FCP 104: The Power of Passive Income – With AJ Osborne

Jack: Hello, there everyone. This is Jack Bosch speaking and welcome to another episode of the “Forever Cash Life Real Estate” podcast. We are gonna talk about passive income today. we’re going to talk about scaling a business. We’re going to talk about self-storage today with our guest, AJ Osborne. So we’re gonna get started in just a second.

Male: Welcome to the “Forever Cash Life Real Estate Investing” podcast with your hosts, Jack and Michelle Bosch. Together let’s uncover the secrets to building true wealth through real estate and living a purpose-driven life.

Jack: All right, here we go. And I’m super excited to have you here, AJ. So first of all, how are you doing?

AJ Osborne: Doing Great. Thank you for having me on. I appreciate it.

Jack: Wonderful. Wonderful. So, you have a broad wealth of knowledge in multiple areas from scaling a business to self-storage to definitely passive income to multiple other areas. So, where do we start, first of all, why don’t we start with, you have a pretty dramatic story that I know. So I want to make sure we kind of make sure that you tell that story about how you got started, not how you got started, but how you had an accident or so or something where you literally paralyzed and while you’re paralyzed, your family still had food on the table.

AJ Osborne: Yeah, that’s right. And you know, it really is the crux of why I do what I do and believe what I believe. And I’m strongly an advocate of individuals investing their income into cashflow that is separated for their time. And the reason being is because, as you mentioned, I was paralyzed or, well, I’m still partially paralyzed. I have leg braces, but I was on life support for months because I’d become paralyzed from head to toe. I was on machines kept me breathing and I was, yeah, completely laying in a bed, couldn’t move, and I had breathing tubes.

And I laid like that for about four months, and then they sent me home where my wife cared for me in a bed because I was still paralyzed. And I’ve been coming back for over a year-and-a-half. Since then my lower extremities, they’re paralyzed, but I have leg braces on that help me walk and I’m slowly getting back a little every day. But I had a normal, I guess, what you say a normal corporate job, I had my investing side business and stuff, but I ran one of the largest brokerage firms in our state. And all that came crashing down and crashing to an end. Not only did we not know if I was going to work again, for a long time, we didn’t know whether I was going to survive or not. We didn’t know if I was ever going to walk again. We had no answers.

And you know, life, for me, putting food on the table and providing for my family at that point was effectively over. I’ve recovered better than anyone imagined and I’m lucky to be where I’m at. But if it wasn’t for the passive income coming from real estate assets that we own, that may have been a totally different story. And I don’t know where my life may be today. I like to say that it saved my family’s financial life and it did. It allowed my wife to take care of me and our four children and not worry about making our mortgage payments. It allowed her to not think, “I got to leave my paralyzed husband with the kids while I go get a job to try to cover the bills.”

So, for me, it’s very, very important. And that’s an extra step. That’s more than just, you know, for me, after I got out of the hospital and we got to the point where I could actually travel six months later, and even though it was in a wheelchair, we said, “You know, we need to get away.” So we went to Hawaii, and we could go to Hawaii and sit on the beach and our bills were still getting paid. And that’s just a freedom that is so incredible and it is worth the fight. It is worth sacrificing now for something later. And it’s worth the effort to learn how to create that passive cash flow.

Jack: I couldn’t agree with you more. I mean, you went through this traumatic experience that we don’t obviously wish on anyone, but people always kind of underestimate this, like, well, it’s gonna happen to somebody else. Well, that somebody else could be myself tomorrow crossing the street, right? Or it could be myself in the car tomorrow and knock on wood that it won’t of course. But…

AJ Osborne: [inaudible 0004:58]

Jack: [inaudible 00:04:58]

AJ Osborne: Yeah. I was 34, healthy, I worked out, I did sports, I’m a hiker, backpacker, young, nothing like this has ever happened before to anyone we knew. I had no, like, pre-existing conditions.

Jack: What happened?

AJ Osborne: So what had happened is I had something called Guillain-Barre, and which took them multiple days to figure out what was even wrong with me. I went to the hospital and they’re like, “You’re perfectly healthy. Except for the fact that you’re paralyzed, you’re perfectly healthy.” And I’m like, “I could walk four hours ago, why can’t I walk now?” And the paralysis continued to move up. And they eventually found out that it was something called Guillain-Barre and they said, “We don’t know what’s gonna happen and how far this is going to go.”

But essentially what happened is my white blood cells attacked my nervous system. My white blood cells were fighting a vaccine in my body. And for some reason, it happens to like one in a million people, can happen to anybody at any time. It’s not genetic. It’s just simply your white blood cells go nuts, they attack your nervous system, and my brain could no longer communicate signals to the rest of my body. And then after it went all the way through and I was on life support, then it was a waiting game to see if my nervous system would ever come back.

