Banks were hesitant to provide loans for self-storage projects, and it was generally perceived as an unconventional choice within the real estate market. However, Self-storage has emerged as a fascinating and lucrative asset class, attracting investors seeking passive income and long-term wealth.

In this episode, Tim and Greg delve into a riveting discussion on the transformative power of self-storage, particularly in times of crisis. AJ’s mission is to teach others about financial freedom and security, turning his hardships into a platform for empowering individuals seeking economic independence.

They also highlight the importance of resilience and determination to turn challenges into opportunities.

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WHAT TO LISTEN FOR
8:06 Self-storage investing and business growth
13:38 Paralysis, financial struggles, and recovery
22:05 Real estate investing and financial engineering
37:32 Real estate investing strategies and market trends

RESOURCES/LINKS MENTIONED
Cedar Creek Capital by Aj Osborne

CONNECT WITH US
To learn more about investment opportunities, join the Cityside Capital Investor Club.

Full Transcript

Aj Osborne 00:00
We’ve invested over $10 million into the storage business, not just the assets. We see ourselves as storage professionals, not just Self Storage investors. That’s very different. Many have noticed this asset class and its impressive performance over the last 26 years.

Greg Lyons 00:27
Welcome to the Passive Income Brothers Podcast.

Tim Lyons 00:30
Here, we remove fear from real estate investing, sharing real stories of successful investors. Welcome to another episode of the Passive Income Brothers Podcast. I’m Tim Lyons, joined by rockstars, including my brother Greg. How are you today?

Greg Lyons 00:46
Exceptional day, Tim. I’m fired up about today’s guest. I love having guests, but today is special. I’ve been listening to this person for a long time, gaining valuable insights. I’m over the moon, Tim. Let’s do it.

Tim Lyons 01:16
Man gets ready to sign autographs later, right?

Greg Lyons 01:19
Geez.

Tim Lyons 01:20
But listen, yeah.

Greg Lyons 01:21
I’m a fanboy tonight.

Tim Lyons 01:23
You are a fanboy. I’m so proud of you, too.

Greg Lyons 01:25
But I’m fine. I’m fine with it.

Tim Lyons 01:26
It’s funny. Our podcast lets us talk to guests like AJ. It’s one of those things where I still pinch myself because I’m a fanboy. Listening to the podcast, reading the book. Our partner Paul swears by AJ and his team. Now we bring it to you guys. Without further ado, Aj Osborne, how’re you doing today?

Aj Osborne 01:52
Doing great, thanks for having me on, guys. I’m stoked to talk to you today.

Tim Lyons 01:57
So AJ, he’s part of the Self Storage world, right? He has a company called Cedar Creek Capital. He’s written a book about Self Storage, and he’s got a podcast called Self Storage Income. So AJ, let me bring it back to the beginning. Why Self Storage? What is Self Storage to the passive investor? Why is it such an asset class that we should be looking into? How has it made you guys successful? What is the “why” behind Self Storage?

