July 29, 2023

JF3250: Faraz Hemani — 3-Step Formula for Succeeding in Self-Storage, Why Flex Industrial Is the Best-Kept Secret in Real Estate, and How to Compete in a Crowded Self-Storage Industry




Faraz Hemani is the owner of Pebble Ridge Capital, which manages storage facilities with zero onsite staff through technology and automation. In this episode, Faraz talks about his recipe for success when it comes to acquiring and managing 10 self-storage facilities across four states. He also shares why he is expanding into flex industrial and advice for those looking to make the jump from storage.

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Faraz Hemani | Real Estate Background

  • Owner of Pebble Ridge Capital
  • Portfolio:
    • 10 self-storage facilities in four different states
    • Land for development
  • Based in: Houston, TX
  • Say hi to him at: 
  • Best Ever Book: Sapiens by Yuval Noah Harari
  • Greatest Lesson: Intelligence/talent only takes you so far. Personality, hard work, and risk tolerance are everything.

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Ash Patel: Hello, Best Ever listeners. Welcome to the best real estate investing advice ever show. I'm Ash Patel, and I'm with today's guest, Faraz Hemani. Faraz is joining us from Houston, Texas. He is the founder and CEO of Pebble Ridge Capital. They manage storage facilities with zero on-site staff through technology and automation. Faraz's portfolio consists of 10 self-storage facilities in four different states, and land for development. Faraz, thank you for joining us and how are you today?

Faraz Hemani: Thanks for having me here, Ash. I am doing phenomenal. Big fan of the show. Cannot wait to dive in.

Ash Patel: It's our pleasure to have you. Faraz, before we get started, can you give the Best Ever listeners a little bit more about your background and what you're focused on now?

Faraz Hemani: Yeah, absolutely. I'll give you the short version. I'm sure the long version will come out later. I was formerly in technology, worked at companies like Oracle and Google as a sales rep, program manager, and lots of fun roles, lots of great people, lots of chances to be the dumbest guy in the room and learn a ton, which was awesome. And you know, the joke is for a lot of us dumb guys real estate is the best path there is out there, so I have been involved in real estate for a while on the side, buying single family homes, residential long-term rentals as a way to compound build wealth over 20-30 years. I thought that would be my retirement plan.

COVID happened, house prices boomed, that accelerated my timeline. I was able to cash out a lot of equity, sell a lot of the portfolio, and put a very meaningful amount of money in my pocket. And then we looked at "How do we redeploy this cash? What do we do with all this money when we have a frothy market?" And that brought us to commercial real estate, and specifically, it brought us to self-storage. What we were looking for was "Where's an asset class where the value of the asset is driven by not the market, not what did the house next door sell for, but what can we as operators do to really drive value? And self-storage has 100 different levers that operators can push on to drive value. And that's why we love that asset class, that's why we got into the asset classes, and that's why we're where we're at today.

Ash Patel: What did you sell to build all that equity? Was it real estate, or was it stock options?

Faraz Hemani: I used to be in sales. I would get commission checks, I would get bonuses... I was lucky, back when I was 22 I had a manager who told me what rental property investing was. So he guided me into buying that first property, and using my commission checks. And not only that helped me learn how to save and budget my personal finances so I could have that downpayment to make; but we bought a second property, a third property. At this point I'm working with investors, friends and family, network, to buy more and more residential properties in Austin. And that is what we sold during the COVID peak and pandemic. We sold those homes. I got very lucky. No way I'm sitting here saying I'm a fortune teller and I saw "Yes, we're at the peak. Absolutely a lottery ticket in my life." But that's what we sold, and that was the equity that allowed us to rollover into commercial real estate.

Ash Patel: Alright, you love real estate, right?

Faraz Hemani: Absolutely. Don't we all?

Ash Patel: Did you love tech when you were in it?

Faraz Hemani: I do. I'm still passionate about tech. I love tech, I love working at Google... Real estate is fairly simple when you break it down. There's a few components that are true almost across every asset class at its core. Tech has so much complexity, and it moves at the speed of light. The tech industry is just full of phenomenal people. People that graduate from the top schools and the top programs - they gravitate towards tech. So the people you meet - they're amazing. To this day, even in our business, we rely heavily on automation and technology. I still code a lot of the program and the scripts; even though I was never a technical guy over at Google or Oracle, I picked those things up along the way - design, UI, user experience, what does the customer need in order to adopt a product easily... And I still incorporate those principles into our real estate business every single day.

Ash Patel: Got it. The reason I asked is I'm just trying to gauge your passion, trying to figure out if you're a real estate guy, if you're a tech guy at heart... It sounds like you're both. Alright, so you evaluated a number of different asset classes, and you picked self-storage. What were some of the driving factors behind that decision?

