130 | Self Storage Investing: Cash Flow, Tax Benefits & 1031 Exchanges Explained with Joe Downs

Patrick: [00:01:00] [00:02:00] Welcome everybody. I’m excited about our conversation with Joe Downs today. We’re going to get into self storage and how to, uh, leverage that, that asset class as, uh, real estate opportunity, passive income opportunity. And so, uh, I’m really looking forward to this. Uh, Joe, thank you for, for joining us.
Joe: Patrick, thank you for having me.
Patrick: Yeah, I’m, I’m thinking about the problem that, uh, most entrepreneurs have when they’re, they’re thinking about, uh, investing in real estate. Uh, they’re stuck choosing between maybe some, some over-hyped passive investments or capital intensive active businesses or, or real estate themselves that they have to go focus time and energy on. And they, they’ve got their main business that they’re, [00:03:00] working with and, and the traditional real estate options feel, I don’t know. challenging, right? Like, I don’t, uh, it’s hard to buy a single family home and make it cashflow. duplex, triplex, same thing. Those are, um, those are hard and they’re competitive, and so, uh, just seems inefficient. Then also, I just think about, you know, the, there’s this internal problem, like, what should I be doing with my capital?
Where’s the best place to park it? Uh. We, we just look at rates. Were pretty healthy for fixed income things. Now they’re, they’re working them way, their way back down. And so, um, there’s just frustration knowing opportunity exists out there, but not knowing which niche to, uh, really leverage and lean into.
And then entrepreneurs just believe capital should be, uh, creating freedom, uh, should be working for them and, uh, should have a place to go And, um. It shouldn’t be, it shouldn’t be as complex as it as it is. So I’m, I’m looking forward to getting into some of these, uh, some of these solutions to these problems. Can you give us a little bit of your background? You’ve got a [00:04:00] robust background as an entrepreneur and real estate investor, but, uh, we’d like to hear more about how you got here.
Joe: Yeah, I, I’m happy to share with you how I got here, but as you were just, you know, your opening monologue there, it was like, believe me, these are not only problems that I personally face, but these are. These are problems that folks that I talk to on a regular basis are, are facing as well, because we not only buy self-storage and develop self storage and, and vary variance or adjacents to self-storage.
I can get into that in a minute. Um, but because we do that, we teach the business, we teach people how to do this, I’m talking. To the very folks you just described, right? I was on a podcast earlier today where I was the host talking to one of our students who’s a veterinarian, and he just bought his first self storage facility and we were just telling his story.
And so he was the guy with no tax problems, but also, you know, what do I do with my money problems? Right?
Patrick: Yep.
Joe: all the way to now. That’s the guy who wanted to be [00:05:00] active. All the way to the other end of the spectrum. I’m constantly talking to folks that they wanna understand it, they want to know how to do it, they wanna know what we do so that when they see it, they understand that’s a good deal or not a good deal or whatever, but they don’t wanna do it.
And I’ve experienced that all the way back into my, back to my other company, which you and I talked in the Green Room about,
Patrick: Mm-hmm.
Joe: which is a deck company. We’re not, you know, we don’t need to get into that now, but I, I remember when we were, we were building that company, I was, I was having the same conversations.
I show me how to do it over here. I don’t, I want, I want you to show me how to do it over here, but I don’t wanna do it.
Patrick: Yeah.
Joe: I’ll never forget the first, the first woman that made me understand there were people that just want to, they wanna learn and invest, not do. And her line was, I wanna know everything you do.
I just don’t wanna chip a fingernail. And I’ll never forget that line. And I said, I get it now. That explains why you’re here and why you don’t wanna do these things. You just wanna understand ’em, so you know what you’re investing in. So I, I, I just wanted to get that off my chest. Like I get it. [00:06:00] Totally get it.
I talk to these folks all the time. Um, well, how did I get here? I actually, I will start with the distressing company. Um, we had a, uh, we still have a distressed debt company. That’s a mouthful for me. I don’t know why I’ve been doing it for 16 years, but, um. And I think it was around 2013, 1415, somewhere in there, the CFPB was created and it, they effectively turns out in hindsight was.
Somewhat unconstitutional, illegal, whatever you wanna say. They put onerous restrictions on banks ’cause they were trying to stop the flow of foreclosures.
Patrick: Mm-hmm.
Joe: in doing so, they really hurt the environment and they almost put us outta business. I
Patrick: Yep.
Joe: almost effectively did. We had a staff them before.
We know in a year or two we were down to just one person.
Patrick: Yep.
Joe: ’cause we couldn’t, the banks weren’t selling, we couldn’t buy. So it was in that time that I realized I don’t have a business. I have a hobby.
Patrick: Yeah.
Joe: a really lucrative hobby when, [00:07:00] when we can buy and do what we do, which is typically modify loans and get ’em reperforming and or sell ’em.
But,
Patrick: yep.
Joe: um, it wasn’t a business anymore. It was very clear to me and I needed to go find a business. And I came from commercial real estate and, and just real residential and commercial. So I had a background in it and I, and I wanted to, to get back into it, but I didn’t know what.
Patrick: Mm-hmm.
Joe: And before that I was raising a lot of money for multifamily.
And I’ve been through res resis. I’ve owned residential, flip residential.
Patrick: Yeah,
Joe: I actually started to do it again because I, you know, I was effectively out of a job. I still had a business, but I wasn’t making money. So I started to do that again, flipping houses, lending money, hard money, you know, and just doing whatever I could.
Thank God my wife had a job.
Patrick: Yeah.
Joe: ’cause it was, it was a point in time where I had to reinvent myself again
Patrick: Yep.
Joe: um. But God, that’s why I love real estate because there’s so many things you can do in it.
Patrick: Yep.
Joe: And anyway, I got this email about self-storage. I didn’t know the first thing about self-storage, Patrick, uh, twenty fifteen, [00:08:00] sixteen, let’s call it.
So about 10 years ago, I didn’t know anything about it. Never rented a unit in my life. Still haven’t.
Patrick: Mm-hmm.
Joe: Um, and I got this email and it said, uh, the subject was real estate, no toilet without toilets, tenants and trash. I’m like, that’s interesting.
