Self Storage University Podcast: Episode 21

Think Like A Banker

Many people see their banker as a roadblock and a pain. But I see bankers as role models for smart storage investing. So why would all smart self-storage investors be better off thinking like a banker? That’s the focus of this Self-Storage University podcast. We’re going to review what makes a banker happy and why that’s an important path to follow. We’ll also discuss some sample case studies of deals that a banker would and would not approve of and how their opinion would have been of benefit.

Episode 21: Think Like A Banker Transcript

If you ask the average American what do you think of a banker, they always think well, I don't know, bankers I hate them. All the time they throw up roadblocks, they put down the deal I'm working on. I just don't like them very much. This is Frank Rolfe with the Self Storage University Podcast. I'm here to tell you that you shouldn't be that way. You should actually respect the banker. In fact, you should think like a banker because bankers offer many important wisdoms that will help you in your self storage career, and help you in a big way.

Let's first start off with a typical attribute of a banker, which is they're always worrying about the worst case. Some people think they're sour, that they're dour because they always seem to be filled with negativity. But let me explain why they are that way. The bank makes absolutely no money on the upside of your property. The bank only makes money based on the amount that they loan out. They don't have any equity in what you're doing. So you're all excited because you're going to buy the property, and maybe it's a turnaround and you're going to bring it back to life, and you're going to increase occupancy and increase rents. But the banks don't share in that. To the bank, here's how it works. Before you can have return on principle, you have to have return of principle. So all they're concerned about is will I get my money back, number one.

Will I make a rate of return on my money number two. But all of your outlandish, phenomenal forecasts of all the great things you're going to do, they don't care. That's why they always seem negative because all you want to do is talk about the upside. Here's the positive. That's not their business; they don't make any money on that. If they were a private equity group that shares in the upside, well sure they'd be all excited. "Hey, I'm kind of worried but hey those are some really cool things we can do," but they don't. Just the very structure of the banking world sets up the scenario where the bank is only concerned about getting their money back and interest on that money, and nothing more. So when you view that as a negative way to look at things, well maybe you should. Maybe you should worry more about the worst case too. I have for decades said that the key to being successful is to look at the best case and the worst case, and the realistic case. The way too many buyers only look at the best case or the best case and the realistic case, and they don't think enough about the worst case. So we all need to think more like a banker. We all need to be always making sure we can handle the worst case scenario, because if you can handle the worst case scenario, the best case can kind of take care of itself.

Next, bankers are notorious for not seeming to be very emotionally involved in your deal, in your loan. They don't seem to care, right? They're kind of like a scientist in a white lab coat. They don't seem to have any emotions. Well, why is that? Because again, the bank approaches your deal from a very pessimistic perspective, and when you start getting emotional then bad things happen, and they know that from experience. Let's say, for example, they were to get all excited about a deal, told all their friends and neighbors, "Oh, you know I'm going to create that loan for that new multi-story, climate controlled self storage facility coming up there in coastal California. It's going to be so cool." And then what happens? Well they say as they do their due diligence on the loan itself, they get the appraisal, and the appraisal comes in far, far lower than what anyone estimated. A bank would never want to be emotionally involved and say, "Well, gosh, but it's going to be so cool. Let's just go ahead and ignore the appraisal." In fact, I've seen banks walk deals the day of closing. They may suddenly say, "Hey, did you see that new thing in the newspaper? The big employer is pulling out."  Someone on the board calls them up and says, "Wait a minute, are we still doing this self storage unit in blank? Well I'm losing confidence in that area. Let's not do the loan after all." They'll literally pull the rug out from under you.

People all the time say, "Gosh, it's cruel, it's mean." Well no, it's impartial, it's science. They're making a decision and they're going to make that decision up to the very moment of closing based on all the facts at hand, because once again they can't afford to make any failure. The best they're going to do on your loan is get the capital back and the interest on it. If they don't get the capital back, do you know how many other loans that wipes out the profitability on? A ton. So as a result they will always keep those lab coats on. What's the lesson learned? You should also. Never, ever get emotionally involved in your deal. Look at every deal completely from an impartial perspective, and if things change on that deal at the drop of a hat go back and renegotiate the price on it or simply walk away from it. We all have stories of deals we bought that we should have walked away from. And when you've had that vibe, when your gut instinct says, "no, no, no, this isn't good," don't carry forward through the inertia of being emotionally involved in the deal. Be always ready based on the science to simply walk it or renegotiate it.

