Special Interview with Aaron Smith.
Aaron: Thank you all for reading this blog. My name is Aaron Smith. I am the founder of Escaping the Odds podcast. We interview the formerly incarcerated who are now successful entrepreneur. I've got my main man here with me. Andrew Freeman, who is the CEO of KO storage facilities with over 18,000 storage units across the country. He's also a partner in a successful e-commerce business yet he was Incarcerated in federal prison and was released in 2015. The goal of this blog is to Inspire, motivate and provide business tips so we can take our lives to the next level.
Andrew: Good. Thank you. I appreciate you having me today.
Aaron: Just jumping right into it. We'll get straight to the chase. You were federally indicted back in 2012 out of Phoenix.
Andrew: I'm happy to jump in wherever, but as you said, I was federally indicted in 2012 out of Phoenix, um, born and raised here in Minneapolis, Minnesota, but I had an opportunity because of one of my best friends, out in Phoenix. So it was going back and forth. And, June of 2012, I was federally indicted on the controlled substance analog act, which, as I mentioned to you earlier was a law that came about 1986. I believe to curb anabolic steroids, basically the chemists or scientists continuously were making the steroids for the bodybuilders and they realized they just could not keep up with the changing, um, compounds and elements of these formulas. So they made this controlled substance analog act that basically said anything that's an analog of this, um, is now part of this blanket law. So we don't have to specifically call out X, Y or Z we'll come after you for anything that fits within there and within the analog., It has kind of three prongs, which is, was it, substantially or pharmacologically similar to the controlled substance? Was it marketed for human consumption? Um, and those are them. So, um, you know, the K2 and the bath salts that were kind of popular back in 2000 10, 11, 12, and maybe even somewhat a little today, was something that I got into and we had a decent size operation out of Phoenix selling to all the head shops and the convenience stores.
Aaron: So you actually had a legitimate, business selling some of these products. How much revenue were you bringing in annually?
Andrew: We were, you know, at the peak probably doing about $2 million a month in sales and, um, the word legitimate. Yes. We thought it was, um, you know, we were paying sales tax. We had a website that we were marketing on. Uh, we had a call center, we had an office with 10 to 20 employees. and you know, as I mentioned earlier, the U S postal inspector would come in frequently to look at our shipping or logistics area to, see if we were doing it as optimal as possible. If they could help shave off any money on our shipments because we become one of their larger customers. So I think, you know, you can say we weren't trying to do anything. We weren't hiding under the radar, it was never my defense when I was indicted that, Hey, "I dont know what you're talking about", "He wasn't there, it wasn't him"." He wasn't doing it". It was, yeah. Everything you're saying he did, he did do, however, it was not illegal. So we were fighting, you know, the constitutionality and then kind of fighting more on a science basis that it was not pharmacologically or substantially similar to the controlled substance in question.
Aaron: So when you came home, it was probably easy for you to make that transition into entrepreneurship again, because it's been a part of your life previously. I remember you mentioning starting this kind of business when you were out of high school, at least started looking at the opportunity to do so. How did you get into the business that you are currently running?
Andrew: Yeah, no, absolutely. I mean, just kind of backtracking a little, from a young age I knew I just kind of wanted to be a hustler and entrepreneur business owner. I could never pay attention in school. School was never for me. Um, you know, I slept my way through high school and was able to do just fine. I attended college very briefly just to kind of appease my parents and, um, some of my family members before me, cause that's just kind of like what you did is went to college, never graduated. But after prison or my, my time there being here in Minnesota, as I mentioned earlier we've got this very unique landscape that we've got two of the largest retailers in the country here, uh, target and best buy. So you can't go too far in Minneapolis without running into buyers or people who work on logistics or import team or private labeling.
Andrew: So it just kind of always something that growing up here was in the back of my mind and my I'm 30 years old. And, I saw a shift from kind of brick and mortar stores and the way people traditionally were shopping to people buying more stuff online and pre prison, it was daily deal sites. So there's Groupon one sale a day, no more ag chocks, he living social. And I was sourcing all of these products before prison and some of them on daily deal sites and honestly had a pretty good sized business. Then when I came home from prison and was thinking like, all right, I'm gonna jump back into that. I had places and people who trusted me and vendors who I could source product from. I thought I'd just get it back on the daily deal sites.
Andrew: In the short time I was away the industry just got bastardized and commoditized in overrun with, you know, cheap imports and knockoffs. And it was not a good platform anymore to sell high-end consumer electronics, but I was able to source, um, it was at that time that, you know, Amazon had been around for quite some time. And the difference was now is, Amazon was kind of shifting model to try and to get sellers third party sellers, to sell more on their platform, as opposed to Amazon buying the inventory and selling direct. , if they can get people like yourself, myself, and other, what they call third party sellers on their marketplace, they still make the same amount of money without all the exposure of having to buy the inventory, hold the inventory, etc.