Faraz Hemani: Absolutely. So what we like to say is this - self-storage is a small business masquerading as real estate. Or better put, it's a small business with all the benefits of real estate, the benefits being leverage, and depreciation, and the ability to 1031. But when you look at what is it required for a self-storage facility to succeed, you've got to be good at customer service seven days a week, you've got to be good at setting dynamic pricing, updating your street rates every single day. You have customers moving in every day, you have customers moving out every day. How do you acquire those customers? You go on Google, you do pay-per-click advertising, you do search engine optimization. Every bullet point I've just made is not true, and not required in probably 99% of real estate asset classes to some shape or form. But it's the name of the game in self-storage. And we felt it's so operationally intensive, the world is changing, customers are expecting a different type of customer experience... But storage is still stuck in the '80s. There's still a ton of mom and pop operators out there where their marketing budget is "We'll take out an ad in Yellow Pages." In 2023 that's their marketing plan. We said "I bet we can come in, by these storage facilities that are being run like it's the '80s, modernize the operational side, pull all those different levers of value creation I'm talking about, just by modernizing the operations." Not having to gut an apartment and put in stainless steel appliances, not relying on physical value-add, but operational value-add. And we thought we'd be pretty damn good at that. And so far, the thesis has turned out to be true.

Ash Patel: What other asset classes were in the running?

Faraz Hemani: A lot. In fact, we've put our feet in a lot of them. We bought a retail center, we bought land, we looked at industrial, which was super, super-darling asset, and I'm today now involved in industrial, which we can talk about in a bit... So we put our feet into a little bit of everything. But where we felt like we had a real edge, where we felt like we are probably the best in each of these little sub markets that we're in was storage. It was the most fun, we saw the best results, so we've gone all-in on storage.

Ash Patel: Who is the "we"?

Faraz Hemani: When I say "we", Pebble Ridge Capital was founded by me, I'm the sole partner. But "we" is the team behind me. The first three to six months, I did everything. I was sweeping units at our storage facility, I was answering the phone when customers called and taking their payments. I was talking to investors, I was raising equity, I was doing everything you could imagine under the sun. And I'm lucky today to now have a team of nine people behind me and helping me, and over 60 investors that participated with us. So that's the collective "we" that I talk about. None of this would be possible without all of us.

Ash Patel: Alright, so you made a decision to go into self-storage. Let's dive into the first property. What was it?

Faraz Hemani: It was a small 16,000 square foot property up in a town called Bay Cliff, Texas. Bay cliff is about an hour outside of Houston, near the Gulf Coast or the [unintelligible 00:07:38.06] coast. This property - we just saw it on loopnet.com, which is like the MLS or Zillow for commercial real estate... And there was a few things we liked about it. They had an onsite manager, on payroll, which is an expense we felt that we could probably get rid of and eliminate. We felt that we had a thought process or an idea of how we could run a facility without any on-site, permanent staff.

Even though they had on-site staff, you've all read the Google reviews - pretty negative stuff. They don't answer the phone, they don't help me out when I need it. The lady is super-rude. I'm calling to rent a unit and nobody's answering the phone. I want to hand you my money, but you won't take it.

We felt that there was a lot of just low-hanging fruit to pick up on, and there was a bunch of other things. Their rates were lower than anybody else in the market. They were charging below market rents. We just felt there was a ton of low-hanging fruit. It was an hour drive away from me, so being my first location, I wanted to be able to go out there and get on site whenever I needed to, to make sure I could learn the process and learn the operations in and out. And we jumped in and did that first deal.

Ash Patel: What was the purchase price?

Faraz Hemani: It was $800,000. And that was back in January of 2022.

Ash Patel: How many units was that?

Faraz Hemani: 108 units.

Ash Patel: Was it profitable on day one?

Faraz Hemani: It was. And most of the stuff we buy is at least cashflow-positive on day one. This one was fairly healthy on day one. But to give you the numbers, when we bought it it was doing about $6,800 a month in revenue. Within 30 days, we had it up over $8,000 a month in revenue.

Ash Patel: How did you do that?

Faraz Hemani: Raising rents on existing tenants. The nice thing about storage is you have what we call month to month leases. If I sign a lease with my apartment, I'm in a 12-month lease. That means they can't come in the middle of the lease and tell me "Hey, Faraz, we're actually changing your rent to this." But upon renewal, of course, all of you who rent apartments know, we bump up people after 12 months under lease. Now, storage is month to month, meaning I can come in at any point and give a 30-day notice and say "Your rent is going up." And I could do that multiple times a year if I wanted to. So the day we bought it, the very next day, every tenant got a letter saying next month their rent is going up to this. And it was about on average a 35% rent increase for all tenants.

Ash Patel: How was that received by your tenants?

