“Beautifully Mismanaged” Properties

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As Thoughtful Real Estate Entrepreneurs, we see problems as opportunities—chances to apply our entrepreneurship that create equity and cash flow. In this episode, Jeff shares and describes the expression, “Beautifully Mismanaged.” Beautifully mismanaged properties are those in which the Seller has left us with a lot of opportunity to create value by fixing the mistakes of their mismanagement. Jeff discusses the many different types of beautiful mismanagement, and explains how to win from identifying these opportunities.

Episode Transcript

Many years ago, I heard a great expression that is really stuck with me. And that is the expression of beautifully mismanaged. See, when a property’s beautifully mismanaged, that means there’s an opportunity for us. And while a lot of investors might look at that and say, Ooh, that seems like problems. We know that that means opportunity. So in today’s episode, I’m excited to tell you the story of my friend who shared that with me and what it means to us. As investors who want to create a win in our portfolio. Let’s cue up the theme song jump right into it. Welcome to racking up rentals, a show about how regular people, those of us without huge war chest of capital or insider connections, can build lasting wealth acquiring a portfolio of buy and hold real estate. But we don’t just go mainstream looking at what’s on the market and asking banks for loans, nor are we posting WE BUY HOUSES signs, we’re just looking for quote, motivated sellers to make lowball offers to. You see, we are people oriented dealmakers, we sit down directly with sellers to work out Win Win deals without agents or any other obstacles, and buy properties nobody else even knows are for sale. I’m Jeff from a thoughtful real estate entrepreneur. If you’re the kind of real estate investor who wants long term wealth, not get rich quick gimmicks or pictures of yourself holding fat checks on social media. This show is for you. Join me and quietly become the wealthiest person on your block. Now let’s go rack up a rental portfolio. Thanks so much for joining me for another episode of racking up rentals show notes for this episode can be found at thoughtful our e.com/e 138 Please do us a big favor by hitting the subscribe button and your podcast app. It really helps you of course to make sure you don’t miss any episodes. But it sends a message back to the platforms that people are listening. And that makes them want to share this show with other people like us other thoughtful real estate entrepreneurs. Thanks for doing that onward with today’s episode. So many years ago, I was fortunate to spend some time with a friend of mine, I have this friend named Barry. And Barry is just a great guy. I mean, he’s the kind of guy you just sort of look up to, in lots of ways as a person, as a father, as a spouse and everything but also as a business person. And specifically in this case as a real estate investor. And as I got to know, Barry, I got really curious about what he was doing. And he had developed a real area of specialization in self storage properties. He had done several other types of real estate investing, and it kind of grown up even in the multifamily world. But he really honed this particular niche of self storage businesses. And he had several markets across the western United States where he would go and he would, you would target those specific markets that he felt like he knew and felt like he was comfortable with and he would buy properties that were storage facilities that were not performing well. And as I got to know, Barry, he said, you know, hey, you should come with me sometime we’re going to jump in a plane or we’re going to head down to Arizona for a day. This is from Portland dad, Arizona for a couple days, we’re gonna take a look at a bunch of properties, a couple that we already own, but a couple that we are looking at and considering buying, as well these Mom and Pop storage facilities. And you should come with me and I said, gosh, that sounds amazing. So of course I jumped at the opportunity. And I went with him on that trip. And as we were driving towards one of the facilities that we were going to go visit he told me, he said, I love when I come across something that is just beautifully mismanaged. And I paused and I said, Okay, I think I know what you mean when you say that Barry, but I don’t want to take anything for granted. Tell me more about what you mean by beautifully mismanaged and he then proceeded to share with me all of these things that he found were so common actually, in the mom and pop self storage facility. Industry. Some of his examples were like paper records, for instance, he would go in and he would, he would see that their ledger was like, you know, a notebook with graph paper basically, rather than computers. And he would see that the only marketing that they had done was like in the yellow pages, if even remember what the yellow pages were. And he would see that their occupancy was really low and their vacancy was really high and that the facility didn’t look like it was kept very well and that the people working the front desk weren’t very professional or polite and friendly. And he would see all of these things and he would say that property is beautifully mismanaged. So I love that expression because it’s such an interesting juxtaposition of words right, beautiful. And mismanage like when the first word is good. The second word is bad, but when you put them together, beautifully mismanaged means so much opportunity when you think like no entrepreneur right now investors, as I’ve said before, on the show, investors tend to gather up their resources and then find something to place those resources into. Whereas entrepreneurs tend to kind of do the opposite, they find opportunity. And then they figure out why that opportunity makes sense, and what resources they need in order to, you know, execute that opportunity. If you are an entrepreneurial, real estate investor, or an entrepreneurial real estate entrepreneur, then that means you’re always looking for ways that you can add value make something better than where you found it, you’re not just looking to park money, somewhere, you’re looking for a vehicle that you can transform, in some