And when we say out of the blue, I mean, I was traveling the week before and I got sick and we were down at the PGA tour in California, my wife and my parents. Having fun, I was at one of my best friend’s weddings. It was just like totally normal life, right? I had gotten a little sick and didn’t think much of it. Then I started to really hurt and then one night I was like, “We gotta go to the ER, something’s wrong.” And we went to the ER, they said, “No, no, you’re totally fine. You’re perfectly healthy.” Sent me home. I got in the bathtub because my legs were hurting. And I’d lied in there, I think I fell asleep for about an hour and I couldn’t get out of the tub, my legs didn’t work. And I yelled at my wife, she drug me out of the tub and rushed me to the hospital and I didn’t leave for months.

So you’re right, you never can anticipate what will happen or the future. Even though too, that’s not the main reason we should have cash flow. Yes, it’s an important one because like I like to say, listen, at the end of the day, your ability to work for an income, it will end, it’s gonna end, it’s called retirement. At some point, you’re not going to be able to, so you’re either depending on other people, i.e. inheritance, government, or you’re depending on savings and if not savings, then you need cash flow, right. And the problem with savings is it’s a mount and deplete strategy. So I’m trying to just save enough so I can take away from it and it won’t run out before the end of time. That’s a horrible strategy.

Jack: I call it the pile of money theory, like build up a pile of money that’s big enough so you can outlive it, hopefully. I agree, it’s a horrible strategy. But back to the point. So one of the drivers, obviously as you said, this is not the only reason you build wealth. But one of the drivers that is always to the moment I found the girl, let’s say, because if it’s for me, I wasn’t really…back then when I started, I was younger and I didn’t really think about that future that much.

But the moment I found the girl, we’re married 18 years now, I’m like, okay, now I have a different responsibility here. I have a responsibility to make sure that she and our future kids are always going to be financially safe. Now, that’s not the only reason we build what we built. That’s not the only reason you built what you built. But it definitely was a reason because you just never know. Like a year ago, one of my friends just went dirt biking and got off on a headache, fell down and was dead. I was like, “Holy crap, how can that happen?” Right. And then it’s just these things remind me that it is my responsibility to make sure that if I get hit by a bus tomorrow, that my family is safe.

Now, at the same time, it’s my wife’s responsibility, just as much. I believe a man is not the plan, right? So, I’m basically, I’m a feminist just like feminists are feminists. I believe women can do everything and more than we can do obviously. But also just I will do my part, my wife will do her part, but I will not just leave it up to her. I will do my part as part of my responsibility to make sure that my family is fine. And so, in that process, obviously before that, you were able to live off that already. What did you do? What is your strategy? Let’s reveal it a little bit to our audience.

AJ Osborne: You know, really the strategy overall, before I did it and was working and doing anything, the strategy was simple. I worked in…I had a sales job, sales position. And I was a sales guy, I worked for a benefits consulting firm and I sold insurance to clients and every time I would lose a client, my income would go. So, you know, income wasn’t very stable, but the same time, I can make a lot more money.

But there was an aspect of the business that I hated, and that was the aspect that I could not compound my returns. So I felt like my own boss, right? I could do whatever I wanted whenever I wanted, right? I could make lots of money, but really I actually just had a lot of bosses. And too, when I earned that money, it was throwing it into a bank account. And then I started saying, well, where are we going to invest this money?

So I worked with my father, we’ve worked together our whole lives, and we started looking at aspects, well, where can we put our money, right? Like most people are investing. The problem was, was once I got my money, I’d already lost 30%, 30% of my money was already gone. So I’m sitting going, I’ve already got a negative 30%, I have to find an investment. And then I started looking at whether I spent it on the stock market or whatnot. I’m like, just to get back to even to get the dollar that I had earned, it’s gonna take years.

And then too, if I want to put an investment, the cash flow is small. There was all this problem, which at the end of the day came down to scale. I knew that if I wanted to earn six figures passively, I just couldn’t throw it into one investment or throw it in the stock market, right? That just didn’t work. I tried a bunch of things and it was hard to put all these pieces together.

But really what it came down to is I needed to find a way to generate capital, then take that profitable rate, take that profit, reallocate that profit back into itself at a known rate of return. And that sounds simple, right, enough. And it is to some extent, it really is. But for most people, it’s very contrary to how we’re raised and how we’re built. So when I looked at capital…and that’s when I really became obsessed with capital allocation. So how does money move throughout assets throughout the economy and how can I use that and project that to benefit myself?

