Today’s Ritter On Real Estate guest is Scott Krone. Scott is a Chicago native whose career in architecture began in 1991 by pursuing his Masters of Architecture from the Illinois Institute of Technology. While obtaining his degree, he also worked as a Project Manager for Optima, Inc. During his time at Optima, Krone’s responsibilities included notable projects such as the 400-unit Cormandel in Deerfield, IL, the 40-unit HedgeRow in Winnetka, IL, and the 51-unit Optima Center Wilmette in Wilmette, IL.
In 2012, Krone founded Coda Management Group – a firm that specializes in managing real estate assets. Since its inception, Coda manages a wide range of real estate including single and multi-family homes, retail, commercial warehouse and self-storage and multi-use flex athletic spaces. Currently, the platform of investments is in excess of $55 million.
Krone has authored High Performance Homes – Navigating the Green Road to Your Dream Home, a book for homeowner’s seeking to incorporate green technology into their home.
Most recently, Scott also founded a revolutionary storage business The One Stop Self Storage. It’s committed to make its members’ time of transition rewarding and strives to remove challenges and hurdles commonly found in the industry. The One
Stop brand is built upon the premise of providing the best in storage solutions contained in sustainable, renewable construction and it’s located in WI, OH, KY and ME (Milwaukee, Toledo, Dayton, Ellsworth, and soon to Louisville and Chicago).
Key Points From The Episode:
- From being an architecture graduate to understanding the roles of a developer.
- Appreciating the impact of structuring a deal.
- Understanding supply and demand in your market.
- Self Storage and why it’s so predictable.
- Beating the competition by cutting prices safely.
- Comparing capital splits in competitive rate of returns.
- Evaluating deals through understanding structures and risks.
- Importance of having mentors in your career.
- Listening to what your gut tells you and avoid second-guessing your decisions.
- Drivers for self-storage.
- Due diligence and the lack thereof can make or break a deal.
- Taking the leap and moving forward.
- The Road Back To You by Ian Morgan Krohn
No one’s perfect. We’re all gonna make mistakes. How do we address the mistakes? And how do we move on? And how do we avoid those mistakes in the future? Do we make mistakes? Absolutely. We’re not going to all have the perfect set of information to make decisions, but we have to make the best decision based on the information that we have. And we just have to make sure that we get the best information that we can in order to make the most educated decision.
Welcome to read around real estate, the show about how to passively invest like a pro. On each episode, I interview real estate experts to give their top investing advice, strategies, and tools. I break down the insights into practical steps to avoid the pitfalls and make better investments. I want to help you passively invest like a pro. This is Ritter On Real Estate. I’m your host Kent Ritter.
Hello fellow investors. Welcome to another episode of Ritter On Real Estate. I’m your host Kent Ritter, and we’re here to teach you how to passively invest like a pro. Today on the show, we’ve got Scott Krone, Scott’s a Chicago native whose career in architecture began in 1991 by pursuing his master’s in architecture from the Illinois Institute of Technology. In 2012. Scott founded the Kota Management Group, which is a firm that specializes in managing real estate assets. And coda manages a wide variety of real estate, including single multi-family homes, retail, commercial warehouse, and self-storage, and multi-use flex athletic spaces. Currently, his platform has investments in over $55 million worth real estate. Additionally, Scott has authored a book called high-performance homes, navigating the green road to your dream home. It’s a book for homeowners seeking to incorporate green technology into their homes. And I know Scott has done a lot, even outside of his bio. So we’ll unpack all that today. But to start off, Scott, thanks for being here.
My pleasure. Thanks for having me. Can I look forward to this time?
Yeah, absolutely. So before we get into the question, answer, I’d love to just give everybody a sense a little bit more of who you are. So let’s start there. Tell us, you know, who you are, and how you got to where you are today?