ways, and beautifully mismanaged, is just well, a beautiful term to describe those things that are so ripe for your transformation for you to bring your entrepreneur entrepreneurship, too. You’ve also heard me on the show talk before about finding the Delta, what’s the delta delta is, you know, the the term for difference? What’s the difference with a gap between what you see and what somebody else sees, and especially in this case, this is the seller, what is the difference between what the seller sees when they look at their own property? And what you see when you look at their property, the seller looks at them, and they might see headaches and problems and people issues and maintenance issues, and everything seems like a lot of work. And they might see something that says 55% occupancy is normal, but you look at it, and you just see something totally different, even though you’re looking at the same thing as they are, you’re seeing something different. You’re seeing what could be 90% occupancy, you’re seeing what could be better marketing, what could be friendlier people, what could be higher rates on, you know, rental rates, in this case, storage rental rates, but you’re seeing the Delta and finding that delta is key to what we do as entrepreneurs. And that is what I think beautifully mismanaged, really speaks to so what are some of the ways that a property could be beautifully mismanaged? Well, I mean, the list is really, really long. And I don’t think we have to go through every potential little bullet point in order to make the overall point. So I thought I would just toss out here, several that we can discuss and just use as examples of beautifully mismanaged first vacancy or occupancy, if you look at it from the other perspective, but vacancy. Most well run properties do have a little bit of vacancy, but not too much. Why do they have a little bit of vacancy? Well, they have a little bit of vacancy, because if they have no vacancy, that probably means their rates are too low, right? It kind of makes sense. And there is at least a school of thought that says if you’re looking at a residential building, for instance, you want to have three or so percent vacancy, because if you’re not, if it’s staying fully occupied all the time, you’re probably sacrificing some in terms of your net operating income, because you’re not charging enough for the unit. So if the units are at market rates, then you’ll have that type of turnover. But if if your units are at 50%, vacancy and 50% Occupancy, you know you have a problem. That’s a beautiful area of mismanagement. Now, of course, the caveat to this is you bought a property that’s in a very low demand area. And there’s just not enough demand to to really keep it full, which I would say is a completely different and huge investing mistake. In my opinion, we want to have high demand properties. But vacancy is one of these things that defines beautiful mismanagement, rents. Rents are related to vacancy, as I just described, when when you meet a seller, I, here’s what I love. I love when I meet a seller who says the rent on my unit is $900. But that’s a little bit low. And I say, Oh, great. Well, what do you think it should be? Or they say definitely 975. But I’m looking at this. I’m saying it’s 1300. I love that because they think it could be better. And you can actually agree with them. Yeah, I agree. I think not. Yeah, I bet you could get 975 Even though you’re knowing that could be 1300. So beautiful. mismanagement is about not knowing rents, and what the market rents are, or maybe knowing them, but not having the, you know, intestinal fortitude, so to speak, to implement those rents and to deal with the turnover that happens as a result of that, or to deal with people pushing back in different ways. So rents are certainly another way a property can be beautifully mismanaged. How about marketing? Number three marketing? Well, you know, in the case of a storage facility, a storage facility is a small business, right? It needs to have marketing, I would argue that every property you own is a small business as well. But you might not think of quote, marketing so much for your single family home or your single family home probably doesn’t have a website where you’re soliciting future applicants and things like that. But you are still positioning the property. In the marketplace, you’re communicating about it, you’re selling its features and benefits. Again, in the case of something like a storage facility, there is marketing to be done. There’s there are leads to be generated, there’s a website that could and should exist, there are maybe ads in local newspapers, there are lots of different things in the form of marketing. If you’re running a 10 unit apartment building, there’s an ongoing process for marketing that building that could be even perceived as the way the building is maintained on the exterior so that it looks a certain way has a certain level of curb appeal, and attractiveness. Certainly it speaks to the ads that get run when there’s a unit available. And all of that kind of stuff to the photos in the ads just taken quickly with your iPhone, are they taken by a professional photographer? Are they staged? Are they not all of these things in the form of marketing? So you might look at a property and say that property is beautifully mismanaged for many reasons, not the least of which is that it’s being marketed poorly. record keeping? Okay, well, this one, like I mentioned with Barry and his storage units, there are people who just keep records on paper. I’ve bought properties from people that way. And why is that beautiful mismanagement? Well, in a couple ways. First of all, when they’re keeping records on paper, they’re probably not doing as good enough job of things like collection management, and probably even other things like tracking their potential, you know, deductible expenses. Also, when they go to sell that property, and they just hand over us a stack of paper that you’re now supposed to take and take to your lender, perhaps that doesn’t always speak very well of the seller. And it might not likely help the seller get the highest price or the best possible deal for themselves, because their records are pretty homemade, and not necessarily very clean or perceived to be very reliable. So poor record keeping sloppy, maybe