Seth: Hey, everybody, how's it going? This is Seth Williams and you are listening to the REtipster podcast. Today, I have the good fortune of talking with AJ Osborne, who's the CEO of Cedar Creek Capital.

Now if you're not into self-storage investing, you may not realize who this guy is, but I can tell you, as someone who has been deeply immersed in this business over the past year, this guy has become a pretty well-known figure in this industry because he runs an annual event. He's a pretty big-time investor himself. He puts a ton of really good videos out there on YouTube. He does a ton of stuff in the self-storage space.

AJ founded his private equity firm, Cedar Creek Capital, because he wanted others to benefit from the same financial freedom that saved his family at a time when they needed security the most. And he's been featured on top real estate podcasts and kind of like the go-to resource for self-storage investing.

AJ, welcome to the show. How you doing?

AJ: Doing great, man. Thank you. Appreciate you having me on.

Seth: Yeah, absolutely. Aside from what I just said there, who is AJ Osborne? What's your story? How did you get into real estate? How did you get into self-storage investing? Tell us your story.

AJ: Real estate. I think anybody that's interested in business and money and entrepreneurship, all that, real estate is always there. It's always in their mind as an option. I think most people recognize that it's the most consistent, safest way to create wealth and income. I think that's a generally accepted thing.

When I got started in life, I followed in my father's footsteps selling insurance, and that's what we did. We sold insurance. And the reason why we sold insurance, and the reason why I wanted to, my father grew up in extreme poverty. He grew up like they didn't have running water. They didn't have a bathroom. They had an outhouse in the high desert of Southern Idaho, and would have to walk to it when it was 20 degrees below zero.

And my dad's not that old. We're not talking about the Depression, everybody. That's not what we're talking, we're talking like 70s. When you look at his position where he was, he needed something to do to get him out of his situation, and he was determined to do that. His brothers and sisters, unfortunately, did not. They became drug addicts and they've all since passed homeless as a lot of people in that situation do.

He met my mother and started selling insurance and pulled himself out of poverty through that. And I think for me, he was able to take control of his life by selling insurance because he was in control of the income that he would make. I think it's the uniform idea that draws people into sales. I control my income. If I want to make more, I'll sell more. I'm in control of my time. And I think there's just so much to that. I wanted to be my own boss. I got paid on commissions. My clients paid me.

In my adult or career life, I never had a standardized paycheck. I worked right out of college for Aflac, where I was there, for lack of a better word, a secretary that just kind of sat at the front. And I would process claims as people emailed in. I was the worst they'd ever had. And they told me, they're like, “AJ, you are by far the worst person we've ever had at this job. And I'm sorry, but this isn't working out, but our clients love you, so we're actually going to have you try to be more in a sales role.”

I just kind of went down that road, followed in my dad's footsteps, and sold insurance. And I quickly learned, I made money. I made good money. I had a knack for it because I think I'm hardheaded and I just don't stop or give up.

But what I thought was financial freedom, what I thought was something that would create wealth and income, actually turned out to be not true. Instead of not having one boss, I ended up having lots of bosses. And my income, although it had unlimited potential, it also was not stable. And so, it would go up and down. My wife and I had to live on a fraction of our income. We saved everything.

And reading about successful people that were huge, like billionaires, things like that, it was clear that their time wasn't connected to their money. And so, the idea of real estate was simply to not have my time connected to my earning potential anymore. Whereas in sales, it was directly correlated. The moment I stopped working was the moment I stopped making money. And that was when I'm looking at like most of us do, more than even just ourselves. When I was looking at my family, when I was looking at everything else, it's like “How do I take care of everybody? How do I do this? How do I take care of my parents? How do I take care of this? Because if he stops working, he stops making his money.”

I think the simple principle that I found out is in order to grow wealth and income, you really have to compound your money. And in order to compound your money, you need stable revenue sources and you need to have a known rate of return that you could repeat over and over and over again. And that stable revenue source couldn't be connected with your time. That's it, really. That's it.

The only things that you play with at all to compound wealth and grow is your return, meaning the input, the money coming in. And then the density or volume at which how many times you can regenerate that return. So, how many times can I buy that source to repeat that income and in what timeframe?

And that's it. Those three things are pretty much all that it takes.

And when you look at people like Warren Buffet, when you look at people that created immensely successful businesses, whether it was Apple or whatnot, there was volume and magnitude. You either sold a ton of widgets and your machine was always selling them, or you sold things that were really, really expensive. And it is usually a combination of the two, and you got volume and magnitude.

I looked at that and it became clear, I'm never going to get off this. And that's when my position really became, it was like a treadmill. And that's how I viewed it. I viewed it and I was working with my dad, like, we're on a treadmill here. We make good money. So, I guess you could say selling insurance made us rich, but just like anybody with a high-paying W2, it was solely dependent on that. Sometimes you made more money, sometimes you made less money. It wasn't consistent like a W-2.

So, real estate became our avenue to escape the treadmill, as I called it. And we wanted tax benefits. We wanted recurring income, and we wanted there to be light at the end of the tunnel that we could get off this treadmill. And so, we started investing in real estate.

But the real estate to me, I actually didn't like. I know I shouldn't be saying that, but when I started out, I didn't like real estate at all. The reason being was I looked at the amount of money that I needed and the return I was going to get, because being a sales guy, everything was cash flow. We didn't focus on anything but cash flow.

Looking at saying, “I'm going to pay this and I'm going to get this in return,” it was like, “Wow, that seems like a really inefficient use of my money.” And the cash is just not meaningful at all, not realizing the whole rest of it.

So, I love the piece of business where I could affect the income. I'm going from a place where it's like “I have total control over my income,” then going to investing in real estate “I have no control over the income to raise it.” Now it's totally not correlated with my time. But at the same time, I was like, “I can't really do anything to build this up.”

And we found storage. And storage seemed like it was a mix between the two. This is prior to 2008. My father actually bought the first little storage facility with him and a partner because of trying to do something. And it was out in a small town in Idaho. I was actually looking at multi-family and some other assets. And he's like, “Look at this.” And we thought, “Okay, well, maybe we can get some cash flow from this.”

But the big thing was I looked at it and said, “This isn't a real estate asset, it's a business. I can actually control the revenue in it.” And so, from there, we just started buying up these small little storage facilities, which we were looking at. And the whole design behind it was they'd be paid off and they'd be giving us cash flow.

We quickly learned that we could affect the income a lot more than we thought. And so, we kept buying it and thought, “Hey, this is our way off our treadmill.” This is the way that we can do it and win basically where we can not have our cake and eat it too.

And as I went forward, we started to get a lot of assets. We started being successful. I was actually running the branch location here in Idaho for a huge $40 billion company out of Chicago. And I had golden handcuffs. They paid me really, really good then at the time. And then I had my storage and I was just like, “I'm winning at life.” It's just kind of thing like, “This is the top of the game.”

And it was at that point, as it usually is, the game ended. I became paralyzed overnight, essentially a quadriplegic, not essentially a quadriplegic. I was paralyzed from the eyes down and I was put on life support.

Seth: Wow.

AJ: And I couldn't speak, eat nothing. And I was fired.

Seth: How did that happen?

AJ: It is something that is called Guillain-Barre. It's a trigger. And what happens is your white blood cells, for some reason, the trigger, there are different triggers that your white blood cells get confused. And they thought my nervous system, my central nervous system was the threat, was the virus. So, my body got scared, and produced a hundred times the white blood cells that are normal. And it tore my central nervous system apart. It destroyed it. And so, it severed my brain from my body, essentially.

Seth: That's insane.

AJ: And it happened within, literally, it was like one minute I was fine. My legs were hurting. The next minute my legs stopped working. And then I didn't even say goodbye to the kids, went to the hospital. And within two, three days, whatever it was, I was being put on life support because my whole body had stopped functioning. And then I was paralyzed from the eyes down. They put me in a coma. When I came out, I was hooked to life support.

Seth: That's terrifying.

AJ: It was pretty crazy. We just had our fourth child. And from there, at that point, I was fired from my job in the hospital. There was no exit date for me in the hospital. We didn't know what would happen or how anything would occur. So, I was fired from the hospital. And after months on end, I finally went from hospital-to-hospital rehab facilities. And then I went home paralyzed to hang out at home.

And when I was sitting in the hospital, I wasn't worried about losing my house. I wasn't worried about anything like that because my real estate was paying for my family to live. Even though I'd lost my high-paying job, I was okay. I could still take care of my family. I could still live. My wife didn't have to leave our four children and now a paralyzed husband to go get a job. And I thought, “This is really important. This is really impactful.”