Well, I think you summed up the beginning part of you know, I’m from Chicago, I grew up here. And I got into architecture when my senior year of college when my parents showed up on parents’ weekend and said, What do you want to do next year? ” I thought I was gonna work for the family business. And they gave me the shocking news that the family business was going to be sold. And so that put an end to that I was gonna be. I was the fourth generation in the family business. And so but also gave me a lot of liberty to just say, Well, my, you know, here’s my path in life, and now it’s changing. So it gave me the opportunity to go in to get my master’s in architecture. And it was during that time, you know, during, you know, I had a week off between graduating and starting my graduate program. And that first summer was like an intensive program that we did to ensure that we were really committed to this three and a half year journey. And I realized at that time, that being the developer was the key to controlling the architecture and the construction. And so that’s where I began focusing most of my career and during my graduate work was understanding the roles of the developer, the architect and the builder. And so that the next year, I was the TA for a gentleman who owned a company that actually did multifamily developments. And so my master’s thesis was a 400 unit $100 million in a revenue project, that he selected mine out of the class, and I was working for it during that class with him. And then when I was his TA, and then outside of class, I was also working in his office. So I worked for him for six years, while in school, and once I graduated, and so I ran that project plus a bunch of other multifamily either apartments or condominium projects for him, and then eventually started my own company called a design build in 1998. And we were doing multifamily mixed use single family, churches, those sorts of things. And then in 13, we started Kota Management Group just to specifically focus on Commercial Investments and beginning of our sort, or self storage career, and we’ve subsequently sold off our multifamily and have been focusing our investments on self storage during that time. And then just this spring, we launched our own self storage brand, one stop self storage. And so now all of our facilities are under that banner.
[0:04:25.0] KR :
Gotcha. Wow, that’s a really unique story. And that, you know, a lot of people get into kind of start this path, you know, I guess much, much less formally, you know, they’re trying to figure out a place to, you know, maybe put some capital or something and come up, but you actually came up through, you know, a very formal process and you know, through your through actually going through university going through education, but you had the benefit of being able to get some real practical experience alongside that. So that sounds like an amazing opportunity to actually work on a development as you’re finishing up here.
It was, I felt incredibly beneficial. You know, when you approach undergraduate and we had undergraduates in the program, who are, you know, taking similar courses as we were because I had to complete some of the undergraduate requirements, during my master’s, because my undergraduate work was in history. So I had to combine, you know, basically, you know, five years of education into three and a half. And so the way in which they approached versus how we were approaching as a, as a, I mean, I approached my graduate work as my career versus college, I approached as college like most college kids, right. And so knowing that I was working on something that was actually going to get built, provide me with a lot greater motivation, and, you know, a sense of purpose. And then when I was working in the office, I was running all the financial modeling. And so I got to see the repercussions of what we were doing on the design board, and how it is directly impacting the overall net line, and you know, how we were structuring the entire deal. And so, it set me up perfectly for my career, I couldn’t, I couldn’t have asked for a better situation.
[0:06:11.0] KR :
Yeah, that’s incredible. So as we were talking, you outline something for me, the your Practical Guide to passive investing, I think that fits so well into the show, and what our listeners are looking for. So I’d love to unpack that with you, and go through the steps and just talk through it.
Well, when we were first, doing the multifamily developments, you know, it was sort of like, the Field of Dreams, build it, and they will come, you know, it was, we didn’t have like a good understanding of what the overall marketplace was, there were some, you know, demographic studies and things along those lines. But basically, you know, this is in the, in the early 90s, and late 90s, you know, the economy began to boom, we were in the midst of recession when I first began, but then things began to take off. And so if you built it, people would just fill it. One of the things I’ve really learned and appreciated comparatively, when we’re doing Self Storage, is that it is as much of a retail business as it is a real estate business. And therefore, it is a very predictable model. So one of the things that we always stress is really understanding the marketplace. So the first practical guide for us is, you know, what is the demand? And what is the supply? And is there an unmet need needed to so we’re always evaluating that. And I think that’s an important thing to do is to understand what the market you’re going into. And you can do this, it’s more difficult, but it can be done in the different segments of real estate. But for us in self storage, it is a much more predictable model. And that’s one of the things that we like about it comparatively. And then the second part of it is, once we’ve identified the market, and we understand, I mean, our market is no more than a five mile radius. So we’re focusing on between a one, three and five mile radius. That’s how specific our market is. And then once we do that, then it’s how we beat our competition, and the best way that we can beat our competition is making sure that our total in price is below theirs. So if we have to cut prices, they won’t kill us. And so we’re always trying to come in around 65% compared to what our competition is doing. And for us, that’s buying existing buildings below replacement costs, and then converting them. So you know, if I can come in and buy a building for anywhere from 11 to $15, a square foot, I can’t build the building for that. So like that inherently gives me a competitive advantage compared to my competition. And then the next thing is the creativity within the capital stack. How do we structure the capital stack to make sure that we’re creating the greatest amount of returns with the lowest amount of risk for investors? And I think a lot of investors overlook the capital stack and the sources and uses when they’re evaluating it, because we’ll get a lot of people that will tell us like, well, I’m looking at this multifamily deal. And they’re given us 80% of the split. And I said, Okay, well, that’s, that’s pretty incredible. You’re getting 80% of the split, what’s your cash on cash, what’s your, your IRR and what’s your rate of return are like 8%, I’m like, well, they’re having to give you 80% in order to get that IRR up to 8%, which inherently tells me there’s a lot of risk, because if they have to give away so much of the deal in order to get a market driven rate, then there’s obviously a lot more risk because the competition, which is what we began looking at a scene within that market cycle, why we began selling off our multi family because, and I perhaps I didn’t time it properly, but I sold all of ours in 18 because I thought we were at the peak and here we are in 2001. And, you know, I don’t think I wouldn’t want to have multifamily during this, you know, pandemic, especially with, you know, putting the moratorium on rent collection and those sorts of things. I mean here in Chicago, you know I would have been killed. If, you know, we weren’t able to collect rents, I mean, just the property taxes alone would kill us. So um, you know, I’m thankful that we got out when we did, but perhaps it was a year or two early, but I’d rather be a year or two early than a year too late.