Andrew: So they were making a big shift. I had all these vendor contacts and I didn't know what I was doing, but I basically sold as if I did. And I told these manufacturers and vendors that I, I knew that, Hey, don't sell directly to Amazon anymore, sell on their marketplace, be a third party seller. But since you don't know how to do it, and you are a manufacturer focus on manufacturing, focus on what you do. Well, let me be your third party reseller. So we started doing that. We, linked up with, the largest, action camera brand in the country. They were one of our first customers multi-billion dollar company and they gave us a chance and they were the ones who, you know, really solidified that our kind of value prop. So from there, we went to 5, 10, 15 other brands and it just grew organically from there into a pretty sizeable business. I don't think I got into it with you earlier, but I was telling you is, um, you know, when you come home from prison, you're still technically in custody, you can't work for yourself or a friend or family member. So I remember right when I got home, I was working in a restaurant and in between waiting tables, I was back in the cooler on my smartphone that I wasn't supposed to have, you know, approving and, uh, you know, selling stuff. And, you know, we'd walk back out to, serving some tables and I pick that right back up, um, right when I got home in 2015, and again, it was just kind of right place, right time, right Connections, et cetera, that took off, which allowed us to start our real estate business, which was self storage facilities. And for the last four or five years, , it had been really a, um, kind of business that most people were not aware of, or it was a kind of a secret asset class within real estate.
Aaron: I know we spoke before about this particular asset class. Why in your opinion, this asset class is the most profitable?
Andrew: Yeah. you know, I'm, I'm very bullish on real estate, just all together. I think it's a great, you know, way or avenue for people to build wealth and to build long term, you know, you can call it mailbox money. I hate to use the term because truly there's never mailbox money. You have to work or get your way there. But you know, one of the reasons I like it is because it's not sexy. A lot of people are chasing what's sexy. This is as unsexy as it gets. You're not going to see too many people on Instagram or Facebook or whatever, social media platform, you know, posing in front of a storage unit on their, on their Instagram. So, you know, that's kind of one of the reasons I liked it is it was unsexy. People were chasing to it, but you know, think about self storage as a whole.
Andrew: You've got a pad of concrete and you've got roll up doors and you've got, um, you know, a structure, but you don't have electricity. You don't have plumbing. People don't live in there or they're not supposed to albeit, you know, we've seen it. So, you know, if you own residential, think about the headaches that come when you have a hundred residential units, plumbing's breaking, people are getting into domestic dispute and the cops get called in as the landlord. Now, no, you have to deal with it. Or they don't pay rent. Or, you know, they leave behind. They throw parties. Um, again, all those things that go with the different asset classes we don't have at the end of the day, it's a box where people store their belongings and their stuff. So electricity doesn't break down and plumbing you don't have it backed up.
Andrew: You don't have issues. The laws for, um, government regulation are not there. Like they are residential. Residential is looked at as a necessity. So here, at least in Minnesota, and I would guess probably in Illinois as well in the winter, you know, people don't pay their rent or their bills. You can't evict them because where are they going to go? Storage is a luxury. So if you don't pay your storage bill and 30 days, I now have a lien on your property in forty-five days in majority of the states, I can evict you. Why? Because it is a luxury. So, um, Minnesota for instance, is a very favorable state for renters. I have plenty of friends who are in residential, where you can live in their place for six months to a year, and you can't evict them. You have to go through this very formal process of getting, you know, a sheriff out there getting an order, bring them to court, and then still they can be a squatter.
Andrew: You have squatters laws. So I can throw a lock on someone's unit in 30 days and turn them over. So I don't want to make it sound like I'm this who doesn't have a heart. It's not by desire to do that. But that is one of the reasons why it is appealing from an investment standpoint. And then, you know, one step further is one of the, the real estate investment terms or a banking term is called DSCR DSD, which is debt service, coverage ratio. Um, if you talk to bankers who are familiar with lending to real estate, self storage, um, has one of the lowest default rates of any asset class, because typically and historically, it's got a very high DSE and at a high level, that's basically just your mortgage payment. Um, and it's your income above your mortgage payment, minus some expenses, etc.
