October 9, 2018

JF1498: Build & Scale A Huge Cash-Flowing Portfolio While Working Full Time with John Lenhart

As a lawyer, entrepreneur, and active investor, John knows a lot about scaling his portfolio while working as a lawyer, and his other businesses. He’s done a lot of unique and interesting upgrades to properties and is continuing his growth still. Tune in to hear how he’s gotten to where he is, and how he will continue to grow. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!  

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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.

With us today, John Lenhart. How are you doing, John?

John Lenhart: Pretty good. Doing well, Joe.

Joe Fairless: I’m glad to hear that. A little bit about John – he is an attorney, an entrepreneur and an active real estate investor. He specializes in multifamily and self-storage in the Cincinnati market. I actually met John at a meetup a couple weeks ago, and we talked for about 20 minutes, or 30 minutes, or I don’t know how long it was… But I just really enjoyed learning from John about what he was doing.

He has a portfolio of over 15 million dollars and growing. He specializes in multifamily and self-storage, like I mentioned. Based in Cincinnati. With that being said, John, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

John Lenhart: Sure thing. As you mentioned, we’re actively involved in the apartment, as well as self-storage markets. We do have a few other small one-off properties as well in our portfolio, but primarily we tend to focus on the apartment and self-storage.

We are local market investors, so we are focusing on the Cincinnati region, mostly because we manage our own property and we know the area ourselves, so it allows us the opportunity to see the properties ourselves. We have not reached out to take private money yet, but that’s something that we’re exploring in the future. But that’s primarily why we’ve stuck to our own local market.

As mentioned, I am a lawyer by training. I no longer actively practice legal work. I have a few other small businesses, as well as my real estate business. As you’ve mentioned, we’ve been doing this for about ten years now and really enjoy what we’re doing on the real estate side… So that’s kind of where my interest just lies, and where the growth has been.

We got into apartments about ten years ago, and have grown that into an apartment and storage portfolio.

Joe Fairless: Okay, so you started out with apartments ten years, and then you went from apartments and also storage units?

John Lenhart: Correct. We started back in 2008, just kind of dipping our toes in the water with a couple of four-families in the local Cincinnati area. You know the Cincinnati market, Joe, so as you know, there’s a lot of older, 60-70 year old two and four-family properties around the area, and that’s how we got in. The market was down at that time, I should say, and there were a few decent deals out there that we were able to find… And what we did is we got going as we built our portfolio up slowly, just rolling over all the cashflow that we got from each property.

Every year we’ve rolled over, being able to acquire another property or two, depending on how much cash we had and the price we were able to find the property for. After about four years we had acquired eight four-families, so about 33 units total, and an opportunity in self-storage came to us in the market… And we’d been studying this for a little time at this point, so we knew a little bit about it. I’d even gone to the Scott Meyers training, if anyone knows who he is… He’s kind of the guru/expert on self-storage training… And the opportunity came up and we jumped on it. It was a very good opportunity for us.

Since then, we were able to find other opportunities, or hidden gems in the area. These were all value-add opportunities that we found, and have since worked on growing those. That’s been kind of our evolution.

Joe Fairless: You mentioned you haven’t taken private investors, but you say “we” when you’re talking about the business. Who’s “we”?

John Lenhart: Well, I have a partner in the business. This started ten years ago. I was in my late twenties at the time, and I work with my father on this. He more or less came to me and [unintelligible [00:06:42].16] interest in real estate at the time, and said “Hey, the economy is down, the market is down. I’m worried about my retirement. Let’s possibly get a few four-families together.” I would contribute to the money, he would contribute to the money… So we went into it as a fairly equal partnership, and that’s kind of how we started building it up.

As the years have gone by, we’ve just continued to let everything build up.

Joe Fairless: And how did you come across a self-storage opportunity?

John Lenhart: Well, the first one we came across was found on LoopNet, of all places… And I’ve actually found two deals on LoopNet – not just storage, but even apartment deals. I know everyone says LoopNet is where deals go to die, and that’s true for many cases, if you can run the numbers right and negotiate, you can find some of those diamonds in the rough and get something that’ll work for you.