Yeah, I mean, it’s definitely a tale of markets when it comes to COVID. Right. I mean, Chicago is a very different environment. I mean, any of those big cities, Chicago, the coastal cities are very different markets than some of the more rural or rural or suburban areas, right. I mean, we didn’t see how they any impact in our portfolio, but it’s just it’s so market dependent on going to watch what, what the laws are, you know, how they, how they’ve been outlined, how they’re upheld, and just the dynamics of it, but so you’ve switched from, you know, from you’ve sold out of multifamily gone into self-storage at this point. And, and I want to go there, and I want to talk more about, you know, some of the comparison contrast between them. But before we do that, just going back to your point about starting at the beginning, with the understanding of the market, right in the market survey and demand and supply and how and how you do that it sounds it sounds like your general strategy is understanding the market and then be able to come in and buy below replacement cost. And even after you’re doing your improvements, just remain below that replacement cost. Because if you’re able to do that, then effectively you can charge rents that are lower than the competition and be able to maintain your margins. Is that in general, the strategy?
Yeah, that is, and then we cap is also based on the fact that we have our own design-build company. And so we can build more cost-effectively than our competition. And so we pass that on to our investors, we’re not, you know, if you just go and hire a GC, they save money on the job, then that’s money in their pocket, right? with us, every dollar goes into the actual project. So when we come in under budget, you know, it’s money, we’ve saved the project. If we’re coming in over budget, then there’s no, there’s no fluff markup on our part. It’s just exactly what it is. And so that is one of the ways in which we stay competitive, more so in the marketplace, by having our own design-build firm as well.
Gotcha. So you go through the design-build process that costs for your investments,
We have our fee to, you know, obviously, keep our lights on, but it’s market-driven. And my point is that if we realize a cost, then we’re doing it cost plus, so plus our fees. We’re not we’re not buying the job for $ amount, which is what most GCS will do, they’ll buy it. And then what the GCs goal is, is to pull money out of that job to keep it in their pocket. Gotcha. Yeah. So they’re saying they’ll keep the extra, you know if they save $10,000 on hbsc? They’re not going to give that back to the owner. They’re just going to, you know, go on a family vacation.
Sure, sure. Yeah, I mean, structuring those construction contracts are critical, and getting the right terms. And as you go into the capital stack, I love the point you made. It’s not a point that’s made often. I think it’s more of an advanced understanding of just risk and a way to look at a different way to evaluate the terms of the deal. So say that, again, what you said and explain that a little more, because I think it’s a really good point.
Well, there’s two points to this, that we normally get with investors, they’ll say, you know, I totally understand apartments, but I don’t get self storage. And, you know, my response to that is, well, apartments are, I mean, self storage in apartments without toilets, it’s without sinks, it’s like the most basic form of an apartment, it’s a box, right? Anything beyond that box, it’s just a more complex apartment. And so that the two models are very similar. So if we’re comparing a capital stock split between the two, it let’s say if we’re offering 30% I’m just gonna make it an extreme if we’re offering 30% of the capital split to our investors. So for every dollar we make, they get 30 cents, and we get 70 cents compared to an apartment dealer, where the apartment developer is given their investors 80%, and they’re only keeping 20%. And but their rate of return is let’s say, 8%. And ours is 10%. That means that they have to give away so much of the deal in order to get that rate of return up to 8%. While we only have to give away 30% to give away 10%. So inherently, our deal has less risk, because of the fact that we can keep more for ourselves and still offer a more competitive rate of return. For the investor comparatively to a multifamily deal or another deal doesn’t. It doesn’t really matter. So if I’m comparing the two and these are all fictitious percent Just on coming up with right now, just as an example, if I’m looking at that, if I’m going to get that 8% in multifamily, and I got to give away 80% of it, that means I got to work really hard just to get that realize that 8% versus if I can give away only 30% and realize that a 10% yield. Right? Does that clarify?