And so, at that time that I made a promise, I was like, “Hey, I'm going to teach others about this and how to do this, and then I'm going to let other people come along with me to achieve the same thing.” And that's when I started the private equity firm to allow other people to invest alongside us as we bought real estate, hold for the long term so other people could participate in that financial independence that I had.

And that became my “why.” That became my purpose. We didn't know if I would ever walk again or if I'd ever recover. And so, I started working and started my private firm out of a wheelchair. And we just started moving forward. And that's really what I've been doing for the last five-plus years.

I should have probably quit my job prior and done this and started a long time ago. But I'm so fortunate and we've been through so much in our real estate investing experience from the Great Recession to owning, operating through it, owning other businesses. I owned everything from tech companies in the self-storage space, property management system, companies to co-founding that as well as co-founding the largest, self-storage co-op.

So, we don't consider ourselves a fully integrated firm. We consider ourselves a universally integrated firm. It's not just we're fully integrated, like we do the management stuff. We actually own the infrastructure in the industry, and we dumped millions into that stuff so we could perform better at what we do. So, we became, and our goal was to try to build out the industry, build out our company, and allow others to participate. And so, yeah, that's what I do.

Seth: Man, that's a lot. You covered a lot there.

AJ: Yeah, it is a lot.

Seth: How long did it take for you to fully recover and how did you recover?

AJ: I still have to take pain meds every day, all day. My nerves were destroyed. I still have problems walking. I still have to think every time I take a step. I don't have full functionality over my lower legs, but I am out of my leg braces and I don't need walking support, which was more than we thought.

And I was told I would never get out of my leg braces or my walking help and being able to walk alone. And at that point I left the hospital center, so I never went back. After they told me that, I said I'd been going to rehab for years, I was like, well then, no reason for me to be here if you don't even think that I can come back for it. But really, how you come back, there is no medicine, there is no cure. It's just they hope your body will work on your nerves and build them back.

And Guillain-Barre normally has a really good outcome. The vast majority of people that get Guillain-Barre, it's like they get weakness in their legs, things like that. I was in the top percentile. You could say I won the lottery when it came to that. I was as bad as it gets. We got to a point where it was like, we don't know if he's coming off tubes.

The odds of me recovering even to where I am at, not only was it not looking great, it was not something that was expected by us. And we just had to learn really early on. When I was in the hospital, I thought, “Listen, I'm either going to become AJ, the guy in the wheelchair, or I'm going to become AJ something else.” And I meant not AJ, the wheelchair, like being in the wheelchair was the bad thing. I actually didn't mind if I was in the wheelchair. It meant more to me of that's who I became, as the wheelchair. Or I was AJ something else, even if I was in a wheelchair.

I had to kind of make that decision and had to say, “Is this who I am now? Does this define me? Is this going to be, “Yeah, AJ's a paralyzed guy. He sits at home and luckily, he has income off it, and it's what he does. He hangs out with his kids and things like that?” Which, not that I don't like hanging out with my kids or anything else, not even though that it's bad, that's just not what I wanted with my life.

And I wanted to try to show my kids that it doesn't matter how bad the situation is, you can be more and you can be better from it. And I knew that if I didn't do it, how would I ever tell my children that? I had some friends that had become quadriplegics and they came to me and they weren't my friends first, but I was in the hospital on Christmas Eve and I had one of my good friends, he's a quadriplegic. He came saying Christmas carols to me in the hospital on Christmas Eve, because when he became a quadriplegic, he was like, I never want to let anybody else stay right in the hospital on Christmas Eve. And he was paralyzed twice. Crazy story.

But he's completely confined to a wheelchair and still today and has not a lot of use of his arms. And he was the definition of that. He has non-profits. He's so much more, and honestly, he probably does more and is more than he ever would've been before. And I was like, that's what I want to be. I want to be more in the situation, not less because of it. But that's a personal choice we all have to make, no matter how big or small the situation is.

Seth: Do you think that the paralysis experience was kind of like a gift in disguise?

AJ: I'm better because of it. People are like, “Are you mad at God? Are you mad at anything?” I'm like, “What? Why would I be?” I guess I'm not so egotistical to think that those things should happen to other people and not me first of all. I was young. I was 33. My thirties, which are almost over now, were essentially taken away in a large format for me.

I was a big bag packer and a big fly fisherman. I was a big outdoors guy and that identity part of me, it was taken away. I lost one of my highlights, my youthful time where I'm supposed to be youthful and I'm finally making money. I have a wife and kids and the world has changed. And so, I turned and said, “I'm going to make my thirties in a different way.”

I think a lot of people, we have a lot of reasons to be mad. We have a lot of reasons to make excuses. We either make a choice too or not, no matter what situation you're in. And that doesn't mean I was always happy. No, no. It's a great story, but it was hell.

Seth: Yeah, I'm sure.

AJ: Literally, I just lied on a bed and people would roll me over on my side as I looked at the wall, as people would wash me down. I couldn't speak. I got home, my brother had to move in with me and help take care of me and my wife and the kids and he would have to carry me. And when you see your kids and you're just like, “I was your hero. I was this big giant type of person and then now I'm whittled down to asking them to help me to do things because I'm stuck in a bed.”

I think we hear those stories and a lot of people are like, “Man, if I had something like that, that would get going.” It's not what you think it is. I'm really happy with where I'm at and the challenges and everything else, but it's not fun. It wasn't easy. And although I say I wouldn't ever change it, obviously. I don't ever wish for it or anything else, but I do believe that I'm better off for it. And I do believe my family's better off for it. I believe my children, my wife, I believe that I have a better business and I think I’m just an overall better person for it.

I never want to lose those gifts, ever. They're so important to me because those gifts became my gifts regardless of my situation. And they were gifts that I created. And that is the biggest lesson I think that I could ever have, was that I can have these things and these gifts regardless of my situation. And I never want to lose that. And that's hard because even as I got better, even now, we all fall back into old ways and I got to remind myself that's not that important. Remember, when you get down on yourself and you start to think about it or anything, “Hold on here, come on, we got to put this into perspective.” And I hope I don't lose those.

Seth: Yeah. We haven't really gotten into it that much yet, but I wonder if Cedar Creek Capital would exist today if that hadn't happened. Think of all the strength you have as a result of going through that trauma in your life.

AJ: Yeah, it probably wouldn't at all.

Seth: I think a lot of people have probably, say if it's something much more minor, say if you're stuck in a job you don't like and you decide to go do something on your own. You wouldn't do that if you didn't have that discontent and that struggle and that friction with something that you're not enjoying. And if you do have a job you like, I guess that's awesome.

AJ: And two, you bring up a really good point. When I talk to people who are like, “Oh, I shouldn't complain. Oh, I got a divorce but I shouldn't have complained,” kind of thing. And I'm like, “Hold on here. There are always two sides to this coin.” Although I physically had this happen and everything, I had my family intact and I couldn't imagine what would've happened or my life would've been like without having the support of my wife and my family and my kids. Actually, to me, that sounds way worse because how much I had to have that at that time.

There are always two sides to the coin. And just because somebody else thinks that what they're going through is smaller or not, that's just not how it works. And two, our brain doesn't distinguish things like that. So, if you're struggling with something that's really bad and devastating in your life, like a divorce or something else like that, it's not like your brain is like, “Okay, well, we have a skill of bad here.” No, it's just bad. And so, when I was in at the worst, I don't know that I thought that it would've been worse in another situation. I think that's really important for people to remember.

So, the way that we approach any problem is the way we approach all problems. And that is universally true, I believe. And so, all those difficult things in our lives, they can be motives. Your boss yells at you at work and makes you embarrassed in front of everybody. That could be the motive for you to do something that you want and to take that and make that into something else. And make that into more. I think that's really important

Seth: On that whole thing about the financial security and having recurring income that kind of saved you in that crisis. It makes me wonder do you think, is there ever financial security if your income isn't recurring, permanent, and dependable? You can make millions from something that requires your active involvement, but if it's not recurring, it's not going to last ultimately, right? I don’t know. What do you think about that?

AJ: A hundred percent. I learned very quickly there's a big difference between being rich and being wealthy. And rich people, they are at the highest risk of losing it all. And the millionaire status is the most volatile social class there is. So, more people come in and out of the millionaire status than any other social class.