So I found it on LoopNet; I’d already been to Scott Meyers and studied Scott Meyers’ training materials, so I knew a little bit about what to find on the self-storage. This was something that was owned by a mom and pop. It was about ten years old, they were looking to retire down in Florida… And when we got in there, we realized that the systems they were running were very archaic, to put it nicely here.

They were keeping the ledger for everyone that paid around the side of the lease, so that every time a person pays, they write on the lease they paid for June, or July, or August. So they had no computer systems in place, they had no property management system in place. The rents were bargain basement low, they’d never raised rents in their history, and they were leaving a ton of money on the table, and there was a ton of opportunity to build this up into a more modern system and really increase the revenue and the value of the property… And it was a great property to start with, for that reason.

We came in there, we originally brought a professional property management where — we brought a system in, and we computerized everything. We made a web page, so people could actually go out and rent units online, which was becoming a thing. Instead of having to spend $2,000 for a Yellow Page ad, which was common at the time, but dying at the time, we realized that we could save a lot of money there, and also increase the revenues. So we did things like that.

We brought in U-Haul trucks as another way to get referrals, as well as to increase revenue through U-Haul commissions. We started selling locks and boxes, which previously hadn’t been done at that location, and it was just another source of auxiliary revenue… And other sources such as storage insurance, things like that.

Then one of the other things that we started doing which was becoming common in the industry at that time was charging what I call is an administration fee or a renting fee, similar to going to the gym where they charge you a fee just to sign up for the privilege of signing up to join a gym – it’s the same concept with storage. A lot of times they charge $10-$20 just for the privilege to rent a unit. That’s very common in the industry, and we initially did that, and just a number of sources of different revenue for the property.

Joe Fairless: The admin fee, the insurance, the locks and boxes, the U-Haul trucks… Which one has the highest impact on the P&L?

John Lenhart: Well, if I were gonna say of anything, probably the U-Haul trucks, and the reason being it’s not so much the revenue that that brings in; the admin fees, the locks, the boxes, the U-Haul trucks – they’re all [unintelligible [00:10:17].11] in the big picture. You’re not going to have an independent business based on renting U-Haul trucks, or even selling storage insurance… But what it does and what it allowed us to do is it maybe accounts for 8%-10% of our monthly revenue… But what the U-Haul especially was doing was it gave us access to their system. We don’t just have our own web page, but we’re on their web page, and when someone rents a truck from us, they’re more likely to need storage, and we happen to be there as they bring the truck back and [unintelligible [00:10:50].27] So it rents us more units. It also puts us on their platform and gets us more views on their web page to rent more units as well.

So that’s why I’d say the U-Haul had probably the biggest impact, but not necessarily from the specific revenue it brings in, but from the additional storage customers that it generates.

Joe Fairless: How many more storage facilities have you purchased since then?

John Lenhart: We have three additional facilities in and around the area. After eight months of running this, we realized it’s actually a pretty good thing, and we really started looking for another one. We found another facility about three miles away. We purchased that about a year into it. That was something we bought out of a foreclosure from the bank.

The way that worked out was the price was great — I mean, you have to be a fool to turn that down…

Joe Fairless: How much was it?

John Lenhart: Well, it was about double the size of our first facility, for roughly the same price. I believe we paid about $650,000 for it at the time.

Joe Fairless: Wow.

John Lenhart: Yes, but it’s had its own set of challenges, that as we got into it we got to kind of see the differences between for example the storage market and the apartment market, and the fact that demographics and location –  how that plays into the storage market.

The market that we bought our first facility in – it was a good market, a fairly middle-class market in the area; it was growing. The market that we got our second facility, even though it was only a few miles away, was on the downturn a little bit, and it was also over-built, so there was a lot more storage in the area than possibly needed to be… So it kept rates down, we had a higher delinquency rate that naturally occurred there… Rates were down because there was a lot more competition in the area… So those were additional, different challenges than the first one.

What we learned from that is when we’re buying facilities, to spend a little bit more time looking at key demographics, almost like a retail establishment would, because that’s gonna be a core driver for your storage rent business.

Joe Fairless: Do you still have that second one?

John Lenhart: Yes, we do. It’s performing really well, and it does very well for us, but it just has to be managed slightly differently than, for example, one that’s in [unintelligible [00:13:13].19] Your unit size is gonna be different, your delinquency is gonna be different, how they rent is gonna be different. It’s just a matter of how you manage it; it’s not quite the same level or same thought process and management that you’d have from one to the other.