Faraz Hemani: Obviously, it was not received well all the time, but you have to consider this - and this is why you can't just go do this at any storage facility. You have to do some homework. If I raise rents 35%, but I'm still relatively one of the cheaper options in town; or even if I'm more expensive, but only by $5... Put yourself in the tenant's shoes. "Okay, it sucks. My rent got up. I'm gonna get on the phone and I'm gonna yell at these guys. But what are my alternatives? To save $5 a month, am I going to go rent a U-haul, take a day off work, load up the storage unit, take it to some other storage facility to save five bucks a month? Or am I going to just throw that crap away", which you probably didn't want to [unintelligible 00:10:13.00] the storage unit to begin with, right? We have a lot of packrat-ism and consumerism in America; people don't want to let their stuff go. The point being you do research on the market, you do research on the demographics, and even though, yeah, it's a 35% rate increase, one, what are the tenant's alternatives? And two, this is probably the thing I love most about self-storage - we're throwing these big numbers, 35%, 40% rent increase. The average customer is paying only about $60 to $70 per unit. It's not an apartment where they pay $1,500. A 40% rent increase might just be $15 bucks a month to these guys, meaning it's not breaking the bank for anyone. But when you multiply that across hundreds of tenants at a storage facility, it's a big impact to the top line for the operator. And that difference, that arbitrage, we can do minimal damage or minimal impact to the customer, and have maximum impact to us, without disrupting the business; it's one of the most unique things about self-storage. And that's how we were able to get away with it and execute that plan in just about 30 days.

Ash Patel: What else did you do to increase revenue, decrease expenses, and implement your automation strategy?

Faraz Hemani: There's three main things we'll do at any facility. We're raising rents, and the market is going to tell us how far or how aggressively we can push. We're adding additional streams of revenue. So we require all tenants to maintain a tenant insurance plan, just like renter's insurance; if something happens to your items, you need a policy to cover it. By the way, if you want to buy that policy, you can buy it from us; we middleman and sell that policy on behalf of another group. We keep 75% of the cut of revenue from it. It's a big revenue stream for us.
Then we're looking at expenses. The easiest and most low-hanging fruit expense that we like to look at is payroll expense. If we think we can run a facility without having a full-time 40-hour-a-week employee there, we're probably saving on the biggest expense that's on the current owners P&L. And we'll look at a lot of other things. We can talk a little more at length about "Okay, if we get rid of that person, how do we replace what that person was doing?" We built the software, we built the technology, we built the processes to -- we can now just put a contractor there for three or four hours, and put some technology, put a website and put a remote team together that can handle the other 36 hours of work that that person was doing on site.

Ash Patel: What does the three to four hours per week contractor do?

Faraz Hemani: There's some stuff that you cannot automate and digitize away, like sweeping a storage unit, or cutting a lock, or making sure the trash is picked up off the driveway. So that person's job who comes for three or four hours a week is to handle the physical maintenance aspects of the facility and its operation. So sweeping units, replacing locks, cutting locks on delinquent units, and just keeping the place clean, safe, and attractive to the tenants. Handling physical things.

Ash Patel: Faraz, what's the software that you use?

Faraz Hemani: We use out of the box software today called Tenant Inc. It's called Hummingbird, the company that makes this Tenant Inc. A big reason we went with this - and now you're going to see my tech side come out... I promise you I'm a real estate guy first; but you asked that question, so the tech guy is going to come out. Hummingbird basically allows you to do whatever you want with your own data. They give you access to your data via what's called an API, meaning you're a programmer, you can tap into your database on Hummingbird and access everything you need via code. And we use that to build our own workflows, things that nobody else is really doing today. We've used that to build a mobile application that we have each one of our contractors download on their phone, just like an iOS app. And when they go to the facility, they open the app, it tells them "Here's exactly what you need to do today." Every time there's a move out in our software, it populates that mobile app and says "Yup, you have a turnover to do." Anytime we have an auction that needs to get done, it populates that mobile app. "It's time to cut the lock and take pictures."

So my point being we use an out of the box software that we like a lot, but a lot of the things that we built, we built on our own; purpose-built for this specific style of managing the storage facility.

Ash Patel: Does that software integrate with an automated gate?

Faraz Hemani: Yeah, it does.

Ash Patel: Okay. So let me play devil's advocate now... There's a lot of competition in self-storage. Everybody's chasing those Mom and Pop operators, that last mile. How are you competing with all the people that are out there? You're asking how we're competing with other operators?

Ash Patel: Other people looking for deals as well. Yes.

Faraz Hemani: Oh, it is a tough landscape right now. We primarily win most of our deals going direct to seller; we're not buying traditionally from brokers, although we love our brokers, and we look at all of their deals, and underwrite and send offers... But we won 90% of our deals cold-calling and going directly to the seller. Beginning of 2022, it worked a lot better. We would talk to people... Sure, I'm interested in listening; I'll hear an offer. Plus interest rates are three and a half, 4%, so we could make compelling offers. Today, if I call somebody, "Man, you're the fifth call I got this week." So the cat's out of the bag a little bit. It's getting harder and harder and harder to just do the same playbook and win in 2023.