And we found that real estate was just an amazing vehicle to compound your returns because of the known rate of return part. So I knew that I could make…it’s math. I knew that that capital that I brought in, I could find investments. It was up to me if I could go out and find them that they would produce safely a return for a long, long period of time to come. That way I could project out my earnings, I could redeploy and redo it and create like a layering effect. Compound that out until eventually the machine would run by itself, hands-off, and it could grow forever. That was the theory. Now, I looked at a lot of different assets and we played with some prior…

Jack: You probably lost half of the audience right now by using big words and things like that. So in other words, you are saying either the way to generate cash so that you could roll that as cash into assets that spit out more cash and then you can then roll those into more cash-producing assets, right?

AJ Osborne: Yes. And the key though was not only did I need to get it to buy more assets, I also needed to get it to pay me, go find more assets so it would grow. And it had to do in a profitable rate. But also too, one of the biggest things that I learned is I had to do it in a form or a vehicle…I call them wealth vehicles that take you to your own financial freedom. In a vehicle that would have tax protections. Because if you don’t do that, your losses generated with tax is almost…it just takes away your ability to compound. If anyone knows anything about compounding interest, if you’re losing 30% of your dollar, your ability to compound, it’s taking decades, decades. So you really had to find that right. And real estate offered all those things to us because of depreciation, because of how you could analyze it, because of its security and safe flow or safe way of going about it.

And for me too, though, I knew that in order to reach my goals quickly…and I had very large goals, right? I wanted to build an empire. I wasn’t one of those guys that was trying to hit $30,000 in income or $50,000 income and be done. No, I wanted an empire. And so I knew in order to do that too, I would have to exaggerate those returns and speed up the amount of times that I could buy, right, and keep the cash flow coming in. And so we looked at different assets that we thought we could have a large impact to the cash flows, which would in return have an impact on the values because commercial real estate is traded off of cap rates, which is generated the value from cash flow as opposed to like houses that are just what people will buy for them.

And that’s where I found best fitted for my strategy and my niche because I knew that by being able to do a value-add strategy and fixing up a profit and driving higher revenues via tenants that I could change the value of it. And then I could either take out of that value in the ways of refinancing or in cash flow and redeploying it. So let me use an example to illustrate how this works.

Jack: Go ahead.

AJ Osborne: Yeah. We bought a self-storage facility, that was our asset class of choice. And this was strategic. The reason we purchased it was a lot of economic reasons at the time. We knew that we would get large, large gains, the tenant base. And too, we also knew that there was a lot of things that we could do to that asset to improve it. Now, that means at times it’s not very passive, which is absolutely true. It’s a business. And I don’t think self-storage is not passive, it’s a business, but we knew that we could create it to be passive. So let me show you.

So we would buy…we would find…we started out at a small self-storage facility out in the middle of nowhere, a place called Bonners Ferry, Idaho. No one’s ever heard of it. Beautiful but there’s more grizzly bears than there are people. And you know, we purchased this 17,000-square-foot facility. It did fine. It made some money, but there were faults, we learned on it. We sold it for less than we bought it, but we did pay down some debt. So we took out $290,000 of it and we went and bought a little larger facility that we knew we could improve the structure, the management, we could increase rates. And there’s a few other things we did. We did that within 18 months, we increased the value to it, and with $1 million, which was originally the $260,000 we put in. Then within 18 months, it increased to a million, sold it.

We went out and we purchased another one, did the exact same value-add with that million, we bought one for about right at $4 million. It was like $3.7 million, $3.8 million. But it was about $4 million. That one today we are currently expanding, but before the expansion’s even done, that’s worth $7 million-plus and that illustrates…and we did that via 1031 exchange. Now, most of our assets we hold, so that’s the example to use how you can grow that capital and that cash flow. So that asset today, cash flow is more than our down payment was in that first asset.

Now, we have over a hundred million dollars of real estate that we are currently own and operate. And most we have lower than 50% LTV, loan to value. So we have low debt rates, but that’s because of our value-add strategy. I tried to get high cash flows and we can use that cash flow to turn around and buy it. Now, as we grew, I would add on people to do the management part and we figured out and we learned. Well, now I have a management team that is in place. We have 11 facilities across 4 states, right? The first asset we had to do everything on. Now, we have a management team to do things, which takes away the ability to do low-impact activities.

So in your organization or when you’re dealing with houses or you’re dealing with businesses, there’s different kind of activities. There’s low-impact activities and there’s also high-impact activities. The point that you want to do as you scale and as you grow, every time you grow a little more, you need to get rid of more of the low-impact activities. That way you’re able to do more higher-impact activities, which allows you to grow. Now, this is hard at first because what that meant is we were buying assets that made a lot of money, but we weren’t taking in any money because all that money had to go to buy new assets and also had to go to paying people to do low-impact activities.

Jack: Right. So did you ever come across situations where you actually ended up being in the negative net cash flow at the end of the day?