Yeah, so um, you know, Self Storage is an interesting asset class because all your listeners have heard about it by now. I want to make sure that it’s clear that we are not new to this. So we were in Self Storage prior to 2008. And when we were originally in it, nobody talked about Self Storage, it was not a thing. In fact, we had people who joked with us that we were basically like junk lords. Like it was like, why are you buying these crappy things, right? Banks didn’t like to lend on it. This was not only not a major food group, it was very much looked down upon. And most people who invested in storage did it as land holds. So all they were doing was buying land that they thought would be more valuable in the future. And they were throwing a bunch of stuff on it, like units or parking spaces, to simply cash flow until they could do something useful with it. And that was a significant portion of our industry. And there are a few reasons for it. It’s the newest commercial real estate asset class out there. And it at the time had never gone through any major cycle. So prior to 2008, it had never gone through a debt cycle, right? Anything else like that institutional money didn’t plan it, less than 10% of the asset class was institutionalized banks. They didn’t play in it. And the reason being was there was no institutional third-party management. So that meant if you bought a storage, what are you going to do with it? Right? Can you imagine a fund going, “I’m gonna go allocate 200 million in storage, and who’s going to operate it? How are you even going to do it?” Right? It wasn’t available. So the barriers to entry for institutional were large, you couldn’t get really good debt options. And also, you couldn’t manage it. So that left it to mom and pop, right? When we got started and what we liked about it, why we got into it was very simple. So we were sales guys, right? So we sold group medical insurance. When I say sales guys, I mean consulting. So we worked with large group medical benefits, self-funding dollars, right? So we were managing around 800 million in corporate premium when we left, including for Fortune 500 companies. Now, that’s something that I grew up in because my dad grew up in extreme poverty. And he got out of extreme poverty, meaning they didn’t have running water or anything. And he poached for food. Now he got our family out of that by selling door-to-door life insurance. Then from there, he went to do group medical, and he worked for a couple of large carriers, right? And I grew up in that world, my dad left and went out on his own to sell his own insurance when I was a teenager. And I grew up literally traveling around rural Idaho with my dad walking into meetings and doing medical benefit meetings at the age of 15. So that’s what we did, right? And that’s what we knew. But when we were doing this, I loved it because I felt like I was in charge of my income, right? I could sell to make more money. But one of the biggest problems was it, I ended up referring to it as the treadmill, meaning you always groups turnover, we don’t own that revenue, we’re paid on commissions, we’re just consulting, right? And so if you’re not selling, you’re not making more money, you’re literally dying. And so we looked at it, and I’m like, This is going to be a problem. Because first of all, what do I do with my dad when he wants to retire? I make money off my clients, he makes money off of his. So if he’s not his clients, he retires. They’re not paying him anymore. What, how do we, you know what I mean? It was like, I’m like, How do I do that? And then two, I looked at it, do I want to be doing this for the next 30 years, just this, this treadmill. And so we thought, okay, we want something that allowed us to do compounding, which meant we could put our money in, we could get a known rate of return, and we could deploy it back. Because that’s what we didn’t have. We didn’t have the ability to compound our money, which means we couldn’t grow it efficiently. We couldn’t plan, and we didn’t own it. So we loved real estate because of those things. But I hated real estate. So when we started out, I didn’t understand real estate. Because for me, I’m like, I could go buy a small business at 3x, multiple real estate, I gotta spend $100,000, and what am I going to make on this thing, like nothing? And so we looked at it, and we’re like, well, we can get depreciation maybe and we can get that stuff. So I started looking at multifamily and small multifamily that this was prior to 2008. So the rage was housing, right? All my friends, everybody was doing it. And my dad actually bought with a partner, a small facility in a small city in eastern Idaho. And he was like, Hey, look at this, I actually like this better because there’s no toilets. Right? Everything else and I so I had never actually been in a storage facility before. So I was very skeptical about this. So he showed it to me. And we went and we walked in the first time I’d ever even seen a storage facility. And I walked in right and looking around, and I still wasn’t convinced until he showed me the P&L. And that changed my mind because it had what other things didn’t cash flow. So what we found was storage wasn’t I, I refer to it as it’s not a real estate asset. It’s a business on top of a real estate asset. That’s why we like it. Because we can control revenue, we can actually add value through business operations, meaning that if I have a multifamily building, and I want to substantially increase the value of that, which commercial real estate, we increase value through net income, that means I gotta get higher prices and higher rents, that almost always coincides with large capital expenditures into the building to charge higher values. We’re buying storage facilities, and I’m increasing revenue by 40%. And I’m not putting any capex on. It’s all efficiency and business operations that we’re building and using. So we started buying these small facilities around the Northwest. And it was good, but like we weren’t great at it. Okay, so we really weren’t, but what we did, we were very anti-consumer debt. We were very anti-personal debt. And so we had very conservative debt on our assets. And we bought things not for equity. Equity, I didn’t understand it didn’t make sense to me when people said the best thing about real estate is the market makes it more and I’m like, You’re a wizard Harry. Like it just it was like, it’s just like, like abracadabra, right? Like, I didn’t get it. And that scared me. Because for me, I needed to be able to measure it. I’m coming from an all-cash background, sales, revenue income, right? So the idea that I’m buying this thing at this and it makes barely any money, but it’s okay because the magic market will just make it more. It’s like, it’s not that that’s not true, because it is, but I didn’t know how I could plan on that or do that. So when we looked at it, all everything was based on cash debt, to me was a bad thing. Meaning that it’s not bad to have it. But it is a tool like a gun, meaning that you can use it to eat, but it can also kill you. So we did very conservative, long structures. I don’t like short-term games, things like that. And then when 2008 came, everybody, as we know what happened in 2008, it was disastrous, especially where I’ve lived. I mean, where I lived in the northwest, it’s really hard to understand how 2008 for people that didn’t live work in it, in some of these cities was, I mean, our population ended up being like from a booming city to tumbleweeds rolling across the street. Eat, it was shocking. And so that was really hard and rough. And one of the things that we did is we stayed away from markets that were booming and busy because we first of all couldn’t compete. And I didn’t understand it. That played very, very well for us. Now, what we did after that was we took what we’d learned, and we just did it on steroids. And we moved up. So we learned about scale. And from there, we just kept growing, we kept compounding me and my father worked full time on jobs and poured everything we had into it. So we accrued a $150 million portfolio using only our own money, we both rebuilt businesses, and we sold them. And we did that while we were building our portfolio, so we could use that capital into our business. So no investors, no nothing, we then started up the largest co-op in the world Self Storage, Co-Op, we also own Self Storage tech companies, we’re fully vertically integrated. Now, I’ve architecture construction management, we have it all because everything that we did was to make the business of storage better. So what we would do is we dump our money into the business, not just the assets. So we poured over $10 million into the business of doing storage, not just the assets. And that’s where we view ourselves, we are storage professionals, we are a Self Storage business, not Self Storage investors. And that’s very, very different. And obviously, lots of people have seen this wonderful asset class and what it’s done. And now what we found out and knew back then is way more mainstream, it’s the top-performing asset in the last 26 years, it is the lowest defaulting asset by far, why? Because we have a 40% margin. And there are things that we can do within our business. So I actually did a chart that we will be joined, like our investors, everything has all our properties. And you can see market revenues, which in every single one of our market rents dropped by over 15%, most of them 20 to 40%, and our revenue in each one of those rows. So we have a spread on half of our assets have a 50% spread from market rate to our revenue increase. That’s stuff that I just don’t know how you could even do in other assets.