Patrick: got my attention.
Joe: So I opened it up and uh, that’s not true. You have tenants, thank God, and sometimes they leave trash behind, but we don’t have toilets and we don’t have emergencies really is the point.
We don’t have nightmares, we don’t have rules and regulations going against us and self-storage. So, but what caught my attention was not that subject. It was the, it was a line in the body of the email that said 80% of all self-storage facilities are owned by mom and pop owners. And I went. Holy cow. That I would not have guessed,
Patrick: Yep.
Joe: I would’ve thought it was, you know, the, I don’t know anything about sub storage, but I would’ve thought the whole industry was public cube smart and extra space and
Patrick: Mm-hmm.
Joe: a couple others here and there.
And it turns out it’s, it’s the opposite. It so it [00:09:00] coming out of the distressed step business, that secondary and tertiary market was like the wild, wild west still is a little bit
Patrick: Yeah.
Joe: that caught my attention and said. Hold on a second. There’s something here and that, and that’s when I took a dive in and I went, I bought a course and then I went to a, uh, three day seminar on it.
Patrick: Yeah, I, I, I love it. And there’s, there’s so many things that I, uh, I am looking at exploring here. So, first thing I wanna highlight is the, uh, CFPB is the Consumer Financial Protection Bureau. So that’s a, that’s a. government entity. It’s like, Hey, we’re, we’re here to help. Uh, which rarely the government does.
And so, uh, we, we see
Joe: So helpful.
Patrick: the time causing lots of, lots of problems. And here’s, uh, here’s, here’s a great example of that. Uh, and then I’m, I’m also interested, you know, I think about the, the data around storage units, and it’s so fascinating. Like the, the number that are out there, the. Uh, the amount of people that have them, you know, and, and I see time to time, I’ve got friends that have some storage units.[00:10:00]
We see people transitioning in life using storage units, and it’s almost like once you get a storage unit, you never let the thing go. You’re just
Joe: They’re very sticky.
Patrick: Par parking your stuff there, like, uh, which, which seems amazing to me. Our houses are bigger than they’ve ever been, and we’re, we have so much stuff in our, we can’t fit it all in our big houses.
We gotta go get a storage unit. So, uh, I don’t know if you want to talk a little bit about the, uh, I’m just curious about the economics around, or not, not necessarily economics, but just the trend
Joe: Yeah.
Patrick: uh, of storage units and how they’re, they,
Joe: I think I know where you’re going.
Patrick: up everywhere,
Joe: Yeah. Well, so we are a consumer society and we buy a lot of stuff and we don’t like to get rid of it. And in good times, in great economies, we buy a lot of stuff. And in, uh, bad economies, we, um, downsize where we live. Um, uh, and we put the stuff in storage. So, um, and that’s true of, you know, bad real estate market.
Um, uh, a recession where. Uh, you know, you got two spouses working. One loses their job. What, you know, you’re, [00:11:00] you’re downsizing everything you can. Maybe it’s two single people living single now. They’re moving into apartments, getting roommates back home, whatever it is.
Patrick: Yeah.
Joe: Um, old, older folks moving, um, you know, out of, out of the house they were in.
Put everything in storage, figure it out next month, six months from now, turns into two years from now to five years from now. Um, yeah, so storage is recession resistant.
Patrick: yeah.
Joe: it’s not proof. It’s resistant. It does well in good times and bad times. Yeah. you started to, to nail something with, um, with people put their stuff in storage and then it just seems to stay there.
Patrick: Mm-hmm.
Joe: There’s never a good weekend to move out. I always, I always liken it to the gym membership. You ever tried to cancel a gym membership?
Patrick: Yeah. It’s hard.
Joe: Fir, here’s the, here’s the psychology behind it. First, it’s, oh, I can’t believe we’re still paying for that. Or the spouse says, I can’t believe you’re still paying for that gym member.
You haven’t been there in six months. I know. I need to get back there. So the one thing is you, you convince yourself it’s time to go back. Then when you’re like, all right, I gotta cancel this thing [00:12:00] you, you can’t call. You have to show up in person
Patrick: Yeah.
Joe: and they first try to upsell you or downsell you into a different tier.
And then when you are, if you hold firm, they, they try to shame you into something and then, you know, finally you get there. But there’s never a good reason to cancel. Never a good time, I should say, to cancel the gym membership. They’re very sticky.
Patrick: Yeah.
Joe: Storage is similarly sticky. You put stuff in because of an event,
Patrick: Yeah.
Joe: right?
You moved any of the scenarios I just painted. Yeah. And then. When’s a good weekend anyway, so it’s the first of the, the first of the month or today’s February, uh, sixth.
Patrick: Yep.
Joe: don’t know if you wanted me to say that ’cause this might, might air later, but Okay.
Patrick: Even if we are it later, this will be, this
Joe: Cool.
Patrick: still be
Joe: Perfect. So today’s February 6th, you probably just paid, there’s people out there that in the first five to 10 days, depending on, you know, the relationship with the facility, they just paid their payment or, or if they’re, they’re smart in the way they manage it.
It was, it just hit their credit card and they didn’t even know. Right. And now they open up [00:13:00] the credit card statement in the middle of the month. I can’t believe we’re still paying for this. What’s in that unit? We need to cut back. It’s $150 a month, $20 a month, whatever it is,
Patrick: Yeah.
Joe: to move out. Okay.
Well. We paid for the month. So when are we moving out? Well, this weekend little Johnny’s got a soccer game and then it rains or snows depending where you are, and, and then, oh, we’ve got the event. We’ll do it next weekend. And then you go next weekend. Wait, what is we got? You know what? Let me go visit it, see what’s in it.
I don’t even know if we need a truck. Are we throwing stuff out? Where are we moving it back into what’s in there? Who even knows what’s in their storage unit? Right? There’s never a good weekend to move out, and so it’s just, it’s just a sticky situation once they move in.
Patrick: And it’s even, you know, the, the example you painted with the, you know, fitness membership and how hard it is to, to cancel that all, at least I have to, like, I can walk in there and with some persistence, I can cancel the thing,
Joe: Yes.
