#104 - Active vs. Passive: Storage Strategies from the Flight Deck with Michael Meylor

[00:00:00] Hello everyone, welcome back to Passive Income Pilots, another week of financial and investing education with your friends Tait and Ryan. What's up Ryan? Not much. You know, it's fun to bump into pilots and they're like, hey, you do storage, I do storage. Wait, wait, we all kind of know each other. You know, so every once in a while we run into pilots and they usually let us know they're pilots and then we have things in common.

[00:00:25] Like you don't say. Yeah, you don't say. And what makes the world even smaller is when they have, you know, a handful of self storage facilities and I'm like, well, I own self storage, you own self storage. Let's let's let's talk about that. And, you know, Mike's one of those guys we're having on the show who flies through a major airline, you know, has been doing it for a long time, you know, flew in the military and just has a fun story.

[00:00:47] And I got on the phone with Mike, I think we talked for like three hours. And, you know, it was just really fun to listen to another pilot, share his story about how he went and bought his own real estate, his own businesses. And, you know, some things went really well, some things didn't go so well. And so if you're listening to the show and you're kind of like, man, I don't know if I want to be an active investor. I don't know if I want to be a passive investor. I don't know if I want to be a passive investor. I don't know if I want to mix that together. Or maybe you're like, man, I don't even know. I'm just listening to decide or learn.

[00:01:14] I think Mike is a great medium to bring on who definitely kind of talk about like the path he went on because he actually surprise, surprise. He did both. He invested passively in multifamily syndications and he's also actively bought his own real estate businesses. So.

[00:01:30] And large storage facilities. So really for the pilots that are listening that have ever driven past, you know, that mobile home park or that self-storage facility and thought, boy, could I buy that? Should I buy that? Does this, does what's involved? This episode's for you.

[00:01:47] It's also for someone who's like, how big does it need to be to be worth it? Right. Or how small can it be to where it still is worth it? I think we're going to unpack that. Like, you know, sometimes people think like I got to buy the smallest thing I can find. And then you buy it and it's like really inefficient for everybody.

[00:02:02] It's not worth your time. Or you buy it too big and you're like, ah, I can't handle this size and I can't come up with that much money. And so we're going to kind of get into that. Like, what's the sweet spot for somebody buying their own property and what might make it lucrative for them? I think that was a really cool conversation we had with Mike and that. So.

[00:02:20] Definitely. And he's somebody that isn't raising money from other people. This is from his own pocketbook, saving up, buying these properties himself, and they've built quite an impressive portfolio. So with that, let's get to the show. I think that we're going to have a lot of fun with it. Welcome to Passive Income Pilots, where pilots upgrade their money. This is the definitive source for personal finance and investment tactics for aviators. We interview world-renowned experts.

[00:02:50] And share these lessons with the flying community. So if you're ready for practical knowledge and insights, let's roll. You know, I call me out. I don't want rent housed, man. What, what if you got to evict somebody? I kind of look at them like, yeah, you evict them. What, what if they trash it? Well, then you just call your contractor and you fix it. What if they don't pay the rent? Well, back to that first thing, you just evict them and find somebody that's going to pay rent, you know, and they kind of get scared off by some of the things that could actually be the, the reality of it.

[00:03:19] And it's, I mean, I look at them and I'm thinking, we're in a 600,000 pound pressurized tube about to launch this thing six miles above the surface of the earth. And you're telling me you're afraid of somebody that, you know, is going to trash a house. I mean, is, are you really that worried about something that small? In the grand scheme of things, it's not that big of a deal if they're taken off a, you know, like a bite-sized piece, you know, you, you know, you got a, you know, a senior FO or somebody that's just upgraded to captain.

[00:03:48] Putting 50 grand into a $200,000 rental house is not that big of a bite. You know, it's just, it's just amazing what scares some people away. Well, I'm really glad I pressed record a minute ago because that was gold. Mike, welcome to the show. Hey, it's great to be here and looking forward to, to talking to you guys. Actually, it's a couple episodes back and Tate, I think it was what you made the comment that, that kind of what you guys have assembled over the hundred plus previous episodes is kind of a collection of ingredients to make an omelet with.

[00:04:16] And it's up to the pilots and the, and the other listeners to kind of take those ingredients and, and make their own omelet. So I guess we can kind of talk a little bit about some of the omelets and, uh, there's certainly a number of broken eggs along the way. So I'm not, uh, not afraid to, to cover those either. You know, Mike, we met through, uh, pilots saying, Hey, are you the storage guy? What about the other storage guy? So it's like the Spider-Man meme, you know, the two Spider-Men are pointing at each other.

[00:04:42] So, so we, we got, we got, we got connected and, uh, it's fun to see another airline pilot who is out doing what I do and what Tate does and invests and, you know, and, and you're doing it differently than I am. You're doing it in a different way. And that's kind of fun to hear your story. Uh, and I think it'll be relatable to pilots that are thinking about, do I start a business with my spouse and do I go buy some storage properties or some rental houses or some multifamily? And what can I expect along the way? Well, guess what?

[00:05:12] Mike did that. So, well, Mike, to back it up, can we dig into your background? How'd we get here? I won't, I won't go too far back, but, uh, we'll start with the, uh, I guess the transition from military flying into the airlines and, uh, kind of the move into real estate. I'd gotten hired by the airlines, uh, as they were coming out of bankruptcy in 2007. So I'd seen what my coworkers had gone through with the loss of the pensions, uh, reduction in pay displacement to lower paying aircraft.

