meaning the person who put the cash in gets 80% of the upside and me the sponsor get 20% upside. So it all depends on the market for what you're offering and how good of a deal everybody thinks you have.
Dan: So okay, you've raised the $700,000 from the bank. You've raised $100,000, from me and a couple other folks that you met on Twitter, and you got $30K in. So let's talk about how it plays out. So you go you buy the place. sense of … you need to spend some more money like implementing tech and stuff like that. How does that work? Where do you get that from?
Nick: So there's sources and uses meaning there's sources of capital. And then there's the uses of the capital, we need to set aside $50K in the operation account just to have it on hand to run the business, we got closing costs for $70,000, we got to put a new gate in for $20,000. So maybe of that million dollars, all in, maybe only $880,000 of it was actually the purchase price of the asset itself, the rest of the capital has to go into to run the actual business. Since I'm putting the deal together. The GP also charges some fees. We're getting way in the weeds now, but ….
Dan: No, this is really cool.
Nick: You charge an acquisition fee to put the deal together, maybe an onboarding fee, because five of my customer service reps are going to bust their ass for a month to get this new facility in our systems and get everybody on board and do all the work. So basically, I'm a service provider to do the actual service of managing the asset,
Dan: You serve your own deal. So you can get some extra margin there. Similar to what a tech fund would do. You have an administrative cost essentially,
Nick: Exactly right.A real estate company is a private equity company is a service business, I'm putting some of my own cash into it. So therefore, I'm a real estate investor with one hat. But the other thing is I'm managing this deal. I'm finding this deal. I'm putting together this deal. And I'm doing the service of making it very passive. There's people who do this all across real estate asset classes, and they're all on Twitter, talking about their deals. There's multifamily out in LA, there's hospitals in Columbus, there's industrial real estate in Dallas, Fort Worth, there's all these different asset classes of all these different sponsors. We learn from each other and talk about it. And it's just a thriving real estate Twitter community.
Dan: I realised that I've had some latent distrust about like, sort of money, vehicles, like the stock market throughout my career, especially when I was younger. And I see that a lot out there. I just want to underline this one thing that this idea that there are people like you creating opportunities that create cash on cash return, where I can put in cash, and make money back, like a 401k, like a stock, like a bond, l like a real estate investment company, like you're doing. It does. So it provides people with so much value, and it's so difficult to do.
Nick: It's really interesting, because there's something called ‘accredited investor rules’, you know, you know what that is?
Dan: Let’s talk about it.
Nick: It's something that I feel pretty deeply about, you know, you talk about the underlying issues with the, you know, socio economic status of everybody in this country. If you're not worth a million dollars, or you don't make $200,000 a year, you can't invest openly in my deals, or another real estate sponsors deal. So those vehicles to grow your wealth are not an option for you, because of what's called ‘accredited investor rules’, basically, to keep people from taking advantage of uneducated folks and selling securities to people who don't know what the hell they're doing because people have been ripped off by the Bernie Madoffs since the beginning of time, right.
But also, you know, you've got a lot of people who really do understand it and really do want access to these vehicles. But it's too risky for sponsors to take on unaccredited investors without the SEC coming knocking and saying, ‘Hey, Nick, I want to see everything you've ever done, or every bit you've ever talked about your storage deals, including, oh, that podcast you did with Dan, where you're talking about how you raise money, you know you're advertising securities, and you can't do that and take on non accredited investors. You're in big trouble’.
Dan: It feels like there's a lot of opportunity there to essentially open up private investing markets to, like, basically, most people. Feels like a lot of people are sort of like hammering around that issue right now?
Nick: This is something that a lot of startups are facing going after right now. Crowd street, fund rise, some others that are starting up and it's awesome stuff. I mean, you wonder how really wealthy families just play golf at their country club and go to liberal arts colleges and then never really work. And it's just what they do for generations and generations. It's because their money is working for them. And it's not in the stock market, it's an alternative investment and some other stuff that can really build wealth fast over time.
Dan: Let's take a sidebar into a napkin math, how much money do you need to play golf all day long. And, you know, poke around on some emails at night.
Nick: I think my lifestyle costs me about $200K a year right now. So passive income I need $200K a year coming in for me, my wife and my three, you know, two kids soon to be three.
Dan: What's required in order to make that kind of return, ballpark?