Greg Lyons 12:12
You know, I think our listeners are really going to appreciate how much you know about self-storage because listening to you on your podcast, Self Storage Income, you impress everyone I’ve come across with your knowledge. It’s like second nature to you. But before we dive into the details of self-storage, I love that you start off by saying you used to hate real estate and had no idea about it, right? And that always amuses me when someone becomes such a success in what they do. You’re almost like an accidental landlord. And you know what? We have something in common. We both used to live in Boise, Idaho. That’s where you are now. And I’m also a cancer survivor. It’s been about 27 years since that time. But you also had a point in your life where self-storage, selling insurance, and all those things took a backseat. And I just want to touch upon that because stories like this are the backbone of success in self-storage or any other field. So AJ, what do you have for us?

Aj Osborne 13:34
So you guys have the background and everything. And frankly, the only reason I’m talking to you guys now is because I became paralyzed out of the blue six years ago, from head to toe. I was put on tubes. I have four children. We had just had our fourth child, who was about four months old at the time. I had a very comfortable job and was investing all my money back into real estate, as we mentioned, while working for one of the nation’s largest brokerage firms. However, I was fired while in the hospital. I couldn’t even speak. I went from being perfectly fine one day to my legs suddenly not working. Within 48 hours, I was hooked up to life support. I didn’t even have a chance to say goodbye to my kids. This experience changed my life in many ways, especially financially. I spent months in the hospital and when I was finally released, I was sent home paralyzed. They put me in bed and I had to relearn everything – occupational therapy, speech therapy, using my hands, even walking. Unfortunately, my recovery was not quick. It would take years, and even now, I’m not fully recovered. I can’t do many normal things and I don’t have full use of my lower legs. However, I can walk and most people wouldn’t notice anything. I no longer need leg braces or assistance to walk. I left rehab after three to four years because they told me it had been years and I wasn’t making significant progress. So I went home and focused on recovering with the support of my family. Self-storage played a crucial role in my life during this time. It saved me financially. I often share this story because it’s true and it means a lot to me. I remember sitting in the hospital, excited to go home for Christmas morning and see my kids open their presents. I wasn’t worried about losing our home or what my kids wouldn’t get for Christmas. In fact, I knew my wife would spoil them. I was sitting there, excited, despite being in a hospital bed, paralyzed, and knowing that my role as the sole income earner had vanished. It was at that point that I realized self-storage was more than just storing things. It was more than just a business. I didn’t know what I would do next, but I made a promise to myself to share my story. So, in my hospital bed, I started a blog, which eventually became my podcast and more. I had never used social media or done podcasts before, and I had never publicly talked about my experiences. But I felt the need to share it with others because I had been given a second chance. Self-storage had saved me, and I wanted to help others achieve financial freedom and security. I wanted to teach them how to do it on their own and give them the opportunity to join me on this journey. That’s what I’ve been doing since I left the hospital. It was challenging at first because I could only work for a few hours at a time. My brother moved in with me to help take care of me and my kids while my wife worked. He would take me to work, and I would sit there for a few hours before needing to leave. It was a slow process, but bit by bit, I started to come back. I built three companies from my wheelchair, all of them generating seven figures or more. I even sold one of them for millions. At first, my wife and I thought about moving to Italy and renting a small castle to escape from everything. We wanted to take a break and not worry about anything. But when we mentioned it to our kids, they were concerned. They asked why we were running away. It made me realize that I was trying to run away from who I had become and what had happened to me. Making podcasts and creating content, allowing others to join me on this journey, requires vulnerability. I know I’m not perfect, and I will make mistakes. Transparency means accepting that you will be wrong sometimes. Initially, I didn’t want people to see me being vulnerable or making mistakes. But it was my kids who gave me the strength to stay and continue what we were doing. They reminded me that we were in this together and that we had a purpose. And that has shaped my future.