Yeah, it does. It does. And so essentially, like what I wanted, I think the nuanced way of looking at it is because, you know when I talk with investors all here, and we keep it pretty cut and dry, we’re kind of a 70,30 throughout all of our deals, but when I talk with investors, you know, I will hear, hear things like, Oh, it’s, oh, I was looking at a deal. And it was, you know, maybe it was a 60,40 split, you know, 40%, to the GPS and 60, to the LPS, they say, Oh, that’s too much the GPS are getting too much of a deal. And I think the nuanced way to look at it is, as you said, Well, I you can actually look at it if they’re still able to get you the returns, that they’re promising and take more of the deal. That essentially means like, you’re saying, that deal actually could be perceived as less risky, because they’re not having to give up as much to still give you the same amount of return. I think that’s the point that I want to get across. It’s just another way to look at these things. As you know, sometimes folks get too caught up, I think, on the splits, and on different fees, and all this. And at the end of the day, even when I was investing more passively, it was I didn’t care so much how much the GP was making and other fees and things were as long as what I was seeing at the end of the day was negative all that and as long as it was likely that it would be realized, right. And so I just think it’s a different perspective to focus on the returns, you’re getting kind of versus some of those other deal structures and, and actually having a more favorable split to the GP, is because there’s more room in the deal. And therefore it could be considered actually a safer deal. So I think it’s just a different way to look at what I wanted to really call out for folks.
Yeah, the other side of it is that you brought to other points because there are preferred returns. And then there’s also management fees or fees that get tacked on like acquisition fees, disposition fees, annual maintenance fee, whatever those things are, right. And the way I look at it is you have to can’t take one in isolation compared to the rest, you have to look at an entirely every developer, every sponsor of the deal has to cover their overhead has to keep the lights on, it should be compensated for their work because they’re bringing value to the table. So is that in proportion to the deal in proportion to the marketplace? And? Or is it those things becoming a top-heavy burden that then is impacting the rate of return? And so when we discussed that with investors, we asked them to look at all those things, not just, you know, taking, as you said, when the splits are better? Okay, but what’s the yield to you? As you said, you know, where are your fees? You’re, you’re taking a whole bunch of fees. Okay, but how long am I working on this compare to what’s going on? Is that a rational or reasonable amount? Those are the things that we always evaluate because we get presented with deals all the time. And we’re asked to assess other deals. And we’re asked to come in and partner with people on deals. And so we’re looking at everyone’s different structure. And there’s no two that are exactly the same. And so it’s a matter of understanding each of these things to find out what is appropriate for that deal. And does that make sense? So you know, those are the different ways in which we analyze risk, as well as how we analyze the proper compensation for the work that is being done. Does that make sense?
It does, I appreciate you expanding on that. And then so what’s the third, was there a third one that we didn’t hit on yet on in your Practical Guide?
Well, that the first two were knowing your market, the second one was buying below replacement cost. And the third one is understanding the capital stack. And so that’s where we also look at other investment strategies that can enhance the rate of return, whether it be opportunity zones, historic tax credits, we’ve done paste financing, and we’ve done obviously cost segregation. So those are four different strategies that we have layered into the deals in order to enhance the rate of return or the capital stack for our investors.
Gotcha. Gotcha. Awesome. And so you mentioned the transition out of multifamily and into self-storage and in 2018, you talked about some of the market dynamics and reasoning behind why you did that, but I’m curious if you could kind of compare and contrast a little bit for us, the two investment types and then and then talk a little bit more about self-storage and why you see that as such an I guess Your investment choice going into the future.
