Q: That I'm curious in your your business if you could identify what your BIGGEST RISK is and if you could then share with this how you go about managing that?
A: I think most people assume that the market, the economy is the BIGGEST RISK with in real estate. Historically, it’s true, interest rates have a huge component to that in terms of the pressure that puts on it.
Obviously we saw that with the big crash. We saw how the markets reacted in the fall of the real estate market based upon the banking industry. That is a component of what we have to deal with.
The way in which we mitigate the risk for that is we make sure that we don't over leverage what we’re doing. We always want to maintain, you know, 65 - 70 percent equity to depth ratio.
Prior to that, we were doing stackhouse's that were ninety percent debt. We were getting huge returns off it, but it was Insanity in terms of what they were allowing us to do, and there's huge risk in that.
Fortunately. I felt that the market was going to crash. When I saw, doctors and investors coming in and being developers. Or the guy that I hired as a carpenter in our first job, who was literally off the boat from Poland and couldn't speak English, was now my competitor. And now he’s doing homes much larger, all of a sudden. How did this guy, in a short amount of time become such a great expert that he could get these huge loans?
It was the American dream. It was fantastic, right? But when I saw all those people flooding the market, who did not have a background nor expertise, that's when I began pulling back.
That's how I mitigate risk. I watch with the market is doing. That's how we got into self storage. because that I've seen an inefficiency within the marketplace and recognized how to take advantage of that inefficiency.
The fact is that the self storage companies, the REITS, stopped developing because they couldn't have that overhead. They couldn't have a non-performing asset on their books for three years while they were waiting for it to become a performing asset. It would pull down on the valuation of their stock.
And so that's where we come in and we build that into our modeling. That is the first way in which we mitigated risk is to avoid over leveraging.
The second way is we really study the market saturation. Recessions are my biggest fear. Our biggest risk is there's too many other facilities within 3 miles. So a lot of that risk is offset by the fact that zoning will prohibit people from being able to accomplish what they what they want to do in terms of our product.
If they can't get the zoning, then they can build. For instance are one in Milwaukee,Milwaukee put a moratorium on any new self storage facility. So in essence it's going to be very hard for anybody to come in and be competitors to us, based on the fact that we already have the zoning. That's the competitive advantage that we have in that Marketplace.
The same in Toledo. They d-zone the entire downtown area to make it mixed use. Our building that we bought was already zoned it and so all we have to do is you know maintain the existing zoning and we have it. But literally across the street, you can not do that because the zoning would not allow.
Those are the type of areas that we look for and we make sure that our competitors don't have the ability to reduce our share of the marketplace.