Tim Lyons 19:49
AJ, I have a saying on this podcast, and I’m going to start doing push-ups every time I hear something incredibly strong like that. And because, you know, Greg, being a cancer survivor, hearing your story again, and having Greg as my partner, and going through that journey with him, looking at him in the hospital bed with no hair and chemo tubes and everything else, it really defines the why behind the how and our behavior. I work as a New York City firefighter, so that’s my full-time job, in addition to being a partner here at Cityside Capital. So I know that any 24-hour shift that I work could be my last. There’s a why behind that because I know that my passive income will support my family if I get hurt or, God forbid, something worse happens. But that’s why this is so important. That’s why this topic is so important. It’s why we’re so passionate. That’s why we have a podcast. That’s why we work with good folks who are doing great things because we want to educate and provide access to people to do things and have that comfort. Is there a risk? Of course, there’s risk in anything we do, right? Yeah. But this is why we were so excited to have you on because we mainly talk about multifamily and residential type investments. But this is such a powerful asset class. And what I love about your podcast is that you talk about the business aspect of it, right? Yeah. So we got the background about the business part, but how did you get started? What is your why? How powerful can this asset be? Can you now take us through the mechanics for the limited partner out there who may say, “Wow, this sounds really cool. But how does it work? What are the mechanics? How does the cash flow work? How does the investor reporting work? How does a long-term hold work?” Because in the last five years, there have been many operators who want to do a quick flip. They want to buy a property with short-term bridge debt, add some value, ride the cap rate compression, and get out, right? Yep. But that’s not what we’re doing here at Cedar Creek Capital, right? So could you give them a high-level overview of how it works?

Aj Osborne 22:06

This is a great question and one I’m very passionate about. The world of syndication, things like that, was completely new to me when I started raising money. I didn’t understand how the mechanics of these things in the back end even worked. All I understood and knew was how to make money in storage. We were good at it. I found that there are lots of things that I’m going to say are games that people play, and I hate that part of this business. I’m just going to be straight up honest. We, which we learned about how this business works, have a more hard stance on if you’re an LP, first of all, what that means and who you should be investing with.

If you are a passive investor, you are an owner. You don’t own an ATM; you are an equity owner, participating in the upside that most do not get to. It’s a privilege to be able to do that. But you also have to realize that ownership almost always comes with limited liability and limited decision making. Who you’re investing with 90% of the time will be if you fail, it’s due to the structure, not the asset. This is important. 90% of all deals that I see fell when somebody said the deal failed; it didn’t. The deal never failed. The structure did. They were doing short-term things that put the asset at risk. That may be contracts, liabilities, other things. The asset didn’t fail; the structure did.

This is something that I talked a lot about two and a half years ago when I wrote something called the Self Storage bubble. I started talking about commercial real estate being in a bubble, and it’s going to pop, everyone. We talked about what’s happening in the markets and why that was going on at the time. For us, we locked in all our debt till 2030, and we paid for that. So we actually had to pay up for these kinds of things. Because what we saw in the industry was people were more concerned about investors and making them happy. They were doing things like funded returns and IO interest only no payments. Why? Because they wanted to artificially bolster cash flow at the front end so they could give investors capital, make them happy, and also improve their own financial returns. This is Financial Engineering.

When we looked at this, I had major problems with it. Because now the product that those investors are buying is a financially engineered product. They think they’re getting equity ownership and a cash-flowing asset. But what they’re getting is a financially engineered structure. I’m not okay with that because that puts LP money at risk. It’s better to do things the right way and do it on good solid foundational principles, even if that means slower or lower returns upfront, to make sure that everyone is not only safe but not playing games with the assets.

One of the things that we look at and do when you talk about the actual mechanics, I am a value-add investor, meaning I’m buying an existing cash-flowing asset that has upside potential. In order to get that yield and returns, though, we have higher expense loads at the front. Why? Because the expenses are improving assets in the form of management, all sorts of stuff. So our expense load is not going to be our 30-35% Expense Ratio; it’ll be much higher than that. Now, once it’s stabilized, it’ll be, excuse me, lower, right.

But in that front-end time, we are always looking at two things, meaning we only do two things with investors: we either improve the equity, meaning your value, or distribute cash to the investor. These two things are almost always at odds with each other. Meaning that if you are improving equity, usually, at the same time, you are not also giving massive distributions on the front side. And so we understand that, and we’re okay with that, right. Then you should be transparent about it.

What I don’t want to do is financially engineer things to get rid of what might be seen as a bad thing at the front, because we want consistent distributions. One of the major mechanisms that we see in this is funding returns. This is something that is actually very commonplace; most all of the people that I know that do what I do do this. What they do is they over-raise and then distribute money back to the investors. So let’s say I need a million dollars; I’m going to raise 1.2 million. And then for the first two years, that 200,000 that I raised, I’m distributing back to investors. They’re getting a return.

Investors like this because it makes consistent cash flow. As I asked one investor, I said, so let me get this straight. You bought that thing at a four cap, and you got an 8% distribution? You’re one, and it’s a value add. Explain to me how the math works on that. And they paused, and you can see a light bulb go off in their head. Yeah, I don’t know how you do that, period, without even a value add. So what happens with that is a problem, meaning that what is being distributed isn’t cash flow from the investment. For me, I’m like that’s not a return, and I wouldn’t do that with my money.