Joe Fairless: I would love to learn more about some specifics of how you manage it differently, because if someone who’s listening finds themselves in a situation where their area is overbuilt, but hey, they already bought the place and the demographics aren’t as good, here’s how you make it work – how do you do that?

John Lenhart: Our second one, as I mentioned, it’s in an area called Middletown, Ohio. For those who don’t know the area, Middletown isn’t the fastest-growing area in town; it’s more of an older factory town, and it’s seen better days, and it’s still struggling. Now, this particular property that we purchased – I guess it was a good deal for us, but it had a high delinquency rate and needed a lot more management on-site to manage things.

The manager has the ability to cut deals with people; we’re doing more storage auctions at this location than we would do at some of our other locations, which don’t have the same type of default rate… But we’re taking a lot more active approach in managing it. We’re working with the tenants, saying “Okay,  we might be willing to take a partial payment or two for someone who’s getting behind here”, or put them on a payment plan to get caught up, as opposed to just [unintelligible [00:14:38].29] That’s the nature of the market that we’re in.

The prices that you can charge per unit or per square foot are gonna be lower at this location versus other locations that we might have. It’s all in the nature of the market and how much competition is there, and the nature of the income levels of the market as well. That doesn’t mean that it’s a bad location or a bad property; it’s a great property and it performs very well for us, it’s just there’s different market conditions and how we’ve gotta adjust our management style.

Joe Fairless: As an owner, when you’re looking at the operations and the profit & loss statement for that property, and you’re doing the balancing act of having the on-site person cut deals for maybe partial payment, or maybe a payment plan, what metrics do you look at to make sure that they’re at the right spot, so that you’re not doing too much of the partial payments or payment plans, and you’re holding occupancy, or the delinquency is decreasing…? How do you look at that?

John Lenhart: Well, I guess the first thing we’re looking at is our delinquency rates. Ideally, all of our properties – we like to keep our self-storage delinquency rates at or below 5%… In that 5%-10% range — it runs more at about 8% in those times. So that’s the first thing we’re starting to look at, is “Okay, where is your delinquency rate at the end of the month? Where is that falling?”

There’s always gonna be a delinquency there. Those places are gonna have some type of delinquency. People fall behind, people have to pick and choose what type of deal is most important to them, and I get it, sometimes you’ve just gotta let your stuff go in a storage unit. But the great thing about storage is you don’t have to go to court to get people out. You can just cut their lock, and have an auction, and that cleans it out, and then you rent it to somebody else… But we’re monitoring that.

Typically, when we’re working with a customer, we’re cognizant to say “Okay, you’re 2,5 months behind… We’re not gonna take a $30/month payment or a $30/week payment until you get caught up. You’ve gotta make a significant chunk. We understand you’re not gonna pay off three months and late fees at the same time, but if you pay off, say, a month-and-a-half now, then we’ll work with you to allow you to make another chunk payment in 2-3 weeks.”

Our goal is to first and foremost collect the amount that they’ve owed for storage, and then late fees are secondary at that point.

Joe Fairless: When you have a customer who is delinquent and you might have to do an auction, is there some formula that you look at, where it’s like, “Okay, if they’re past $200 in delinquency fees, and I know on average I’m going to generate $250 in income, then I’ve got a $50 spread, so I’d better do the auction now versus next month, because then it’s at $300, and I’m gonna make $250, so I’m down $50.” Is there some type of formula you look at for that?

John Lenhart: Not necessarily. It’s just us, again… We’re probably more of a smaller group than some of the big REITs out there, who I’m sure may have a set formula in place, when they’re also managing tens of thousands of units as well. What we typically look at is our lien status is extra 60 days, and then the auction – anytime between 90-110 days is typically when we’re holding our auctions. We hold them quarterly at our facilities, or at least the ones that need it. So we have quarterly auctions for those.

Typically, what we see is when the notice of auction comes out, that’s when people get excited and anxious and they wanna make a payment. I often tell [unintelligible [00:18:20].18] that spurs people to action, and typically the week of the auction, that’s where we are getting our big collections coming in from those. We let people pay to get their stuff back up until auction… That’s how we typically do it. Because most of the time, the auctions are not gonna generate what you owe in rent anyway… So we typically let them have until that time.