Well, I appreciate my iPad, two major mentors in my life. And the first one was, you know, my professor I work for. And he really liked the Henry Ford Model of business. You know, his clients could have any color car that they wanted as long as it was black. And, you know, being the architect that training that I am, you know, if people don’t like your design, it brings about a certain level of critique or offense because it’s like, you know, it’s personal, right? That you’ve put out this creativity, and you know, someone rejects it. So when you have apartments when you have condominiums when you have buyers that are picking things, I don’t like the kitchen, I don’t like the cabinets, I don’t like the color the paint, I don’t like the carpeting, I don’t like the tile work, I don’t like the layout, I need more of this or that. There are just so many different things that people can nitpick about within multifamily. Compared to within Self Storage is you can have any color box you want, as long as it’s white. The only real question that we have for our customers is, how big and where would you like it? You know, it’s so it’s a lot fewer decisions. And so people are when they’re comparing our product to others, they’re looking at, is it safe? Is it dry? Is it secure? How easy is it for me to get into? And what is the pricing? So the deciding factor is a lot less complicated and much more simplistic. And that’s one of the beautiful things that I really like compared to self-storage compared to multifamily is that it is a lot more basic business model. And it’s a lot more predictable based on those factors. I don’t have to worry about having to change out the cabinets in five years or new appliances and, you know, do people like black or white or stainless steel or, you know, now people are coming out with the 1970s almonds or lime green and stuff like that. So you know, it’s just to me, it’s just a lot more basic of a business model, which then as a whole heck of a lot more predictability into our business plan.
Gotcha. What what’s an operating expense ratio look like in self-storage? You know, in multifamily, we would say okay, 50% is kind of a standard, what’s Self Storage look like?
Anywhere from 25 to 35%.
So the other big comparison is like when we were doing 400 units, that was $100 million in revenue. I mean, it’s a big, hefty, big, hefty loan. I mean, we’re doing 850, 900 units, and our cost basis is below 10 million. So I mean, it’s like a fraction of the cost, it’s a fraction per door. And our operational expenses are far less percentage-wise, I mean, our biggest expenses either if we have people on-site, in real estate taxes, the rest of it is, you know, very minimal compared to multifamily. So per deal, we’re putting in less risk significantly, and we’re able to create just as much yield. Our cap rates are very similar to multifamily. But our cost basis and our exposure are a lot less. And so that’s another aspect I really like about it.
Gotcha, gotcha. and Europe, you’re looking in Chicago, I know from living in Chicago for a number of years, that space is a premium. And so clearly there’s self-storage play just because of that, right and you live in a tiny little apartment, you need somewhere to put all your stuff. I remember having it crammed all over my closets everywhere else. So I’m curious if you have a perspective on self-storage in the urban environment versus self-storage in more of a suburban or rural environment? I don’t know if that’s a perspective you have, I’m just curious how the dynamics differ.
Well, first of all, I gotta find out who built your apartment buildings because we got to build more self-storage next to that guy, or that person. My second mentor has a friend in North Carolina who intentionally builds multifamily, with two small closets and then he puts a self-storage facility right next door. So we do look at all three classes. And so we classify him as A, B, and C. Now in other forms of real estate, that would be like, A is the best neighborhood, B is the next best and C is not so good a neighborhood in D like you don’t want to buy in that neighborhood. That’s not the case in self-storage, they classify more of size, location, and product type. So Class C would be more roll like what you were referring to. And the first generation is not climate controlled smaller, maybe 100 to 200, 300 units max. And we classify that as like a penny stock. So you’re going to get a nice little coupon off of it. You might see a little bit of appreciation, but basically, you’re clipping a coupon for that type of product. Class B would be more of a suburban product, maybe you know, anywhere from like 200 to 400 units. Maybe climate control might Have you know paved roads and a fence around it with security cameras. And that was we classify as like a blue-chip stock, so you’re gonna get, you know, a good yield on it, it’s just a good healthy rate of return of that investment. And then a Class A would be more urban. So 500 and up units, and all climate-controlled and, and typically state of the art where you’re driving into the building in each of our facilities except for our main location, you’re literally driving into our building to unload. So in the heart of winter, or in the spring, when it’s raining, or in the summer in the heat, you’re driving into an air-conditioned building where you can unload the door comes down, and you don’t have to worry about your stuff, having legs and wandering off while you’re putting your stuff in the locker. So those we consider like a growth stock, you’re gonna see the big appreciation and also yield a rate of return on their investment. So that’s why we consider them as a growth stock.
I gotcha. And as far as, as you’ve seen, supply and demand dynamics play on the market. I mean, where was the largest? I mean, where’s the demand sitting right now, and a, b, and c?