And when you look at the financial support and financially rich people, they make a lot of money and they can spend a lot of money. They usually have lots of nice things. And wealthy people, they don't have to work for their money. And then you have what I'd consider the super wealthy, which means they're rich and wealthy means they make lots of money and it's all non-correlated with their time and support.

That's kind of the end goal. You're like, “I want to make lots and lots of money, but it also needs wealth.” But too often, I think we default to making a lot of money, having the nice things to securing the income, because you pay upfront for income security on the back end. That's just an economic reality.

And so, people that make lots of income, they're usually actually at risk of losing their standing the most because if something happens, where do they have to come back from? The distance is huge. If you're a doctor that works with his hands and you make $400,000 or $500,000 a year and you break your hand, what are you going to do to make $400,000 or $500,000 a year? Your whole entire lifestyle, your whole entire life just got uprooted and can disappear in an instant. Unless that income is not tied to your time, it’s diversified and is backed by real assets that are stable and not at risk.

Yeah, I don't think there is a lot of income security. It didn't matter how good I was at my job, my income stopped. I could have been the best in the world. It didn't matter. It was over and I was 33. So, it's not like, “Oh, this is something for you to worry about.”

I like to say everyone has to retire. That is a universal fact. At some point, you will no longer be able to work to earn an age. That is guaranteed. At some point, you will lose your income. So, you would think that more people would put all their effort and stress into understanding, finding ways to prepare, and have that retirement. But that's usually not something anybody thinks about until their 40s, sometimes 50s.

And because of the way that stable income works, it doesn't work like, “Oh, I'm going to do this now and receive this income.” There is this tail end to it. Time is a big factor when you're talking about true stable income and wealth. So, people that start in their 20s, it's not the same as if you started in your 20s and your 40s. Now it doesn't mean that it's not possible, of course it's possible, but your strategy has to change and you need to do things differently. So, it should pretty much be like the goal or at the foremost goal of everyone because it is a 100% certainty.

Seth: Yeah. And not to mention, you've probably met people like this too. I've met so many people with jobs who make a really good income, whether they're lawyers or doctors or bankers and a lot of them, they want to get out. They don't like it. They're making a great income. It's like if they could quit tomorrow, they would absolutely do that in a heartbeat. So, just knowing that so many people want to get there, it's like, you might as well get to work on that. Do what you have to do so you don't have to work anymore.

AJ: Exactly. A hundred percent. I don't think I've ever met a professional that said, and a lot of people think, “Oh well, if I were making a lot, lot of money, then all my problems would be solved.” That is not how it works. I've never met a working professional that makes six figures plus that was like, “Yes, I never want to stop ever working. I don't want there ever to be an exit here doing this one thing that I'm doing.”

I don't believe in retirement from the standpoint of meaning, I don't believe people are ever designed to retire, but the functionality of how we make our income, that's what we're talking about. So, I'll never retire, I'll always be investing, but I can do that because it's not tied to my time. Now, anybody, any working professional doesn't believe that their income will last forever. And they don't believe, it's like, “I'm done. It's over. I'm good.”

So, when you look at people, whether you're making $30,000 a year or $300,000 a year, at the end, their concerns are all still the same. They really are. Now I know someone that's making $30,000 a year hearing that saying, “Hold on, it is not the same.”

And I get that reaction because it's true. You aren't the same as far as your life that you live or your worries or your concerns. You're worried about making payments. You're worried about literally having money in the bank account to do the bare necessities. What I mean by that, and I'm not at all trying to say that their concerns or struggles are the same, it's just that everyone is working toward a goal or everyone's thinking about a goal. Most people just don't understand what that goal is or how to get there.

And that's one of the biggest problems that we have in the United States. Most educated people are financially illiterate. And the two, lots of times I find that the more financially you are paid for your jobs, things like that, generally they are more financially illiterate because they haven't been looking for solutions or trying to understand it. And so, there's no pressure for them to do it. So, they're not really looking.

Where a lot of people that are making less, lower middle class or even more of an upper middle class, they're looking and they're trying to understand and they're seeking for knowledge to increase their position. And I think that there's a huge advantage doing that because you can do it right. I know lots of people that are in their 60s that are dentists, doctors, they can't retire. They just barely paid off their medical bills.

Seth: Wow. That's crazy.

AJ: Yeah, it's crazy. Literally. I know somebody who is 55 celebrating paying off their education, their medical bills. And I'm like, “What? It took you your whole life to get to that point and you're a high-paid individual.” So, it's a universal concept.

Seth: I'll have to go get some antidepressants after hearing that. That's really sad.

AJ: Well, hopefully kicks us all into motion, right?

Seth: Yeah, exactly. Exactly. So, you mentioned in passing, did you say you own a co-op and property management software?

AJ: Yeah.

Seth: Did I hear you right?

AJ: That's right.

Seth: Which ones are those?

AJ: We have store local.

Seth: Yeah, I'm familiar with that.

AJ: Which is a self-storage co-op. The reason why a store local was built, why we co-founded it, was because of the need for independent operators and people that wanted to get into storage. We wanted the competitive advantage and landscape to be universal. Meaning the big companies that come in, we didn't want to end up like the hotel industry where five brands own the whole entire market. We wanted independent owners and operators to compete at the same level. And so, the co-op allows people to get there by services and get everything at the level of the biggest companies. So, it creates a situation where their competitive advantage is higher.

And then the tech company is a property management system and that is called Tenant Inc, the product of Hummingbird. That property management system is an open-source system. Once again, we're trying to create an ecosystem in which independent operators can operate like REITs. And it was very clear that that was impossible without the tech playing into it. We didn't have options so we had to create options for the storage operators and owners. And that's where the tech company came from. Yeah, both of those things.

When I look at real estate, there's two parts to real estate. Most people focus on the market, meaning the market makes you that disconnect between their time and their money means they fully rely upon the market. I focus on returns that are driven from our actions, not the market. And so, we focus and pour a lot of money into things that would generate power for us to affect the returns of our assets.

Whereas most people just pour their money simply into the assets. We poured it into the ability to operate the assets at a higher level. That made us more proficient, that made us understand opportunities better and take action on those opportunities. And we did that and created that so everybody can use it. It's one of our missions.

Seth: To the listeners out there, AJ did not tell me to say this, but I've actually got a little reminder in my calendar to join store local and I've been on demos with I think seven different self-storage property management software companies. I've spent many, many, many hours now trying to find the best one for my new facility because I know it's a really big decision. It affects every single day.

And Tenant Inc is by far the best one I've seen so far, by a long shot. And I think the problem with that whole software realm in the storage business is that a lot of them are terrible. They're just really bad systems or they're antiquated. And I think the reason that happens is because first of all, there's kind of a monopoly going on, but also a lot of them are sort of made to trap you. Once you get into their system, it's very hard to leave. It's a huge hassle. So even if you know it's terrible and you know you're overpaying, switching and jumping ship is not an easy thing to do.

I don't know how big Tenant Inc is in terms of market share right now, but I have to imagine just based on what I saw, if people could, people would be going over there in droves because it's way better. The user interface is very clean. It's easy to use, it's easier to understand. The websites look great. I'm planning to sign up with you guys.

AJ: The thing that we look at in the industry is, when you look at property management systems, let's take self-storage for example. They were built by tech guys. And the tech guys built it to own the revenues coming in from the subscriptions and their data. So, your data, the intellectual property that they had is part of the intrinsic value of the company. So, it was never open and never shared. And it was tech people.

The other operators like Extra Space and the big REITs, they built their systems for their companies and for storage. So, they perform astronomically better. Tenant was built by storage people. We built it for storage operators, owners. We all came together, we funded it and then we hired tech people to build what we needed in storage.

And that simple difference makes all the difference. Having it be open-ended allows us to do true automation. And things that help storage operators make more money, through increasing revenues, interfacing user customer experience, as well as limiting their overall cost. And so, when you look at it, this was built by operators for us. So, the owners are the end users and that is a very different setup than anything that exists.

Seth: And that does make a huge difference. I know the common feedback I hear from people using other software out there is, “This thing is terrible. It needs this feature and this feature.” And they'll tell the company and they just get ignored because the company doesn't care and they don't have to do it because the person is not going to leave.

AJ: Yeah. The first time we said, “Hey, we need our data on another property management system,” they said, “All right, you pay us $5,000 and we'll get you your data.” It's not usable, it's not anything else like that. But we needed it to switch. We literally had to pay that astronomical amount of money to get our own data to do what was best for our company. And it's like, “Oh, this is a racket and it's not made to benefit me.”

And that's the problem. We never wanted to start a tech company. It's not like we're like, “Oh, how can we make a ton of money?” That never occurred. It was literally because we were forced into it.