[00:05:41] And so, uh, I went in, uh, to real estate really as a kind of a defensive play. It was a backup plan knowing that at some point I'm going to be facing furlough pay cuts, uh, that sort of thing. Knowing that the pension wasn't there, I was looking for a way to build cashflow in retirement. So, uh, started out actually, uh, while I was still on probation, uh, bought my first rent house and it was the turnkey in the sense that we bought a house that was ready to rent. It wasn't from a turnkey provider.

[00:06:10] It was a house from the MLS. And, uh, we found a tenant for that house the day we closed. And so, you know, with, with some coordination with our, uh, real estate agent and seller, we were able to, uh, show the house and, and have it leased. So we were collecting rent from day one when we closed. We stepped the next year into a little more challenging situation. The house took a little bit of rehab. It was a bank foreclosure, uh, a little bit of rehab, a little bit longer to get a tenant into the house.

[00:06:36] And the, the third one we bought was a little bit deeper rehab and all of those turned out pretty well. Uh, if you recall, uh, prior to the financial crisis, there was a four loan limit or four conforming loans was the limit. So with our primary residence and my wife and I on three investment properties, we were looking at that four loan limit.

[00:06:55] And from there, we started looking into commercial properties as a way to essentially get more leverage on cashflow and real estate rather than go down the route of, you know, commercial loans for residential properties for investment. We started looking into commercial properties. Now the four loan limit actually was raised, uh, up to 10, I, I think it was 2009, 2010. So, so that limit went away fairly quickly, but we'd already kind of mentally gone down the path of going towards commercial real estate.

[00:07:24] So we looked at RV parks, mobile home parks, uh, retail strip centers and self-storage facilities. And so we got into self-storage because we discovered that they had the highest performance rate of commercial loans, but low default rate. So we figured, okay, well, it's gotta be safe. If nobody's defaulting on storage loans, it must be the safer of the, of the asset classes. And, uh, at the time the SBA had recently reclassified self-storage as owner occupied real estate.

[00:07:54] So what that means is they treat it like a barber that owns their barber shop, a veterinarian that owns the building that their clinic is in. We were doing short-term month to month rentals on effectively storage lockers. And so, uh, that put it in a category that was favorable for SBA funding. And we were able to, uh, buy a property with, uh, you know, 90% leverage. Now at the time, interest rates and cap rates were far enough apart that that created some cashflow.

[00:08:21] So effectively the, the asset that we acquired had, we acquired it all cash would have returned nine to 10%. We were able to get financing in the, yeah. Yeah. Ryan, I saw that look at what 10 cap one storage. Yeah. I'm that old. Uh, I actually bought one at a 10 cap on a trailing 12. So. Wow. It was impressive. Yeah. Yeah. Sometimes a better lucky than good. So kind of the blind squirrel, the blind squirrel theory of real estate investing.

[00:08:47] So, so with financing in the, I think it was in the mid sixes, we were able to actually get reasonable cashflow with, uh, with 90% leverage. And so that was our entry into storage. And if you're listening and you don't know what he just said, you know, that's like buying a million dollar property and you're going to make a hundred thousand dollars of cashflow today. You buy that same million dollar property. You're probably going to get 40 to $50,000 of cashflow. So if you bought it a hundred percent cash, if you bought it all cash, right? So that's, that's a cap rate.

[00:09:17] Like, I don't know what he means by a 10 cap. That just means if you bought a million dollar property, you get a hundred grand. And I'm like sitting here like, Oh, that's pretty good. Cause today's market is, uh, like I said, 40 to 50 K maybe you might buy a junker property in a really tertiary market and get more cashflow than that. But, but the reality is a good property and a decent market. That's what you can expect. Yep. Yep. And there was a little bit of value add on that. We had some upside. There was a little room to expand. And so we added a, uh, new office at the time we acquired it.

[00:09:45] The facility was running out of a construction trailer. So, uh, we took that as an opportunity to build a permanent office and, uh, a couple dozen, uh, climate control units on site as well to, to expand the revenue. So, uh, with the increase in revenue, uh, several years in, we were able to do a cash out refi and, uh, do a kind of a longer term, uh, longer term financing, uh, what they call a CMBS note, just a, basically a 10 year fixed rate loan. You're on the hook for, for all 10 years.

[00:10:14] There's no early payoff on one of those, but we were committed to the property and, and, uh, we figured it was at least a 10 year asset for us. So we were comfortable taking the cash out to, uh, uh, and then effectively pulling our down payment plus a considerable amount back out of the property. So now we're into the property, effectively $0 out of pocket, still on the asset and it's cash flowing. So for us, that worked, uh, worked real well. Yeah. That's the, that, that's the dream with real estate. And, and one of the reasons I like it. Was this close to your house or was this across the state line?