It's a very saturated space. I would probably go as far as to say in commercial real estate, in a small scale, sub-institutional, there are more people calling into storage facilities than probably any other asset class in commercial real estate. That just means we have to get smarter. And we have, and we're doing a lot of things that we think are outside the box, and how we can reach owners, how we can identify who is the most likely people to sell, how can we get them before other people, how can we more consistently follow up with them... That's a combination of hiring the right talent, putting software and automation into place behind our acquisitions engine... Even on the acquisition side, I feel like we're doing some things that probably no other people are doing.

Ash Patel: Like what?

Faraz Hemani: So the first thing you have to do if you're reaching out to storage facilities is you've got to have a list of storage facilities. Who are the facilities that I'm going to call? Traditionally, a lot of people, especially maybe in wholesaling, or maybe in the cold-calling call centers, they'll just buy lists. There's companies you can buy lists from, "Here's a list of properties." One thing we did is - well, storage is a business, just like a restaurant is a business, or a hair salon is a business, meaning if I go type into Google "storage near me", a bunch of storage facilities are going to pop up. If I go type "warehouse near me", a bunch of warehouses may not pop up, because there's not businesses listed on Google Maps. Storage facilities are. So we took it a step further. Google Maps has an API ecosystem, meaning we can programmatically say, "Give me every storage facility in this radius", and Google will spit back at me what their names are, what the addresses are, what the phone numbers are... So now we're curating lists of storage facilities; with a click of a button - boom, I have a list of 100. We have other software, we feed it through... By the time it's done, I can tell you at the storage facility, "Here's the people who own it, here's who owned it last, here's how old that person is, here's how much debt is left on the property, here's when that debt matures, here's how many times we've called that person in the past, here's what they told us last time, here's the last time we texted them, here's the last time we sent them a letter."

We have such robust information that I feel like we know who's likely to sell, we know exactly how to get to them, we know how many times we've attempted to get to them, and we make sure we never miss a follow-up. And that consistency is what allows us to find needles in the haystack, even in today's very challenging acquisition environment.

Ash Patel: Faraz, is there an ideal seller for self-storage? Is it age-related? Is it debt-related?

Faraz Hemani: Yeah, we'd say there needs to be an urgency factor. That's the phrase that we use. If somebody's just like, "Sure, I'm willing to hear an offer to see how much money I can get", I tell our folks on our team, "That's not our seller." We're just gonna get a market price on that asset. They need an urgency factor. A lot of times that is retirement. "Hey, I've been running this facility for 30 years. I'm getting old, I'm done with it. I've made my money. My basis in this property might be like $100,000, because I built it in the '80s, and I'll sell it to you today for $2 billion. It'll be life changing for me and my family."

Retirement is a big urgency factor. But we've seen others. We've seen a guy where he says, "Well, I want to buy a trucking business. I've gotta get a million dollars together in the next two months. Can you help me do that? I'll sell you my storage facility at this price if you can close in two months." Urgency factor. The guy was in his 40s, he's not retiring. In fact, he's going harder and harder. There needs to be an urgency factor for you to win deals at below market prices 100% of the time.

Ash Patel: Yeah, that's great to hear. So when you're following up or when you're calling these owners, that's what you're diving into, right? Is there an urgency? Why are you selling? They're not even wanting to sell. Often, you're hitting them up before it goes to market... So have you considered selling? If so, why?

Faraz Hemani: Exactly. Look, I tell our team this all the time, too - on a cold call, you're a stranger that's got 30 seconds to a minute of the sellers attention. In that 30 seconds, are you going to convince someone to sell their storage facility that doesn't want to? You're a stranger, you have no credibility with them; they don't know you. That's a fool's errand. That's a huge uphill battle.

Our job is not to convince people to sell, our job is to get to as many people as possible, to find out who's already got the seed of selling planted in their mind. And then it's our job to water that sometimes. "Why are you looking to sell? Retirement? How is it for you? How many hours a week are you putting in? Man, that's tough? What would you do with the money?" Our favorite question - if you had the $2 million, what would you do with it? Would you go to the islands, are you gonna go buy a cabin? And we want to just water that seed in their mind. We don't want to be the ones to plant it. You can't do that in 30 seconds. But if it's already there, we want to find the people that have already got this inkling of "Maybe I should sell in their mind." That is who we're targeting.

Ash Patel: Yeah, great advice there. People get emotionally attached to the money upon sale. So often when you're close to a closing, you have some leverage in retrading, because the money is often already spent in their minds. This is what I'm going to do. I already told my spouse that we're going to move on buy your dream house, whatever it is... So yeah, playing on those emotions often will yield some leverage towards you. Good. So now you're pivoting into another asset class. What is that?