Nick: Everything I say here's hypothetical. I can't talk about me telling people return projections and things like that on my deals are really a risky thing to do
Dan: Just let me just frame the question another way, Simon Simon came on the podcast a few weeks ago, he likes to have his own approach to investing. He's like, ‘Yeah, about like $2.5 million. If I have, if I can be a full time investor, I don't really have to, you know, run a business anymore’. I'm wondering if you have a number in your mind like that?
Nick: We had about 3 million cash when we sold the business. And that was enough for us to go out and buy $100 million worth of real estate on the structures. We're taking the entrepreneurial risky approach to investing that money if we just had that money, and we didn't lever it up with bank debt or LP financing. Yeah, I think you can buy real estate all day that will give you a five to 10% cash on cash yield and then you get the appreciation as a bonus if things go well with the economy and interest rates.
Dan: So you've gone in for a few months, your teams there, you're charging an administrative fee. You’ve bought a million dollar structure. What's the income going to be on that, talking ballpark? Napkin it for a year. Where does it come from?
Nick: So $300,000 in cash is coming into the deal, and 8% cash on cash yield is what we target. So $24,000 a year of cash would come in after all the fees. First year, that's the first year target and then on up from there as we kind of get the facility really rolling. So $24,000 in cash the first year would be split off basically all to investors, right? Remember that 8% hurdle. If we don't cross over that hurdle, then me as the sponsor, I don't get any of the cash flow. And then beyond that,
Dan: So is that $24,000 after you paid the bank the loan of the $700,000 that they need back?
Nick: Yep, that's all expenses related to the deal.
Dan: That's cool. So you maintain that bank loan, and then pay the cash right away back basically, do I have like stock shares in this particular property? Is that how it works?
Nick: Yeah, we do a deal by deal basis where every facility has its own account, its own LPs, its own ownership group, its own structure with its own operating agreement.
Dan: So I give you £100K and I'm getting what?
Nick: You would own 33% of that million dollar deal with 100 grand, because you put in 33% of the cash. The real power here is with real estate. And this is where it gets exciting is the economies of scale. There's a lot of big players in the real estate game that are trying to buy $50-$100 million deals. And when you do that, we're looking at a big one now, the debt market is totally different, meaning it's not a local bank that you're dealing with anymore. You can go out on the commercial debt market and sell what's called ‘commercial mortgage backed securities’. And there's some other options of basically investors, retail investors, funds pensions, investing in the debt on the storage, so I'm not going to a local bank anymore to give me money off their balance sheet, which is like their reserves, I'm going to what's called the debt market, and I can get market market rates for my debt. So if you're doing a $50 million placement to buy a big deal, you can get a lot cheaper debt, you can get interest only periods, you can get non recourse, you can get higher loan to value, so more cash, and you can get lower interest rates. So you might be around 2.875% whereas I'm borrowing money right now in my small deals at 4.25%.
So what that does is it changes the underwriting when you build a portfolio. So if you're selling one storage facility in one small town, and it's $2 million, or $1 million, you're you're selling it to some small time investor who's going to deal with a local bank and they're going to pay 4.25% interest, they're not gonna be like an interest only, their debt service is going to be expensive. It's going to really weigh down the returns of the deal. But if you combine 25,30,40,50 self storage facilities together then you're attracting a different pool of capital and a different buyer who can find cheaper debt. So they pay a higher multiple on the value of the deal. So while we might buy these small deals, I don't know if you know how cap rates work,
Dan: Let’s talk about it, what’s a cap rate?
Nick: A cap rate is the return on your overall cost. So if I spend a million dollars, and it generates $80,000 of net operating income, that's before debt service, remember, that is an eight cap, $80,000 on a million is 8%. And it's 8%. cap rate. Now, cap rates, there's a tonne of nuance in that, but we try to buy deals at an eight cap, meaning 8% of overall spend, the overall cost is going to be our yield before we pay our debt service that generally generates a eight to 10% cash on cash yield after we get debt
Dan: Is that we're down to like your buddy bought a duplex down the road. And that rent to mortgage ratio is 10 years. It's that kind of a similar math equation?
Nick: Exactly, even single family, this is all areas of real estate that kind of rely on this cash on cash metric. And it kind of depends on okay, if we bought this deal unlevered, meaning no bank that we bought the million dollar deal for a million bucks, what would be our cash on cash return that and that's your cap rate, really. Cap rates get compressed when you do bigger, larger, more scalable deals because there's more money after them and they can get cheaper debt. So me and Dan, now all of a sudden you look up, it's June of 2021. We have 24 properties, and 642,000 square feet of storage. If we sold that, we’d get bigger investors' in who can get cheaper debt, and you get cap rate compression. And that's where real estate, you know, syndicators and sponsors like me are encouraged to sell these assets because we've added so much equity, appreciation to the deals when you get to that scale.