As far as the specific metrics go, we might schedule the auctions typically in the winter time. If the weather — if we know it’s a colder month, we might hold off a couple weeks here or there. If it’s January, we might hold off till February or March, because people start filing their taxes in February or March, so they get their tax refunds and a lot of times they’re able to have a big chunk of money to pay off their storage bill at that time. So those are some things we take into consideration.

Joe Fairless: Your storage facility portfolio versus your apartment portfolio – which one do you make more money on? I’ll start with that question.

John Lenhart: Well, they’re both very profitable. The biggest difference, I’d say, between the two of them is with storage you’re going to get more cash. Storage is a very cash-cow business. You’re going to be able to generate more cash with a storage portfolio than apartments. But with apartments, if you’re looking to grow value of the property and then cash out in 3-5 years, you can get a bigger value probably when you go to sell the apartments, just because more buyers out there [unintelligible [00:19:55].10] slightly better cap rates than storage. That’s the big difference, I think – you’re gonna get better cashflow on the storage.

Joe Fairless: And what’s the largest apartments size building or community that you’ve got, in terms of units?

John Lenhart: Right now, our largest is a 50-unit complex.

Joe Fairless: And then self-storage – what’s the largest?

John Lenhart: As far as number of units?

Joe Fairless: Units, yeah.

John Lenhart: About 450 units [unintelligible [00:20:20].01] square feet, it’s about 65,000-70,000 square feet.

Joe Fairless: So comparing the 50-unit apartment complex to the 450 rental spaces/storage unit, which one takes up more of your time?

John Lenhart: Oh, the apartments, by a long shot. We are always having to go to apartments, and not always having to go — I mean, I had a staff that takes care of most of the stuff for me, but we’re always getting maintenance calls about clogged toilets, or leaky roof, or any number of issues. Or we’re turning in apartments, and we have to do renovations, or there’s always maintenance issues to handle at an apartment that are always coming up. Then you have the constant issues as well for people running late, and assessing late fees, and tenants can’t seem to get along… That’s pretty much common at any apartment building. But at storage you don’t have any of that. It’s still a collection business, where you’re sending notices to people as well, and you have to have somebody who most likely works at the office, depending on the size of your facility and what services you offer there. But outside of that, you could have a call center that answers the calls and takes payments after hours.

Our facilities are set up where people can go online and make their payment if they want. Or a lot of them are set up for automatic payments, so at [12:01] AM, 60% of all our revenues come in for the month, and we’re already cashflow-positive… So that’s some of the great things with storage. You don’t have to worry about getting that call in the middle of the night saying that a pipe has burst and is being flooded. That’s not something you have to worry about with storage. You don’t have to worry about someone having a meth lab in your storage facility, because there’s no water source. Those are all things that make the management of that a lot easier.

Joe Fairless: The last one you purchased, how long ago did you buy it and how did you find that one? The storage unit.

John Lenhart: We’re typically relying on a network of brokers that we’ve developed; we work closely with them, as well as vendors that we work with for other things, who go out and are bird dogs for us and try and find us property. I’m not someone who goes out — I don’t have the time to do letter writing and send out letters to various owners and try and solicit properties; I rely on the brokers for that.

This particular property – the last one we closed on – the closing date was in early February this past year, and we looked at it back in August of last year. So we got it under contract in September/October timeframe; it was about a three-month close.

Joe Fairless: From a broker?

John Lenhart: It was from a broker, yeah.

Joe Fairless: Okay. And when you have a bird dog, like a vendor or someone who finds a deal, how much are they compensated?

John Lenhart: Well, we’ve looked at properties from them; we haven’t found a property from them yet.

Joe Fairless: How much would you compensate them?

John Lenhart: I don’t know, I hadn’t thought about that. Obviously, something that’s fair and reasonable to everyone. I’d probably give them — it depends on what a reasonable broker commission would be. At least 1% or 2% of the deal is what I think, but I hadn’t really thought too much about that.

What [unintelligible [00:23:26].01] I’m using my U-Haul guys to say “Hey, find me a facility”, because for them – it looks good for their numbers too, because I’m gonna bring U-Haul to that facility if there’s not there; and if there is, they know that I’m gonna keep it there, so it helps them in their business, as well. That’s one good thing.