Faraz Hemani: I wouldn't say pivoting; we're just adding more stuff. We're looking for more and more things to do. One of the things we found very compelling is this asset class flex industrial. All that really means is you've got a big 60,000 square foot warehouse, let's say, or a bunch of buildings that add up to 60 to 70,000 square feet. You chop them up into small suites. I'm talking 1,500 to 2,000 square feet of warehouse space. Here's the problem we're addressing. If you're a small-time contractor, a plumber, electrician, whatever it might be, you want to rent warehouse space - there is is virtually no product available at just 1,500 square feet. Warehouses are traditionally 10k, 20k, 30k, 40k square feet; you don't need all that space as a small business owner. Not only that, the places that are smaller, older warehouses are typically older product; a lot of that was built-in the '80s and '90s. We're seeing decreasing supply. That's a phenomenon we're not seeing in a lot of other asset classes. Multifamily - you go drive around the major metros, there's new buildings being put up everywhere. These asset classes are typically being bought, repurposed, redeveloped, gentrified into something else; you have a diminishing supply, you have more small businesses than ever that are in need of space. You have more contractors and electricians and home services than ever before, especially in growing areas that need space. Not only that, if you're a business in need of space, you have a few choices - you can rent to office, you can rent a retail spot, or you can rent one of our spots. I'm saying it's not limited to industrial tenants. We have dance studios, churches, ghost kitchens, Amazon sellers, that just need some space; they just need some space that's not their house. And this is the lowest cost option for business in need of space.

Ash Patel: To illustrate that for the Best Ever listeners, flex space is typically you have a man door in the front, and potentially a bay door in the back, and/or the front. So like you said, a landscaper that needs a place to securely store his or her equipment, a window tint shop, we've had churches, kitchens... So really -- and your average size flex is about 2,000 square feet...

Faraz Hemani: Just about.

Ash Patel: Okay. So imagine just a 2,000 square foot shell, where each tenant that comes in can basically start over, move a wall if they want more office, more retail, more warehouse, or if they want all warehouse. The landscaper doesn't need office, or may not need any retail, or any customer exposure. They just need four walls, securely stored equipment. But then we've had churches where they come in and they want it to look like an inviting space. Nice flooring, nice walls, nice lighting...

Good. The question that I have for you... If you look at price per square foot on storage versus flex, how does that add up?

Faraz Hemani: Price per square foot on buildings?

Ash Patel: In terms of being able to rent out.

Faraz Hemani: Rent. Of course, the answer is it varies market to market. But I'll put it this way. I live in Houston, Texas. When it comes to flex space, we're doing ground-up development. So we're building new flex space. So I could speak on my market here in Houston. The price points we've seen in some places like Stafford, Texas, or Missouri City, Texas, some of the suburbs near me - they're renting at $24 a square foot a year. That's the high end. On average, we're leasing our projects at $18, $19 a square foot a year. Storage, especially in a city like Houston - here's the thing... Storage is pretty oversupplied in a lot of cities. You have tons and tons of competition. This is an asset class that's now institutionalized and very mature. That drives down prices. It's a race to the bottom. Storage rents in Houston might be closer to $13, $14 a square foot a year, and you have a much less sticky customer in storage. That's kind of the gift and the curse sometimes in storage. A customer comes in on a month to month lease, which is great for all the reasons we talked about, but he may leave in three months. You have sticky, easy to manage business customers on triple net leases, which is also very important. They're covering your expenses, they're covering your taxes, they're covering your insurance; typically paying a higher rent, not wanting to leave, and there's a shortage of this stuff. We can't build this fast enough in some of our markets.

Break: [00:23:21.19]

Ash Patel: What's the ideal size of a flex space, including ceiling height?

Faraz Hemani: It varies. And we go back and forth on this a lot as a team. In our mind, there's no ideal suite size. We like to see on the smaller side, 1500 to 2000 square foot suites, sometimes up to 2500, because that means that -- tenants always don't care about dollar per square foot. They're like, "Tell me what the check I'm cutting you is every month. How much is my rent?" A smaller space means a smaller rent. So you typically lower your rent, the lower the price point, it's a lower barrier to entry to get in. We feel like there's other products out there that are building 5000, 6000, 7000 square feet suites, and they service a typical need. We've found our niche in these smaller spaces. There's a huge array of people that come in.

And answer your other questions, typically a 20 to 22 ceiling, 14 foot dock high doors... Again, these are small customers. If somebody's coming in with hundreds of pallets of inventory, they're probably too mature for your flex space. They're probably going to a warehouse. These are going to be light use cases. They don't need all the bells and whistles that a big industrial tenant has. Basics. 20 foot ceilings, 14 foot door, clear space... The inside is a shell, we don't even paint the walls; concrete floors... It's a blank canvas, like you said. "Here's four walls, you do what you need to do with it."