Dan: So essentially, what you're saying is like, okay, on the one hand, we got this really cool thing that's very intuitive to people, which is, you know, you're paying $80,000 a year to run a storage facility, I'm gonna run it cheaper and get a better return on my money than most people would. But now you're there's a second layer to it, which is you're building a product, which is your portfolio, which then you can offer to capital pools that require assets, essentially, like yours that are difficult to build.
Nick: Exactly right. These large asset pools, which are institutional investors, private equity funds, you know, even pension funds, like big wealth managers, have these pools of capital that are designated, earmarked for certain assets. They're having a really hard time deploying right now, because it's really competitive. They're having a hard time deploying their capital. Let's say, Dan's wealth management company was a billion dollars under management, his partners, his investors want 10% of that to be in storage. Well, he's got to deploy that money in storage, he's got to find a way to deploy $100 million in storage. That's hard to do, it's really hard to do, because everybody wants storage, storage is a really hot asset. Therefore, big funds want to have money in storage.
Dan: One of your philosophies that I found so attractive is you said, ‘Hey, don't go compete with all the Harvard cats. Like, you know, figure out, figure out where it's a little bit less competitive. But you know, it sounds like you're describing a pretty frothy space, a lot of people know about self storage. What do you think about your competition?
Nick: So I am going at it from a little different angle. Most of the capital that wants Self Storage exposure, wants it in major metros, they're sitting in their offices saying, ‘I want to own storage in Austin, Atlanta, Miami’, all these markets that are exploding, right? And I'm saying, ‘I think cash flow is cash flow in self storage. So I'm going to buy one in a town of 3000 people in upstate New York that's been shrinking for 20 years. That's a little bit risky, right?’ We're kind of the only people that are looking at buy these assets in non growing markets, small towns, and it's a lot of work to operate them. We do all of our operations in house too. So we are actually, you know, building, buying, servicing the customers like doing collections, like all the actual ‘on the ground’ work. So it's pretty rare that people are actually going to want to do the work that we're doing right now because it's so hard.
Dan: It sounds like having fun though. The way you talk about deals and deal construction and stuff you can tell you like really get lit up about that. What is it about it for you?
Nick: The potential is there. It's just a totally different ballgame than student storage when, you know, hopefully we could add another school and grow. I mean, I preach sweaty startups, and I preach non scalable stuff. And I still believe that that is the way to build serious wealth. But we're just on to something that I think could be really, really, really big.
Dan: So like generational wealth? I think your basic framework still stands, which is - you can't start at the generational wealth phase. If you look into the generational wealth stories, people say, Oh, no, what about the founder of Instagram? What about the founder of Facebook? They came from generational wealth. So there's that too.
Nick: Getting started with real estate and getting started where I am now, it's just not it's not would not be possible. I mean, A) we learned everything about management, operations, logistics, you know, remote management with our service business, we learned how to fire, hire, deal with problems. And it also gave us the capital to get started. So yeah, you look at it, you look at any very wealthy real estate investor or developer, almost all of them got their initial capital from either A) family, or B) business.
Dan: 100%. And it drives me crazy. When people talk about real estate as the first step. It's the last step. Frame up real estate as an endgame because this is something that you kind of have intimated over your career, like, hey, the end game for the folks that are playing golf all day at the country club or whatever, it's real estate. Why is that?
Nick: Well, because it's tax efficient as hell a I mean, the tax code favours people who build, maintain and own real estate for good reason, because it's critical, without people building and developing and owning and operating real estate in the United States, it would not thrive. So the government has subsidised that through advantageous tax codes. I mean, that's why, ‘you know who only’ paid $700 in taxes, because almost all of his net worth isn't real estate, that we could go down another rabbit hole of how depreciation works. And bonus depreciation works. It's really fascinating how I can build this portfolio and have millions in cash flow, but pay nothing in taxes. And that's why the path that we're on right now,
Dan: Tell me the basic idea of how that works.
Nick: It's called depreciation. And when you buy a million dollar asset, remember, I only put in $300K to buy the million dollar asset,
Dan: You only put in $30K. I put in $100,000.