The other thing… My fence guys – same thing; the guys who repair my fences, my plumbers – people like that, that might know of something becoming available. It just means it’s gonna be more business for them down the line too, in their main business. So that’s kind of a strategy I use, too.

Like I said, we haven’t found anything that we’ve purchased from them, but we’ve certainly looked at quite a few properties they’ve sent our way and underwrote them.

Joe Fairless: What’s your best real estate investing advice ever?

John Lenhart: Well, as a local market investor, it’s relying on my network, whether it’s the brokers or out outside vendors, to help find properties for us that are kind of under the radar. Some of the best properties we have found, especially lately, are the ones that are owned by the out of town investors that don’t understand the area and are missing out on a lot of upside that the property has, that they don’t know because they are out-of-towners.

They don’t know the local trends, or some of the local developments coming through the pipeline, or they’re not in tune with the local business community to see where the growth is going as well as a local is. That’s part of the reason why we really focus a lot on our local market.

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

John Lenhart: Absolutely.

Joe Fairless: Alright, then absolutely let’s do it! First, a quick word from our Best Ever partners.

Break: [00:25:06].12] to [00:25:52].19]

Joe Fairless: What’s the best ever book you’ve recently read?

John Lenhart: Recently read, or in general, the best book I have read that I recommend is The Millionaire Mind by Thomas Stanley. Early on in my career it kind of set my focus a lot, and I thought it was a very good growth on business.

As far as recent books, I’m in the middle of Matt Faircloth’s “Raising Private Capital” book right now. That’s a pretty good book, too. I enjoyed that book a lot, too.

Joe Fairless: Best ever deal you’ve done?

John Lenhart: Well, I’d say back in 2014 we did a storage facility, and the great thing about it – it was owned by a developer who was having some issues, struggling… He didn’t exactly know what he had, and we got the thing for a very good price. There was a little bit of uncertainty there, because there were a lot of units we couldn’t touch, and when we finally took over, we realized about half the units were deemed vacant, but it had people’s belongings in it. We quickly auctioned that off and got the place rented up fully. We’ve doubled the revenue on the facility by the three-year term, so… Great deal for us.

Joe Fairless: What’s a mistake you’ve made on a transaction that we have not talked about already?

John Lenhart: Probably I’d say my first real estate deal. It was a two-family house I’d purchased back in 2006, even before I really started actively investing. If you remember back that long, that was the height of the old real estate cycle, where everything was just crazy-priced. I bought in an up-and-coming market that was way too much. I still have the property today, and it’s performing well for me, but for the first couple years it was cashflow-negative, and just not a great investment at first, but we were able to turn it around.

Joe Fairless: Best ever way you like to give back?

John Lenhart: Well, having some younger kids right now, I spend a lot of time volunteering with their activities and their events… But my wife, she’s big with the Ronald McDonald House; she does a lot of stuff on their board, and I got to know them through the years… If you don’t know anything about the Ronald McDonald House, they are a phenomenal charity to work with, and they do a great job for families of children who are in the hospital, with long-term care needs.

Joe Fairless: What’s the best way the Best Ever listeners can learn more about what you’ve got going on?

John Lenhart: The best way they can learn more about what I have going on – I am active on Bigger Pockets, and I am a commentator there. Anyone is welcome to reach out to me on that, I’m always happy to talk real estate… Or see me at some various local networking events as well. I’m always happy to chat with them there.

I love the business, I love what we’re doing, and it’s definitely my passion, so I’m happy to strike up a conversation with anyone who’s interested. I appreciate you inviting me on the show, and I appreciate the Best Ever listeners for listening to me here today.

Joe Fairless: Oh, absolutely. I’m very grateful that you were on the show, learning about how you turned around the storage facilities, some specific ways that you did that… The U-Haul inclusion, where you’re not only getting the fee from referrals, but also you’re included in their network, so you get new leads, so it’s a partner that continues to pay dividends in the future… As well as the more challenging storage facility, the second on that you bought, and what you did in order to make that work, and all the other miscellaneous tips along the way.

Thanks again for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

John Lenhart: Sounds good. I look forward to seeing you around, Joe. Thank you.

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