Patrick: I’ll eventually get
Joe: It doesn’t cost you anything to cancel.
Patrick: It doesn’t cost me anything to cancel when I go to my storage unit.
When I cancel my, my, my monthly [00:14:00] lease with the storage unit and I go there. I gotta do something. I’ve gotta go get a truck. I’ve gotta find out where I’m moving my stuff, you know?
Joe: It might cost you money and there’s work and effort.
Patrick: of it
Joe: Yep.
Patrick: Like there’s, there’s like real effort involved in this. And so, you know, however sticky we think those fitness memberships are, the, the self-storage membership is,
Joe: It’s a little stickier. Yeah.
Patrick: Yeah. So this is, this is
Joe: So
Patrick: All right.
Joe: a, good business model for that reason.
Patrick: Yeah. Very good. So we’ve, we’ve laid the, the foundation for, uh, why self storage? Um, I, I’d be interested in just talking a little bit more, ’cause I think it’s, it’s always fun to get into the, um. Real estate in general as an asset class. And, and you talked about some of this, but I think this is worth exploring. Uh, we like to be just really mindful of the fact that in most cases, real estate is a, is an active opportunity versus a passive one. Uh, when I think about a passive one, I can go put some money in a balanced portfolio [00:15:00] in, uh, the market, and the market will do whatever it does. It’ll go up, it’ll go down.
But in. Long enough period of time, historically speaking, I’ve made money in that. Uh, that example, if I buy a real estate project and I never go look at it, it’s going to be worth less money. You know, the bank’s gonna foreclose on me. It’s gonna be a disaster. It’s ’cause, you know, I have to give it time and attention to execute and make the, the value show up.
So, but there’s varying degrees of that, you know, and, and there is passive opportunities like, um, I don’t know if this is something that we, we dive into. There may not be any opportunities, but like, let’s say I call you and I go, Joe, I’ve got a half a million dollars. I don’t, I’m, I’m so focused on my business.
Um, but I would love to be involved in a self, self storage project. When the next opportunity comes up, let me know. And if there’s some room for me to, to invest alongside you, that’d be great. That’s in my mind, the closest thing I can get to, from a passive investment. I take a great operator, I plug some money in. [00:16:00] And now I just keep doing my thing and I get, you know, the depreciation and the checks and all that other fun stuff, um, you know, just, just flowing through to me. But beyond that, you know, now I’m, I’m pretty invested, but there’s, there’s varying degrees of that. And we, you hit on this with the, the email that you received. You know, no tenants, toilets, or trash turnover, whatever other tea we want to throw in there. Um, and so, you know, I think about self storage, and I like the fact that there are no, there are no nightmares. You know, like, I’m not gonna have frozen pipes. I’m not gonna have,
Joe: No.
Patrick: these other things. I think, you know, uh, natural disaster could be a problem in some way, shape or form for us.
But, uh, you know, I’m, I’m trying to, to think about this. So I look at self storage and I go, okay, this, this seems like a, a more passive strategy than let’s say a 10 unit apartment building. Like I, there’s not an asset class that I like, less than a 10 unit apartment. I want like. hundred
units and up or a single family home, uh, you know, 10 unit always has a vacant unit.
It’s not big enough to put management in place, so I’m always there, like [00:17:00] stuff to it. And, uh, so it’s, it’s been a long, long time since I’ve had a 10 unit, but, uh, owned one and, uh, they, they, still some, some nightmares there. So. Can you talk us through a little bit of the management of, of what a self storage unit, uh, or self storage facility looks like, and what it takes from a, uh, either bringing in outside management or management that I sort of pay and have on, you know, taking care of things.
I’d, I’d be really interested in that.
Joe: Yeah. Well, um, there’s a, there’s a gray area in between what you just said in selfs storage, which is another reason I love it. So you’re a hundred percent right. Any of these asset classes, you wanna write a check, you find a great operator. There’s plenty of great operators out there, plenty of bad operators out there, unfortunately.
But you can find an operator, you can write a check, you can sit back and be passive. That we can agree that that’s, that’s available any asset class everywhere. Right. The other end of the spectrum is you use the 10 [00:18:00] unit multifamily. It’s operationally intensive. Um, it’s. It’s too small to put active, uh, third party management in place.
So if you, if you make the mistake of buying that, then you’re, you’re stuck in it. Right?
Patrick: Yeah.
Joe: Um, we have an area in between there. So we have students that will come through, we’ll teach ’em how to go source, evaluate, underwrite, close on self storage facility that. They want to be the active manager.
Patrick: Hmm.
Joe: Right? And
Patrick: Yep.
Joe: and if you are, and maybe I should back up a second, no matter what, it’s an operating and business sitting on commercial real estate, which is why it qualifies for SBA loans.
Patrick: Yep.
Joe: And
by the way, that, I love that. I love every part of that. I love every part of what we do, but it is a business and sometimes people don’t appreciate that. So you can, you can badly manage your way into a bad situation if. You buy one, you’re gonna [00:19:00] remote manage it, but not really manage it and not know what you’re doing.
You’re gonna lose money there.
Patrick: Yep.
Joe: but we, we also have the, the InBetween hybrid scenario, which is like the, the veterinarian I just talked, I talked about at the beginning of this shut, he bought the, uh, I’ll tell you what he, I’ll tell you his numbers. He paid one a little north of 1.8. Almost 1.9 million for a 20,000 square foot storage facility.
He used an SBA loan. Uh, I did, he didn’t put 10% down. I think to make the, the numbers work, he put closer to 20% down.
Patrick: Mm-hmm.
Joe: that’s what, 360? A little less than 360 all in with closing costs. He was probably in the four 50 range. So that’s under the 500,000 you just talked about. Right.
Patrick: Yep.
Joe: And then he’s a vet who works three days a week, but it’s really 40 hours over three days a week.
He doesn’t have time. And by the way, this is an hour away.
Patrick: Yeah.
Joe: From him. So what does he do? He has a, he does have, [00:20:00] and this is the beauty of it, you can put, we do have third party managers that can manage that size facility, that 10 unit building,
Patrick: Yeah.
