We all learn useful lessons in life from a number of teachers. And over the past 40 years – as long as I’ve been in business – I’ve been obtaining real estate loans. While the procedure has remained pretty much the same for all that time, there have been four fundamental concepts that seem to be shared by all bankers – and with good reason. All four of these will have a huge impact on your success in buying self-storage facilities.
Episode 7: Four Things My Banker Taught Me Transcript
You can learn something from almost anyone, but a group of folks that I've learned a whole lot from over the years are bankers. You can't really do real estate, you can't really buy a self-storage facility without a loan. No one really buys cash for real estate, they never have. So when you want to learn how to buy a self-storage facility, if you want to learn all the right things, the right attitudes to do it, then often you can learn a whole lot from just talking to the lending community. This is Frank Rolfe with the Self Storage University podcast. We're going to talk about the four things I learned from my banker, things I learned over the years from bankers. Not just one particular banker, but really every banker always shared these four items.
Number one, give yourself plenty of time. Bankers are never in a rush. You've probably noticed that. You tell them what you want, you hope they get back to you tomorrow or two days from now, but they never do. They'll get back to you in about a week, maybe longer. Then they'll say they're going to do up a loan commitment but it never comes the next day. And even drafting the documents for the loan, now, if something else comes up better on a Friday, they're going to roll it to Monday. What I learned from bankers are, don't put yourself into a hole. Don't pin yourself down on time. Give yourself plenty of elbow room because that's what banks do. And since we all require bank lending to buy, then we need to use that same attitude in our contracts.
So when you're forming that contract to buy that self-storage facility, make sure you give yourself plenty of time for due diligence and financing. Add, if you need to get an extension and you think the bank tells you, "Well, I need another month to get the loan done." Well, then you probably need to go ahead and ask for two months. Because again, you don't want to bracket yourself down too tightly. So the first thing I learned from a banker is basically just to give yourself a whole lot of time, never to over promised and under deliver. Always to realize if you think it'll take you three weeks, you better ask for four, maybe more.
The next thing I learned from a banker is safety. Now, what do I mean by safety? Well, when you're a bank, the old saying is, "Before you can have return on principle, you have to have return of principal." So think what that means. In other words, if the bank says, "I'm going to make 5% on my loan for $300,000." They don't make any percent on that until they get the $300,000 back. Remember that your bank doesn't share in any of the upside in your deal whatsoever. If you buy that storage facility for a million dollars and sell it later for $3 million, guess how much of that $2 million gain the bank gets? They get absolutely none. So why would they take any undue risk? The answer is they won't, and neither should you. When you're looking at buying something, you need to make sure that you are going to be able to sell that at some point in the future for at least what you paid, hopefully more. You need to make sure you can always get a loan on it because you never know when you'll need to get a loan on it, when your bank might not want to extend the loan. So once again, you've got to have safety in your principal. You have to make sure you can get your money back.
Now, I know you might say, "Well, gee, I looked at this really risky storage facility in the middle of nowhere, but gosh, the returns, they might be really, really good." Well, here's the deal. If you think the return might be 20% and then you lose everything, well, you lost 80% of your principal. So got to always stay attuned to safety. That also means you need to have a plan B and a plan C. Banks love to see that kind of stuff. So if you say, "Well, I'm buying this storage facility and here's what I'm going to do with it, and won't it be great?" Well, that's all fine and dandy, but you better have a plan B if it doesn't work out that way, and you better have a plan C if plan B doesn't work. Once again, it's all about preserving your capital. You worked hard for the money, you paid tax on the money, you do not risk that money at all. If you want to risk some of the profits down the road, you buy a self-storage facility, and you fix it up, and you sell at a big profit, then you want to go ahead and risk just the profit portion till the end of the earth, well, that's okay. If you lose that, you still preserved your principal. But your principal needs to be sacred to you. You never want to put it in harm's way.