So, guys, if you said, Ajay, we got a great investment for you, give us 1.2 million, and I’m going to give you 200,000 of the back. So you get cash flow. And then you’ll start generating, which creates a timeframe which we can meet up returns, right. Any educated investor, any major investor is going to look at you and go. So you’re giving me my money back interest-free, so I can feel good. And you’re saying then that’s a return, right? The basics are better.

When we buy, we get large cash reserves that we’re trying to pile up. All cash flow, when we’re doing value-add, is going, i.e., first into the facility into reserves, and going to improve the asset. And until we have open outgoing projects, meaning that’s construction or anything else, we don’t want to do distributions because then we’re draining cash levels low with open-end liabilities, right? This is common business practice and things that you do, right.

We’re very conservative now; that obviously played off very well in the last year. But for a long time, that actually hurt us. But we are conservative by nature because our goal is that within four to six years, our investors have 120 plus percent return. And they also own the equity still; they’re not being cashed out, and they get paid still going forward. So we know we can deliver those returns, right? But also, we know that things have to be done.

So we’re trying to get the upside without having a corresponding downside. I call this my margin of stupidity. And it’s a really important rule for me. Meaning that if I have to be outrageously intelligent to pull this off, or I can’t make a stupid mistake, or this is going to fail, I shouldn’t be touching this thing. I need to be able to buy something and I need to be, as an operator as an owner, the person first of all that’s taken responsibility and taking your money. I need to be able to do stupid things because I’m a human. And so if this project is reliant on us making a certain metric within two years or it goes under or I have to do artificial things, right, we just shouldn’t do it.

So we do the same thing we did with our own money with investors. Now how we structured it was very different, where we basically say, Listen, all the profits go to the investor. So what we’re doing, and we’re saying everything goes to the investor until we get to our marks, and then it means so we’re aligned investor first. We have a 120% mark right before that takes place. So investor first, we take the risk, and then we get paid on the backend, which means I have to before I can make really my money, I have to pay the investors out. It means that I have to be aligned with them, and my focus is risk. Why? Because if I take risk, and it doesn’t make money, I’ll never get paid. Right? So for us, when we say piggybacking, our investors are piggybacking along with us on our assets and our business. We mean it; they’re partners, they’re equity partners, and we’re passionate about that. This isn’t a stock. Right? And to it’s funny because investors may think it is, but I’m like you’re not my first concern. The asset is. So the asset, if it’s taken care of, and if it does well, we all get paid, and everything’s good, right?

We don’t want investors, us, or anything else messing up the long-term value creation and putting things in short-term risk for that asset. We’ll buy something; we come in immediately; we have what we call dynamic pricing and revenue management. That means we are changing all the rates in that entire asset. So we’re coming in, and we’re optimizing square footage and rates. We have a whole technology stack to do this; I built out a proprietary system that does this. But that is disruptive to that asset, obviously, right? We’re realigning with the market, and we’re maximizing prices. There’s a slow season and a busy season. So we have a five-six month period where we can really optimize; then we have another five-six month period where it’s the downturn, which we’re optimizing in another way. Cash flows in the first couple of years are very much up and down. Obviously, we’re kicking people out. So I try to a lot of people to understand that. But I actually will buy an asset and say 30% of these tenants gotta get out and we gotta get them out now. Because I don’t care about occupancy; I care about revenue. So I’d love to kick 30% of the tenants out and double my revenue, right.

When we’re buying these things, we also know that there are unknowns, so we want to plan for them, and we want to be prepared for them. Because maximizing revenue comes with tenant turnover, disruption, and it comes with open-end liabilities. And to not acknowledge that I think is kind of crazy, right? Now, it doesn’t mean that it’s necessarily risk. But disruption. Those are very different things. Right. And just because someone’s not either not getting a distribution or not doesn’t mean that money is even at risk, right?

So people need to understand we’re buying a business; you’re buying an operating thing. You need to look at the people you’re putting money with and ask yourself, are you selling a security? Or are you running an actual business? Are you a sales machine that is simply selling shares? Or are you a business partner for me? And those two things are very different.

Greg Lyons 33:30
No, you’re absolutely right.

Tim Lyons 33:38
I wish you could talk about some addiction in your voice with some hardcore beliefs in this stuff because like, I really can’t hear you, in your voice. But I’m obviously joking. When you talk about risks, though, can you also talk about the financing of these types of properties, especially given the current climate? We’re recording this towards the end of 2023, almost in December. And a lot of the short-term liabilities out there are causing people a lot of headaches, right? So there’s recourse, there’s non-recourse, you know, can you kind of walk us through how does your business view debt? And what kind of terms do you usually look for?