The co-op, we were trying all these large storage operators and small operators mean single operators, we were trying to get the companies to work with us and to build us out something that we could utilize in the way that we wanted. They just all said no, nobody would ever do it. So, then we were like, “Okay, well if we need this, I guess we got to do it ourselves.” But it was never designed to go, we never thought we wanted to own or start a tech company. That's not how it worked.

Seth: Yeah. Well, it makes sense that you'd be involved with this just given your size. Because I've had that same thought where it's like, “I wonder if I could build my own software, but I'm just not big enough and it doesn't make sense for me to do that.” But when somebody gets to your size, it's like, “No, it kind of does make sense because I'm big enough and I have the connections and other people could use it.” And so, I'm glad you jumped into that. It's a great idea.

AJ: Thanks. We're excited about it. Everything that we do is long-term. And I think that's one of the biggest things when you're looking at anybody in any industry, no matter what you go into, the more long term you are out, and the more long term that plan is, the solutions that you need change and they change pretty dramatically. And so, a lot of storage operators feel that way.

Seth: One thing I wanted to ask you about because I know you must have done this to some point. How do you form partnerships in the storage industry? What role do you personally play in the facilities that you own or have a part ownership interest in?

AJ: Yeah. When you're looking at partnerships, in general, real estate, everything else like that and in storage, there are a few things that you need to realize that the individual assets or industries may be sensitive to.

Storage is very sensitive to the operator. You can have two storage facilities on the same street. They could be next door and they will make different amounts of money. Exact same products. So, it's not like the market set the price of a two-bedroom, one-bathroom with this quality. And so, that is the price of that thing in this market. That's not how storage works. It is like a business. We do things like dynamic pricing, revenue management. We maximize this square footage through offerings.

I view storage and I teach in storage that the unit is a product. We are doing product market fit. So, when we look at our storage facility, we have 10 different types of units. They're 10 totally different products that have 10 different customers. We also have our add-ons, we have insurance, we have other products that we use. On one facility we may have what would be considered 20 sources of revenue. And then we may have our managers at that point and we are doing full-time marketing because of the short-term leases people are turning over. That gives a much larger component to more like a retail business, getting people in the door, working it on that end.

With that, storage is very dependent on the quality of operators that will be operating the business. And so, for us, we operate all our own assets. We don't do third-party management. We do not third-party management for anybody else. Our entire management company and system are predicated on our assets. My father and I built up over $100 million, $150 million in assets with just us, no investors. And our management company was predicated on that. Why? Because we had no third-party management options when we got started. So, we were forced into it.

Now, because of that, when we do partnerships, partnerships are based upon risk, work, and money. In real estate, that's what you got. And so, when we look at it, our partnerships are broken up into the fact that it's predicated on us operating and owning. Now we joint venture with people. We have investors that come into our deal. So, we generally have it set up as a general partnership with limited partners and we'll have co-GPs if we do like the joint venture partnership with an individual.

But we always are the ones that run the assets, meaning we have to be the operators or else we're generally not going to do it because our entire system of valuing it is predicated on our system. So, when we do our feasibility studies, when we're underwriting assets, the inputs that are coming into that are directly correlated with how we run the system. So, we're not guessing. It's like I know exactly the expenses, I know exactly the return on ad spend, I know what we have to do, I know how long it's going to take. All of that.

When we underwrite something, we know what we're trying to do and we have the tools and means to do it to execute it. Partnerships we do and utilize our technology like we're talking about to do it. We also have large technology pieces that do the revenue-generating piece.

We come in and we're going to be the operator. And then other people come in and they'll own it with us. So, we have equity splits, fee splits, and differences with that deal. And depending on it, we'll depend on how that deal works. So, if somebody brings us a deal that only they have and only can get, it's an off-market deal, they have a lot more say and power because they now hold the opportunity. And so, we're happy to do deals and we're happy to look and go with other people or they may bring in lots of money.

There's just a whole variety of the ways that the deals can be done and shaped. But we don't ever do deals that we're not managing. And I hold the risk on all our deals. So, I hold the debt, I hold everything. Our investors, they don't. And so yeah, it's a variety of different structures that is dependent on the deal and the parties involved.

Seth: So, you basically have your own management company that uses Tenant Inc products to manage everything. And this is over how many different facilities?

AJ: We have 2.5 million square feet across 10 states. We're in Washington, Oregon, Idaho, Nevada, Arizona, Oklahoma, Missouri. Through a whole bunch of these different states, that we own and operate. The amount of facilities, I think it's like 24, 25, something like that. Our average square foot per facility is 85,000 square feet. We've done everything from conversions. We've turned bankruptcy for Kmarts in storage facilities. We're currently doing an office building into a storage facility that we bought right when the coronavirus hit and all the markets were shutting down and the financial markets. We picked up an office building that everybody was scared of and in distress.

So, we were very strategic. We do ground up huge developments in strategic opportunities. But yeah, we're agnostic so much to the location as it is the opportunity. I don't ever want to trump. I want to be here. And that trumps the overall opportunity in returns that we would get.

Seth: Maybe we'll just pick on this Kmart deal. I know you've got a great YouTube video with Ryan Pineda kind of walking through that thing, which I thought was fascinating. A similar thing happened to a Kmart near where I live, so it's kind of cool seeing what happened from your end.

But for something like that, what portion do you personally own? And it sounds like you manage it. So, do you get a management fee for that too?

AJ: Generally speaking, 30%. How it works when you're dealing with partnerships in general who's doing what work gets the general fees associated with it. We take the ownership splits or generally we have it put in like this, it's 70/30, so the limited partners get 70%, we get 30%, but they're paid first. So, you have an 8% preferred return, and then they get paid their 70% and we get paid 30% of the profit left over.

We get a management fee, which the average management fee in the storage space is 10% to 15%. Now, a lot of management companies, they market that they're 5% or 6%, but they also take in the fees for everything else. They'll take signup fees. They take all the insurance premiums. And so, as a gross revenue component, they're 10% to 15%.

I don't like that at all because obviously the value of the property is predicated on the net income. So, if you have third-party management that is taking 15% to 10% of the gross revenue, then your value, because it's associated that's coming off the net profit, is astronomically hit because the value is leveraged and we express in the form of a cap rate.

So, to give you an idea, if you have a million-dollar property and are making $100,000, that's a 10% cap. Now, if I have a 5% cap on the exact same property, that's $2 million or it's $50,000 net income. So, you're talking about the moment you start taking away from the net income is the moment you start cratering the value.

So, for us, we do a 6% flat. We take no other fees, nothing else like that on it. And it's a percentage of gross revenue. If gross revenue goes up, we make money. If not, then we obviously don't. And that should be a component of the management company and we're very strong believers in that. So, we directly correlate our returns with the performance of the asset. And that's a big deal no matter who you're working with.

Seth: That 6% flat fee, that's the property management fee?

AJ: Property management.

Seth: Gotcha. Cool. It sounds like you and your dad grew, I don't know if it's relatively fast, but it seems fast when you talk about $150 million in assets even over a decade. That's huge. How did you do that? Starting from where you were in 2008 to where you are now, what was the secret sauce to make that happen? It's probably a very convoluted question or question and answer. What are your thoughts on that?

AJ: No, it's not. Let me walk you through it. It was a little complex on how we stumbled into it but the method is actually very simple. We started in 2000. My dad bought that little one first in 2004, then we bought our next one in 2005. And then we bought some small ones, rode through the recession, and then just kept going.

But because of our situation, we had to manage, because there was no third-party management available. So that meant when we bought them, we needed the revenue to pay for us and the management. But in order to grow our portfolio, we needed to do two things: we needed to get our money out and get it working again.

So, we couldn't have our money trapped in the assets, or that would kill our ability to grow. And so, if we sold it though, we would lose the income to pay for the management.

Our simple strategy was we are going to find underperforming assets, and then we are going to increase the revenue, refinance those assets, take all our money out plus profits. Use that now tax-free to buy another one while that asset is still paying us. And then we would buy another one that was underperforming. We'd turn around, refinance and do it over again.

So that meant we could compound our money without ever losing the original source and we could do it in a way that we didn't pay taxes on it. Now, we did that and that obviously worked very well.

Then we also started up businesses and selling businesses to try to get more capital to throw into the machine because it was working so well. We started brokerage firms and even after I got out of the hospital, I started another one, which built up and then just sold to try to get money into our system.