Nick: But I mean, in general, the people who own it put in 33% of the capital, but you get to depreciate the full value, that $4 million, you get to treat it as an expense over a certain time period. Commercial real estate is 39 years, and you get to write it off every single year, 1/39 of the value of that property. And that can offset your cash flow, even though it's not a cash expense right then and the bank footed 70% of the bill. So the bank foots 70% of the bill, you get all the tax rewards. Now, there's something called bonus depreciation. And this is a very controversial area of the tax code that allows you to say, ‘Okay, this building may have a 39 year lifespan, but the windows don’t, the doors don’t, the sidewalks don't. I'm gonna have to replace that stuff earlier, that has a shorter lifespan’. The windows maybe have a seven year lifespan, the roof has maybe a 15 year lifespan’. So you can depreciate that stuff faster. It's called accelerated depreciation.
So you have somebody come in and do a cost segregation study on a building, we spent a million dollars, okay, where did we spend this money? What value does the windows have, what value does the doors have, the sidewalks, the landscaping, all these improvements, and they assign values to all of it. And then you depreciate it faster, the stuff that doesn't last as long. So you get a lot of accelerated depreciation early. And then there's bonus depreciation, which was a tax loophole that was put in place, that in the first year that you put something in service, you get to write off 100% of anything that has a 15 year lifespan. So all the cost of the windows, all the cost improvements, all the landscaping costs. So if you buy a million dollar building, you may get $200,000 of bonus depreciation in year one. Remember, we put in $300,000, we get $200,000 of a tax write off, and we're only making $24,000 in cash.
Dan: So how does that balance?
Nick: It just wipes out all your other income on your other properties.
Dan: Basically you're describing a snowball, an investment snowball. The fact that you have the investment makes it easier for you to compete and to hold others. What about the financing, like the fact that you have $700,000 of a loan does that then make it easier for you to go out and get the next loan or or how does that work and also maybe mentioned like the composition of debt to asset or the actual capital in the deal versus debt, like how do you decide that. Is it like just what the bank decided that it’s 30/70? Or is that your perspective?
Nick: So this is where a really interesting concept that has supercharged our careers, it's the cash out refinance, that's where this comes into play. So our first building we built in Ithaca, New York for $2.4 million. We put in some of our own capital, we got $1.8 million in debt from a bank, just like it's about 70% of it. It's not like a single family home where they look at comps down the street to see what somebody else paid to figure out what it's worth. commercial real estate is all valued based on how much money it makes, and those cap rates. So as you make more money, it gets more valuable. They don't care what you paid for it.
So you go back to the bank, we built this $2 million facility in Ithaca, $2.4 million facility in Ithaca, in 2018. We went back to the bank in 2019, and said, ‘Hey, this thing is printing money, it's doing really well. We think it's worth more money. Let's talk to you about adding more debt’. Because remember, they don't care what you paid for it. They just care what it's worth, and they'll loan up to 70% of the value. Well, we went back and they appraised it for $5 million instead of $2.4. And they said, Okay, yeah, we'll loan you 70% of the money. And they wrote us a check for $4 million. We paid off our initial $2 million in debt, we had $2 million left of tax free cash, we just added additional debt to the building. And you use that to fuel your snowball and grow it.
Dan: Did you know all this stuff when you started doing it?
Nick: No, it's been an incredibly long journey to learn all this stuff. This is how private equity works too. It's pretty complex. But real estate is very nuanced.
Dan: I think one of the interesting things, Nick, that you shared in our last conversation was like you had insights into the wealthy, basically one of the vignettes that I always attribute to you as the vignette of the ‘non working class’. And then you would draw these tendrils back to, ‘Rolled up 10 tree trimming services’, or, ‘Wwns the local municipal service company that digs the graves’, and that's so been my experience. It's a generational thing, too, because these folks have had time to accumulate wealth and stuff. What have you learned since we last talked? Now you're in a new class of wealthy people, people putting together deals, people giving you money for your deals? What have you learned from this wealth class that might be somewhat surprising to our listeners?
Nick: I don't think they're that special people. I've talked to people who are on a clear path to becoming a billionaire, arguably self made billionaire, maybe their dad invested $500K in their first deal. They're not amazingly talented. Some of them are not the best communicators. You don't have to be that smart to make a lot of money in this world. I just think you got to get lucky and choose the right thing to work on. It doesn't necessarily reward competence.