Aj Osborne 34:13
Yeah, so I view debt the same way I view the market. We don’t expect the market to make us, but we expect it to kill us at any time. And it’s the same thing with debt. I don’t expect debt to make me. It’s another tool, but I know that it can kill me at any time. So when we look at debt, we don’t look at it as a financial engineering solution to improve return. We go back to a very holistic thing, meaning that on that asset, if I can improve the revenues by X amount, my net income will improve X amount, and that means the value will therefore improve X amount. I then have debt as a tool that I can use within that to accomplish those things. So we look at debt as in, this is a great tool, a powerful tool we have to use. And it’s wonderful we get to, but it has to be used within a controlled environment; time is your best friend when it comes to liabilities like that. So I want my debt to give me time to figure things out. If I have a three-year period of time, I am terrified. Why? Because I cannot plan markets in three-year chunks; I can do it in 10, I can buy something, and I can tell you in 10 years off of what we’re buying, it’s going to be worth more because I have now time to improve that asset. So if you have a three-year chunk, and you’re doing a value-add system, a three-year chunk means only three busy seasons to execute on that. If you don’t execute on that, or the market turns on you in that, then you have to refinance. What’s happening is people are going to refinance. And what they bought at a five cap now is not worth a five cap; it’s worth a six or a seven cap, right? And all of a sudden, they lost 30-40% of their value. This is called extrinsic value. And intrinsic and extrinsic are different. And that’s what I’m talking about here. So extrinsic is price. That’s all it is. It’s price. So somebody says, Oh, it was worth $6 million because they bought it for $6 million. No, they paid $6 million for it; what it was worth is what the asset actually produces. Right? So what does it produce relative to what you bought? So when we look at the extrinsic price, the extrinsic price moves not according to necessarily what we do; things that are outside forces in the market will change that price, that extrinsic value. So in a timeframe of three years, two years, four or five years, I know the market can change those prices on us at any time, regardless of what we’re doing. So I have to hedge myself against value destroyers that we don’t have control of. So I can’t control that. So I have to protect against it. That’s why time is my best friend because the market can be the market. And over time, then I can pick when it’s good to refinance, when it’s good to sell and everything else. But if I don’t have time, that power is taken away from me. And then if I’m forced to do something which I call value traps, meaning that you have a refinance or a sell period or something in your contracts that take into account extrinsic value, that is like a trigger on a trap. Right. So you may be stuck in a position where once again, the asset is fine. But the market is not pricing it right. And now you’re stuck, and you lose the asset. Even though the asset didn’t fail, you did because of the structure. So we utilize debt to obviously get leverage. Leverage is a wonderful, amazing tool. I would love interest only if I can get it right. And we pluck that out as far out as we can. We’re buying things that right now, high-interest rates, that’s okay because I’ll actually I don’t mind that I’m really excited to buy deals today. This is the most excited I’ve been in years. The reason being is I marry the price, but I date the rate. So I would all day long buy something at 10% interest at $3 million than something at 3% interest rate at an astronomical price above that. Why? Because the interest rates will change. So for me, all the interest rates mean is I’m paying short term to get that asset on sale. That’s wonderful. That’s the immediate value that I can get the moment markets change, right. So using those things to your advantage is great. That’s an awesome thing that we can have. So another thing we obviously do is we don’t want prepayment penalties. Because I want to be able to change the moment it’s opportunistic for me, and that’s a mistake I made. So when after 2008, we were buying really big assets, and there wasn’t a lot of financial products available to us. And we were they think that those were the first CMBS non-recourse loan done in the Pacific Northwest at the time. Now our terms sucked. And so we were locked in with prepayment penalties that any of you know things about non-recourse, which I obviously didn’t, didn’t know enough, but your payment penalties are predicated on interest rates, meaning that you’re swapping it out for like-minded bond to cover the holders of that debt. So if interest rates go up, then guess what, you’re benefited because you can swap it with something easily. So in fact, there’s some cases where you can even be paid to refinance that because you’re swapping it with a premium, while at the time it was 5% interest. Now, for everyone that’s only been investing in the last 10 years, we didn’t think 5% interest could get lower. So we were like this is amazing 5% interest. So we locked it in for 10 years. Our value creation in four were yours. And then interest rates, lowering was astronomical, we had $50 million in five years that we couldn’t touch. And that is killer to compounding returns. So we learned that, that, you know, there’s also locking up for time is good because you have time, but you can also lock yourself out of opportunity, which is bad. So we try to have our cake and eat it too, if that makes sense.

Greg Lyons 40:26
Yeah, no, that’s especially relevant and kind of what’s going on in the world today. And so that was a great explanation. Something you said a little bit earlier was margin of stupidity. And I didn’t realize I lived my entire life that way. And Tim probably knows that, as well as my wife, the margin of stupidity is really, really important.