Andrew: So if you take a duplex for instance, where you have two units and you're bringing in $2,000 a month and your mortgage is thousand, if one of those units is vacant or doesn't pay your rent, you're at break even, and the bank's going to look at it and say, all right, you know, Mr. Freeman, you know, what is your other source of income? Because if you don't have another source of income or you don't have other money, this is not looked at as a favorable loan to the bank., Or there's concern that if you miss one month rent from your tenant or they move out, that takes you three months, how are you going to pay your mortgage? Whereas in storage, I have a hundred units and I would have to lose 50 units before I might not be able to make my mortgage. So Banks Looking at it like, Hey, you know, there's not going to be this mass Exodus of storage customers who move out, you know, like that, we like this. We want to loan to you, because you can move 50 units before there's a risk of not hitting your mortgage. You know, my 50% of my storage facility is a lot different than 50% of a duplex.
Aaron: How easy is it for small player such as myself to get involved into this industry here?
Andrew: Know, I want to say it, it's not easier. It's hard, but I then want to kick myself because it just depends your, your grit, your hustle, right. Um, it's gotten harder and harder because everything I just laid out to you, a lot of people realized post COVID, you know, think about all the people who own residential, who couldn't collect rent through COVID or think about all the people who own retail spaces, where restaurants or retail stores had to close and didn't collect rent payments. Um, this asset class through COVID actually performed positively, you know, think about all the college campuses that abruptly closed in March or April of 2020. And they told all the kids, Hey, you have to get out of your dorms, your apartments, we're closing school. We have no idea when we're going to reopen, but just get out. What did the kids do?
Andrew: They went and stored their stuff. Um, and any property that we had that was, uh, within 30 or 50 miles of a college campus, just overnight hit a hundred percent occupancy. All the restaurants that were told you can stay open at 50% occupancy. A lot of these places don't have extra space to store the tables and the chairs. They wouldn't stored it on top of that. All these people who went to work home or to work remote and build, you know, a home office needed to store what might have already been in that, um, that bedroom that Dan, the kid's play room. So they turned it into a home office and they wouldn't start their belongings. Um, if you do some research on storage, uh, one of the appeals is that they say in good times or bad, so a good economy, bad economy, people need storage.
Andrew: The, the old adage is the driving factors of storage are death, the four DS death, divorce, downsizing, and dislocation, you know, mom or dad dying. And you don't want to get rid of their prize possessions, even though they're probably not worth much more than just sentimental value. When you do, you go put in storage, if you get fired and need to become nomadic, or you need to move for some life altering, um, you know, event, you probably downsize your stuff. And you personally, you put it in storage and you become nomadic and you move where you need to, but you put your stuff in storage. If you need to downsize your residence, for whatever reason, you probably put your stuff in storage, right? Um, in divorce, if you get divorced and it's just something you need to do quickly, you put your stuff in storage.
Andrew: And, you know, our units are anywhere between $50 and a few hundred dollars depending on the city, the market, et cetera. So it's, it's something cheap that people kind of forget about, you know, and then on top of it for $50 or a hundred dollars when the weekend comes and you have free time to go clean out mom and dad's stuff just like now pay in another month, 50 bucks, 75 bucks, I'm just gonna let it keep going. So, you know, our average length of customer is two and a half to three years. And honestly, I've seen so many units. I've only seen a few units where the value of the belongings people are storing are actually above and beyond. You know, what they've paid us. It's, you know, a lot of times it's your children's artwork and pictures and mom and dads, you know, stuff from kids. So the only real value is sentimental.
Aaron: So what advice would you give to someone who's coming home from incarceration? That's thinking about entrepreneurship or anyone, that may be thinking of entrepreneurship, what would be those nuggets that you would provide?
Andrew: Good question. I hope this is a good or right answer. It might be a roundabout way of answering it. I think the one thing that I did well or that I think helped me is, you know, when I went away to prison, you know, I was hanging out with, you know, people who were like me to just smoking weed all day, didn't really do much, or have the same ambition. Um, upon coming home, I surrounded myself with people who I thought wanted, who wanted to do well and, you know, just kind of win. So I'm not inventing this by any means, but just kind of that old adage of you're a common denominator of the people you surround yourself with. I think it's the best thing people can do if you come home and you go back to hanging out with the people who were just doing dumb by osmosis, you're going to probably get caught up in dumb. If you can find five people who are just on the up and up doing well doing right, just by being there. And by way of osmosis opportunity is going to present itself. So I don't have one thing, like do this, read that, surround yourself with people who are like-minded, who want to do right to do well. And again, good things will come by being around that group.
Aaron: Well, speaking of reading this or reading that I know while I was incarcerated, I read countless book , I don't even know the number anymore. Give me that one book that has really affected the way you move throughout life.