Joe: a 20,000 square foot facility in self-storage is kind of like a 10 to 30, 40 unit building in multifamily.
Right.
Patrick: Yep.
Joe: not big enough to put extra space or CubeSmart or public third party management in place. But our industry has evolved to the point where we have really good third party managers and you have options with them
Patrick: Yeah.
Joe: down at that small of a facility. So this guy Jeff has, has just bought this facility and he’s got a third party manager in place.
So he’s actually living the best of both worlds. He’s the owner.
Patrick: Yep.
Joe: no investors. It’s his facility, and all he does is manage the manager,
Patrick: Yeah.
Joe: is a couple hours a week, one, a weekly phone call,
Patrick: Mm-hmm.
Joe: a half hour to an hour weekly phone call.
Patrick: Yep.
Joe: you have these options. You go totally passive,
Patrick: Mm-hmm.
Joe: [00:21:00] active, or this space in between.
Patrick: Yeah. I love this. And, and one thing you just highlighted there that I think people need to hear as well is managing the manager. Uh, we’ve seen the most effective owners, um, not be completely checked out, you know, and, and what they’re doing is they’re, so we have one asset that we third party manage that we don’t own.
Okay. Uh, it’s a senior housing property. My, my wife. Uh, operates for this, this family that sold a business has a hundred million dollars invested in a, in a trust, and the trust owns this, uh, senior housing property. And the guy that ran that business to a hundred million dollars, uh, he might be 90, I don’t know.
He’s getting up there, but he still looks at the, the monthly financial statement. He’s got his pencil out, he’s making notes on the
Joe: That’s how he made a hundred million.
Patrick: how he made a hundred million dollars. Right? And so he’s still having that weekly conversation and he’s dialed in and you know, the, he’s seeing things that everybody [00:22:00] else should also be seeing, and he is highlighting it like, Hey, this, this is something that’s going on.
And, you know, so he’s not, he’s not actively there. You know, managing a senior housing facility, making meals and changing linens, you know, uh, but he is actively managing the, the financials and looking at it going, Hey, I’m noticing this thing, you know, vacancy is up. Or,
Joe: Yep.
Patrick: know, uh, we’re actually. Uh, have no vacancy.
So let’s, let’s raise rates. Let’s see what opportunities are out there, you know, for, uh, increasing our, our revenue. So, uh, it’s really interesting to see, uh, an astute business person be involved, and I think that’s something that people need to be mindful of. You know, if you’re gonna be involved in some of these things, you’ve gotta have, I’ll say proper dashboard so you can look at it and see the opportunities and see where things are starting to slip a little bit and go, okay.
Let’s, let’s be, uh, plugged in here because the reality is the squeaky wheel gets the grease. And if I’m managing for 10 different owners, right, and I’ve got one that I know is going to start squealing, [00:23:00] if things get a little bit sideways financially, I’m gonna pay extra special attention to that, to that asset.
So I think that’s a, a key distinction you made there, and I, I do appreciate
Joe: Yeah. And we, and we see that all the time with, so what that gentleman’s doing is acting as the asset manager, right? And so he’s looking out for the long term, uh, care of the asset by managing the manager, and that’s, that’s very, very realistic in self storage.

[00:24:00]
Patrick: okay. I like this example that we’ve got with, with Jeff. He’s, he’s put some money down. He’s found, um, third party to, to manage the asset. It’s not taking up lots of his time and energy. A couple, uh, hours a month maybe. Um. I’m, I’m curious, is there, um, what kind of, what kind of returns can we expect on these?
Is this more of like a cash flow opportunity? Is it, [00:25:00] more of a appreciation opportunity? Is there opportunity to come in and fix operations and sort of drive more cash flow to the bottom line, which forces the appreciation? And, uh, I’m, I’ll, I’ll stop there, but I, I can also qualify my question in lots of different ways, so.
Joe: Uh, well, I’m gonna give you a yes, yes and yes ’cause
Patrick: right. Good.
Joe: it’s all the above the trifecta as you find that all in one deal.
Patrick: Mm-hmm.
Joe: So we have folks that, um, find deals that, you know, they don’t cash flow. A great amount, year one and two, but they don’t care ’cause they don’t need the cash flow.
Patrick: Yep.
Joe: But there’s an opportunity, it’s a value add situation.
There’s an opportunity to get this thing turned around and then grow it and then make, you know, like for instance, I, I don’t remember all the numbers with Jeff’s steel, but I won’t be surprised if he’s, what, what’d I say? 450 ish all in.
Patrick: Yep.
Joe: won’t be surprised in five years if. If he were to sell it, I don’t know.
He might not want to, maybe he just refis it or whatever. But if you sold it, I wouldn’t [00:26:00] be surprised if his exit was a $500,000 profit on top of that.
Patrick: Yeah. Yep.
Joe: very common in this space. So, um, then there’s others that wanna buy, just, they buy for cash flow. So you’re in more of a, uh, a stable, I’ll just answer it, you’re in a stable, uh.
Area,
Patrick: Mm-hmm.
Joe: uh, you, you bought it, right? But there’s not a tremendous amount of growth in the market going on, so therefore it’s harder to really push rates. So you’ll see growth, but more importantly, you’re, you’re enjoying the cash flow along, along the way. At the end of the day though, we, the way we grow our asset values by growing the NOI
Patrick: Yeah.
Joe: and then there’s a, the function of the cap rate that, that’s placed on it at sale, which is obviously a function of the market we’re in.
Patrick: Right.
Joe: an interest rate environment as well as the physical geographical market you’re in, plus the the asset that you bought.
Patrick: yeah,
Joe: So all those things. Confound to determine yeah. effect, which of that cap rate. But at the end of the day, it’s NOI growth. So which kind of deal do you wanna put [00:27:00] yourself in?
Patrick: Mm-hmm.
Joe: we’re looking for deals, we find all of those options and it’s just matching up the right investor with the right deal. What are your goals, Patrick? Are you looking for cash flow or are you looking for growth?
Patrick: Yep.