Dan: Why?
Nick: I wish I had the answer to that. Maybe energy and just falling into the right risks, falling into the right locations. I mean, I didn't know anything at all about self storage. When I had the guts as a 26 year old to trust my Dad who worked for a real estate developer, my Dad's a middle class guy who didn't have any money, but he knew how to build a piece of real estate. And we leveraged that out of pure luck. Looking back, it was the riskiest thing we ever could have done to build that building. By the way, we had a $1.7 million budget to build the building that ended up costing $2.4 million. So we went way over budget, extremely stressful. But we put our hat in the game, we just played the game. And we got lucky, we got bailed out by a good market. If, you know, if I did a multifamily development, and it was 2007 I would have lost everything and I lost the investor money and I’d have lost at all. That's what happened to a lot of people who got started in 2007. And something that wasn't self storage. You play the right game and get lucky and, and things start to click and you can just generate massive amounts of wealth.
Dan: One way to think about it is - starting a business is like that first externalisation of,exposure to upside and downside that's not just like what you did immediately. And that can feel really counterintuitive. One phone call to one person I signed a contract with 12 months ago could completely change my financial destiny. And then you move it into the space that you're now operating in, the investment space in the coverage is much larger, you're much more leveraged. I almost think about it like this kind of, there's like, you know, there's a roulette wheel life or whatever and there's like a bunch of boxes, you can put bets on. And being an investor feels like there's just a lot more bets on the table. There's a lot more numbers that could hit your way.
Nick: It’s anxiety producing for sure knowing that, yeah, I'm personally guaranteeing $25 million of debt right now in self storage facilities that are in towns all across, spread out. One little conversation on Zoom with somebody who we then hire and bring in to get involved in our entire infrastructure of our business. Yeah, you're right, man, you're right, owning. It's just something that I'm kind of numb to, I guess, because I've done it for so long. But there's tonnes of anxiety around other people making decisions where the consequences largely affect you, not them.
Dan: And it's both for the positive and negative, it's just a counterintuitive thing about investing and owning assets in general, is that they kind of have a life of their own.
Nick: Yes. Some of the wealthy people who are where I want to be 10 years from now, they'll tell you straight to your face that, ‘Hey, I am here where we are, because we caught one little lucky break. And we got a couple of the right people on board and they took the ball and ran with it’.It's a lot of luck, man.
Dan: One thing, Nick, I've noticed is - that one thing that people can control is their Twitter account. And now I'm at the stage where I've met handfuls of entrepreneurs who have changed their lives because of Twitter. Let’s talk about how it happened for you.
Nick: So a guy named Moses Kagan who is one of the original real estate Tweeter, it's, you know, real estate, Twitter personalities. He came on my podcast, the sweaty startup right around the same time you did you supercharged my, my Sweaty Startup podcast, by the way, he found out about me through your podcast. So actually, I would not be at all where I am, unless you and Jane and Dan would have had me on the pod. But he came on and he ran a real estate private equity company that's much larger than mine, much more successful than mine. He is a very impressive individual. He came on my podcast to talk about service businesses and what he's seeing out there in his management company with how easy it is to carve out a little bit of the pie in service businesses, because it's not very competitive.
And at the end of the conversation, he's like, Nick, you're in, you're in real estate, why are you not on Twitter? And I was like, ‘Social media, it is just a waste of my time. It doesn't make sense for me to focus on that. I'm gonna focus on my business instead’. Well, a couple months later, he followed up with a text and said, ‘Nick, you really need to get on Twitter. I think it'll help your real estate career. Trust me, just get on there, start tweeting about your deals’. So I went on Twitter. And in the real estate community, it's notoriously very tight knit, you know, close to the chest hold secrets, don't share what you know about real estate. And I just started sharing everything. I mean, screenshots of my profit and loss statements, you know me Dan. People reached out to me via my DM and said, ‘Nick, are you crazy? Are you crazy? You're giving everybody your playbook. It's insane. You're telling them how you run self storage facilities, you're telling me exactly what you're doing?’
Dan: Well, what are they worried about?