AJ Osborne: Yes.

Jack: So how did you bridge those bridges?

AJ Osborne: That was known. So let me be very clear. We didn’t buy anything that negatively cash flowed. So…

Jack: No, no, not the asset but once you had all the people that you need to pay and all the extra things to it, did you come across situations where there wasn’t much left over for you at the beginning?

AJ Osborne: There was nothing. I worked a full-time job. So I was working my consulting job and my partner, who’s my father, he was too. So we were both working full time and all the money, we took none, not only did we not take in money, we had to put money into the business to get it to scale. And that’s because we knew where we were trying to go and we knew we were putting money into it.

Jack: So the importance of vision again. So I love that. So it’s very good. It’s very similar story to ours but right now we’ve been expanding our apartment complex investing side of things. And the first asset we bought was an asset that we had to kick out, like, 70% of the tenants over the first year, replace them. So we still paid our investors, but there is nothing left for us. Actually, we had to supplement the investment over the course of the last year with our own money in order to make everyone whole.

And now, as of last week, we’re at 93% occupancy. Now the game is changing. Now the asset is appreciating because of cap rate and things like that. And now moving forward, another year from now we might be able to refinance, get some of the money out or go sell the asset, etc., etc. So it’s exact same thing and then roll it over into bigger and better asset. We’ve done that with multiple other assets. So yes, if you are listening to this, pay close attention to that, this is really a brilliant strategy and particularly it’s a brilliant strategy to do because if I hear this right, you guys have done that without a whole bunch of outside investors.

AJ Osborne: No, we only have one deal we brought in outside investors on and that was a large deal.

Jack: Got it. And that is actually brilliant because right now in today’s market, in the multifamily world, and whichever world, everyone talks about syndications. And I like the fact syndications. We take on private investors, but we don’t make a secret out of it that our ultimate goal is to do deals without investors, right, because…and I had an interview or I had an interview with a guy that owns 20,000 units. They said at the beginning they took on outside investors, but as their ability to do deals themselves grew, they started doing only investments themselves and then doing that only with the investors.

So the thing is, the message here is that, when you do syndicated deals, it is great, but you’re giving up half of the profits or so to somebody else. And if you do it yourself the way you’re doing it, you’re having the same amount of work, perhaps even more effort, but you can end up, you can roll yourself up from a smaller to a bigger deal. I love it.

AJ Osborne: Yeah. It’s interesting when you talk…A lot of people, the thing is they see where they’re at and they see the dream and they don’t see the in-between. And the problem a lot of people don’t understand is like nobody does, right? And you need to understand basic principles and you need to get an outlay of the territory that you’re going to be walking through. But then you got to find your own path.

We knew the fundamentals of what we were trying to do would get us there. Then we had to figure out though how to make it work. And that’s when you’re down in the trenches, right, trying to figure out how to make it work. We were taking money from our consulting businesses, things like that, and just putting it into real estate as fast we could. And once again, we were making money and that was a huge sacrifice for us. We could have syndicated, make money, right? But instead, we said, no, we’re going to go years not making money, pouring it all back in and then we’ll have this large portfolio of real estate where we can own all ourselves or anything like that, right.

Jack: In the process, did you ever…sorry to interrupt you. In the process, did you ever doubt yourself, whatever was the right path?

AJ Osborne: All the time. You know, like, okay, this is gonna work, right? We think this is gonna work.

Jack: We just put $250,000 of hard-earned savings and things into that, it better work, right?

AJ Osborne: It is. And it is nerve-wracking and it’s scary. But when I look at it, whenever emotion started getting in the way, I always turned back to my fundamentals and say, Have the fundamentals that create the outcomes changed?” And I’m not delusional optimistic, right? Like if something’s not gonna work, it’s not gonna work. I don’t care how much willpower I have. And so I look at it and say, though, “If the fundamentals haven’t changed, it means my emotion’s getting in the way and I need to ignore that,” because so many times, emotion gets in the way. And it happened to me all the time and I was like, “I don’t know if it’s going to [inaudible 00:23:25].

So I didn’t do it even though the fundamentals were sound. I knew that it would execute in a certain way, but because I was nervous and scared, I didn’t do it. And that’s the key separating…to advance forward is understanding the premise of your philosophy of I have an investment strategy, a business strategy, understanding well and getting good advice and sound background that that strategy, those fundamentals are right. And then ignoring that voice in the head that is saying, “No, you’re going to lose it all,” or, “You’re going to fail. It’s going to be embarrassing. Everybody’s going to hate you.” Right? And getting rid of that and moving forward.