[0:26:07.0] SK :
Well, if you say in the marketplace as a whole, the coasts, the East Coast, Florida, Texas, the West Coast, are heavily saturated, typically, you’d see in a market demographic reports where supply would equal demand is around seven square feet of lockers per capita. in those areas, we’re seeing people building where it’s like 11. And so it’s like, you know, just off the charts in terms of bringing more and more products into those marketplaces. And so we’re, we’re not, we’re not investing in those. So we’ve been asked to, like build in those. But our investment is predominantly what we call the flyover states and, you know, the Midwest, so we’re predominantly, you know, Wisconsin, Illinois, Ohio, Kentucky, that’s, you know, our market Iowa, Missouri. That’s where we’re focusing the bulk of our effort on and our underwriting. But we’re probably underwriting 10 to 20 deals a week, in terms of what we’re how we’re assessing and plus running our existing facilities as at the same time,
I gotcha. Yeah, I mean, it makes sense. It’s the same thing, like from my company’s standpoint, in multifamily, we focus on the Midwest, I mean, kind of for that same reason, but it’s just interesting. So the risk, then, I mean, it sounds similar, the risk you’re seeing is oversupply. And therefore, one of your main drivers is going into markets where that supply-demand differential is favorable on the demand side, and that’s kind of your initial, one of the initial indicators to enter into a market.
Absolutely. So for instance, in our Chicago one, when we acquired the building, we were around two to two square feet of lockers per capita, we had half a million people within three miles, and 66% of them were renters. And we know the medium and we know the medium income, we know all this demographic study about it, and so that we can predict the model of how long it should take us to lease-up. And in the heart of COVID. In 15 months, we’re over 50% occupied, you know, the typical absorption rate between multifamily and self-storage, if you’re doing ground up or converting, is 3% per month. So historically, it would take you three years to lease up either a self-storage facility or a multifamily building. But with that much unmet demand, the feasibility consultants that we hired, predicted the modeling to be 24 months.
Gotcha. And is it So you mentioned that the number of renters and obviously be higher in a city like Chicago? So is it better to have self-storage in a market with more renters than more homeowners?
Not necessarily. I mean, there’s two, there’s going back to your previous question, there are four real drivers for self-storage, we call them the four DS, it’s divorce, death disposition, and, you know, you’re basically stuck, you know, you can’t move you got your displaced, right. And so, the biggest thing within those is, we look at the medium income. And predominantly if the housing stock has the biggest three reasons for not using Salesforce or if I include taxes, I’ll help throw in the fourth one, but it’s basically basement garages and attics. You know, people have those, they’re not going to use a lot of self-storage. But if you’re in Texas, and you have a big front yard and or you can just park whatever you want, or you put up you know, a structure in your backyard and you can put it exactly so, you know, those are the types of things like you know, or just putting up a barn right you put up a metal barn and then you store all your stuff in your backyard if the property is big enough.
Yeah. Well, it’s really practical. I mean, I think that’s easy to understand for folks to wrap their heads around. Right? It makes a ton of sense.
Yeah, I mean, that’s what we look for. When we’re evaluating a market that is predominant, a single-family will ask the brokers like what is our basement, you know, or do we look at the aerial view on Google Maps? Do you see every single car on their driveway? Which means that they’re not using their garages for parking or using them for storage? Right?
That’s a good point. Yeah. So somewhere like Florida where they really don’t do basements can be a good spot
Or a flat roof and they don’t do attics. You know, so there’s, there’s a lot of comparisons there. And that’s what we look for. And when we’re evaluating those marketplaces,
Very, very curious. I know, I know, I went kind of deep there with you. But I appreciate you getting to the four DS, because I was just curious as we started talking about it. So you know, Scott, you’ve had a fantastic career, a really unique experience. I’d love for you to share with our listeners, just what are some of your biggest lessons learned over the past 30 years of working in real estate?