Next, you ever notice that banks are always such a pain because they always want to have like a really good business plan? They want to have this loan package. They don't want you just to show up and tell them the story, not have anything written down. What is that all about? Gosh, they're a pain. Well, no that's not a pain. You should want that. Every buyer of a storage facility should prepare a complete, from start to finish, business plan of exactly what they're going to do. All of the budgets, all the plans of action, all done in realistic terms. Don't go crazy. Don't say you're going to go ahead and fill the whole thing up overnight, you're not. It's going to take you some time. And even then, be conservative in your estimates. What a bank wants to see is they want to see a business plan that not only lays out the entire narrative of the future, but it also has plan A, plan B, a plan C, plans for all the eventualities because everyone knows that life doesn't always go as you hope. Sometimes you think you're going to pull off X but it doesn't happen. You have to then have a next plan to go to, to continue on towards your goal.

So when you prepare that loan book, that loan package, you need to make sure that it really is a work of art, it's your best work. Because it's there for you. It's not just there for the banker. You should not be writing a loan package just to try to impress a banker, one that you are not 100% committed to yourself. The very act of building that package may steer you to say I don't want to buy this thing after all. I don't think I have a plan B, it's too risky for me. Or it could do the reverse. It could make you say wow, this property is even better than I thought originally. But that package, it should be your guide. If someone tells you, "I don't believe in budgets," well then they're an idiot. That isn't how you do business. That's not how you do good business. You need to do everything based on the science, based on the math, and you need to have a backup plan to everything you do.

Even Paul McCartney of The Beatles had a backup plan. If you read any of his biographies he never thought The Beatles were going to work. Even when The Beatles were selling a million records at a whack he still thought it was going to fail. He just wasn't convinced that The Beatles was a long-term career. What was his backup plan? He wanted to open a sandwich shop. He'd gone ahead and already created the menu in his mind. He had all the different sandwiches, he had funky names for them. He was ready to go ahead and open his little Paul McCartney sandwich shop the minute the manager came in and said, "Sorry, Beatles, nobody likes your music and so we're not going to be able to go on tour anymore, and you just lost your record contract." He would just walk out, find some retail space available, and open that sandwich shop. You have to do the same. You should always have a plan and you should have a backup plan in the event that plan doesn't work. And then a backup to the backup, and a backup to the backup to the backup. You cannot have too much planning involved when you're buying that storage facility.

Finally, banks always seem to be a pain in the rear in due diligence. Have you ever noticed that? Oh, we have a problem with the survey. Oh, we have a problem with the title. Oh, they just seem such a pain. They're so perfectionist. Well, you need to be perfectionist too. Over the years, we've seen many properties that had fundamental problems in the title, in the survey, in any number of items. And we would have probably let it slide. We would have probably said oh well, you know, we can fix it, it's so ridiculously minor. Is it? Or is it not? We once had a property where there was a piece of the road missing. The guy had built the road but apparently he had to buy one little chunk from a neighbor and he didn't do it. He just built the road anyway, not thinking twice about it. The bank caught that on the survey. They said, "Oh, well, you can't have it this way. You cannot have someone else owning a portion of your entrance road." We were like, "Come on, man, it's been that way for like 30 years. Under the rules of that state, it's the active domain, eminent domain, we own that piece. We must own that piece." And they said, "No, that's not good enough. You have two options. You can either have a judge decree that," of course that would take months or years, "Or you can just go over and buy that piece of land." So what did we do? We went over and bought that piece of land.

Now, at the time it seemed like a horrible pain, so petty, so ridiculous. But who knows? For all I know, down the road they would have popped up and said, "Oh hey, we own your driveway and we're going to hold you ransom now because you can't have cars coming in and out." Meanwhile, I'd be out there having to go to court to prove hey, well that's our road isn't it, through eminent domain. And what if we lost? What if the judge said, "No, actually it's not your road." Well then what would happen? We wouldn't even have a road. The bottom line is the banks force you to do better due diligence than you would without them. They're going to make sure that you do the basics. The survey, the title work, typically property condition reports, an appraisal. Don't look at these things poorly. Don't say, "Oh gosh, these are all such a pain, and they're so petty in the way they review them." No, it's for your own best interest." That's what people forget.

So the bottom line to all this is banks help you a lot. If all of us thought more like bankers we would all do better in life. Bankers really are your friends. Bankers do you a world of good in everything that they do. This is Frank Rolfe, the Self Storage University Podcast. Hope you enjoyed this and talk to you again soon.