But also, when you get people and you look at something and you see it the opposite where the fundamentals don’t make sense at all. It’s never gonna work, but they’re so overly optimistic and they just want to believe that it will. So then they just press forward and do it and they fail. If you have the simple stuff right, it’s really worth the squeeze and you need to move forward and ignore that emotion and that voice in your head.

Jack: Absolutely. I love what you said that you gotta look at your lane and you gotta identify your lane. You got to know what is it that I wanna accomplish, do your proper research, and then focus on the numbers. Like when we started buying…back in 2009, we started buying single-family houses after having done about 25,000 or 30,000 land deals or whatever, 2,500, not…2,500 or so, 2,800 land deals, we started adding improved property to it and everyone, all the media, everyone was screaming, “This is the worst thing, run away from houses, real estate is bad.” But as you said, it’s math. If you look at it, if the math makes sense, if you’re getting $900 a unit in rent and you’re paying $40,000 for the unit, it makes sense, right? The numbers just make sense and the numbers don’t lie. And it’s the same for you now. Why out of all…Go ahead.

AJ Osborne: It’s interesting to me because the mob is very confusing and the mob can destroy you, the internet and the voices in the heads and everything like that. And you know, when we were first married, I was trying to find a real estate deals. I wanted to be in real estate and everybody was buying houses and fourplexes and duplexes and somehow they were all making money at it. And I wasn’t smart enough to figure it out. What I learned is needed or were they, the numbers didn’t make sense, but they were doing the deals because they were gonna make it on equity. Well, that’s not making…if the numbers don’t work, you’re just hoping and praying, right?

And for me, when I was looking at this, I couldn’t figure it out, then the mob changed again. And in 2009 and 2010, I said, “Hey, I’m going to start buying real estate and I’m gonna start buying houses.” And everybody’s like, “Are you crazy? This is the worst real estate market ever. It’s going to tank again, like, you’re just asking to get hit.” And I’m like, “But the rent, not only does it not justify the purchase, it’s a fabulous cash flow. It’s spread, it’s great, everything like that.” And despite experts in the industry, in apartments, things like that, that told us not to get in.

I’m like, listen, you can’t…you don’t…the deals make sense. I’m just gonna do them. Because if they make sense today, they’ll make sense tomorrow.” And that simple looking at the map, looking at the numbers, and using larger macroeconomic themes, like, I don’t need to make money today, tomorrow…Like, I know 10 years it’ll be a good deal and I’m not pressured and you’re not going to get yourself into trouble. It just works out and it always will, but it’s easier said than done because the mob is very convincing.

Jack: Right. It is but…yes. So it seems like you, and we have that too, are very numbers-driven people that if the numbers make sense, I don’t care what the mob says. The numbers make sense. Having said that, what brought you…I bet since you started buying houses though, and I bet you looked at all kinds of asset classes, what made you select self-storage?

AJ Osborne: So there were lots of asset classes that were really good for lots of people. My background though was in insurance business. I also did mergers and acquisitions where I got the chance to analyze businesses, look at revenue flows, dealing with risk on insurance. So I had this background in this world where I look…

Jack: Very beneficial background.

AJ Osborne: Yeah, it was a really good industry to be in and I liked it even though I didn’t like the way I made the money just because it wasn’t reliable and couldn’t compound.

Jack: It prepared you for your next part of your life.

AJ Osborne: It did, absolutely did. And so when looking at storage, the reason I liked it was because I knew that, I don’t want to say manipulate, but I knew that I could actively change the revenue structures within those assets if I implemented good business strategies if I change the looks, the management, institute policies, procedures, dynamic pricing for products, services into that business.

And I was essentially buying what people viewed as a real estate asset. And I was turning it into what it should be is a functioning business and we could get the revenues to just soar and skyrocket. And that asset fit me, my skills, and my personality type. And too, it was the right time for the right deal. Each one was the right deal. I turned out tons of deals in same asset class at that. But we found the right deals, the right deals for us, and that changes.

The first deals that we did…the best deals…Like, one of the rock stars we have, we bought a bankrupt Super Kmart and turned into an all indoor self-storage. We sold the land off to apartment developers. That deal, which was just a wonderful deal, four years earlier, I would not have been able to do. And so, you know, people look at what I’m doing now, right?

Jack: What are you saying, what do you mean by that?

AJ Osborne: So when we found the deal, first of all, we understood the dynamics, how to underwrite. When you’re looking at an asset, you have to underwrite it, right? And the ability to do the deal is the ability to understand the confidence of that revenue flow and being able to either keep that revenue flow at where it is or raise it. Well, that gets even trickier when you’re looking at something that doesn’t exist.

So when you’re looking at bankrupt Kmart saying, “Okay, we can buy this for how much, sell the land for how much?” But then we have to build. Well, how long is it going to take to fill it up? What are the price points to build? There’s a lot more inputs that have to go into this to make a good, sound decision. I didn’t have the answers to all these inputs until I’d already done it for a while.