Nick: They're worried about competitors. I guess they live in a world of scarcity, where they feel that if somebody else wins, it'll take away from them. Where I live in a world of abundance, where if somebody else wins, that helps me. Everybody winning helps. We all can win together. Anyway, I got on there, started tweeting about all my deals. And sure enough, my network just exploded, people started following me on Twitter. I didn't ever advertise the fact that I take outside investment for my deals. But they read through the lines and reached out to me and we kind of built relationships offline, right? They DM, you get to know each other, you build a relationship, half an hour zoom call. And the next thing you know, this person and three of their friends are putting $500,000 into a self storage deal with you.
Dan: Talk a little bit more about that backroom of Twitter. I haven't really been exposed to it myself. But I feel like one of the scarcest things in the world right now, in terms of products, is just people who you can trust to give your money that they're going to return more money back.
Nick: The crazy thing about Twitter is it's a look into someone's brain. That is a blessing and a curse. Right? We all got to look into these politicians' brains and realise how crazy they are. We get a chance to basically tell the entire world what we're thinking at any given moment. And when you tweet 10 times a day and people can follow you and they can read your responses and how you handle assholes and how you think about this or that I get to know people by following them on Twitter. I know how their brain works. So I don't know if that's really what leads people to trust deals or if they do a lot of their due diligence. I mean, they also hire private investigators to chase me down too in the background. But yeah, it's really interesting. I don't know what it is about Twitter. But it's definitely a place where big big deals happen. And I'm a very small fish when it comes to the stuff that's going on on Twitter.
Dan: There are even anonymous billionaires that hang out on Twitter and look for deals. It's crazy.
Nick: Yeah, people acquire companies on Twitter, people invest in startups. I mean, if you're a venture capital fund, and you don't have a serious presence on Twitter, then you're going to miss out on almost all the deals, because ‘fin twit’ is where things happen.
Dan: Obviously you've outlined a basic strategy. You went into a tight knit powerful space, and you did the opposite; you were zigging and zagging. Are there any more nuanced tactics or ideas or just even taste ethics that you have for listeners. I'm sure a lot of listeners are thinking, ‘Man, I could really get a lot of leads off of Twitter’, basically.
Nick: I think people tweet too much on Twitter, I've grown my following using a very specific strategy. I'm not the best at this. I'm still trying to stay disciplined. But, ‘If I tweet this, will it make a smart person think seriously about what I'm about to tweet? And if the answer is no, I don't tweet it’. Even if I think it might be funny or clever, or if I want to get feedback on what people think because it's really hard. Once you get 100,000 followers on Twitter, you're constantly wanting to put information out there to get feedback on it in any kind of shape. You know what people might think about what you think, you know, I'm getting in the weeds now. But...
Dan: No, go in the weeds, the details are interesting here.
Nick: Yeah. And people tweet too much about politics. You can't you have to be apolitical on Twitter, or you're just going to not do well at all there. Stay focused. I mean, if you add value to people, they're gonna follow you. And also it's about threads. If you don't write threads on Twitter, you're not going to get followers.
Dan: Why?
Nick: It's just what I found. I mean, I write two threads a week. And those threads generate 95% of my followers, even though I'll have some pretty insightful or at least what I feel to be pretty insightful, business strategy one off tweets or conversations with friends on there. And for some reason, it's the you know, threads that really get you followers.
Influencers in any space, whether it be sports or media or politics. I mean, they are influencers because they've accomplished something, they've done something, they're doing things that they can talk about. So step one, in my opinion, is always go out there and actually take some risks and do something crazy and start a business and then it's a lot easier to talk about that stuff and people to follow along.
Dan: Awesome talking to you as always. Just curious. I was listening to one of your episodes is great episode we talked about your brother making $75,000 in his first year running a lawn care company, just out of college, and this is the classic ‘Sweaty Startup’ advice and so cool that he actually took it and did it and you know, sounds like he cut a lot of the lawns himself but
Nick: He's not wired like me so I've actually stopped kind of stressing him out because he and I are wired totally different. When we get together for family gatherings, we'll smoke a cigar and drink some bourbon and I'll be like, ‘Alright, when are you going to learn Spanish, when are you going to do the h1 b visa programme. When are you going to get a bunch of marketing going, when are you going to get your second truck?’. And he's like, ‘Nick, I did the math. I made $80 an hour last year. And I only worked 32 weeks a year and I went to the Florida Keys and I fished for three months’. And I'm like, ‘You're right, man, who the hell am I to tell you that that is not the life?’
Dan: One of the notes my producer made here is that, you know, the Sweaty Startup philosophy is awesome. But like Nick would succeed, no matter what he does, like we put you in like the most competitive freakin social media startup. And you do that too, because so much of it is how you're wired. I think, you know, you have demonstrated in the past few years that you're just a true blue entrepreneur, you're wired that way.