Ash Patel: How much of the inside is conditioned space?

Faraz Hemani: As in air conditioned?

Ash Patel: Air, heat...

Faraz Hemani: Let's say in a 2000 square foot space, what we're typically giving you is about a 200-square foot office, a small bathroom, equivalent of a half bathroom. Above the office - the office is maybe 10 feet high. And remember, we have a 20 foot space. So above the office we'll reinforce what's called a mezzanine layer. So it's like basically your office is two stories. You can go up the stairs, and then there's a second office. We will air-condition all that office space. So if you want to bring your clients in there, if you need to sit in there and crunch numbers, or do whatever it is, you have an air-conditioned space for that. Your warehouse - not air conditioned. Insulated, to make sure it doesn't get too hot or too cold. Not air conditioned. Very basic product. That's the thing we love about it. This is a basic product that does not need a ton of bells and whistles for it to lease and fly off the shelves.

Ash Patel: Yeah. And the benefit is you have business owners that are your tenants, and they will often go in there and improve your space on their dime. Any stories where people have drastically improved one of these flex spaces?

Faraz Hemani: Yeah, absolutely. We've seen spots where it was like a jujitsu gym, and then they ended up leaving because they outgrew the space. But they left behind mirrors across every single wall, like something a gym would normally have... There's this company called Big Ass Fans; sometimes [unintelligible 00:27:44.17] these really, really massive fans; they installed one of those in the warehouse space to keep things cool. Absolute decor, they made the office space, incredible waiting area, lounges, and they left the space, and it wasn't that hard for the landlord to say, "This is basically a gym. Hey, if anyone needs a turnkey gym location, come in and go ahead and make it."

So we've seen some cool, interesting uses for what people do with that space. We saw one where it was a ghost kitchen, and the guy just left all his equipment behind. He's like, "I can't move it. I'm upgrading anyways." So you had massive freezers, iron stove tops... It was a full-blown, ready to go ghost kitchen. A lot of cool improvements the tenants will make on their own dime, that you get to benefit from.

Ash Patel: Yeah, it's the equivalent of having an apartment tenant remodel the bathroom, remodel the kitchen, add granite countertops... Which never happens. So that's one of the benefits of commercial real estate. That's great. Are you buying existing flexspaces, or are you just building?

Faraz Hemani: Today we're building, but absolutely; we're looking at applying the same principles of acquisitions that we have in storage over to flex space as well. And looking to buy existing assets that we can add some value to, whether it's driving rents, or improving the curb appeal of the building... And we know there's a big shortage of supply, we know there's a product we can build at a relatively attractive price... So we're doing a ton of development of this product as well.

Ash Patel: Yeah, and this is not that big of a jump from people coming from the self-storage asset class. What's your advice to somebody that has been in self-storage for so long, and they're also experiencing the increased competition? What's your advice for them to get into flex?

Faraz Hemani: If you can do well in storage, you will do well in Flex. Storage is a lot harder operationally than most other asset classes. Because you nailed it - one, you don't have a commercial tenant; you have a regular customer. And by the way, you probably have 200 of them at a given location. Regular customers, you're gonna deal with regular people problems. "Hey, I'm late on my payment" or "I'm gonna be rude", or "I'm gonna cuss out the customer service rep", or "I'm gonna show up to the facility drunk and drive my car, a U-haul, and nick the side of your building." And by the way, all true stories. These aren't hypotheticals; these are things we've experienced. I have a list of 100 funny horror stories and stories that we've had.

You move into flex, you're not dealing with professionals; you're dealing with businesses. You're dealing with maybe 15 of them, rather than 200 of them. They're on Triple Net leases, meaning that "Oh man, my taxes went up this year." It's okay, it's your tenant's job to cover that. If you can nail it in storage, you will be just fine. In fact, you'll be like "Why didn't I do this sooner?", in a triple net lease commercial asset class like flex space. But just make sure you know what you're doing, you know your underwriting, you understand it before you jump in headfirst. Don't have too much of a shiny object syndrome. But if you're a storage operator, there's not much harder than that in terms of operations. You'll be just fine.

Ash Patel: Yeah. And I would say buy before you build. So buy an existing facility, so you'll learn all the nuances. Ground-up development - do that once you're comfortable with managing existing flexspaces. You had some experience into retail... Can we dive into that?

Faraz Hemani: Yeah, absolutely. So after we sold all those houses that were in Austin, Texas back in 2020-2021 - actually, the first commercial real estate asset class we bought was a small strip mall. It was like 10,000 square feet here in the Houston area. That was my first experience with a triple net leased asset. Very similar characteristics with what you did in flex space. It's a business that's leasing space from you on a triple net lease; you're only dealing with like 9 or 10 different tenants.