And so once again, people look at people farther down the line. You’re looking at what may be, you know, me, what may be your Z, right? Not realizing that when we were doing A, they were teeny little facilities and, you know, out in the middle of nowhere markets and we were learning and trying to do them. So it took me years to understand how the asset class worked, how the consumers worked, things like that to be able to be confident enough and to pull off a project like that.

Jack: Right. When we do our seminars, we talk…in a part of a seminar, we talk about a concept we learned from Dan Sullivan called the 4Cs. And the 4Cs talk about the confidence, courage, capability, and the fourth C, like, right now I forget which one it was. But these other three main Cs right now. So, in essence, what you’re saying is…and the same happened to us. I would say like if 15 years ago somebody would have brought me a $7.5 million apartment complex, I would have been screaming, running the other way, right, because I neither had the confidence nor did I had the courage, nor did I had the capability, nor did I have the fourth C, which comes to me in a moment. But basically, without the capability…the capability comes from experience and as you do smaller deals in the back woods, you gain capability, with it comes more courage comes more confidence, and you start rising and your ability to do more complex deals and…

AJ Osborne: You just hit it right on the…This is one of the fundamental parts of scale that people don’t understand. Scale isn’t that something that you get down and you write out any of that. You can mathematically see everything else like that, but scale is a process. So as you learn, as you gain confidence, you’re putting more arrows right in your quiver and so you’re able to hunt bigger game. You understand what they do, how they function. Then too, also, you’re getting the financial base and the support that is needed to pull off those big deals. And you’re right if somebody is like, “Oh, well, I can’t do that,” you’re right, you can’t because you haven’t started small, you got to start small.

You gotta start putting those things in your corner. And as you build up and collect more resources, people that you know, skills, advantages, then you have more to attack the bigger deal. Then you do the next one, which then in return gives you more confidence, skill, financial backing, help you add on more employees, you partner with the right people, which then allows you to do the next deal. And scale, it’s like a ladder, you got to take every step one at a time and then build out a structure to run it all.

Jack: And by the way, this even works generationally because if you look at people like…and I’m not talking about politics right now, I’m just talking about real estate activities. If you look at people like Donald Trump, right? Not getting into politics, stay out of it, but his dad was already building large apartment complexes somewhere on the other side of Manhattan and some were in the suburbs. And because Donald Trump was able to see that and grow up in that environment, he was able to build the skyscrapers over in Manhattan, right? Because he already was brought up in that level.

Now, I didn’t grow up like that. You might’ve not grown up like that. My dad is a high school teacher, so I had to start from zero and learn these things and then start building this up. So the message is you can’t totally reach those levels. You just gotta take the ladder, as you called it, and take every single ring on the ladder in order to make it there. And it’s a process. I love that, saying that scale…

AJ Osborne: Well, you bring up a good point because the number one advantage that people like Donald Trump or whoever, right, we’re talking about, doesn’t matter…the number one thing that they get that’s passed on to them, it’s not money. It’s information.

Jack: Information and the confidence and knowledge that they can do it.

AJ Osborne: Exactly. And they get the tools and stuff to do it. So if you actually look at wealth in the United States, less than 15% of all wealthy people and millionaires receive it through inheritance. That’s just not actually a major way in the United States that we receive wealth and things like that. But what is passed on is knowledge. So wealthy parents are much, much more likely to have wealthy children because they are taught early on how to play the game and they’re taught the rules of the game and how to exit.

So one of the things that I like to say, this is important for us to know because what it means is that you need to reach out to others that know the tools of the trade. You need to learn it and you need to find mentors. You need to find people that can teach you how to play the game. And one of the things that you got to be careful is there’s so much misinformation out there in an internet age.

And I think that is probably the biggest struggle that people have today from how to get from point A to point Z. They’re always going off on weird avenues and they’re always doing weird things and hearing weird advice and taking it because they read something on CNBC or somewhere blog that has nothing to do with them or nothing to do what they’re doing. It’s about focus surrounding yourself with the knowledge and the people that can and then doing.

Jack: Right. So let me jump into that. I love this discussion, right, because this is like my pet peeve. I can talk about it all day long. But I want to jump back into this self-storage for just a moment. It’s like you mentioned that you generated…it almost sounded like you generated multiple streams of revenue inside of one of these self-storage units. Because everyone thinks self-storage, everyone knows them, you drive by them. It’s a bunch of garages, people pay monthly. What other things other than they might be air-conditioned or not air-conditioned that’s two different distinguishing…but what else are you guys doing on your facilities to increase the revenue streams in there for the income?