Now I learned very quickly that it's a whole lot easier to just partner with other people than starting businesses and trying to sell them to get the money. So, then we found out, “Well, you can do that just doing it with other people, using OPM - Other People's Money.” Then we still got our compounding nature. We could still get our capital moving. We didn't lose that at all, but we didn't have to go start a business and sell it to amplify it. Instead of amplifying it, we just had other people come along with us. And from there it obviously just exploded after we'd figured that out.

Seth: How did you find these deals or historically, what has been your best trick? Using direct mail? Are you just calling people up? Is it just a networking thing? Is it all the above?

AJ: Until last year, I'd never bought a deal on market. Until last year, last year was the first year we'd bought in deals on markets. We have a three-tiered approach. We work with brokers. Prior to that, we had a relationship with two brokers. One of them was the main broker. And he brought us the deals off-market. And he'd bring them to us, they were in these markets and everything. We were very clear on what we wanted.

So, we developed great relationships. We also developed relationships with storage facility owners. And it wasn't that we would go out and say, “Hey, sell me your storage facility.” No, we actually went and developed relationships, which paid off big time.

And after 2008, capital was tight, you couldn't give money and our money was tied up maybe in another deal or we didn't have it available to us. We did a lot of owner financing. So, then we brought in owners and had them seller-finance our deals, which allowed us to bring very little capital, if any, and didn't need bank financing and we could do that too. And that all came from our off-market nature.

Developing relationships with owners and brokers tie to networking. Then we'd go out and we would network, we'd be very involved with the industry, and then other people would bring us deals. And the networking, the organic searches, meaning we would identify a market that we wanted. I would find all these facilities in that market. I'd list what the best facilities in the market were predicated on their location, their size, and whether they were being poorly operated or not.

So, the best location with the perfect size for us that we wanted, that was being horribly run, would be number one on that city in our hit list. From there, I would go around and basically the top five we would try to hit, but I would go talk to all of them in that city and we would try to develop relationships, learn from them. And those resulted in acquisitions.

Seth: You said something interesting about how you develop relationships without actually asking to buy the facility.

AJ: Yes.

Seth: How did you do that? Because in my mind, that's the only way to start the conversation. What does this relationship look like if you're not just going right for the kill right away?

AJ: These owners are getting hit every single day, 10 times over mailers, emails, calls, people stopping by asking, “Hey, would you entertain selling your storage facility?” Because they've just got it all the time, that is the straight opening for them to say no.

It doesn't mean that they don't want to sell. It's not what they're saying. They're just saying, “No, I don't want to talk to you about this because you and everybody else, and no, I don't know who you are, so why would I talk to you about this?”

Instead, we develop relationships with the owners because they're in this market, they're in the industry. “Hi, my name's AJ Osborne. I'm in storage. I saw you were part of the statewide SSA. I'd love to take you out to lunch and talk to you about your facility, see what's going on in the market, what are your concerns, everything else.”

Now we're talking shop and we're talking about the industry. I'm trying to learn from them, “How'd you get your facility? What'd you do?” And then we have a professional relationship. And after that it may be like, “Well, you're a great person, you're a great guy in this market, you know it well, I'd love to enter in the market. So, if you know anybody in this market that'd be willing to sell, just keep me in touch.” I didn't ask him to sell me his facility ever, not once.

Now we're acquaintances. We know each other and he knows I'm in buying mode. And a lot of times that results in, “Well, I don't know anybody that's buying a facility, but if you're trying to move into this market, why don't you just buy mine?” “Well, alright, we can talk about that.” Or if not, he may give me some names, then I get to go talk to them. And then we keep in touch and keep in base. He knows I'm actively trying to buy. We know who he is. He knows ours. Then two, three years later calls us up, “Hey, we're having health problems, whatnot, I want to sell, you buy us.” That happens. So, we've bought people four years later that we'd talked to every single year and knew.

Seth: Yeah. Now that I hear you say that, it kind of sounds like a no-brainer. “Duh, just become friends with people and then they'll trust you,” and that kind of thing. But that's the thing most people won't do. They just don't want to put the time or the effort in. They're just like, “Nope, just give me what I want when I'm done.”

AJ: It's easy to do mailers because you pay somebody else to do an action that takes no time. And I'm not saying that mailers are bad, I'm just saying you should expect what you paid for. And in times like the last three years, those things worked. They just didn't work very good. And you got a certain type of seller because they know they can make a lot of money. They know the markets are good, things like that. When you have a relationship with somebody that changes everything. It changes your discussion. It changes why they're calling you. Because then they're like, “Well, I don't have to pay a broker. I already know you. You want to buy.”

We had one guy that we were talking to saying, “Hey, we're looking.” He's like, “Wait, why didn't you buy ours?” And I'm like, “How much would you sell it for?” And he is like, “Wouldn't sell it for anything less than $4 million.” We looked at them and said, “All right, $4 million.” First time we'd ever been to the site. He said, “Really?” We stuck in our hand, shipped the hand, and the deal was done. We sent over a purchasing sell agreement at $4 million and we bought the asset, and it was him. He's the one that asked us to buy it. And so, it's a little different, but it's meaningful when you're dealing in real estate.

Seth: Oh yeah, for sure. For sure. Wow. These brokers who would bring you off-market deals, do you have any idea how did they find those off-market deals?

AJ: Yes. The brokers that we worked with, and particularly the one, he had spent years developing relationships. He had a network of relationships with storage owners all over. He didn't work on volume, so it's not like he had a facility. It's funny, I'm buying a storage facility from him right now. It was never volume. It was always quality. He was an independent shop. All he did was storage, nothing else.

And so, he was an expert and I developed a relationship with him through our viewpoints and how we viewed the industry. First time I found him, first time we ever had lunch, I sat down and talked to him for three hours. And I didn't say, “So, you got any good deals?” I don't say that. I say, “What do you think about the market? Where're things going?” By the end of it, we thought about the same things. We discussed, how you come up with value? How's valuations done?

And so, as we developed that relationship, and as I understood more of him, he understood more of me. He knew what I wanted. I knew how he underwrote and valued. Then as deals came along, it was “AJ, I've got a deal that fits what you guys like and what you're doing.” And I knew he views the way that I do. So, the deals coming from him are going to be good quality deals.

And at the time it became, “Hey, why don't you take a look at this deal?” And then we would close on a deal. And he then knew if you guys say you're going to close, you're going to close. So, I'm not at risk and I have a really good buyer.

Then when he talked to owners and the owners were like, “I really don't want to go through this whole thing with sellers all coming to the property and I don't want to be jerked around anything else like that,” the broker would say I got a guy and if he likes your asset, he'll buy it. And if he says he's going to close, he's going to close and he won't put you under a contract if he's not going to buy it, he won't trick your time around. He's willing to pay a fair market price. He's not going to come nickel and dime you. So, if that's something you're willing to look at, let's just go to him. And they'd say, “Yeah, that'd be great. I can avoid all the mess.”

So, we're providing value to you and they're coming to us. And that's where I have this whole analogy that I call “Be the bear.” And the idea is that you have this fisherman who's running around on the banks of the river and he's trying to, I'm a fly fisherman, so he's trying to trick the fish into biting the lure. He's trying to get the fish, he's going over there, he's trying. And out of all the fish he's not doing a very good job and he's just trying to fool that one fish.

Where a bear walks over on a waterfall, sits down and sits there and the fish just jumps straight into his mouth and he eats and is happy. The idea is I want to be the bear. You sit on the path of opportunity and let the opportunity come to you. So, focus more on creating the conditions of opportunity than you do trying to force it. And you'll be a lot more successful.

Seth: Now, how often do you build new facilities versus just buying existing ones? And when I say build, I also mean converting like a Kmart into a climate controlled. How often is it just buying what's there versus starting something new?

AJ: Our primary mode is acquisitions, but generally, my rule of thumb is in a given year, the assets we're buying, 20% of them, we want to be billed developments. And we are uber-picky about developments. The reason why I like developments is acquisitions, you get what you get. And markets are the largest determining factor if you're going to be successful or not.

Self-storage is wholly predicated on demand. So, if I go find a market that's just an amazing market, and I know the asset will be successful, it doesn't mean somebody's going to sell me an asset. Then I want to mix our acquisitions with assets in premier markets that are just amazing and I want to diversify our portfolio and our overall end.

But when I'm looking at a development, I'm looking at three times cost to value. So, if it costs me $10 million, I want it to be worth almost $30 million when I'm done. And obviously, that means what you're putting down is way more because you're not putting down $10 million.