Well, due diligence, you really got to dig into the nuts and bolts, that is important. And some of my most costly mistakes have been because of not enough due diligence. So I think that’s the biggest part of it, and making sure that you, I was listening to my mentor, and he was interviewing a CEO of one of the largest pharmaceutical companies or lab companies in the country. And you know, the guy went to Harvard and MIT and all these great things. He goes, look, no one’s perfect. We’re all gonna make mistakes. How do we address the mistakes? And how do we move on? And how do we avoid those mistakes in the future? Do we make mistakes? Absolutely, we’re not going to all have the perfect set of information to make decisions. But we have to make the best decision based on the information that we have. And we just have to make sure that we get the best information that we can in order to make the most educated decision. And that’s what for me, what it comes down to is, we’re going to assess risk. And we’re going to assess, you know, the upside. And there are two things that my mentor and my second mentor also talked to me about was, you were mentioning about the investors comparing, like how much someone else is getting from the deal? Well, he said, just look at its best case, worst case, and what most likely will happen. And if you can live with the worst case, then go forward with it. But never go back and question what the other side made. If you were happy with what you were supposed to make going into the deal, then don’t second guess what the other side made. And you know, that there’s a life lesson there. You know, in my first investment, my investors got a 90% rate of return on their investment on a single-family home. And they said Do it again, and don’t tell anyone. I was like, I mean, that’s a pretty impossible standard, to me is a 90% rate of return, you set the bar pretty high first, right out the gate, it was too high. But it also told me I gotta tell everybody, because of the fact that if they’re wanting to keep me in this little box, that means I’m doing something well, and I need to expand my investor pool as well.
Yeah. Yeah. Now that I appreciate those points because I mean, you’re talking about obviously needing to do your due diligence and, and check all the boxes, but at the same time, the lessons from your mentors were you know, at a certain point, you’re never gonna have perfect information at a certain point you gotta take the leap, right? You gotta move forward and I see so many people get stuck in kind of this analysis paralysis time and there’s always some reason why it’s not the ideal or there’s always something to hold them back. And you’re right, we never have perfect information but at a certain point, the reason those people were so successful is well they made a decision and they went for it. And right or wrong, they adjusted and they kept going.
Absolutely. My background was a history major so call me a nerd. I will not be offended but I like the History Channel. And some of the shows I enjoy the most are like the man who made America great, you know, they faced incredible amounts of risk. And we’re talking about or the foods that made America great and you’re and it’s not so much to me about the food but it’s understanding what these men saw within the marketplace that caused them to say there’s an inefficiency there’s an opportunity there’s something I’m going to take advantage of and you know, develop this and you know, they look at some of the great like Hershey’s or Reese’s or Wrigley you know, and especially here in Chicago, I mean, those were big Chicago companies, right? Or you look at Rockefeller, Vanderbilt, Carnegie Mellon, all these guys Ford, and the competition they were going in was how to be better than those guys and how they were you know, spurring one another on even though they weren’t even in similar products. But the whole reason why Rockefeller, you know, went as he was trying to cut Vanderbilt out of the cost basis and that’s why he developed pipelines because he didn’t want to pay Vanderbilt more money to be shipping his oil across the country. You know, it’s just like that little spike that you know, under his claws. They drive Vanderbilt, you know, differently.
Yeah. Interesting. Now it’s fascinating when we will learn so much from, you know, looking at what the folks ahead of us have done. So I appreciate that perspective. So Scott, before I let you go, I want to take you through our keys to success round, there are four questions I want to ask you. The first one is to put yourself in your shoes and one of your investors, if they could only ask you as a sponsor one question, what should that one question be?
Tell me about who you are, you know, all the figures, all the nuts, and bolts of the deal should be outlined in what they’re offering. And I was talking with the gentleman who owns a family office and a good friend, and I asked him to evaluate what we were doing, you know, can he punch holes in our deal? I asked him just, you know, I said, I’m not coming to ask you as an investor. I said, see what I’m doing. punch holes. Tell me what if you know, you know, where am I leaking? if you will? So it looks good. There’s nothing that goes No, I never really looked at the numbers. I said the numbers are there that are they are what they are? He said he said, then how do you base your investments? How do you? You know, how do you move forward? So you guys, if I liked the guy, you know, and that was the main criteria is like, you know, I invested in this company that was doing above grade pools and retail shopping malls and teaching swimming because I liked the kid. And we got a good return on it. It turned out to work out. Okay. But I liked the guy. So I mean, I think that there’s a big part of that. Because every offer should have the right return should have the rest should have those things. And you can assess those, you can determine those on your own. But if you have one question for the sponsors, you know, how much do you appreciate him? How much do you like him? How much are his goals in line or hit her goals in alignment with yours? You know, those are the types of things that I think are important. So just getting to know who you’re working with is very important.
Yeah, I think that’s a fantastic answer. And like I’ve said many times, you know, a good sponsor can save a bad deal. And a bad sponsor can kill a good deal. So it really does start with who the sponsor is. You’re exactly right. So Scott, what are you most proud of in your career?