[00:10:44] It was about an hour away, 45 minutes to an hour, depending on, uh, you know, traffic and truck wrecks on the interstate, but. Fair enough. But yeah, it was roughly, uh, roughly a one hour, one hour distance from the house. When we were acquiring the property, we wanted something that was large enough to support, uh, full-time, uh, onsite manager, not a resident manager that, that lived at the property, but we wanted enough income that, that we could cover, uh, you know, 40 to 50 hour a week

[00:11:13] payroll to have somebody, uh, have somebody on site. So, uh, my wife came from a background in property management, uh, while I was in, uh, in pilot training for the military, she'd spent two years, uh, working at two different, uh, apartment communities as a leasing agent and assistant manager. So she was very well versed in, uh, in property management. So she was responsible for managing the houses when we had, uh, when we bought those and then took over effectively as the regional manager for our region of one, uh, storage

[00:11:43] facility at the time. And the property came with a full-time manager who was, uh, working for the previous owner and she stayed on with us for about probably about a year. And then, uh, she retired. We actually hired one of our tenants, one of our customers, uh, to stay with us, uh, at the property after that. Wow. Okay. So I want to make this really relatable for airline pilots here because I get, I get questions all the time where somebody says, man, I just drove past this mobile home park, right? I just drove past this storage facility. Should I buy it?

[00:12:12] And I really want to break down what the process looked like for you. How'd you find it? How'd you figure out whether it was a good deal? Did you use a broker? Did you go to the bank? How much money did you put down once you bought it? What was the process of actually getting your hands around it? Can you walk us through the process so that people can understand, you know, the next time they drive by something, maybe they have a better idea of whether they can take it down.

[00:12:42] Well, lots to cover there. That was a lot of questions. Maybe, maybe start with Mike, if you don't mind, like how, how did you even get the education to do that analysis? Like, where did you even learn how to do the things that you're about to describe? So from the financial analysis standpoint, coming out of college, went to work for a computer manufacturer, had a number of jobs over a decade there in sales, sales management, marketing, product development.

[00:13:08] And my, my last several years there was a product manager for software and peripherals lines within the company. And so every week I was putting together financial models and business cases. And so, I mean, my Monday, Friday, nine to five job was pitch decks and spreadsheets. You know, I was effectively creating an internal pitch deck to, to launch a new product line, you know, which printer should we carry, which scanner, you know, new version of office, whatever, you know, software packages.

[00:13:37] So I had a lot of familiarity with the spreadsheets and the financial modeling. So that actually came fairly natural. I just kind of dusted off the MBA and, and, and put that, uh, put that to use in a, uh, in a different role after, you know, having been flying full-time for a number of years, uh, probably the decade from the early two thousands until kind of mid two thousands when I went to the airline. So it was probably about five years that I was away from that type of work, but it came back fairly quick.

[00:14:04] So there was certainly some familiarity with the financial modeling before I got into the real estate, uh, arena, but real estate map is not that complicated. I mean, it, there's a lot of nuances to it, but I'm kind of going off on a tangent here, but we'll, we'll just deviate around this thunderstorm and get back on, uh, on track to the next steer point here in a bit. But I guess kind of the way I looked at, I tried to look at things like simply.

[00:14:29] So in the, in kind of the simplest terms to me, real estate is, is it's kind of like flying with a tailwind. I mean, you just, you keep the airplane airborne and that tailwind is going to move even faster in your direction. Uh, and in some cases it's almost better than that. Like you're floating in a river, like if you don't even move, if you're just in your inner tube, you're going to float downstream and you're going to go somewhere. So, and, and really that's has a lot to do with, you know, if you look at the central banks, federal government, monetary policy is built to be inflationary.

[00:14:57] So, you know, if you look at a, pick a number, you know, 3% inflation target, uh, and over the longterm, if the, if the central banks at the federal reserve and the government are managing to a 3% target over the longterm, well, if you're in an asset with 75% leverage and 25% equity, you're getting that inflationary return on the debt, but the debt balance stays the same. So 3% inflation with 75% leverage is in effect a 12% return.

[00:15:27] That that's kind of overly simplifying things, but, but looking at it that way, you kind of know that you have kind of two big forces in your corner, moving you in the direction you want to go. So if you acquire a cash flowing asset in a stable market and run it average or better because we're all pilots. So, right. We can be better than average, right. Uh, or so we like to think. So doing that, it kind of moves everything in, in the right direction.

[00:15:53] So the financial modeling, you know, I would build together, you know, look at what, you know, what, what are the expenses? What's the, what we call our net operating income. So the gross rents minus what we might lose to, you know, vacancy, what we might lose to non-payment add in our expenses, taxes, uh, property taxes are huge in, uh, in some States. And, uh, you look at your insurance costs, your labor costs, add all those costs in. And then what you're left with is your net operating income.

[00:16:21] And you're looking for a buffer in that operating income above what the cost of your debt is. And with a sufficient buffer there, you create some cashflow and you have a little safety factor there as you're paying down the, uh, as you're paying down the debt. So you've got the cashflow from the property. You've got the appreciation that's generally driven by inflation. In the case of a commercial asset, uh, I know Ryan comes into a lot of these properties

[00:16:47] that are underperforming improves the operations and you can actually force the appreciation of the asset by improving the way the business operates. Uh, dependent on the financing, you may have an amortizing loan. So you've got some principal reduction, you're paying the debt down over time. So there's, there's a lot of ways that real estate moves kind of in your favor, but the, the initial analysis is just looking at what's the income, what are the expenses? And does that give me a comfortable cushion over what the cost of the debt is?

[00:17:16] At that point, it's, it's fairly simple math. It's such a good explanation. You know, we talk about NOI all the time. We talk about cap rates, but that was a really great breakdown of how real estate works. And I think, you know, that's the reason why we're all such big fans of real estate, because most people, you know, if you compare the S and P 500 with real estate, people are only looking at it through the appreciation lens. They're not considering what you just said about the ability to leverage it.