When we look at that, that really limits us. It really does. But the reason why is if it's achievable, that means the market is awesome. And so, I don't build to build. I have what I call my margin of stupidity. Warren Buffet has his margin of safety. The margin of stupidity is that the market is so good and the assets so good I can be stupid and I can do stupid things and we're still going to be successful. And that's really important to me.

And so, when we look at developments, we want the markets and we want the assets to be home runs to where we don't question the success, we only question how much. And that keeps us out of trouble and it creates diversified markets into really good assets and asset types.

Seth: Gotcha. Do you do all your own feasibility studies in-house or do you use a third party for that?

AJ: We do now. We have over 80 employees in-house and we do our underwriting, we do all our own feasibility studies. When I started, I paid for other people to do them. Now, people pay us to do them. They go to our site and they buy them, and we do it under the same way that we do our own. Yeah, we do them all internally at this point. But no, for years, we paid for somebody else to do them.

Seth: Yeah. I've always wondered when I see things like a Kmart, that's a lot of square footage that suddenly is new storage space on the market. Does that mean there has to be a severe lack of storage in that market to justify that? How long does that take to lease out when that suddenly hits the market?

AJ: I've never had a deal that took over eight months to lease out, but that's not normal. You should never expect that. Three years is what you should expect and you should do. And you're right, the biggest problem people have is they build in areas where they think there's demand because things are occupied. High occupancy doesn't mean high demand. That is just not true. They build in those markets and they find out, unfortunately, the hard way that there wasn't the demand we thought about.

And if you're not in a market that is really good and growing, some people they'll develop in markets where the demand is not there. And guess what? It's not going to be there. It may take years for the demand to ever get there, if at all. And that's the danger.

Seth: When you say things are occupied, do you mean storage is occupied or just buildings in general?

AJ: Storage. Just because you go to a market and the market's a hundred percent occupied doesn't mean there's high demand. And the reason is storage is cheap in a lot of markets. The demand equation is a three-dimensional one, but I'm just going to hit on two sides to understand.

The relationship between the price or the cost of the square footage and the square footage being occupied is a very delicate one. A lot of people have 100% occupancy, but their economic occupancy is like 80% or 70%, which means the rates aren't in reality what they think they are.

And two, frankly, the demand may not be. So, you're building at a price point that you think it is and it's not there. All of a sudden, the reason it's occupied is because they're charging so little. Somebody's like, “Ah, I don't care, sure, I'll use it.” But if you increase that five by five or that 10 by 10 from $60 to $90, nobody wants to rent anymore and they won't rent at that price point.

So, what you see as demand doesn't really reflect reality because you have 100% occupied and you're like, oh yeah, and they charge 10 by 10 for $100. Little do you know though that the owner, 50% of his occupancy only pays $50 and they won't pay $100. So, the occupancy is way, way less. And so, developers get trapped in that. They are fooled by the occupancy fallacy.

Seth: Yeah. So, how do you see through that then? How could you know if the people are actually paying $50 instead of $100? Can you know?

AJ: There are a few ways. You can find that out through acquisitions, but in general, what we look at is we look at the past. We look at the past and the past offerings. So, what was occupancy and what were the rates at that time, and then what happened when occupancies or prices went up?

The sensitivity of the relationship between prices and occupancy, that tells a lot. All of a sudden, we lifted prices and occupancy went down. We lowered prices and gave discounts and occupancy went back up. There's not a lot of demand, even though they're at 100% occupancy.

And we found this in places like the Midwest where you're like, “Okay, everything's occupied. They don’t have a lot of square footage.” So, we thought that there would be a lot of demand. And then what we found is why have prices never changed, even though you have really good operators here? And then we go and ask managers, “How is it getting rates up?” And then we'd find really good operators and the highest prices in town and they had the lowest occupancy.

And so, you're like, there's a direct correlation here to price and occupancy. And the more direct correlation between price and occupancy, the less the true demand really is.

Seth: So, there are places where you can go and find this historical data like what were prices three years ago and what was occupancy then? Is that stored somewhere? How

do you know that?

AJ: Yeah. There are a few ways you can do it. One of the biggest sites you have is Yardi and then a site called Radius Plus. And they'll usually look back and show you rates and pricings. Now the more rural market you get into, the less you're going to be able to find out any of this. And hence one of the reasons why there's more danger in rural markets.

So, if you're going to develop in a fourth-tier market, you're not going to have a lot of data. And not only not going to have a lot of data, the smaller the market is, the more sensitive it is to new square footage and the less the future is to do it. When you get into smaller markets, risk increases dramatically, very, very big. And that has a lot to do with the less amount you want.

If future demand is the next thing we look at and you say, “Okay, well, today's demand looks good, but there are 200,000 square feet of storage on the market.” And I have people that call us and they say “I'm doing this deal, it's awesome. They've never not been 100% full.” And we look at it and we say, “You're developing a hundred thousand square feet and there are 200,000 square feet in the market. How can you know that this market can take a 50% increase in supply?” I don't know that, and I don't think you can. I just don't think that.

So, if the market is going to get hit with 20-plus percent new supply, I start to really argue that you don't truly know if there is demand for it. No ordinary business would assume that they could increase supply by 20-plus percent and truly know if there's demand.

So, you look for the tighter square footage. The higher the square footage, the less of the impact of square footage gives you an idea of demand. So, if I'm looking at a market and I say, “I'm going to put 5% supply on the market and I can look at certain type units that we're going to put on there, they're all a hundred percent full. They've been getting rate increases every single year and they're not moving out,” then obviously, there's demand for them because there's not even the 5% gap that you're putting on the market. That's not even inexistent.

So, there is demand for it. Make sense?

Seth: I think so, yeah. How often have you seen facilities that basically made this mistake, built a new facility and they shouldn't have, and there's not enough demand, and as a result, they go out of business? Does that happen often or do they just find ways to just float it until it does fill up?

AJ: Yeah, a lot of people just find ways to float it. They lose money in it. What's happened over the last five years, you've had the largest increase in demand for self-storage ever seen.

So, to give you an example, last three years, the average occupancy for self-storage in the United States was 96%. In the history of self-storage, the next highest point ever averaged was 86%.

Seth: Wow.

AJ: So, all of a sudden in an environment like that, the market is bailing out bad players and it's bailing out people that made stupid decisions. And that's why when I look at it, the real estate market in general, the risk I see is that people didn't learn because they didn't have a situation in which they learned.

Now, in 2008, that wasn't the case. In 2008, if you built a storage facility, you were going under. I bought a lot of people that were going under because there was no demand. We bought facilities that had 20% occupancy. And their 20% occupancy was 50% below market rates.

When markets are propped up by the federal government printing trillions of dollars, so it's totally not normal, then you don't have a lot of people failing. But it's important to remember that's not normal. And right now, we are seeing people not struggling to fill up, and we are receiving calls because people are moving into permanent loans out of their construction loans and they want to sell it off before they go into perm loans. They're not filling up and they have to move into higher debt. So, we're now going to see a lot of that.

Seth: Do you think self-storage is safer or risky right now just given where it's been and where it seems to be headed?

AJ: Yes. What I mean by that is self-storage is coming off the all-time high of all-time highs. If you don't expect self-storage to do what it did in the last three years, then you expect a normal market cycle. And if you're in a market that didn't double its square footage or didn't have a 30% increase of square footage in the last three years, and that square footage is not predicated on growth, then you're okay.

And it's very safe. You've got good margins. You should be underwriting at sustainable levels like occupancy at 85%, 86%, not at over 90%, which has never existed on average. And you should be looking at markets that have been tight all along and have had little impact on new square footage. So, it really comes down to the basics.

Now, if you are looking at storage in areas like Austin, Texas, you should be concerned. That was predicated on growth rates that were the highest in the nation and they'd been building storage like there was nobody's business. Because the developers were building storage and selling them as if they were fully occupied. So, the money they made on it was stupid. They were making millions. Well, now they can't do that. So, all this storage is going to be hitting the market and it's going to need to fill up and in order to fill it up, they've got to drop rates. And then that means the whole market rates start to slow down and go down.

So, is storage dangerous right now? Only if you're in bad markets, only if you have bad expectations. Other than that, no, it's not. So, we're opening up our fund in the next two weeks here, that's our distressed asset fund. And basically, we're going in to buy people that were either developing or refinancing and they made bad, bad assumptions.

I call this “event-based investing.” And people that did acquisitions, what they did is they bought it and they paid these astronomically high prices. They couldn't afford the debt, so it didn't matter because they were going to get an interest-only loan for three years. And at the end of three years, they were going to sell it at a four cap and that's how they were going to make the returns.