Perseverance. It’s been through four recessions. I mean, the last one, technically, wasn’t even a recession. We had one bad month and a quarter as opposed to two consecutive down quarters. But, you know, some of the hardest times that you know, between oil prices in the 90s, and then the internet bubble crash, the, obviously the banking crash, and then 9/11, and then, you know, the pandemic, and then the big financial crisis, I mean, the fact that we’ve been able to persevere through all of those situations and adapt and move forward. That’s what I’m most proud of.
Yeah, that’s awesome. It shows there. There’s something there. There’s some staying power, for sure. And what’s a book that everybody should read?
One I think has changed our business a lot is the “Road Back To You”. It’s by Ian Morgan. Crone. No relationships. So I’m not getting any royalties or kickbacks off of this, I assure you. But it’s about understanding personality types, and it breaks everyone’s personality down into nine. These four-century monks came up with this stuff, it just blows my mind away about how applicable it still is today. And it’s helped me understand and relate to people. So that as well as myself, more importantly, myself and how I respond. And so I think it’s been an incredibly helpful tool within our business, as well as outside of our business because of how I can, you know, we can be more effective in our communication and understanding one another.
Yeah, absolutely. And so much of it is about communication, right? And just communicating it in the right way. I mean, so many problems in life come down to poor communication. So that’s awesome. We’ll make sure that’s listed in the show notes so people can check out that book. And lastly, Scott, what is your number one key to success?
My key to success is you know, my daughter’s soccer team, they have an expression, ltg love the grind. It ties back to perseverance but works hard. You know, I’m not afraid of working hard. I think. You know, I believe that you do need to pull back and rest and read and relax and be silent and quiet to allow your mind and body to rejuvenate. But I think it’s important when you dig into something to maintain that focus and work it out. And I think a lot of times when we experience procrastination, or you know, not, not getting something done it’s because it’s a mental block hurdle that there’s a fear of trying to overcome this thing there’s a fear of like I won’t know it but every time that I’ve experienced it and I just pushed through and knocked it out I’m like oh that wasn’t so bad you know but you have to get to that point of being willing to do it so there’s a bit a little bit of a loving the grind you know putting your nose down and working hard and getting it done and then when the task is done go and go enjoy life you know I had the opportunity of doing a program with Jesse Itzler and I don’t know if you are familiar with him but he wrote a book called 30 days living 30 days with a seal and you know he breaks his life into certain hours and he’s like three hours of my life everyday are my I will work X amount of hours I will sleep X amount of hours and I will have my family time for X amount of hours but I need three hours for me. Okay, so if you work really hard for eight hours then why is it so bad to give yourself three hours so if you work 10 hours whatever it may be, right? And so during those times, I’m focused on you know, I’m driven to get what I need to get done.
Now that that’s awesome and I totally understand that idea of those mental blocks it’s like for whatever reason there are certain times where there are things that that I just cannot get off my to-do list and when you think about it, just it does come down to like a man is just like a mental block to make it want to get this done. And I think you’re right it does go back to kind of the if it’s something new if it’s an unknown thing and in the same way, I’ve kind of looked at those as like those are the things you really need to attack and, and push through because you always do realize on the other side, like I wasn’t that bad. You know, that’s just you just gotta get through it. So yeah, I hear you loud and clear. Well, Scott, if folks want to like what you’re saying they want to learn more about what you’re doing with your company, how can they get ahold of you?
Well, first of all, thanks for having us on the show. I really appreciate it. And secondly, if they do reach out to us and they mention the show, we will send them a feasibility report. They want the same report that we buy about one of our past historic projects so they could see why we went into that marketplace. And so we teach them about self-storage, not just about that location, but about the market as a whole, it’s like 175 pages. So if you’re having a hard time sleeping at night you can always pull this out and you know that it should do the trick but in all honesty, it’s a great educational tool to understand why the market and how they come up with this stuff. So if they reference the show, we will give them that feasibility report for free. But the way they can get hold of us is as at info at Coda codamg [for management group] .com our web pages codamg.com but info.codamg.com and if they want to see our facilities, it’s one stop Self Storage.com. That one stops spelled out selfstorage.com.
Awesome. And as always, that will all be in the show notes, folks. So just scroll down and click those links to check out Scott and his company. And Scott, thank you once again for coming on and adding some great value to our listeners today.
Thank you very much.
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