[00:17:44] The fact that if you're paying 5% on your interest rate, but inflation's ripping at three, you're really only paying two and you're getting the benefit of the appreciation, the tax benefits, the cashflow and the amortization of the loan. Yeah. What would be your advice to somebody who didn't graduate from college and go get their presentation and underwriting? And they just, you know, there's a lot of pilots that listen to the show who graduated

[00:18:11] from an aeronautical school and went right to the regionals or, and very shortly, very went, you know, went to the majors and they don't have the benefit of having that sort of extra life experience. Where would they go acquire this knowledge and get the playbook on stuff like that? There are a lot of, a lot of places to go. The first place, the first place my wife and I went in Texas, uh, where we bought our facilities, uh, was to the Texas self-storage association.

[00:18:36] Each state has their own association and there's also a national self-storage association, which most of the states are affiliated with. So within the state of Texas, there's a state specific storage lease. So when we acquired our first property, we didn't have to go out and hire an attorney to draft a lease for us. We were able to get the same lease that the majority of operators within the state use simply by joining the association. So for us, that was, you know, several hundred dollars, uh, well spent.

[00:19:05] Uh, there was a lot of education available within the storage association. Some of the vendors, uh, that, uh, that we worked with had some additional education. So the, the management software that we use to run the facility has a lot of webinars and training videos available, how to use the software and, you know, some other basics of, uh, the leasing process. From the legal aspects, uh, the storage association conducts, uh, a legal seminar so that the managers

[00:19:34] can get trained on some of the legal nuances within the lease. So they're very well versed in, in what's there. So you're really not on your own. And I think I've heard you guys allude to it before that real estate is a team sport. So really it's, it's about assembling the, assembling the team to, to do the pieces that, that you can't do. So it sounds complicated, but none of this stuff was really all that complicated. The math, none of it was, I mean, even college level math. It was high school math to do the calculations.

[00:20:02] It really comes down to, to putting together the team of people that can fill in where you're not qualified or capable. And so it really took my wife and I looking kind of internally to go, okay, what don't we know? Well, we don't know what the lease is supposed to be. Well, let's go find that. And so, uh, we joined the state association and my wife and I are very thankful for, for what the state association provided. And we've actually both given back to the association by, uh, volunteering and, and, uh, serving on the

[00:20:30] board of directors for the association within Texas. You're ahead of it. There we go. It was a setup, Ryan. I appreciate it. But, uh, so somebody listening and they're, they're, they're following the clues here. They're going to say, yeah, but Mike had that experience from college and then, and then he had, he could find a 10 cap and, you know, interest rates were a lot lower than, and, you know, excuse, excuse, excuse, you know, what, what's kind of your pushback to that? We talked a little bit about it before we hit record, but what, what's kind of your, what's,

[00:21:00] what's your rebuttal to that? You know, just stay out, make more room for Ryan and I. Okay. The end. You don't have to say anything more. So there are a lot of opportunities out there. You don't have to jump right into a, you know, 300 unit facility on day one. There are a lot of smaller facilities. If you're looking at storage specifically, there are a lot of smaller facilities that, uh, that you can get into some of the smaller secondary and tertiary markets are great

[00:21:29] opportunities that, that larger operators are going to pass over. You might find a, you know, 40 unit, 50 unit facility. And, and for a large operator, it might not fit their portfolio, but for a small operator, that $500,000 asset might be just the, just the right size to get started. Right. And that could be a killer deal, right? But you or Ryan are going to get out of bed for that. I mean, it's just, it doesn't have the economies of scale. It's just a distraction. Yeah. Yeah.

[00:21:57] And there's stuff that I would, I'd take a swing at that, that, that wouldn't be a fit for Ryan. So the, absolutely. There's kind of that, that tier of, of different assets. You know, we, we started with a, I'm going to say small, but you know, about as small as you could go and, and still have full-time management and have kind of grown to larger and larger assets over time, just from efficiencies, economy of scale. And, and over time, as you build those contacts and, and that network, there are a lot of great

[00:22:25] events, uh, regard, you know, whichever industry, uh, my brother had done some stuff with RV parks, uh, and they have a trade association for RV parks that he belongs to. And so that's where he got a lot of his education, not to sidetrack in that area, but. That's a good point. Yeah. Every asset class that you are interested in, RV park, storage, office, multifamily, whatever it is, there's an association that will help bring together industry leaders to go to a conference or a meetup or whatever it is and educate you on that space.

[00:22:53] So if you're looking at getting it in anything, there's an association for everything. Cause these groups are usually like lobbying groups. They like, I'm actually testifying in Olympia, uh, later on this month for, uh, some tax increases that are potential in self-storage or trying to hit us with sales tax. And, you know, the SSA, the self-storage association that Mike was alluding to is the representative body of that. So not only do you get the political positioning to fight against, uh, issues in your industry,

[00:23:22] but you also get the experts that rally into the organization and offer education and classes and things like that. So it's really beneficial. Mike, you mentioned, uh, the threshold, the smallest threshold that you could go and still have a manager. What is that threshold today? Uh, you're probably at about 40 to 50,000 net rentable square feet and three to 400 units is about kind of about the minimum size.

[00:23:49] And what does that translate to in terms of, of going in price today? How much does someone have to spend? So today that's, it's probably a, you're probably about a $3 million facility. If you're looking at something that's, uh, you know, NOI 150, 200,000, you know, that's going to equate to a, you know, five to 7% cap rate.