Before we transition to our three kinds of thoughts at the end of the podcast, three things, three words really jumped out at me when talking to you, and that’s genuine. I feel like you have a genuine interest in your investors and in the assets that you buy and acquire. And then the second word is honesty. You’re pretty brutally honest with what’s going on. And I think investors, if they’re savvy, really appreciate that, because honesty is what gets you through the peaks and the valleys of different investments. And the third, for someone that hates real estate, you’re very knowledgeable. And whether that’s market trends, you talked about the Self Storage bubble two years ago, the dynamic pricing and the technology that you bring to all of your assets, that knowledge of the Self Storage industry is unbelievable when you’re going to be a steward of someone’s capital.

So, you know, just really a ton of value today for our listeners. And it’s not just the regular Self Storage stuff, either. It’s how you build the building, throw some stuff in there. This is real, actual gold about the Self Storage industry. So we do thank you for that.

Aj Osborne 42:14
I appreciate that. And I am too. I try to be honest and transparent as I can because first of all, I feel like we have no reason not to be. But I think that you’re right. It may be brutally honest. But it is because I’m also honest in what we screw up on, which we do a lot. And I feel that transparency is what people really want. And the margin of stupidity, everything else, is you have to understand that we’re humans, we will make mistakes. I know I will. So I need to make sure that I’m brutally honest about how I’m trying to protect also against myself, and what can happen there. And I think that you should be, you should demand that from people you’re investing with, you should demand transparency. Why are you doing what you’re doing? How are these returns actually got when I ask people when they see, they say, well, it’s projected at 20% internal rate of return, I ask them, where’s the return come from? They say, What do you mean, the asset? And I go, No, where’s it return? Is it a sell? Is it like, how are those things coming out? Right. And I think we should demand it. And people should be confident in giving both correct and wrong answers. And when I say confident about giving wrong answers, what I mean is confident about being wrong and saying they’re wrong. And also confident about acknowledging that they can be. It’s the most scary thing is the person that thinks that they can’t be wrong, that they’re smarter than the market, and that they won’t make mistakes because that means they’re gambling with your money. And that, to me, is terrifying.

Greg Lyons 43:47
And that’s the worst part. There’s no doubt about it. Again, just a masterclass in being a passive investor. I mean, this has been fantastic. But let us transition, let’s be mindful of everyone’s time, transition to our three short answer thoughts. And the first one is when you’re talking to an investor or if you’re on a podcast, what do you say to people when they say investing in real estate is just too risky?

Aj Osborne 44:13
So obviously, I’m sensitive to that because I remember when my income went away like that. Honestly, I have very strong beliefs that the separation in our economy from social classes, everything else like that, it’s just participants, and not meaning that people that own assets, they are better off, they just do better over time. And people that don’t, they get left behind. And that’s how markets work. That’s how it’ll always work. It’ll never change like that. So when I look at it, I first of all think your money is guaranteed to lose money by sitting in the bank. That’s not risk. That’s a guarantee. You cannot save your way out. That does not work unless you make millions and millions of millions of dollars, right? So for normal people, and I’m talking about high earners, even like I was with my sales job, I did the math, it doesn’t work. And we even put inflation in that, right? It does. So for me, I’m like risk can be managed. That risk, though, cannot be. So the risk of your money losing value can’t be managed. It’s guaranteed. This is a risk that actually can be managed. But you also get the upside. So how risky is that? When you can actually manage it, and you get an upside for it, as opposed to getting the downside? And there’s not even a potential of an upside, and it’s guaranteed.

Tim Lyons 45:43
Love that. I love that answer. I mean, it’s a paradigm shift, right? It’s a total paradigm shift learning how money works, how the banking system works, how to adequately due diligence on a deal and understand debt and leverage and returns. I mean, all this stuff, right? Inflation, inflation wasn’t even a thing until about three years ago, right? No one even cared about it or understood how it worked. But now, I just did my updated finances, and I’m spending 70% more this year on groceries than I did last year.

Aj Osborne 46:16
Oh, yeah. It’s wild. My wife was blown away. We’re like, we literally, we come home, we’re like, I don’t know how normal people can afford this. I mean, we are obviously not naive enough to think that we’re at a level, and when we look at it and say, this is a problem that scares us, that terrifies me, I have four kids and trying to feed them is like, I’m on, you gotta have a part-time job. I got three boys, you know. And I think that it’s also important to know that your money is being risked. So your money is working, you put your money in a bank, your money is being given to people like me. So I’m getting your money, you’re just not getting the upside for it. But that’s what banks do. They don’t hold your money in a bank account that doesn’t exist, your money is gone immediately and given to somebody like me, so I get to use your money. Whether you get the upside or not, it’s being used.

Tim Lyons 47:06
So you might want to participate. Alright, question number two. Jim Rohn is a big influence in Greg and my personal growth and development type of stuff. And he says that a formal education will make you a living and a self-education will make you a fortune. What does that mean to you?