The returns were predicated on the sale. Well, interest rates rose, they can't give four caps anymore. So, now they're going to refinance into 8% interest where they couldn't even pay it at first, and they don't have a sale to get them the returns to get out. So now they're just trying to get out.

Did the asset fail? No, but did the person that bought the asset fail? Yes.

Those are very different things. So, I buy good assets that people failed on. And that is actually more common than the opposite. The assets don't fail, it's the people that are doing the assets that failed. And that's the perfect situation.

There's a difference between intrinsic and extrinsic value when it comes to storage, when it comes to markets in general, but particularly real estate markets. Extrinsic value is the buying and selling of assets. So, what's it worth? It's worth this price because the marketplace of buyers and sellers put that price on it. I call that extrinsic.

Intrinsic has to do with the cash flow that that generates. The intrinsic value of this is $200,000 of net profit. Then what I pay for it is my value predicated on the yield that I get off that asset. I only focus on intrinsic value. So, if you only focus on intrinsic value, you don't expect markets to bail you out and you're okay.

Seth: Kind of a hypothetical question. If you had to hit the reset button right now and you started over from either nothing or wherever you were back in 2008, knowing what you know now, if you had to start over, what would you do? How much money would you need?

AJ: Take money sooner. I was operating on our income. My father and I, we took no income from our real estate for a decade. We didn't pay ourselves. We only pumped money into our real estate. That limited how much we could buy the opportunities that we had. If I would've obviously taken other people's money to supplement our capital, we could have bought way more and grown faster and done it just as safely.

Seth: You think getting other people's money involved a lot earlier is probably what you'd do? Getting other partners and that kind of thing?

AJ: Yeah, that would've allowed us to do more, be more stable. It would've protected us and our investors more. I was just scared of it, so I didn't do it. Now, you always say that hindsight is always 20/20. I tell people when they're like, “Okay, yeah, but you're risking my money.” And I'm like, “Please, I'm risking our $200,000? I have $80 plus million that I hold the note for. I've been doing this for 15 years and I never had your $200,000. I'm not risking your money. You're riding on the back of my expertise.” And that's true.

And so, it makes it so I can tell people and look at them. “No, you don't. I'm not risking your money. I risk all my own money.” And I did that forever before I ever took anybody else's money. So, although I say that I wanted, I think it plays really well to my story and it gives me a lot of credibility that I didn't. So, hindsight's always 20/20.

Seth: Well, that's interesting because if we go back to 2004 or 2008 or whatever it was that you get started, you hadn't done a deal yet. You had no track record, you didn't have this $80 million, you really had nothing. But if you could start over with your same brain, a person might not be throwing their money at you because they don't see your track record. So, for somebody who is getting started, do they take down their first one on their own or do they partner up on the gate with somebody?

AJ: Either way is fine. The only deal that you have to remember, if you're getting started and you don't have anything, there's a skewed platform on the relationship between you and your investor. Right now, I get a 70/30 split and I get paid to do the work. People have to pay me for what we've done and built. If I'm starting out, I have nothing, I don't get those terms. I don't get that. The person that's putting in their money is taking way more risk than I am. And so, you have to be sensitive of that relationship. That means you're going to have to give up a lot, you're going to have to work for free. You're going to have to do things that maybe you don't want to do. And to be frank, you may not make a lot of money, but it's going to add to your experience.

And two, that may be their only option. Now, I don't believe that. I think you should start out by yourself and go get someone that will seller-finance it. And then you can seller-finance it. You do it, you get your own experience and then you immediately can do your next one now with experience, with assets under your belt, with other people. Now other people may not know how to do that. I think you can learn, but they may not want to. That's fine.

I have a guy that's part of my inner circle who got a lot of connections with a lot of capital. That’s his superpower. So, it makes no sense for him to do a deal not using other people's money. But at the time when we got started, I didn't even know how to ask people for money. I'd never heard of that. I'd never been around people. I was from Boise, Idaho. And Boise, Idaho wasn't a thing. We didn't have rich people where I lived. We came from families of farmers. I didn't know who would you ask. I didn't know you could take money like that from people. And there were no books on self-storage. There was no podcast, there was no social media.

So, from that we had to figure it out the way we had to do. And I think that's the key. It's not about, “Oh I don't have that opportunity or I do.” It's about figuring it out. And if you have the opportunity do. If you don't, find somebody that will seller-finance it. If you have your own money, use your own money. And three, do a combination of all three.

And that's how I do it. I use all three.

Seth: Yeah. One of my questions here, it's kind of a generic question, but just how much money does it take to get into self-storage if you were starting from nothing? Does it take anything if you could do seller financing or should you have a certain nest egg put aside?

AJ: Nope, it doesn't take anything. But this is one of the biggest fallacies there is.

I have people that are like, “I need to start in single-family homes.” And I go, a member of my inner circle, we just got them a $250,000 storage facility, which we wholesale. So, we called directly the owner and negotiated with him. It’s an owner-done deal directly to it, $250,000 and has 50 doors. And I asked them, in your market, what does a duplex cost? And this was six months ago. It wasn't $250,000. It was $400,000.

All of a sudden, I'm like, is it really harder? Is it really more expensive? And two, by the way, is the owner of the duplex going to do things like seller financing? No, they're not. So, all of a sudden, I showed him how you could basically take half of what it would be to buy a duplex and you can get into storage and instead of having two doors, you have 50. Which one's safer? Which one has more upside?

And so, I think that's just an argument that you can quickly tell people that you don't need your own money. And even if you're using your own money, you don't need a ton of it. I know storage facilities that will sell it for $80,000. Now you may not be able to be in LA. I wasn't. When we got started, I went to places like Bonners Ferry, Idaho. For any of you that don't know where Bonners Ferry, Idaho is, there are more grizzly bears than there are humans there. And I think that's actually true. It's a one-street kind of town. I don't even know if there's a stop sign or anything, but that's where we could go. So, we bought a dirt gravel facility on the side of this highway up in the mountains, going through Northern Idaho. And we went where we could go.

The next place we went to is Pendleton, Oregon. Why? They would seller-finance. So, that's where we went. Too many people want the market to give them what they want. The market doesn't care about you. Why should it? And so, you got to stop thinking like that. You need to go with what you have and go to the place where the market will deliver opportunities. If not, you need to change your circumstances and stop making excuses and figure it out that way.

Seth: Yeah, that makes perfect sense. Now, you do a lot of stuff obviously as we've talked about. You've got software, you've got the co-op. You've got the Self Storage Income. Is that a conference you run every year? Is that what it is?

AJ: Yeah. Self Storage Income is basically our educational platform. Once again, it was a promise I made in the hospital. We give away all our information for free. So, YouTube, podcasts, everything, we get on every single week, we tell numbers. I do it on Instagram, we show backend. We show what things are doing, we show case studies, we walk through how do you get financing when we're interviewing all these people. And so, it's our educational platform. It's where I have the best-selling book in the industry “Growing Wealth in Self Storage” by AJ Osborne. I put that out.

And then I have my inner circle, which is just people come and they join and they get my time and then I jump on teaching. I'm like, “If it has to do with my time, you got to pay me.” That's kind of how the bottom line is. But that's just for people that want more and want to do things like that.

But all my information is for free. You can go listen to everything, do everything. It's always been a big, big thing for me that if the industry does better, I do better. And if the participants in the industry are making money, that means I'm making money. If I'm in a city and a storage facility owner is doing poorly and not making money, that doesn't mean I'm doing great. That's not how it works.

So, I want the industry to be better. I want people to be better so that my assets, because I don't make income from education, I only make income from doing right. That's where all my income is. And so, I need those assets to work and I need it to be good. That telling everybody through what we do, how we do it, that generates opportunities in the form of investors and also deal flow. People say, “AJ, we understand you. We know what you do. Here's a great deal that we have.”

The idea with Self Storage Income is we want to be not just the largest educational platform in self-storage in the world. We want to be the highest quality platform for self-storage. We do events, which our first event that we did cost me $150,000 out of my own personal pocket after everything was paid to due. We don't go cheap. This isn't something that's like in a hotel. There are firework shows at a resort. This is high-end. We have the largest owner of self-storage, privately owned self-storage in the world speak.