[00:24:12] So you're probably about a $3 million facility with an NOI, you know, 150 to 200,000 is about where that, about where that's going to land, but it's right where you were going. If it's smaller, what does that look like on a day-to-day basis? This is someone, someone's like, ah, I don't want to pull in a bunch of partners. I just want to, you know, learn this stuff and, and take a swing on a manageable asset. Say they find a storage unit for a storage facility for a million, million five. They can take it down themselves.

[00:24:38] What does it look like on a day-to-day basis once you own that thing? So something like that, uh, you're going to make use of, uh, of technology in, uh, in those smaller facilities, larger facilities too, but a lot of the technology that's available in a larger facility is, is available in a, in a smaller one as well. So, uh, you might not have your own internal call center, but you can contract with a third party call center to take some of the after hours calls.

[00:25:05] So you aren't necessarily the one answering the phone all the time, or they could even take your day-to-day calls for payments and leasing. Uh, there's so much integration now between the management software and the, and the website that you can do like online leasing. You can have a contact free move in and, and COVID really advanced that. We saw a huge push in the technology and the, and the contract contact free rentals now where someone can just move into a facility online.

[00:25:35] And so you need to decide if that fits within the, you know, the management model. And a, you know, traditional storage facility, that's probably not that big of a deal on a boat and RV facility. You might want to get eyes on or, or at least some photos of the, of the RV or the vehicle that they're, that they're moving into the property. Yeah. And offer more perspective on that too. I think if the facility gets so small, that technology and call center fee is a monthly

[00:26:00] rate usually, and it might even impact it if it's too small to even justify a call center. So yeah, you, you kind of really got to find that sweet spot where there's enough income to cover your technology fee that you're going to pay on a call center and revenue management software, which is then going to alleviate your need to answer the phone. And I'll tell you one of the best deals I ever bought was in Fort Worth, Texas, and it

[00:26:24] was a property that was completely run into the ground, like smoking hole. And it was a disaster of a storage property and it was owned by an American airlines pilot. Yeah. So, yeah. Cause he's answering the phone and because he said, I just have, I have so much, you know, I'm, I'm doing this, I'm doing that. I'm trying to answer calls in between my turns and I'm, you know, I'm playing whatever. And, and, and it was crazy.

[00:26:51] We, when we took over the property, the tenants were like, yeah, we were trying to pay you, but we didn't know where to send our payment. I mean, and, and when you really unpacked it, I mean, the guy was just, I mean, he was just an absentee owner. And so it's no, nothing against him and nothing against anybody, you know, that wants that, that fails at running one of these properties. But you've really, like, I always say, when you think about doing something, you got to think that it's going to be 10 times harder than you think.

[00:27:17] And so I know I've gone on rants on the show about like expectation setting, but Mike, it's not just like, oh, I found this beautiful property and inserted a few coins and boom, it's, you know, making me money. Right. Like that is not what this is. Not even close. No. Not even close. No. In fact, there are, there are more properties like that one you described in Fort Worth than, than you could imagine. There are a lot of where you have an absentee owner.

[00:27:42] And the reality is as an airline pilot, I mean, an hour of your time is worth a lot of money, you know, pick a, you know, pick an airplane, a fleet, whatever, you know, a hundred dollars, $200, $300, $500 an hour, you know, if you're a wide body captain. So, I mean, there's a, there's a big cost of spending time doing something other than your, you know, primary traits. So could not agree more. Yeah.

[00:28:07] So, so if you can hire someone that can do that work for you, then great. In some cases, I don't kind of jumping ahead a little bit, but to a point that, that really needs to be made, sometimes maybe you're better off just investing in the asset instead of trying to run the asset and, and give up a percentage of that to somebody that knows what they're doing. So I was looking for some exposure in multifamily real estate.

[00:28:35] We'd, we'd sold a couple of our storage facilities and wanted to reposition some of that capital into, into multifamily real estate. My wife coming from a background of a couple years in multifamily looked at me and said, I am not running an apartment community. I said, I agree. We don't want to run an apartment community. So we, we found some, we found some operators that were, uh, that we were happy with and, uh, made, made some investments in multifamily.

[00:29:03] Now there, there are some horror stories there too, uh, thanks to some variable rate financing. And I don't know if we want to dip into that too much, but the point I want to make is you may want exposure to an investment in the asset without exposure to the labor and the management of that asset. And, and it's worth giving up a portion of that return to somebody else that has a team in place that can run it. Yeah. Well, if I can go open Kimono for, for a second and keep on the active track, I, I own a small

[00:29:30] multifamily building in South Carolina. And I used to be a huge proponent of out-of-state investing kind of have to be, uh, living on the West coast and, and in, uh, in the islands. You know, if you want cashflow, you got to look outside a lot of these markets. And, um, so I bought this multifamily property back, gosh, I don't know, 2018, 2017, 2018, something like that. And it's a nightmare. It's, uh, you know, it's, it's a lot of time zones away from where I live.

[00:29:59] Uh, we just had, uh, have a property manager, but of course you don't have the economies of scale and we don't have the economies of scale. Your property manager isn't making a whole lot of money, so you're not a priority. We just had a tenant trash one of the units. It's really bad. Um, and so I'm fielding quotes and it's like, is this really worth my time? Like I could, I could go pick up, you know, I'm getting calls for double time and I could, I could do that. And instead I'm thinking about, okay, can I bid a, a four day East coast trip and run

[00:30:28] down there so that I can oversee the materials that are being picked for the, for the, uh, renovation, it's just like, it doesn't make sense. Uh, so I think you have to think one, do you have the time and the drive to actually do this and treat it like a real business? And two, uh, be careful not to buy something too small because, uh, I've, I made this mistake in the, the multifamily that I own on the East coast.