We got it at a very attractive cap rate. There wasn't much of a value-add story other than there was a seller that needed to get out. We worked with that seller for a few months on price, beat him up a little bit on it... But again, urgency factor. He had this plan to go build a bunch of luxury condos somewhere in Houston, just desperately needed the money... Had an urgency factor. So we bought it at what was equivalent to about an eight and a half cap, put on [unintelligible 00:31:17.26] interest rate debt on it, and just managed it. And it wasn't that bad.

We were also doing storage at that time. Storage was taking 95% of my time and management, this shopping center took like an hour a month to manage. So actually, I loved it. It was awesome. But we stuck with storage because we felt like retail - we didn't have an edge. We were good, we knew what we were doing. But what was our edge? Were we going to outlease the other centers? Leasing, we're just handing it to a broker. There's not a ton of [unintelligible 00:31:42.13] that we had personally there as operators. I know there's a lot of people in retail that have an edge. We just felt like our edge was in storage; we were going to be better than a lot of other operators there, and that's why we gravitated that way.

Ash Patel: Would you go back into retail?

Faraz Hemani: For the right opportunities, I think so. But I'll tell you this as well, and going back to your question, "What's your advice to people jumping from storage to any other asset class?", make sure you know what you're doing, because as easy I just painted retail out to be, we sold that shopping center, actually, December 2022. 1031-ed the proceeds into a storage facility. I got lucky I did that. Within four months we had three or four tenant leases expiring at that retail center. None of them renewed. All of them outgrew the space, they all went somewhere else. Now that shopping center is sitting 60% empty. Even on our 4% interest rate debt, it would probably barely, if even, been covering debt service.

If you don't know what you're doing, if you didn't have a plan, and you didn't have reserves, and you didn't have a leasing strategy in place... If you were just doing cookie cutter stuff, you would have been in a tough spot. So the point is, I would maybe do it again, but I would rather stick with what I've researched, what I know, or the asset classes where I have partnerships with experienced operators... I want to do what I know. I don't want to get burned because I had an oversight. And that's the advice we give to any investor jumping in a new asset class. Don't get burned.

Ash Patel: Faraz, I want you to not give me a cliché answer for this next question... But if you can go back in time just a little bit and talk to your younger self, as you're starting to scale your business, what would you say?

Faraz Hemani: Not a cliché answer... I love it.

Ash Patel: I want something creative.

Faraz Hemani: Yeah. I left my job when I started this stuff. I was working at Google. It was a great, cushy job. I loved it, I was making more money than I ever thought I'd make in my life at 26 years old... It was awesome. When I left, I saved up a couple years of runway, meaning if I'm selling those houses and all that means I had enough money in my bank account where, okay, if I don't touch $1 for two years, my living expenses are covered. That's safe, I have a safety net; let's get after it.

So my advice - you're jumping into a real estate asset class, or maybe you're thinking about going full-time into that real estate... I saw something that was really resonating with me the other day - you have an hourglass. Sand is at the top, and it's slowly trickling down. Each piece of sand that falls down is meaningful. That's your runway. That's your time that's gone, that's your resources that's gone, that's your safety net of savings that's gone... So focus. Focus, focus, focus, focus. Everyday matters. Do not get shiny object syndrome. Don't start looking at multifamily and then get enamored by "Oh, but that guy's making 20% in short-term rentals. Let me spend a few weeks researching that." Pick something, learn it, stick to it. Be relentless about learning it. Say no to things that are not that asset class. Live and breathe that asset class. Be hands-on as much as you can, yntil you've established yourself. Because that hourglass is ticking, your runway is ticking. Your ability to compound your wealth is ticking. Do not waste any moment of those first couple of years.

Ash Patel: As you were growing your team and your business, what's the biggest mistake that you made?

Faraz Hemani: Trying to do a lot of things myself. Obviously, when you start a business, you're not starting with millions and millions of dollars for the most part when you're a younger entrepreneur. I waited too long to put the right people in place and to offload tasks off my plate, for a couple of reasons. One, everyone has this natural thing, "I know how to do this better than anyone else. If I get somebody else to do it, they're going to make mistakes. I'm gonna have to sit with them and I'm gonna have to train them... Just get out of my way. I can do it quicker. Just don't worry about it, I got it." I was like that. And I have a little control freak in me, too. I know that about myself.

I spent way too long doing the things that were needed for the survival of the business, but they weren't pushing the needle for growth. And I think as an entrepreneur, the biggest thing - this applies to anything beyond even real estate - your job is not to be in there to just do all the work. Your job is to put the right people and the right systems in place and work on the business, rather than work in the business. I didn't really grasp how important that was probably until a year, a year and a half in. Now we audit our time every week, me and some of the key people on our team, and say, "Why am I spending my time doing this? Someone else should be doing this. I should be focused on XYZ." And we will ruthlessly do that.