AJ Osborne: So we do a lot of things and this is the thing that comes back into self-storage is you have to understand it’s a business. There’s products that you’re selling. First of all, every single unit has its own supply and demand, different size, different customers. You do have different sizes, you have to pull up drive-ins, everything like that. You may have 15 different products, right, just in that aspect. You may have climate control, you may have wine storage, right? You may have special RV dumps, all these different things that set you apart from the competition.

And so you have all these products. But then internally, we also sell everything from moving equipment to we ensure people. Those are products that we use, boxes to locks to a lot of different things, which can make up a large portion of revenue. And we have to train our employees. We have policies, procedures, how they execute not only lease agreements but to the sales process. And we almost mandate insurance to everyone and that can be a very large a stream of income for us. But it also then protects them and protects us. So it’s really a win-win-win, we love that avenue.

And when I walk into a self-storage facility, I can analyze all the revenue streams and then I can look at how they do their revenue. So how they actually set up the revenue. Lots of people say, “Oh, 10x10s are $50,” right? Well, first of all, that doesn’t make any sense at all because a 10×10 to one person, to another may be totally different prices. If you look at airlines, hotels, if you walked into a hotel tomorrow morning and asked for the price of a room and then I walked in tomorrow night, the same hotel, and asked for a price of a room, we’re going to get two different prices, right? That’s how self-storage is supposed to be run and should be run. Demand changes.

Jack: You do dynamic pricing, then.

AJ Osborne: Dynamic pricing. It’s very important for us.

Jack: All right, so how do you pull that off? Do you have software for that?

AJ Osborne: So, we implement multiple different kinds of software. It is different…it is an art and a science. And self-storage is very behind the technology sphere and world. So a lot of the tools, they only get you halfway. So we look at it and we do monitor it based upon occupancy, time of the year, different size units. But then we also go in and we do market analysis, analyze, and we change rates based upon those things. We also do individualized pricing. So if one person comes in, they’re going to get a rent increase every single nine months, right? So you may have somebody that just moved in compared to another one, it’s very, very different price because each one is on their own pricing schedule even though the size may be the same.

So, if I walk into a facility that has static pricing and really doesn’t sell anything at all, I know that there’s probably 15% in revenue boost within 6 months for me. And it wasn’t like that at first, right? We couldn’t do that. Now, I can know like three or four points of information about a storage facility and we can almost come to a price that we buy it for. And if we buy it, we know we’re going to make 20% cash-on-cash return or higher. Every facility that we’ve ever bought is a 100%-plus return. And we may not have taken out equity. We have some that have, you know, $8 million-plus in equity, but we just don’t touch it. We just let it sit there.

We do everything from, you know, we had one where we put $800,000 into it, but then we sold the cell tower lease for $600,000 to it. And so in 2 years, we had 100% returns. Our returns are infinite from that point on. So, there’s multiple ways of making self-storage facilities work and if you understand the foundational principles and how to implement the strategies and then the policies and procedures and train the manager and the team and then have an active advertising strategy.

So we also…in our marketing, we will segment the market into basically three different categories. You have people that are concerned about price, people that are concerned about location, then you have people that are concerned about quality. The first one, I don’t want. I want location and quality. Those are the highest renters. Normally, those are families. They do not live in apartments. They actually live in homes and they can pay on average per square foot a month, you know, 30 cents higher, which is astronomically higher if you consider that an average rent may be 70 cents, but compared to somebody else that’s $1.20 per square foot a month. Once again, the revenues can just skyrocket.

Jack: Absolutely, yeah. I can see that.

AJ Osborne: Yeah, we purchased a facility, to give you an example of how this works, and we kicked out, oh, it must’ve been 40% of all the tenants in the building the first day we bought it. We just jacked prices up on average 70%, at times it was 160% increase. We flushed everybody out within four months. We had it fuller than it was when we bought it and the revenue was 40% higher.

Jack: Wow, that’s amazing. That is really good thing. Like I never thought about dynamic pricing for self-storage units, but it makes total sense that you price it based on seasonality, based on occupancy, based on location, based on different factors. So makes complete sense. And then you put everyone on a different price increase schedule itself, just blanket increases. It is software-based ideally if you have the software to do that. But I love this discussion.

I mean. if you’re listening to this, this is what you want to think about in real estate. It’s like there are so many ways you can optimize an asset, and you really have shown some mastery in that. I love that. So we need to wrap up very soon here. So I want to do a quick game here and…not game, I want to ask you a quick five questions before we wrap up. And that is number one, what’s the best book that you’ve ever read that helped you through your career?

AJ Osborne: I’m going to say “Ego is the Enemy” by Ryan Holiday. And that talks a lot about the motivation, why we do what we do, why we’re driven to do. I think some of the biggest mistakes I’ve ever made in my life were because they were ego-driven.