[00:30:56] It's if it were three or four times the size, it would be worth my time to go and, and metal with it, but now it's just a pain and I don't want to sell it because it's not optimized. And I'm going to be selling it at a, at a pretty good discount. If, uh, if I don't go and, you know, really tune it up, but it's barely worth getting on a flight. So, you know, maybe, maybe, you know, before you jump into something, make sure it's big enough that it's worth your time to actually go out there.

[00:31:26] And if that means pulling a couple of partners together might not be a bad idea. Yeah. Yeah. That's, uh, absolutely the case. And, and, and the economics, I know in my case, Ryan, your case too, you know, they, they've changed a lot over the last decade, you know, when, uh, you know, kind of look, when we started in storage, the, the returns on a percentage basis were maybe a little bit better because of the, you know, like we talked about that spread between the cap rate and the, and the interest rates, uh, several years ago.

[00:31:53] And, uh, we also weren't making as much as airline pilots, uh, you know, five years ago, 10 years ago. So you weren't giving up as much as a, you know, year two new hire on a, you know, late two thousands contract. No, that's okay. That is, that is totally worth talking about because, yeah, I mean, I've been a motivated guy my whole life or whatever, and I'm entrepreneur and all this, but sure. I mean, I wanted to be an airline pilot. I got to the airlines and made 18 grand back in circa 2004.

[00:32:24] And I was like, I was not destined in this life to make 20 grand and fly regional jets, you know, four days a week. Um, so I was like, I got to get something else going on. And then, I mean, you know, Tate and I, we kind of grew up, I mean, everybody has their experience, but I mean, if you're listening to this and you were an airline pilot after 2017 or 2018, like good on you. I mean, you went through COVID and had a little bit of a scare, but not really in hindsight.

[00:32:48] And, you know, you look at how good it's gotten and the pendulum has swung back to time value of money and how much we're getting paid per hour now to fly airplanes. I mean, that same position I was in, you know, pays six figures plus in the first year now. I'm not so sure I would have been so motivated to spend the time on the things that I went and did on the side, had it been the right pay.

[00:33:15] My passion would have still been there, but my need to have a supplementary income would have gone down. And so, and then mix that with, you know, a rising interest rate environment with cap rates, you know, kind of staying the same, squeezing the cashflow on these properties. And then fewer of them, you know, being out there than increasing labor costs, deal costs, you know, you know, inflation. I mean, it makes it tricky.

[00:33:40] You know, you can't, you know, it's harder, but, but also like at the time that you bought that property, you probably thought the same thing. Like it's hard to find these, these properties and you don't know that the cap rates are going to compress down to five and these things are going to be worth way more in the future. So at some point you, you are destined for action or you're destined to be passive. And I think that's where you have to really look inward and say, do I want to be dealing with fires at my property when I'm supposed to be going on vacation, which we'll get to

[00:34:08] in a second, or do I want to be dealing with my vacation and not be dealing with my property? And so now there's benefits to owning the property because now if you own that property and you do get a good investment, you know, that could pay and it could be the difference between saying I'm going to fly less trips. I'm going to be gone last. I'm not going to chase the green slip, whatever it is. But that's kind of what we're talking about right now is we're, we're bringing on, you know, Mike who, who flies for a major airline, who has gone through all the things that our listeners

[00:34:38] have gone through and has taken this step with his spouse to go do real estate actively and a bit in a pretty big way. I mean, you had three facilities at one point. Three and fourth, fourth one under development right now. Yeah. So, I mean, I mean, this is not like small potatoes. These are decent sized properties that you're managing and actively running and being part of a trade association and flying, flying the line and, and, you know, family stuff. I mean, that's, this is, this is not for everybody.

[00:35:07] So could, would you mind kind of go like, I don't want to completely trash this idea. There's obviously upside to it. Yeah. That's what I was going to ask is, you know, what's the pot of gold, the end of the rainbow? Why should somebody consider all of the education and hard work that it would take to go and, and actively manage a property and, and build a physical real estate portfolio? So part of it goes back to what Ryan said, kind of that, you know, you kind of got that internal entrepreneurial drive, that kind of, that, you know, internal motivation that

[00:35:35] kind of pushes you, pulls you really in, in the direction that you want to go. So if you've kind of got that internal desire to go out and do something on your own, absolutely. You know, do it. You have to actually get some enjoyment out of what you're doing. And Ryan, you know, we haven't spoken too much about it, but I got to believe it's actually kind of got to be fun finding properties, jumping into Cirrus and flying around to, you know, do a, you know, monthly property visits or that sort of thing. You've got to do stuff that you like, that you enjoy.

[00:36:04] And so I enjoy kind of the, the building and the development process. And so to me, it's not a lot of work to, to do that. I get some enjoyment out of it. So if you actually scale enough, you get to the point where you're not the hands-on that you're directing the team that, that runs it. So this next property that we get, we've done the development and we're going to see it through construction, but we're, it's not going to be our management company that runs it.