Next lesson I learned from my banker, quality. Banks love quality properties. Now, what does quality mean in a self-storage facility? Well, number one, location. You want to have a good quality location. But you also want a good quality property. You want it to be well-built, well-maintained, in good condition. These are all the things that banks like to see. Why? Because banks know that a quality property will always be able to find a buyer, right? So it goes right back to safety. And they also know that a quality property can always get a loan, because banks love quality. In tough times, like right now during COVID-19, banks do what's called flight to quality. That means they stop making loans on lesser properties. If you have a rural location or a strange location, or just a strange property, the way it was constructed or in poor condition or poorly maintained, they won't be making those loans when things are tough, when times are unstable. They look at that as being very risky, because again, banks don't like risk and neither should you.
So look for properties that are very, very high quality, both in location and physical structure itself. Now that doesn't mean that you can't make a property that doesn't appear day one to be high quality high quality. Sometimes you can find a property that's been poorly maintained, and you can bring it back to life. You bought it, maybe at a price that reflected not good quality, then you made it quality. But remember, the whole time you're at risk. Until you get it nice, if you needed to sell it to refinance it, you might be caught. Again, focus on quality property. We like to call it investment-grade property. I think that's another good way to think about it, is things that are worthy of investment. A lot of property, you drive by and you see it's not really investment grade and you know it's not investment grade. Stay away from that stuff, sketchy stuff, strange location, stuff that you're like, "Gosh, how do they even find any customers?" Well, the truth is they probably can't. And if they do, they're very lucky and maybe during COVID-19, they lost a few that they had. So just stay focused on quality.
The final thing I learned from my banker, never hesitate in canceling the deal. Bank seem cruel sometimes. You'll have a loan set up, you're buying that self-storage facility. Everything appears to be going great, and two days before closing they pull the plug and say, "Nah, we've changed our minds. We don't want to do it." Now, why would the bank do that? Just to be mean to you? No, they're doing it for self-preservation. Remember what we've already talked about here, banks don't share in your upside at all. If that bank determines there's a risk, they can't get their money back. Can't get their money back, then they're not going to be able to get any return on their money because they never got return of their money. So you need to be like that too. You should always wear a white lab coat around mentally, say to yourself, "I'm going to buy this property if everything checks out up to the minute of closing. But if I don't like the way it's looking, even if it's a day before closing, I'm not going to do it."
Both my partner, Dave and I, in our past have bought properties in the early days where our gut instinct said, "Don't do it." But we didn't know what we were doing back then so we might've gone ahead and gone forward and bought it. I had one property like that, so did Dave. Now, what happened? Well, my gut instinct said, "Don't do it." But I had the seller calling me, "When are we going to close?" and the banker calling me, "When are we going to close?" and the title company calling saying, "When are we going to close?" I didn't know what to say or what to do, so I just went with the flow. I told myself, "Well, even though I'm not really excited about it, it'll probably all work out in the end." But it didn't. The property didn't do well at all. Now, fortunately, I was able to sell it and get my money back. But I had to struggle with the property for quite a bit of time before I could pull that off.
That's a bad deal. Just getting your money back, if you have a whole lot of time and suffering to get it back, that isn't really a worthwhile investment. Dave had the same experience. So the key is never get emotionally involved in a property. Never tell your friends and neighbors, "Hey, I'm buying this self-storage facility," until you've actually pulled the trigger and done it. Because every time you tell someone, "Yeah, I'm buying this," it's going to make you want to buy it more. Not for good reasons, not for making money, not because it's a good investment, but because you don't want to look like a fool. You don't want to be embarrassed to tell people when they say, "Hey, didn't you buy that?" And you say, Nah, I really didn't." Think it makes you look like a flake. And also don't worry about how you look to others. That broker, who you're afraid of offending, you'll never hear or see that guy again after closing. He doesn't care what happens to you. It doesn't matter whether you do well with the property or not. What about the seller? Well, you'll never see him again. As soon as it closes, if you bought a bad deal, he'll be laughing going, "Man, that guy was a chump. I sold him my storage facility, and it really wasn't worth anything near what he paid."
So always make sure to never be afraid, to never hesitate to pull the ripcord, to hit the brakes, to push the eject button. If, in fact the property at the end of the movie does not feel like something you need to buy, trust your gut instinct on this just as the banks do. This is Frank Rolfe with the Self Storage University podcast. Just want to tell you the things I've learned from my banker. I think they're important issues, ones that we can all use in everyday life. Hope you learned something from this and talk to you again soon.