Jack: I just have…

AJ Osborne: [crosstalk 00:42:13]

Jack: …a Ryan Holiday book right here in front of me. I haven’t read that one yet, but I have “The Obstacle Is the Way” by Ryan Holiday.

AJ Osborne: That’s a really good one. Helped me a lot in the hospital. I actually wrote Ryan Holiday a letter after dealing with that in the hospital and he was very kind and responded back and “The Obstacle” is always one of my all-time favorite books.

Jack: I will go check that out because I haven’t read that yet, I mean “The Ego Is the Enemy” Great. So what did you take from that book?

AJ Osborne: What I took really from the book is ego is destructive power. And that when you look at your life and the decisions that you make, if you can take ego out of the equation, you’re almost always going to get not only a better result for you but those around you and you do things for the right reasons. And it’s a way to not…you know, we self-sabotage so much of our life and that really is like the first step to stop self-sabotaging even when you don’t know that you’re doing it and you really are. So it is eyeopening if you can read the book and then internally look at yourself and, not judgmentally or anything else, really have an honest conversation with yourself and make measurable steps to change, it will completely change the outcomes because your actions begin to change for the better.

Jack: All right, wonderful. Next question is what is the one thing you wish you had done differently when you first started investing?

AJ Osborne: One? I think that the one thing that I would have done differently, I would have watched expenses more closely and understood high-impact versus low-impact cost and allocated that very, very differently. So I would have stopped wasting time doing low-impact items and I would’ve farmed that out to people that were better at it than I am, focused on high impact, and get away and just get rid of all fluff expenses that don’t have long-term impacts on my strategy.

Jack: Absolutely. I love that. Number three, what’s your biggest failure in real estate career and how did you get past it?

AJ Osborne: So I had my biggest failure, but it’s not in real estate. It’s in another one. Do you mind?

Jack: Sure.

AJ Osborne: So I kind of got swindled. So we purchased a company, it was mergers and acquisitions and we bought a brokerage firm. And we had basically been set up for the company to be destroyed after we purchased it. And it could have been avoided, not blaming it on anybody else. It was my fault. I signed the contract. And it had massive impacts to what it could have done personally to the business and individually. It could have been devastating. Now, I do want to say that that failure, and I look at it as failure, but that is what was the main thing that led me to real estate investing.

Jack: Okay. Well, always, I’m a huge believer of like anything negative, if you allow it to, will ultimately lead you to something positive. Now, the key is if you allow it to. Most people don’t allow it to. A lot of people, they’re like, “No, it’s negative,” and they…They look at it and they harp on it and they get attached to the past forever. But if you’ allow it to teach you something, it’ll open up another direction, it puts you sometimes into another direction that then becomes even better than before.

AJ Osborne: And that theme is pretty much the theme of “The Obstacle Is the Way.” If you’re having problems in your life, you need to read it. It really moves you from a victim mentality and empowers you and uses those failures to drive you forward sometimes.

Jack: Awesome. That’s great. So although I don’t think I have a victim mentality, nobody’s perfect and I’m looking forward to reading it and getting more self-aware about that even. So what’s your daily habits? Do you have any daily habits that you contribute to your success?

AJ Osborne: So my daily habits have obviously changed a lot since I been out of the hospital, but I do have daily habit where I surround myself with really good people. And every day I get with them and we do goal setting. I do weekly, monthly, yearly goals. I set goals every single day and I plan out my day. And in that planning is always working with others that are not only just better than me, but that are trying to help me and our organizations get to our goals. So I think that planning is absolutely vital. It’s the first step. And I believe anyone that has a vision or has dreams, if you’re not planning, you’re just not doing anything. But not only that, you need to set up systems that keep you on that path and hold you accountable. And so planning and then meeting with the people that hold me accountable.

Jack: All right. Wonderful. Last question then is what’s one single piece of advice that you can give to your listeners who are just starting on their real estate investing journey?

AJ Osborne: You can never get enough information. And if you think that you know a lot and you aren’t doing, you don’t know anything. So that was something I could’ve learned really early on. I think young males, especially, are affected it, they think they know a lot, even though they don’t do a lot. And so if you’re not doing, you just don’t know.

Jack: All right. Thank you very much. And that wraps it up. So thank you very much, AJ, for being on the call with us. I love the conversation. I could continue for couple hours here, but we can’t do that so we might have you back to continue the conversation a little bit more. Thanks a lot, everyone. If you enjoyed this episode, as always, if you’re watching it on YouTube, give us the thumbs up, share it with your friends. If you’re watching it, listening to it on iTunes, give us a five-star review. And with that, that’s a wrap. Thank you very much. I’ll see you next week.

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