Have you changed? Do you have these kind of fundamental philosophies written up on your website? Have you added texture? Have you changed your philosophies? How are you thinking about things differently? And maybe in the context of somebody thinking about going the Sweaty direction, so to speak, in 2021, in a post COVID environment, how have the opportunities changed? And how might we be able to take advantage of them?
Nick: I'm changing my mind on a lot of stuff. I'm getting more piped into the tech entrepreneurs and what they do, and there are tonnes of opportunities there. You talked to me a year ago, and I thought tech was wasted. And you know, there's no more opportunities, and you should go start a ‘Sweaty Startup’ right away. Another thing that I'm shifting my mind on is that not everybody's cut out for to become a sweaty entrepreneur, I my fear is that I'm going to create a bunch of 50 year old people who work 70 hours a week have no control over their lives, and basically have a job that they're dumping all their money back into their business, they're generating no wealth, maybe they drink a six pack of beer every single night, like many tradesmen, that's my fear, right? Because it's not easy to scale up a service business,
The opportunities are better than ever, people are spending more money than ever on their homes. There's a huge shortage of people who do this. So if you want to go into the space, I'll tell you one piece of advice that I think would really revolutionise it, that's more applicable than ever, is that you have to take extreme ownership over your hiring. Because it's not easy to hire right now, it's never been harder to hire. And too many service based business owners, including my brother, can't find anybody to do work. Maybe they blame the government, maybe they blame whatever. The good businesses find people to hire because they're resourceful and they figure it out. The fact that the labour shortage is in place is why you can charge whatever you want to show up and do work on somebody's house. So without that environment, everybody would be in this business. So it is hiring and management. That's the only part that's really critical right now, marketing's not that important. SEO is not that important. You know, if you can hire and train and manage and recruit, mainly recruit, decent people who aren't drunk and will show up to work for you. You can win in the service business sector. That stuff is really uncomfortable - trying to find employees, hiring employees, managing employees dealing with the problems of these employees. It's the hard part of being a service based business entrepreneur.
Dan: Do you see opportunities like that in the virtual space or tech space right now that you're interested in?
Nick: I worked with a company that was really exciting, that is sourcing Filipino talent. I know you guys are proponents of offshore hiring. We now have seven Filipinos working for us in the past three months. And they're amazing, amazing employees, they're adding so much value to our company. And we're having a tonne of fun. And it would be really, really hard to hire Americans to do the same stuff. So we work with a company to outsource to them that we really like. And you know that that's a pretty cool example of just, ‘Hey, here's a problem where we're going to run around the Philippines and find really competent people to work for you. And we're going to get resourceful as hell’.
Dan: I love that example. It's straight up with our remote recruiting, it's the same deal. ‘Hey, you need to hire somebody, we'll just run around to every job board in the world and pull together all the databases in spreadsheets, it's hard. But we'll do it.’
Nick: Even the scalable companies are services businesses. I think if more people treated the scalable companies like service businesses and did the stuff that doesn't scale, especially early on, I think that's how you win, right? You know better than I do, Dan, but I think that's how you win.
Dan:100%. Nick Huber. We appreciate you coming by the pod.
Nick : Dan. I really appreciate everything you've done to help me get on the mat man. Thanks again.
Dan: Big shout out to my guy Nick Huber, owner of ‘Bolt Storage’, and the main man behind ‘The Sweaty Startup’ podcast and blog. Nick is one of those guys that I proactively reached out to after having read his blog. There's such an opportunity to put out remarkable, unique content When I first stumbled across ‘Sweaty Startup’, it wasn't popular. You know, it wasn't some big phenomenon. But I knew by reading those articles that the guy behind the words really knew what he was talking about. And I wanted to get to know him.
So I hope that you were inspired by Nick's journey and got to know him a little bit better today. So if you want to go into the weeds a little bit deeper on today's topics, just head over to ‘Sweaty Startup’ dot com. Nick's ability to be open and generous about the deals he's cutting about the businesses he's making. All the podcasts and blogs and tweets he's put out, has attracted an amazing network to him. And I think that's one of the lessons behind today's episode. It is absolutely a core philosophy behind what we do here at TMBA. I encourage you all to do the same. That's it for this week. We'll be back, as always, next Thursday morning.
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