[00:36:31] We're going to contract with, with one of the national REITs and we're just going to decide, okay, are we, are we going to put orange doors or green doors on the property? And, and so from that standpoint, it removes us from the operation, but still gives us exposure to the asset. But it, it takes a decent amount of capital to do that. So on a, on a smaller scale, uh, what we've done in the, in the multifamily space is, you know, we've, we've gone into some syndications, limited partnerships where we still get the benefit of owning real estate.

[00:37:00] We get exposure to the asset, but we don't have the banishment responsibility for it. And, you know, we, you know, you give up a share of the return for doing that, but you also give up the, you know, phone call that something's on fire. Or signing on that loan. I mean, that, that to me, I think that's the, yeah, I think that's the most understated thing. Like syndication. Yeah. You, you share in the profits, but you don't sign on the debt. That that's like risk that you're putting in your portfolio that exactly. Yeah, it looks exactly.

[00:37:28] It looks great when everything's going great, but then when it doesn't go great and you're on the hook for the loan, that's a scary situation, right? So. Yeah, it is. And it's, uh, and starting out, you're going to be on that. You're going to be on the hook, those smaller properties. You won't find non-recourse financing. Let's talk about that. What's the difference between, uh, for, for listeners that don't know the difference between recourse and non-recourse debt. They've never heard of the term. Um, so, so the recourse financing, it, it's maybe like what you're used to like say for

[00:37:57] your mortgage, you know, if you don't pay it, they come, you know, they come after you, you know, you have a, you know, your, your agreement is you will pay that dollar amount back on the loan with a non-recourse loan. Uh, for example, the, the CMBS loan that we did on our first property, once we kind of finished, you know, building it out, stabilizing it, um, the terms of that loan were, we will, uh, effectively, we will either pay back the loan or we will hand you the keys.

[00:38:25] And, and those were the kind of the two outcomes. So now the property, you know, performed well, we had, you know, no intention of ever handing the keys back, but the terms of that loan agreement were such that if the deal had gone sideways, then they wouldn't have come after personal assets to satisfy the loan. The only asset that was backing up the loan was the property. Now that's also going to be a lower leverage loan. We acquired the property with full recourse, the SBA loan, and we were on the hook for the

[00:38:55] entire amount, but we were able to get 90% financing. The subsequent loan was, you know, we only borrowed 60% of the, of the asset value at that point. Um, but you know, even, but even though, I mean, even though they won't necessarily be able to come back financially, if you sign on that loan and it goes sideways, you're out of business because you can't get another loan now, uh, if you've had a loan go bad.

[00:39:21] So you may not pay the price financially on that particular loan, but, uh, if, you know, you're, you're not buying any more properties with non-recourse financing. Right. You mentioned the SBA loan and only 10% down that may have perked up a few years. You know, somebody's looking at a two, $2 million facility and they're like, oh, all right, I could swing at that. Uh, what does that process look like? So it, it's a fairly involved process. There are two options. There's an SBA 7A loan, which I've not used.

[00:39:51] I have some familiarity with it, but the SBA 504 loan is the loan that we used. Uh, we actually use that to acquire our first facility and, uh, actually for the, the two facilities after that, we started with SBA financing. And so you get a bank loan for 50% of the asset. And then an SBA loan will come in and fund the other 30 to 40% of that asset.

[00:40:17] And the SBA portion is on a 20 to 25 year fixed rate term. So that takes a lot of interest rate risk out of the, um, out of the transaction. So when you have, you know, uh, let's just say, you know, you do a 40% SBA loan, that's, you know, roughly half your debt. When you're on a 25 year fixed rate loan for a commercial property, I mean, that that's phenomenal leverage. I mean, there's, there's only two things better that I've seen.

[00:40:47] And that's the 30 year fixed rate mortgage on a single family house. That's, you know, to me, one of the safest, although small. So you don't, doesn't really move the needle in, in gross dollar terms, but it, it's a very safe play with a 30 year mortgage on a single family. And then there's, um, some very specific HUD financing available on multifamily development, where you could get a 40 year fixed rate on a multifamily development.

[00:41:15] If you, if you fall within certain guidelines, but the 221 D4 is the loan product. I probably beyond the scope of what we want to get into here, but if you want to jump on Google and look it up, there's options. There's also USDA loans, which I think give you a higher, yeah, yeah. Yeah. Amortizing, but no, there's options out there. So the, you know, the small business administration is trying to incentivize Americans, you know, to borrow money, to buy small business. That's what it is.

[00:41:41] So if you're an airline pilot, like the SBA is a great route to go and you can talk to a broker and, you know, if you ever need a referral or somebody, you can always email me because we, I deal with SBA. I, um, I've actually never used it, never pulled the trigger on it officially, but it's a great product for that. I know a lot of pilots that have gone out and got SBA loans to buy businesses. And, um, in multifamily, you can't get an SBA loan, but instead you've got the Fannie Freddie Mac, you know, bad financing.

[00:42:08] You can get kind of, uh, better financing in multifamily because there's support for people to go buy housing. So like these are, there's incentives for these things, right? So SBA is a big one for storage and you can only borrow, I believe up to 5 million total, something like that. Maybe the limits changed over the years, but you're right. Yeah. Yeah. You, you, you can't have, but then usually the bank can sometimes then give you additional funding above that. So the bank might do like a pair up a SBA loan, but there's, there's options out there.

[00:42:36] It's, you know, I'm curious, how did you kind of put together your down payment? Anything creative there or any, any tricks to somebody or were you just an excellent saver? Yeah. Wife and I just were good savers and, um, we took a look at our kids' college savings. We looked at our three kids and we thought, nah, they can work when they go to college. We're taking that money. That's amazing.