So as soon as you can, invest in the growth of your business, invest in the people that will allow you to focus on growth, and then to focus on keeping the business afloat.

Ash Patel: What's a deal that you lost money on?

Faraz Hemani: Knock on wood, so far we haven't lost money on a deal. But I'm sure if I stick with this long enough, the market gives and it takes away... So there's some deals where I feel like we're struggling on, that aren't performing to where I expected... But the second storage facility we ever bought was out in Louisiana. That one has been a challenge for us. It's been tough; it's not leasing at the rate we thought; the revenue has been fairly stagnant for almost seven or eight months, we've had tons of crime... We had a period last November where there was targeted breakings at our facility, meaning 30 units got broken into in an organized fashion. And we lost 45 out of our 80 customers in almost two months. It was absolutely brutal. We're back on track a little bit now, but there's so much I missed that could have been prevented in making this happen.

I think the number one thing, just to make the last point here, is as a new real estate investor you fall in love with your model in Microsoft Excel. You look at the numbers, the numbers work, good. I'm good to go. But real estate is a physical asset class; there's things that don't show up on your proforma. The characteristics of the neighborhood; the type of tenant that you're going to attract. The type of growth that you might experience in a given area, and what's that going to do to your business. Excel can't capture that; there's no substitute for going and walking and living and breathing that real estate that you're going to be acquiring, and we didn't do a great job of that on that second property. And we missed it. That's the biggest lesson we've learned from that one.

Ash Patel: What would have prevented some of this stuff from happening?

Faraz Hemani: I think a lot of things. One, better systems in place. So now we understand -- we have a rinse and repeat security playbook at every storage facility, that involves gate access controls, motion detectors after hours, sirens that connect to police stations... Little pieces of technology that aren't even that expensive etc, that are now put into place, connected together, automated. How did we get to that point where we knew how to build a security system? We had to get broken into 30 times to understand what are all the gaps we need to cover.

So there's no substitute for making your mistakes, by the way. As a new entrepreneur, or as a new real estate investor, you're gonna screw some stuff up. It's okay. Learn from it. Honestly, that deal - it's been tough, we struggle on it; 50% to 60% of our learnings about how to improve our operations come from that property.

Ash Patel: Yeah, great story. And thanks for sharing that. Faraz, are you ready for the Best Ever Lightning Round?

Faraz Hemani: I love it. Let's do it.

Ash Patel: Alright, Faraz, what's the Best Ever book you've recently read?

Faraz Hemani: It's a book called Sapiens. Phenomenal book, just about the human history, from when we were cavemen, to today. And how did we evolve into societies. It's a fascinating book because it teaches you a lot about why do we do some of the things that we do today. Why are we all obsessed with money? Why are we all collectively rallying around certain values, and why is our society different from their society? Why do we have boundaries between countries? It's a really, really phenomenal understanding of why humans act the way they do through the lens of history, evolution, and all of that. I can go on and on, but I can't capture it. Read that book. It's a long book, it's like hundreds and hundreds of pages. Read the first 60 pages; if you're not convinced, put the book down.

Ash Patel: What's the Best Ever way you like to give back?

Faraz Hemani: With my time. One thing is I learned most of commercial real estate online, through Twitter, through LinkedIn, DMing people that were in the business and a few of them that were lucky enough to give me the time of day, they gave me a lot of helpful advice. I didn't have a mentor, I didn't have a guy I could pick up the phone and call, or a guy I could go to his office and say "Teach me self-storage." I had to kind of scrappily put it together, and then learn from a ton of my own mistakes. So what I would love to give to every new aspiring investor is my time. Anyone that says "I'm young, I want to be into real estate, I want to learn to invest", I never turn those meeting downs, as many as there might be. I love to give my time and see if I can make a difference in somebody's ability to do what I did in a much easier way.

Ash Patel: Faraz, how can the Best Ever listeners get a hold of you?

Faraz Hemani: I'm on Twitter, it's @faraz_tx, and you can find me on LinkedIn, Faraz Hemani. Find me on both platforms. I'm super-super-active on there. I respond to all my messages, reach out.

Ash Patel: Awesome. Faraz, thank you for your time today. Great story about pivoting, getting into self-storage, actually leaving your tech career to get into self-storage, and pivoting into flex space. So thank you for sharing your time with us today.

Faraz Hemani: Absolutely, Ash. Thanks for having me. A ton of fun.

Ash Patel: Best Ever listeners, thank you for joining us. If you enjoyed this episode, please leave us a five-star review, share this podcast with someone you think can benefit from it. Also, follow, subscribe and have a Best Ever day.

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