Joe: Uh, because if that, if you’re, if you tell me one or the other, then we’re going to, we’re gonna find a deal for you that looks like that.
Patrick: I, I love it. And, and I think there’s, I. I wanna pause for a second and highlight all the ways we can make money in real estate. ’cause I think this is, this is really important. It’s, it’s one of the reason when you look at the Forbes list, okay, people are on there for one or two reasons. They built a business or they own massive amounts of real estate, and they usually have real estate around that or, or business around that real
estate.
Okay. Uh, what’s not on the Forbes list is being a stock picker. Okay? Um, closest is Warren Buffett, but he’s one out of 330 million, and I would argue he has. Businesses. So, um, but with that being said, so it’s like most people, it’s hard to run a business. But I can get there through real estate. But, so let’s, let’s talk about the ways that we can [00:28:00] make money in real estate. we, we’ve talked about a couple, we’ve talked about appreciation. So if I, if I buy a million dollar asset and it appreciates at 3% a year, it’s going up in value, or $30,000 the first year, uh, 30,000 in some
Joe: 33,000 or something,
Patrick: Yeah. It
Joe: that is.
Patrick: it keeps, it keeps going.
Joe: All right.
Patrick: Uh, so I, I get some nice appreciation. Uh, the next is cashflow. We, we’ve touched on that. Let’s say I get. Uh, let’s use a conservative number, 4% cash flow. So now I’m getting, depending on how much money I put down on the deal, if, you know, if we use that, uh, half a million dollar example and I’m getting 4%, all right, I’m getting $10,000 a year of like. Cashflow coming out to me. Nothing to be terribly excited about, but, you know, uh, it’s okay. Then we look at loan amortization. Uh, you know, typically I’m on a, commercial loan that’s a 20 year amortization. It might be 25, could be 15, depending on [00:29:00] how the deal’s structured. Uh, I don’t know all that much.
Does SBA give us longer amortization rates, or are we, are we typically looking at the 20 year range
Joe: the seven year, sorry. There’s two SBA loans. There’s a seven a that’s a 25 year am. Then there’s the 5 0 4, which is a. Two part loan. I don’t, we don’t need to get into it, but average is 23 a year, so
Patrick: All
Joe: call it 23 to 25 year rams.
Patrick: right. Great. So the, the nice thing about those somewhat shorter amortizations is I’m, I’m, I’m actually building equity, uh, on the balance sheet. Just like the, the appreciation, you know, my, between my loan pay down and my, my appreciation. It’s like that, that can start to stack up to be, uh, pretty nice equity piece.
And then the, the one that, uh, people don’t. Necessarily think about is the depreciation. Uh, the, the government is really bad at owning and developing real estate. So they, they give us the, the benefit of depreciation. They say, Hey, this, this asset I’m in right now, let’s use my office building. It’s about a 15,000 square foot building. They say, Hey, uh, you get a depreciate that over. [00:30:00] Uh, this would be I believe a 39 year schedule. Residential property is 27 and a half. And so. But I can do cool things like a cost segregation
Joe: Yep.
Patrick: oh, hey, I’m gonna take the components, parts of this building, and the IRS gives us a schedule for those on different timeframes, and they let us accelerate that depreciation. Then we take in consideration the big beautiful bill, which said, Hey, anything shorter than a 15 year? Schedule you can shove all into year
one. And you’re like, all right, well this is, this is pretty cool. Um, so now I can take all these, these losses, uh, from my real estate. And I’m an active real estate investor and I qualify as real estate professional, now I can offset my. Earned income with my real estate losses. And, uh, now we’re really rolling. Uh, that’s really hard to do for, let’s say your veterinary client, uh, because the, the threshold to be passive, or excuse me, real estate professional, is 750 hours and your primary activity. So if he’s working 2000 hours in his, his veterinary clinic, it’s gonna be hard for him to, to claim real [00:31:00] estate professional Strat status.
But if his wife. Maybe he’s only working part-time somewhere. Uh, she could, she could be the real estate, uh, professional if she gets it 750 hours. We just encourage people, be really good with your calendar.
Joe: Yep.
Patrick: sure all of these things start to show up because, uh, the burden’s on you. If the IRS says, prove it to us, we, we have to show up and, uh, demonstrate that we’re, we’re actually in the real estate, uh, estate business, so. Um, when I think about the depreciation, that can be, uh, a fantastic wealth builder, uh, as well, because it, it can offset, especially if I’m continuing to acquire assets, it can offset almost all of my earned income. I can pay almost no income tax, uh, in that scenario. And so it’s like, well, I’m gonna recap those.
We’ve got appreciation, we’ve got cash flow, we’ve got amortization, we’ve got depreciation. It’s like you start stacking all those things together and real estate’s just, uh. It’s one of my favorite asset
Joe: It’s, uh, it’s almost like they have the biggest lobby in Washington.
Patrick: yes. Yes. It’s, [00:32:00] uh, hey, you know, I, I kind of wish there was more, uh, less government involvement, but, uh, when, when we get all these benefits from real estate,
Joe: do too, but if you can’t beat him, join him. right. That’s right. I’m Exactly. just happy nar iss the biggest.
Patrick: Yes. so those are, we’ve covered the, the benefits of, of owning, uh,
Joe: Can I throw in, throw one more in there.
Patrick: please do.
Joe: you sell it,
Patrick: Mm-hmm.
Joe: you can 10 31 exchange it.
Patrick: Yes. Yes. Yeah. Can you, can you walk us through a little bit of just high level what a 10 31 exchange is? ’cause I think that’s a powerful asset, uh, or a powerful opportunity as well.
Joe: Yeah, so it’s essentially if you bought a, so Jeff, if he, uh, staying with him, if he go five years from now, he sells that facility. He is got a $500,000 gain plus all of the depreciation recapture he’d be looking at, right? Um, he has the ability to 10 31 exchange that, which is to, to not take the gain. So you use a qualified intermediary at closing.
They take the [00:33:00] 500,000 and they fill out your paperwork for you. And it’s, by the way, this, this service costs like 2,500 bucks or something. It’s nothing compared to what the, the, the benefit you’re getting.