[00:43:04] But the way we looked at it though, you know, we had Coverdell savings accounts for the kids, uh, and, and they were, you know, they were back in the, I don't know, single digit ages, you know, like just starting, uh, kind of just, you know, starting out in elementary school. So, you know, we had a long time to go. And so we thought, well, why put this money in the market when we could put it into real estate? And so, uh, we liquidated their college funds and, and started putting that money into, uh, into real estate. It's fantastic. All right.

[00:43:33] For all you, uh, crazy spouses that listen to this show, run home, grab your spouse, tell them you just heard a podcast that said we're going to liquidate our college. Jimmy's college fund. We're liquidating our college funds and we're going to buy a self-storage facility. And just, just let me know how that conversation goes. I'm just joking. That's awesome. And to go one step beyond that, not only did we, uh, not only did we take the money out of their college funds, uh, we put them to work at the storage facilities. So nice. Nice. Yeah.

[00:44:03] So, uh, that, that, that's a whole different episode there. How old were they when they, uh, when they were doing that? The youngest one was probably eight or nine. Excellent. And so, you know, you start at that age earning what? $5,000 a year and put that into a Roth IRA starting at 10 years old. And you can move the needle a little bit for the next generation when you do something like that. Well, you teach them a lesson, which is the most important thing you can do, you know,

[00:44:32] work for your money and how to save. And it goes into an account and that's amazing. And yesterday my grandson was helping. He asked me today, he goes, Papa, can, can I work every Tuesday? I was like, no, it's spring break. You got school next week, but, uh, but maybe after school we can go out and work. Yeah, no, that's great. And it's an income shifting strategy, right? You can pay your kids, what is it? 12, 14,000 a year. And, um, it's a deduction for you and your kids don't pay tax on it. Absolutely.

[00:45:00] So, you know, it needs to be meaningful work, uh, of course, but, and we find that and, and as the business grows, so that's kind of one, one mark in the favor of, of maybe doing it yourself. If you've got the, the drive and the, and the time to is when the business grows to a point that you can support some, you know, additional employees, putting the kids on the payroll and, and having them do some work is, uh, you know, it's worthwhile. So, you know, we'll, we'll put our daughter to work when my wife and I go out of town on vacation

[00:45:27] sometimes, and, you know, she's going to, you know, she's going to work a few hours there. And, you know, we put the, you know, let, you know, let the boys do some of the bookkeeping work. Mike, what is the most valuable piece of wisdom that you've picked up during this journey that you didn't expect that you would, you'd get? So I was surprised at the, I guess the, I guess kind of both the value and the ease of building a team.

[00:45:55] There are so many people out there with so many capabilities, so many skills across, you know, broad spectrum of, uh, of, you know, trades and, uh, careers that they do, you know, they specialize in, in whatever their field is and they want to do a good job in that field. And a lot of times it's just as simple as picking up the phone and asking somebody, Hey, I need help with X, you know, do you know, do you know who I could call?

[00:46:22] And so just building a network of folks, you know, within the industry or adjacent to the industry, um, that, that was the thing that surprised me was, was just by asking and building relationships, how quick you can actually build a very capable team of people to, to help you out when you, when you need a hand. That's amazing. I couldn't agree with that advice more. I mean, that's been my experience as well as like so many people have done, have already gone

[00:46:51] through it and it's, your network is so powerful. And quite frankly, why we started the podcast. I mean, it's, it's, you know, Mike, you and I probably would have never met, um, or maybe we would have, I don't know. Um, but we connected and we, we, we spoke on the phone for a few hours and, and shared, shared our worst, our worst stories and, uh, and our successes.

[00:47:14] And, uh, but you know, that's just another person you meet and is a resource and you can continue to do that. And, you know, I think that's what the show is all about. It's like, Hey, how do we expose a network of people that we like and trust and work with, uh, to a greater audience and then share their stories on how they made it work and really leave people thinking with, you know, how, how do I want to be involved in this? And maybe it's just, I don't know how I want to be involved in any of this.

[00:47:42] I just like learning about it and I want to continue learning about it. And someday I'll make a decision on what I want to do and enjoy the journey of learning. Cause I think that's, that's another thing is like, don't, don't jump into whatever you're going to jump into too fast. Like take the time to really understand the playing field. Well said, Ryan. Very critical. Yeah. Yeah, absolutely. Absolutely. Well, Mike, we want to be respectful of your time. Uh, if listeners want to get in touch with you, how can they do so?

[00:48:09] Uh, email, uh, it's Michael at greenlightstorage.com and, uh, can, uh, reach out and, uh, uh, that's probably the best way to connect or, uh, or on LinkedIn. Uh, you can find me, uh, there, Michael Myler on, uh, uh, on LinkedIn, not the software developer, the, uh, the storage guy. There's, uh, there's, uh, there's, there's two of us that share the same name on LinkedIn. So nice. Well, this has been a blast. Well, thanks so much, Michael, for coming on and sharing with our listeners, uh, your experience as always to our listeners.

[00:48:37] If you have any questions about anything, uh, we just had an episode that was inspired by a question, found a guest that knew about hanger airplane hangers, right? Episode one-on-one, send us an email, ask at passive income pilots.com, get us talking and maybe we'll get a guest that, uh, fits your question on the show. So thanks everybody. Catch you on the next episode.