Aj Osborne 47:29
Yeah, formal education is great. I mean, I’m very kind of anti-education system, I failed me, I left high school early on, went to college early, and that actually happened to be the best thing ever. Because as of right now, the school system is not set up for students functionally, I mean, functionally, so the actual structure of it is not set up to maximize outcomes of students, right. And that’s a huge problem we have in America. And I think that your formal education is necessary. It’s important, obviously, if you do not get the basics, meaning you don’t know math, you don’t know how to read, right? Like you don’t understand how the world works, you could never be successful like that’s, that’s, of course, right. And you want to maximize those fundamentals. But your incremental gains paths that are not the same. So once you get outside of that, you’re going and choosing individual topics to go deep on, which individual topics and the relationship to outputs and how you use it differ wildly, depending on degrees, everything else, and there’s a total disconnect with value in the education system, because value is placed upon credits. That doesn’t make sense. So you buy a credit, that can make you a lot of money versus one that will actually not make you anything and they cost the same. It’s not there, that’s not aligned. And I think we have been in a paradigm where people said, you have to go to college to actually make money, where there’s no correlation with that. There’s just not right. So you can have a correlation and outcomes based upon certain things, like being a doctor, everything else, of course, right? We’re not talking about any of those things, people. The reason why people that are more educated on average, make more money is because most higher degrees go into professions, like surgeons, doctors, lawyers, right attorneys, these kinds of things that are paid on average, higher, which those are licensed jobs, meaning that you have to do it to get a license to even practice. So 100% of anybody that does it has a degree. That’s why those are in large part of school. So if you are not going to become a license, meaning I’m paying and that’s gonna give me a license that allows me to make $300,000 a year. The value correlation doesn’t exist. It’s not there, and you’re learning by When we do not actually learn by reading, you have somebody that graduates from business school. And it’s almost like they know less than they did when they started. Because what they think, usually is not actually reality or what’s even happening. And so when you have instead, people that do their learning dynamically and four dimensionally and applicable, that is the value of education, education only has value as it is applied. So applicable learned knowledge is 10x. The knowledge that you get from a book, we live in an information age, I can get access to anything you pay for an MBA, anything I can get, in fact, I can probably even find better information. And yet I don’t have to pay for it. So there is a fundamental value problem with education that has not been corrected in the United States because it hasn’t changed. We’re doing education like we did when there were horse and buggies. How does that make sense? Right. So that’s kind of my thoughts on it.

Greg Lyons 51:03
That’s thorough. I love that. That’s a great thought. So our final thought is from Robert Kiyosaki. This can be a little controversial for people. He once said savers are losers, and debtors are winners. What does that mean to you?

Aj Osborne 51:22
So this is a truth, meaning that the government and monetary policy are meant to devalue money. That’s its actual job. Inflation is necessary. Once you get above 3%, it’s extraordinarily destructive. Inflation is a function and target. The government, with all its power, military, and world economies, works every day to make your money less. We’re paying taxes to make your money less. That is the function of it. If that changes, you have what are called depressions, restructuring of debts, and currencies. When you’re a debtor, you’re on the other side of the coin. Your money is being used to get something from that economy. You devalue money to increase the economy. It’s that spread. We’re talking about the economy growing at 3-4%, and you’re losing 3-4% on your money. Even if you just track GDP, you’re making 6 plus percent a year. That’s just tracking normal GDP. The stock market is obviously even more than that. Then, when you get into real estate assets, it’s benefited even more. Add on appreciation, cash flow, debt, market growth, and tax benefits. It’s wildly disproportionate to anything else. It’s not wrong; it’s just a natural reality of economics.

Tim Lyons 53:15
Well, AJ, I’m going to tell you that I had about 4000 more questions to ask, but we are at time, my friend. So I just want to thank you for making the time, coming onto the show, sharing your knowledge, and the love and passion you have for this topic. Thank you so much for that. If people want to know more about how to find you, your companies, your books, your podcasts, what is the best way for them to find all that?

Aj Osborne 53:41
Yeah, so pretty easy. First of all, Cedar Creek Capital is my site. If you want to dive headfirst into storage, go to Self Storage Income. We have a simple rule: we give away everything for free, all knowledge, everything. We don’t hold anything back. My goal on podcasts and coming on here is that transparency part, to make sure we are completely open on everything we’re thinking about, even if it changes and when it’s wrong. So people know. The more access we can give people to our information, particularly our investors, the better. We actually want that. You can go to Cedar Creek Capital for our investment stuff, and then Self Storage Income for all the education. Again, we teach and allow others to participate. Instagram, Aj Osborne. I’m putting out short-form and long-term everything we can do to get information out. Google Aj Osborne Self Storage. I’m sorry because it’s obnoxious how much they did. I have a really good team, and they do a good job making it obnoxious. So I apologize.

Tim Lyons 54:46
Well, listen, Grant Cardone said, if there are a billion people in the world and he wants everybody to know his name, right? So, more obnoxious, the better. So, AJ? That’s gonna do it for this week’s edition of The Passive Income Brothers podcast, and we look forward to serving you again next week.

Outro
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