Patrick: Sure.
Joe: then you have some rules.
Patrick: Yep.
Joe: have 45 days from the, from the closing date, the sale of your property to identify up to.
I’m gonna stick with the simplest rule. There’s like three rules, but. 90% of people use this, this rule. You have 45 days to identify up to three properties with which you will exchange those proceeds into, meaning buy your next one, and then you have 180 days, which is six months. Plenty of time to close in that property.
So really the 45 days is, is the clock. You’re most concerned with. And then what you’re, what you do is you, you roll that 500 grand out of, so in this case, Jeff’s rolling 500 grand out of one self storage facility, and maybe he bought another one. He just rolls it right into another one. And the beauty of that is he can line up his next purchase before he ex even bliss his property for sale if
Patrick: Yep.
Joe: [00:34:00] negotiates right or right around the same time.
So he will know with a 45 day buffer that he’s gonna complete a sale and then complete a purchase.
Patrick: Yep.
Joe: Five years from now. I’ve, I’ve done a few of them myself. I’ve had, I used to actually, and I didn’t even go far further back than the distressed debt company, but I raised $93 million. In 2005, six and seven for 10 31 exchanges.
So I know a little bit about it.
Patrick: Yeah.
Joe: Um, but it’s a, it, I mean, what a great way to just continue to punt
Patrick: Mm-hmm.
Joe: capital gains taxes. And, you know, a lot of, I’m gonna say this for your clients that are sitting on real estate, back in the day when I was in that. Business. That’s what we did. There were 10 31 exchange syndications.
Patrick: Mm-hmm.
Joe: A lot of my clients were rolling out of, let’s say, uh, they owned a triplex in California that they bought in 1980.
Patrick: Yeah.
Joe: And it’s worth 3 million bucks now,
Patrick: Mm-hmm.
Joe: the cash flow is like 1% of the actual value.
Patrick: Yep.
Joe: You look at what they had invested in it. Yeah, it’s great. It’s cash. [00:35:00] On cash. It’s still great. It’s 15, 20%.
But the trapped equity in there, when you factor that in, you’re sitting on 1% return on your cash, on your, on your investment. What it’s worth. So those folks would sell that. That’d be looking at a two, $3 million gain, al almost the entire thing was gained.
Patrick: Yep.
Joe: And then they would take that and they, they’d whack it up into, you know, two, three different investments.
They’d roll 10 31, roll it into two or three other investments. That might be cash flowing, 8, 9, 10, 12%.
Patrick: Right?
Joe: now their 3 million bucks is now let’s just round numbers. One 1% before is now earning them 10%
Patrick: Mm-hmm.
Joe: and it’s a whole different ball game. And you didn’t pay taxes on it. It cost you, it cost you an accommodation fee
Patrick: Yeah.
Joe: to do it.
Patrick: and the cool thing about what you’re talking about is, you know, we’ve got the estate tax threshold up to the point now where it’s $15 million per person, $30 million for a married couple. So we’re, let’s take this example. And we’re, we’re, we’re rolling our equity [00:36:00] forward, we’re, we’re missing out on the. Unfortunately the capital gains tax, you know, which is, uh, which is exciting and allowing our money to just continue to compound it at at greater rates. Uh, we were just looking at an example earlier today of a penny compounded doubling every day for 30 days.
Joe: Yep.
Patrick: And what that, that number
Joe: It’s over a million bucks, isn’t it?
Patrick: I think it’s $5
Joe: Oh, 5 million.
Patrick: which is a crazy figure.
Uh, it really starts to accelerate towards the end there, but when you apply 37% tax to it, it gets to about $15,000. So it’s like, you know, when you strip out the tax wealth building just happens so much faster. So with that in mind, we think about this, it’s like, man, you can really accelerate the, the wealth building
Joe: It’s tax deferral.
Patrick: Rolling it forward.
Joe: Yeah.
Patrick: then the cool thing is, is when you die, there’s a step up
Joe: Steps up. Yep.
Patrick: So it’s like, we can never pay this, this capital gains tax. Our kids take it, you
Joe: Yep.
Patrick: free. We’ve got a $30 million sort of window to get that done. And even then, we do lots of planning for clients that, uh, you know, are exceeding that threshold.
There’s, [00:37:00] there’s really cool ways to get some discounting and whatnot if we’re, we’re bumping up on the estate
tax.
Joe: Can I, make two comments since we went into 10 31?
Patrick: Yeah.
Joe: one, one piece of confusion for people is ’cause, and I might have confused him too, when I use the same example, Jeff sells storage. He buys, you don’t have to buy self storage.
Patrick: Right?
Joe: You could go from land to self storage. Self storage to residential.
It’s just real estate to real estate. That’s the only qualifier. It’s gotta be real estate. Typically, you wanna hold it for at least a year, but actually it’s not about that. It’s about intent. So you can’t do this with the intent to flip,
Patrick: Right.
Joe: if, um, I, I own API bought a piece of dirt and I’m gonna build self storage.
And I don’t know if where your listeners live, but I live in Wawa country, so I’ll use Wawa. Yeah. that’s where Wawa’s from, where I, where I am, uh, live. And you know, Wawa comes along and says, I’ll pay you 3 million bucks for that piece of dirt.
Patrick: Yep,
Joe: And it was six months later. I’m taking the 3 million bucks and I’m gonna go roll that into something else.
Patrick: yep.
Joe: So it doesn’t have to be the [00:38:00] year, it’s all about intent.
Patrick: Yeah,
Joe: if you wanna play it safe, you know the audits. Sure. Hold it for a year.
Patrick: Yeah, absolutely. I love it. Um, all right. This is, this is great. So we’ve, we’ve, we’ve had a lot of fun talking about real estate and the tax benefits, but let, let’s say I call you up and I’m like, Joe, uh, I’m, I’m wanna get plugged into your community and I wanna, I wanna learn, tell, tell me where, where do I start?
Where what, what is like step one of the, storage facility ownership process.
