You can’t always get a storage deal for the price you want to pay. So when should you agree to the higher price and when should you withdraw? And how can you make sense of paying that extra price? That’s the topic of this Self-Storage University podcast. We’re going to talk about the science of stretching as much as any personal trainer – and it won’t cost you a cent.
Episode 44: When Should You Stretch? Transcript
Wikipedia defines stretching as being capable of being made longer or wider without tearing or breaking. This is Frank Rolfe, The Self Storage University Podcast. We're gonna talk about stretching and as you just heard in the definition, what you wanna do, sometimes is you have a deal where the seller wants a certain price and you wanna pay a lesser price, and then comes the question, should I stretch? Should I go beyond where I wanna be to buy this property? And can I do so without tearing or breaking my personal finances apart? Now, let's first talk about why you might wanna stretch or why you should even stretch. We can't really make sellers sell at the price we feel they should.
If you have a property on your radar screen and you think that that property is a wonderful asset for you to own, but gosh, darn it, you can't make the seller go any lower than a certain number, but it's not that too far off, you have two choices, you can either walk away from the deal and say, "Gosh, I'm sorry, I can't pay this much," or you can stretch and go to their price and still buy it even though it's a little out of your comfort zone. Now, if you say, "Well, what about the third option? What if I walk away? Maybe they'll come back later at a lower price," and that is also true, but as we all know, it's a competitive world out there, and if you see something that seems right for you and the price was within a range but a little bit too far, and instead, you just tell the person, "Well, I can't afford to pay that much," and hope later they'll revisit the price and come back to you.
There's always the possibility in the interim, somebody else comes and takes the deal away from you. So sometimes stretching is a perfectly appropriate response. Now, how much should you stretch? That's entirely based on the deal itself. All I can do is give you the mechanics of the stretch and you'll have to apply those to each individual circumstance to see whether or not it was in fact a good idea. So how do you decide if the stretch is possible? How do you know, like the Wikipedia definition, you can do so without tearing or ripping apart your budget, your financial goals, your financial aspirations? Well, here are some things to consider. Every deal you look at, it doesn't matter what it is, you should always break it into three categories, best case, worst case, and realistic case. You should be unwavering in this definition, your best case would be if everything you did worked perfect, every assumption you made on occupancy, on rent levels, on cost cutting, it all magically occurred. That's your best case scenario.
Then you have your worst case scenario, that's if everything went the other direction, you actually instead of improving occupancy, lost occupancy, instead of raising rents, the rents went down because of competitors, that's your worst case scenario. And then you have your realistic case scenario which is somewhere in between. It's not as terrible as your worst case, but it's not as glowing as the best. It's somewhere in between, somewhere where you can say, "Well, you know what, if I don't play the eternal optimist or pessimist, this is roughly where I think I would end up." Now look at how you score in all three arenas, if you say to yourself, "You know what, I can survive the worst case, I would be ecstatic at the best case, and I would still be very, very happy at the realistic case," then that stretch probably will work for you. However, if you look at the three scenarios and you say, "I can't possibly financially handle my worst case scenario, and the realistic case scenario isn't very exciting either, but I'd be kind of happy with the best case scenario," then you shouldn't stretch, because that deal isn't going to work for you, the odds are far too great, you won't hit your goals, and therefore you shouldn't press forward with it.
Now, Sam Zell who is the greatest real estate investor of all time, largest owner of office buildings, apartments and mobile home parks in America, he wrote an entire book on the concept of risk and reward. His concept is, if it's got high reward and low risk in a property, you should buy it. If it is high risk and low reward, you should never buy it. And then you have to debate all the other potential outcomes, if it's high risk and high reward, then you might buy it, so it's no different with self storage. When you're looking at these options, as far as you stretching for the property, make sure the property is truly worth it. You wouldn't wanna stretch on a property that's just average.
What's the purpose there? When you stretch, you increase your risk, now you're becoming higher risk, you have to have at least high reward to make you want to do it. You would never want to stretch on a property that you don't find that compelling, an average location and other issues, those typically should not be part of a property that you stretch on, that you should get outside your comfort zone. It's also extremely important when you're pondering doing the stretch that you understand the ramifications of doing that, because you are really adding to your worst case scenario. You've encumbered this property now with far more cost, or far more debt, so it makes the worst case even more important to understand. It also... You have to map out how you're going to bridge that gap.
For most people when they're gonna stretch, what they say to themselves is, "Well, if I stretch, I'll still be okay. Because I'll raise my rent a little bit, or I'll increase my occupancy a little bit, right out of the chute to go ahead and make up for that stretch." And what I want you to remember from that is you only wanna stretch on things that you actually feel that you can control. If you're in a market and the mom and pop has not been effectively advertising their storage space for occupancy, and you think it's pretty clear if you re-do the website, if you go on and get social media reviews, if you do all the right things that you should certainly be able to increase the occupancy up, say, 5% or 10%, okay, well, if you really believe in that, then that stretch might be doable, but if you're looking at a property that's at 95% occupancy in a very competitive market, and you think, "Well, it'll all work out if I can just get it up another 5%." Can you really do that? Is that really realistic? Make sure when you do your stretch is that the ways you're going to bridge that gap so you don't tear is within your control.
You don't ever wanna be in a position where you've stretched and yet you don't know if you can actually bridge the gap. What happens when you do that is you put yourself in a terrible position, you've been unrealistic in your expectations, unrealistic in your planning, and very well, you'll put yourself up into an embarrassing format that you stretched and you can't actually then make those debt payments or make those investor returns or make the investor returns that you promised to yourself as the investor. So always make sure when you stretch that you do have control. Do not become a gambler, don't go stretching and just hoping it's going to work. The army wrote a book on that. And it's titled, Hope Is Not A Method. It was a book they wrote for their officers, there's absolutely no odds in winning when you base things on random chance. You only should be doing things that you know with great degree of certainty in your heart you can get resolved. There's certainly nothing wrong with stretching. Many great deals have started off on a stretch where someone took a leap of faith based on what they truly believed, an outcome that they could control and they paid a little more because at the end of the day, they thought it was a great property.
So there's certainly nothing wrong with it, but there is a science behind it, don't do it just because, oh, I've been looking for a long time and I can't find a storage property, and so I'm gonna go ahead and stretch on this one because this is the tenth one I've looked at and I don't want it to be another one that doesn't work out for me. That is not the correct reason to stretch. However, if you find a property and you say, "I love everything about it, I love the location, I love the facility itself, it's all perfect, I think it's great. The seller wants more than I can afford to pay, but I've run all my numbers, I've run my best case, my worst case, my realistic case scenario, and I am willing to make that commitment to stretch on this property," that's the reason that you would wanna go forward and do it.
I was talking to a bank recently, what they do on every property is they actually stress test it by taking an additional 10% off the revenue to actually build to their own internal bank underwriting worst case scenario, and they're doing that to see how far they can stretch the loan, in their opinion, the other direction to make sure that they can still get their payments back and the property will still come out whole and they'll get fully paid. So all of us really, if you think about it, are always stretching in life. Banks are stretching the other direction, you might be stretching as the buyer, sometimes maybe the seller's stretching, they really wanna do the sale, but you're offering them less than what they were hoping for, but they still are willing to take it because at the end of the day, they like you as a buyer or they just simply wanna get it sold. So there's nothing wrong with stretching, don't think of life as an absolute, a boundary you can't go beyond, it's not a boundary, it's just a guideline, but when you make those decisions to stretch, just make sure you've used good judgment and decision-making to do so, so that all things work out in the end. This is Frank Rolfe with The Self Storage University Podcast. Hope you enjoyed this. Talk to you again soon.