We had Ken McElroy who owns $2 billion in real estate, owner of The Rich Dad Poor Dad. Awesome, right? He speaks at our events. Things like that. So, we try to do everything quality, high-end. We're not trying to do it to generate money from it is to generate opportunity, which makes us money. The money comes from doing and that's our whole goal and our whole purpose. And that's what we do on that end. We want to be the leading brand in quality.

Seth: If I can work it out, I'm hoping to make it to the one next year. because I saw the video recap and yeah, it looks like an awesome time. Kind of a smaller group, right? You could actually get to know everybody there for the most part.

AJ: Oh yeah. You're meeting with all the members. We could do a thousand members. That's not what we do. In fact, I literally have a meeting today to plan next year's event, but if we even go to 300, you're done. So, nobody else can come in after that point. Why? Because we want it to be intimate, meaning the speakers and you. People, we're just hanging out together. Ken McElroy's out there hanging out with people till 03:30 in the morning. He's out on boats with people. I'm out on boats. That's what we want to be known for is quality.

You can go to ISS and SSA that have thousands of people. That is not what we're trying to do. They hold their place, they do a great job for it. But we are not that, and we are not some ginormous convention center that you pay a ton of money to go to. And the speakers that are there, who knows if they're good or not, and everybody's trying to sell you something. We don't do that.

Seth: Cedar Creek Capital. So, if I understand it right, could I go and invest money with you there? Is that how that works?

AJ: Yes, hundred percent. We take accredited investors and they come in and we view it as right on. They're actual owners. They get K-1s, they get all the depreciation, they're owners of the storage facility with us and they come along and invest alongside us.

That's my mission. Cedar Creek Capital is my mission and we hold long term. So, we don't kick investors out. Why? Why don't we kick investors out? Because the goal is that other people have long-term wealth and income. It's my “why.” I believe you can change the world by changing the financial well-being of individuals. Why? Because financial independence is the only true form of freedom that we have. Meaning you can make any decisions that you want.

And it's not like a political thing where it's like, “Oh yeah, you do something for me, I'm going to do.” No, we want to allow other people to be independent, to change their own lives through their own financial system. And when you do that through economic participation, the whole divide that we have in the United States is predicated on one thing: people who own assets and people who don't.

So, our goal is to get as many people owning parts of the economy as we can for the long-term. Not some quick fix, not a stock that they own that may go up, may go down, but it doesn't produce any income and all the benefits go to everybody in between. No, you actually own the assets and we're big believers in it.

Seth: Are you allowed to talk about what kind of returns a person could expect or can you not go there?

AJ: Yes, I can. How our filings and how we're a 506(c) so I can talk about things. I can't talk or promise obviously anything. And I don't have anything as of right now that we are funding. I don't have anything right now, that will come out in a couple weeks, where we do our fund. Generally speaking, though, I can't tell any deal specifics, which I don't need to and I don't have. But I can say our mode of operations, it's very, very simple.

Our goal is unlike any other fund that's on the market. The goal is this. They come in, they invest alongside us. We improve the asset, we pay everybody all their money back plus a 20% return in our three to five year period. And then they own the asset free and clear and have infinite returns forever. And then we refinance it. You keep getting those returns and those profits.

The goal is just like how I build on my company. You asked me, “AJ, how did you guys do that so fast? How did you do so much?” It's because we got our money out, but we still own the asset, and then we could redeploy that money back in and keep it growing.

My goal is that somebody comes in and invests with us and in 20 years they're like, “AJ, I've been investing with you for 20 years and now I own 50 storage facilities with you and it's all off the same money that I started out with you. So, I didn't even put more money into it. In fact, I took the profits out and pocketed them, but my money just kept going back into more and more deals.”

And then they own this huge portfolio of deals alongside us. Our returns, what we shoot for are targeted. Everything else, all the principal paid back plus a 20% return in three to four years is generally what we target. And then infinite returns from that point on. And they're getting it in a way that is set not tax-free, but the most tax advantages that you can.

Because if you sell the deal, what happens is you have huge splits with the promote that you have to do. You have to recoup depreciation, pay capital gains tax. So, all of a sudden, your true return is much smaller than you ever thought it was. And then you have to take that money and go reinvest it to try to get those returns.

The way that we do it allows you to get that money back but not have to pay recoup on depreciation or capital gains returns. You don't have to pay taxes on it because it's in the form of a refinance. So, we believe that it hyperdrives people. It gets them to a point where they own assets and have zero risk in them whatsoever. And when they start out, they don't have any risk. I take all the risk of the debt, everything else like that, but then they don't even have the risk of capital but they still own.

Remember, our goal is economic participation. It's not just purely returns. And we think that beats out 24/7 all the time, every day. One of the reasons why we can do this is our company is built on my and my father's assets. So, our management company, everything else like that, that's paid for by the assets that we already own. So, we don't have to sell assets to generate big returns to pay bills. We don't need to do that.

Seth: Yeah, that's amazing. That's making me wonder, I almost wish I had known about this before I decided to build my own facility because this would've been way easier. Is there like a minimum investment required to play ball with you guys?

AJ: Yeah. Generally speaking, we'll do $50,000 for first-time investors, but we're trying to keep it at $100,000. Now our end goal is that we create economic participation for everybody, even people that don't have $50,000 and $100,000. But how the government works right now is the government set up laws that basically say, “Unless you're a rich person, you're stupid.” And I am so absolutely against this, but that's literally what the law says. You don't know enough to invest.

And politicians put this in the framework of protecting investors. They're not protecting investors. They're protecting Wall Street. Why? Because if you could invest your money directly into a cash-flowing asset that has equity and participation and tax benefits with people that have track records to the tune of hundreds of millions, you're doing that. You're not putting your money in your 401(k), you're not putting your money in with some random stocks on Wall Street that everybody gets their cut from.

I believe it's a totally rigged system that the government set up to shelter economic participation. The vast majority of funds and assets that the wealthy play in, nobody hears or knows about it because it's against the law for them to talk about it. That's crazy to think about. And when people are like, “Yeah, the rich get richer and they have all their secret deals and their secret things they're doing.” It's secret because they don't want to go to jail. That's why it's secret. This is government-instituted.

I personally have a big problem with that because it's like, how are you supposed to get ahead if you can't participate in the economy and the government is stopping people from doing it? So, we want to get to a point where we actually do more of not a 506(c) but one where you can take non-accredited investors or non-rich people.

That is a huge thing though. It's going to take us a while to get there because of the legality of it. It's a really big deal. But that's our end goal is that we open it up and allow access to everyone. But the government makes it really, really hard to do that.

Seth: That's interesting. I never thought of it that way until I heard you phrase it like that. But that's kind of the truth though. It really limits a lot of people from being able to play a ball. It's kind of crazy.

AJ: Yeah. And I know a lot of people that are not accredited investors and are much smarter than accredited investors. So, this idea that you are protecting them because they don't know is total BS. The statement itself is to me ridiculous. That somehow you pass an income, you become a millionaire, or you pass an income of $300,000 a year and suddenly you're smarter than when you were making $150,000 a year. What a joke, right? It is total BS and right now they're trying to change the laws. So, they're trying to change the laws to make accredited investor status up to $10 million.

Seth: Really? Whoa. Who's going to make it even worse?

AJ: Tell me this. Who has 10 million of investable assets? That doesn't count your house. You're going to eliminate investments in the super-rich, not even the rich. And it's shocking. And they're pushing. That's a big, big goal of theirs and they're trying to push it through right now. And they're trying to limit it. We just play with the rules we can get, but we don't allow things to just happen to us. We're going to fight against it and try to do what we can for our investors.

Seth: And you can't even include my $10 million house in that. That's crazy. Oh.

AJ: Exactly. You can't. Sorry, man.

Seth: Well, AJ, you've been very generous with your time. I appreciate you sharing. There's a ton of stuff we've covered here. It's been awesome.

If people want to find out more about you, it sounds like we've talked about a lot of this stuff. There's this SSI, there's cedarcreekwealth.com. You've got an awesome YouTube channel. I'll be linking to all this stuff in the show notes. You can find that at retipster.com/146.

Is there anything else people should do or any place they should go, or anything else you want to share?

AJ: If you go on to my Instagram or Self Storage Income, email us, we email you back. I try to get back to DMs on Instagram, so I try to directly work with people. Yeah, just check it out and learn more about us and what we're doing. We're fairly easy to find, Google. All the links will be there, but you can Google “AJ Osborne Self Storage,” and you're going to get inundated.

Seth: Yeah, sounds good. I'll link up to all that stuff in the show notes again. And thanks again, AJ. I appreciate it.

AJ: Hey, thank you, man. I appreciate the talk.