Joe: Yeah, great question. So, and you’re catching me in an, in an awkwardly awesome time. So I’m, I told you, we, we teach, um, students, but I’m, we’re closing down one mentor’s program. He was the original Scott Myers. He, he was the, the first to start teaching self storage. I came through his program, we took over his program.
We, we do all the fulfillment. So we teach all these students. That’s why I, I have all these stories and, and, um, in front of people all the time. He’s retiring, so his last academy’s coming up. In fact, it might be over by the time the airs. [00:39:00] Uh, and we’re kind of picking up the mantle ourselves and launching a completely new online community digital presence where we’re gonna match up, uh, folks that are out there.
Doing the hard, hard work, by the way, the, the grind, the, the gritty grunt work of
Patrick: Yeah.
Joe: being out in the street or making phone calls or sending letters or trying to talk to mom and pop sellers.
Patrick: Yeah.
Joe: They’re the ones doing the hard part. So we’re, we’re training and coaching them up to go find these deals. Sometimes they’re like Jeff and have their own half a million to put into a deal.
Sometimes they don’t. So they’re looking for. Uh, equity partners.
Patrick: yep.
Joe: So, uh, we’re launching this community to bring everyone together. We’ll oversee it all. If I match, you know, uh, someone that’s, uh, that’s out there prospecting for deals with, you know, Patrick, you’ve got, you’re the half familiar. You’re the, you’re the gp.
Patrick: Yep. I match you guys up together. You don’t know this guy from Adam, but you know me and I’m gonna make sure we oversee the deal for you. So that community is called the storage moguls.
Yeah.
Joe: Um, and it’s storage [00:40:00] moguls, the, sorry, the storage moguls.com.
Patrick: Very
Joe: if you wanna just start learning about storage.
Patrick: Mm-hmm.
Joe: I actually have, uh, I’m on, I just recorded, I dunno what day we’re on technically.
’cause you know, you record ’em a little ahead, but I just recorded day 68 of the storage 100. So there’s, I think there’s like 66 videos public
Patrick: Yeah.
Joe: So if you go to YouTube, it’s the storage, uh, storage moguls mastermind channel, or just my name, Joe Downs. You’ll find it.
Patrick: All right.
Joe: Uh, and there should be, you know, in a couple weeks there’ll be a hundred, a hundred some videos of.
Every aspect of self storage, it’s, it’s free. It’s just a great place to start learning about storage. But if you want to, um, if you wanna get on our community waiting list, it should launch by somewhere in April.
Patrick: Mm-hmm.
Joe: Uh, it’s the storage, uh, moguls mastermind dot or storage moguls.com. That’s a little confusing with the two storage moguls.com storage moguls Mastermind on YouTube.
Patrick: All right. Very good. Well, we will have links to all of that in the, the show [00:41:00] notes, uh, the storage moguls.com. It’s, uh, this episode will be coming out right about the time that, that, uh,
Joe: Cool.
Patrick: that site is opening up and, uh, uh, be one of the founders, be one of the folks that, that gets plugged into what Joe’s got going on here.
I think this is a. fantastic opportunity to, uh, just start exploring this, this, um, this opportunity. I, I do think, you know, when you were talking about, know, I live here in Iowa, uh, I’m two hours from Chicago. I’m also two hours from the middle of nowhere, right? Like, I, I, I still do cell service at times.
I’m like, how is this possible? I thought we were past this,
Joe: You gotta get starlink.
Patrick: I know I, I do park it on top of my car, um, as I’m driving. But, um, I drive through these tiny little towns, you know, the population like 70, and I’ll see unit, you know, storage facility there. And I’m like, what the heck? You know, they’re everywhere
Joe: Yeah.
Patrick: everywhere and, you know, these, these secondary, tertiary markets, you know, like, uh, you, you talked about that.
It’s like, hey, there, there’s probably some [00:42:00] fantastic cash flow opportunity because. You know, captive audience, uh, they’re not driving an hour to, to go store their stuff. If they could do it right down the block, it, uh, it’s great.
Joe: That, that scenario is a little small. Um, but I will tell you, you can make millions in this secondary and tertiary market in self-storage. You, you don’t want to be in the primary markets. There’s, uh, my favorite saying is in this case is you wanna beat Tiger Woods as something you can just don’t play ’em in golf.
Patrick: that’s and that’s the same here. I can’t beat, nor can you beat public exercise and CubeSmart. You don’t have the capital stack. You don’t have the, the ip, they own all the SEO. You can’t beat ’em in their markets.
Yep.
Joe: But I bet you within an hour’s drive of where you are, there’s. 10 markets that are fantastic for storage
Patrick: Sure. Yep. And we’ve been looking at the same thing actually when it comes to senior housing. Uh, we’re like, Hey, let’s, let’s find some of these tertiary markets. Let’s, uh, let’s not be in, you know, Madison, Wisconsin or Milwaukee, but let’s be in some of the surrounding suburbs that, uh,
Joe: suburbs of the suburbs.
Patrick: Yeah, we [00:43:00] aren’t getting the same, uh, attention as the, the major area. So that’s, uh, that’s great. All right. So Joe, I’m, I’m thinking about, uh, self storage. I’m, I’m seeing, uh, fantastic opportunities here. Is there, is there anything else we should be talking about when it comes to, uh, this opportunity?
Or have we, we done a good job covering it.
Joe: Well, I mean the. Uh, other than the time, the timing is incredible. Uh, and that, that’s self-serving. To say that I’m a self-storage guy, I get that.
Patrick: Mm-hmm.
Joe: But here’s the logic on it. We, I, earlier in this show, I talked about how self storage is great in, in good times, and it’s great in bad times. What about the InBetween times?
We just came through a strange. Period that we, we rarely see, we see recessions, whether they admitted or not. We see them all the time and we survive them. All right. Stagnation periods of stagnation, those are rare. I mean, in the last 40 years, I, I, I [00:44:00] don’t know that I can name another time where I think you have to go back to the seventies
Patrick: Yeah.
Joe: if you remember, in 23 and 24, we saw interest rates.
Move up 400 basis points in six, nine months, I think.
Patrick: Yep.
Joe: And then at the same time we had inflation going on. That was a a period of time that really hurt self storage. And on top of that, I, the other funny thing saying I have is COVID giveth and self storage and COVID take ticket away.