old, just super old school record keeping. That’s another area of beautiful mismanagement. Number five, definitely physical upkeep, right? I mean, we’ve all seen deferred maintenance on properties, we’ve some we’ve seen some maintenance that is so deferred, it looks like the owner has never done anything. To maintain the property, we see other types of deferred maintenance that just might be they kind of do the minimum, but they’re avoiding the big stuff, you know, like they keep the exterior of the house painted, but the roof is failing, and they probably should have replaced it five years ago. Physical upkeep, ultimately kind of comes back to bite the seller upon their sale. And that can be an area of beautiful mismanagement, where you can have opportunity, because you are now going to do for them what they should have done themselves previously, in terms of keeping up this property after you buy it, that might come in the form of lower price, it might come in the form of some flexible terms, it could come in lots of different forms. Alright, number six, staffing or team or people sort of the people category of things. You know, as I mentioned, with Barry, because he’s running a basically retail business in the form of a storage facility, they need to have an office, the office needs to have somebody sitting at a desk, where they can field requests and customer questions and sign new people up and give tours and unlock units and move people in and all of that kind of stuff. So there’s a lot of variation in how those people could be how they could function, right? Are they? Are they gruff and outside smoking all the time and don’t even want to serve the customers who are there? Are they Brighton, perky and wearing matching red shirts with logos on them polo shirts, there’s all sorts of different levels of how competent or professional or well trained staff could be. I’m sure you’ve seen an apartment complex, where they have quote, an onsite manager, which is basically just somebody who’s been living there rent free for the last 30 years, and they don’t really do too much, but they’re kind of quote the onsite manager. That’s another example of beautiful mismanagement. What if they have a maintenance person on staff, but that maintenance person is not consistent, doesn’t do a good job, just those bare minimum. That’s a people issue related to physical upkeep. But you could have a beautifully mismanaged property in terms of the people side of the equation. And then I’ll just give you one more example, which I would say would be the customer experience. A person could beautifully mismanage a property by just delivering really undesirable crap type of experience to customers, right customers being tenants in most cases, right? So you could have residential property manager, who is just really grouchy and has a short temper and is rude and doesn’t communicate well, you could have the person who is supposed to be manning the desk at the storage facility office, who doesn’t show up on time doesn’t unlock the gates at the right time, you know, always smells like smoke, or it looks disheveled. There’s a lot of different ways that you a person could screw up the customer experience of things to resulting in a beautifully mismanaged property. But one point I want to make is that with all of these things, right, we talked about vacancy and rents and marketing and record keeping and physical upkeep and the people side of the equation in the customer experience for you to recognize a beautifully mismanaged property naturally implies, of course, that you have to know what a well managed property looks like. And when you have that, in your mind when you know what vacancy could or should be, on this property, when you know what rents could or should be on this property, when you know what appropriate marketing looks like for this type of property. When you know what good record keeping looks like, on a property when you know what good maintenance looks like, and what good people are in that the experience that those people deliver when you know what good or great looks like. That’s how you can find the Delta. But if you don’t know what great looks like in those ways, then it’s hard for you to identify this delta, identify that beautiful Miss management, right? If you think rents should be $1,000, when actually they could be $1,300, you don’t fully have a good idea of what perfect looks like and thus you won’t be able to fully identify beautiful mismanagement. So in summary, beautiful mismanagement happens when the current owner is not treating something like the business that it really is. And they’re not treating it like something that they actually seem to care a lot about. But you are, you’re going to come along, you’re going to care as much as it deserves. You’re going to treat it like the business that it is. And as a thoughtful real estate entrepreneur, you know, you can do better, you know, you can probably do way better. In fact, in most cases, so my friends look for beautifully mismanaged properties because they are the ones that have opportunity for entrepreneurs, like you and like me. And that is it for today’s episode of racking up rentals. So again, show notes for this episode can be found at thoughtful rv.com/e 138. Please do us a big favor by hitting the subscribe button or the Follow button in your podcast app and rate and review the show I see every one of those myself and I’m so grateful. Every time I do that also helps get more people to watch or listen to the show. Did you know that we have a Facebook group for thoughtful real estate entrepreneurs too? We do. It’s called a rental portfolio wealth builders. And we would love to have you join us there just go to group dot thoughtful ar e COMM And the magic of the internet will redirect you right to that page within Facebook. If you liked this episode, then please take a screenshot of it on your phone. Post that screenshot to Instagram if you do Instagram and tag us. We are at thoughtful real estate on Instagram. So I’ll see you in the next episode. Until then this is Jeff from the thoughtful real estate entrepreneur signing off. Thanks for listening to racking up rentals where we build long term wealth by being when when dealmakers remember solve the person to unlock the deal and solve the financing to unlock the profits.