Patrick: Hmm.
Joe: So during COVID was the greatest time self-storage has ever seen.
It was deemed essential. Everyone’s occupancy was through the roof. They were trading like crazy. When you bought though, after that you were, you were overpaying in a, in a way, you were buying in the market you were in, but you were overpaying in hindsight because people started to move back out. O occupancies dropped, but people weren’t making money and inflation was up.
So it was a very difficult time. Our, our message in 24, everybody was survive through 25. Try to get to 26, so it’s [00:45:00] 2026. There’s a little bit of a bay breeze at our back. Not a, not a stiff wind. But the beauty of buying now is you’re buying, we buy trailing twelves. We buy your performance, not what you can do.
The, all the trailing twelves are on sale. They’re on, they’re at discount,
Patrick: Yeah.
Joe: and the economy has now turned, and the current administration’s policies aren’t even in place yet.
Patrick: Yeah.
Joe: when I say this is the, maybe the greatest time to buy self storage, I wish, believe me, I wish I was in this business in the eighties and I’d be saying that was the best.
But in the LA, since I’ve been in the business. Since 2018, this is the single greatest time I’ve seen to buy self torch
Patrick: yeah.
Joe: right now.
Patrick: I love it. Yeah, this is great. And um, I, I think the. The key is seizing on opportunities, right? And if, if we’re, we’re staring at a fantastic opportunity and I, I don’t see us. I do believe United States is the greatest country on the planet. Uh, I don’t see us slowing down. We’re, we’re just [00:46:00] too resilient for that.
And, uh, you know, you just look at our, our growth trajectory and, uh, there’s gonna be some bumps along the way, but, uh, if that’s case we’re gonna keep growing and keep having the level of abundance we have, uh, self storage is just gonna continue to, evolve into something that becomes more, more necessary for,
Joe: It. It supports. It supports the abundance.
Patrick: It does. So I, I think about the stakes here. If we don’t take action, you know, we’re, we just continue to allocate capital to maybe overcrowded investments, uh, you know, compressed returns, limited control, uh, maybe increasing volatility and, uh. just stay busy managing wealth without feeling truly optimized.
But, uh, when we started deploying capital into like durable high yield asset classes, like, like self storage, uh, there’s all sorts of opportunity and I just think about what you’re doing and the opportunities you’re creating for people. ’cause I think about how I got started and it was, it was the hustle.
It was the grind. I was out there. Sending out letters, knocking on [00:47:00] doors, putting deals together, any way I could possibly get one put together. And I was going and finding some people that had money to put into the things. And, uh, and those were wins for everybody. You know, I was, I was willing to put the, the blood, sweat, and tears in.
And I feel like that’s how most. Real estate entrepreneurs get started and, uh, I love that you’re, you’re laying the foundation for people to, go out there and find those opportunities, especially in the mom and pop space. Man, when 80% of the marketplace is controlled, uh, by mom and pop, mom and pop get tired of dealing with opportunities.
They get too old. They wanna move to Florida, they want to exit the business. The kids want nothing to do with it. And it’s like those are the opportunities to come in and find a, uh. A poorly managed asset. You know, it’s not totally mismanaged, but it’s, it’s not optimized. And so you can come in and you can start driving that, that NOI, that net operating income up and, uh, that, that hits the bottom line.
And now, now my asset value is starting to increase at a multiple of every dollar that hits that, uh, that bottom line. So, uh, I love what you’re doing here, Joe. I think this is, uh, this is [00:48:00] fantastic. Any final thoughts before we, before we wrap up?
Joe: I, no, I was just gonna say I love listening to your story ’cause it reminds me of mine just out there grinding and gritty and doing it. And by the way, we did it all without podcasts to listen to.
Patrick: Seriously?
Joe: always compliment every host that I’m on. Thank you for doing what you do. ’cause it’s, you’re putting a lot of.
A lot of your time, energy, and effort into bringing on, hopefully I didn’t suck, but bringing on, you
Patrick: great
Joe: guests who are enlightening your audience and motivating your audience. And we had to do it without all that. So, I, I just, hats off, kudos to you for, for doing what you do and providing this for people.
’cause you know, I, I wish we had it when we were out there, you
Patrick: Yeah,
Joe: our way.
Patrick: absolutely. Thanks Joe. This has, uh, this has been great. And on that note, I remember I used to have, I had an Earl Nightingale tape set
Joe: No way.
Patrick: I, I was in my early twenties and I, I read that this Earl Nightingale, I think there were six tapes in there. And so I would, I listened to Earl Nightingale tapes and then I, then I moved along to [00:49:00] CDs and I figured out, uh, uh, that I, I. I didn’t like listening to CDs at normal speed, you know? Uh, so I found some software that allowed me to rip it to my computer. Turn it into double time, put it back on the cd so then I could listen to it in my car so I could get through twice as much material. And, and half the time it was, uh, I’m exposing myself, uh, but, uh, is is a little bit of a nerd.
But yeah, I was, I I do love the, the content that we have access to. I think about your, your YouTube videos, man, what an asset that, uh, that YouTube is, and I can go. If I’m willing, if I’m willing, you know, and I think about the, this is, we try to do something similar, right? Like we’re providing a lot of value, we’re giving the framework away for people, and then, then they have different levels of involvement with us, right?
So it’s like, here, here’s all of the tools. Go execute yourself. Oh, you don’t have time for that. Cool. Here’s another opportunity with a little less time. Oh, you want it done for you? Let’s
Joe: Yep.
Patrick: plugged in and go. So, uh, I, I love that you’re. You’re creating the [00:50:00] same opportunities for people. I think it’s, uh, it’s fantastic and if, if you wanna know more, we’ll have links to all of these things in the show notes.
But, uh, go check out the storage moguls.com. Uh, you can be one of the founders in that group. We’ll make sure that this episode comes out right, uh, at the time that, uh, that’s available. So Joe, thanks so much for being on the show. Do
appreciate you.
Joe: such a pleasure to be here. Thanks for having me.
Patrick: thank you

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