Real estate is all about leverage and obtaining debt is a big part of successfully buying a self-storage facility. So how do you find a bank? In this Self-Storage University podcast we’re going to give you the simple steps required to find a lender.
Episode 83: How To Find A Bank Transcript
Debt is the tool that allows real estate investor to have superior returns. The gap you have, the spread that you have between the cap rate and the interest rate is what propels your cash on cash terms to a new higher level. But in order to utilize debt to buy a self-storage facility, first you have to find a bank. This is Frank Rolfe, The Self-Storage University Podcast. We're gonna talk about the simple steps to finding a lender for your self-storage deal.
Now, the first thing you have to know is, there are several options to obtain debt for the self-storage property. You have good old seller financing, and then you have bank debt, and then if your deal is larger, let's say it's $1 million and up, you can even use the service of what's called a loan broker, and that loan broker has access to even larger banks into the conduit network of CMBS debt. So, the first question you have to ask yourself is what kind of debt are you seeking? And if you say, "Well, I've got a $5 million deal," well, then maybe you should just call up Security Mortgage Group or Bellwether and have them find the bank for you 'cause they can probably do a better job than you can, they can probably get better rates, better terms, take the stress off you, get two or three different options and you can choose the best one.
But, what if you can't get that kind of a situation 'cause your deal is not big enough? Then what do you do? Well then you fall down to a regular old bank or seller financing. But, so let's assume that the seller can't carry the paper. They already have a large mortgage or maybe they won't carry the paper. They don't like... They had a whole idea. They just want their cash up front so they can move to Florida and retire. So then what do you do? Well, you got to get a bank. So what I'm talking about here is situations where you're buying a deal that's about $1 million and under that you can't get seller finance. In those cases, you got to go out on your own and get a bank.
So, how do you find a bank? Well, the first thing you need to do is to remember that the typical bank for that self-storage facility will be found within probably about a 30-mile driving radius of the facility itself, because you're looking for a regular bank from that market. So go onto Google and put in that metro area or that county, and put in bank. And there on Google, you'll see a list. Typically, there's always anywhere from 5-25 banks based on how big the area is, and they're all there as the official list now of all the bank options that you have. So go ahead and write all those down, all the banks, you can even look at the credit unions.
Alright. Next, cross out all of the big ones. You're not going to be able to get a loan probably at Wells Fargo, you're not gonna probably be able to get a loan at Chase Bank, because those big national firms, that isn't really what they do. In fact, if you look at the local banks near that storage facility today, you'll see that there's a skeleton crew. Where there used to be maybe eight employees, now they're down to three. Where there used to be several loan officers, maybe now there's just down to one. So that's not really part of their business model, those giant banks, it isn't what they do. They collect in money from all over the United States in a one big lump, but they don't really apply a lot of that back to the community in the form of actual banking in that area.
So, you have not much success with them, so let's go ahead and cross through those. Now you have your remaining number of banks, and you still have a very good quantity after eliminating those big national firms. So now what do you do? Well, you simply call each of those banks. And what do you tell them? You say, "I want to talk to you a commercial loan officer regarding a self-storage facility loan." Now some will say, "Well, we don't have anyone for that," or, "We don't do that kind of lending." We'll then cross those off, those aren't going to be potential prospects. But on the rest, you'll get a hold of somebody and you'll say, "Look, I'm looking at buying the self-storage facility, and I'm calling to see if you make loans on that." Your initial call is simply to see if they actually engage in that or not. Most will say, "Yeah, we do that kind of stuff." So now you have the expansive list for your market of who does self-storage loans.
So then what do you do? Well, you've got to build a loan package. What's a loan package you say? Well, it tells them, in general, what the mission is. You're going to buy the self-storage facility, you're paying X, it produces Y in net income, and then all the many things you're going to do to make that a more successful property for them to have debt on. A successful package is not a bunch of hot air. Banks are skeptics. Banks have no equity in your deal at all. The best they get is their capital back and interest. They have no equity in the upside, so don't try and tell the bank all these wonderful things like, you're gonna raise the value up 50%. They could care less.
All they wanna hear is why their money is safe. They wanna hear what the budget is, and many of them are thinking, "Okay, well, what if things went down a bit?" Some of the banks out there like to do what they call stress testing on the loan. So they look at what happens, let's say if the net income were to decline by 10%, because maybe you have a bunch of people move out in the worst of times. But build a package for the bank that shows an accurate story, but don't sugar coat it. Don't put in a lot of additional fluff of things that might happen, because again, that's not important to them whatsoever.
And then what you do is you send them the loan package and you follow up to find out if that deal might work for them or might not. And if the answer is yes, this deal might work, now you have an actual hot lead. Many deals you're gonna be able to distill it down typically to two or three banks it all might be most logical players, and ultimately one will come forward as your natural choice. They'll have a better term, they'll have a better rate and a more enthusiastic attitude, and then you've got a bank.
Have I ever seen a deal that could not find a bank? No, I've never seen a deal that could not find a good local bank, assuming that it's a good deal. Have I seen deals that were bad and couldn't find a bank? Yes, because the bank did not feel it safe to stick their capital into that storage facility. But as long as what you're working on makes sense, as long as you portray it accurately and with a good eye to pessimism, understanding the role of the bank in the deal, you should have no trouble finding that potential bank for your storage facility. This is Frank Rolfe, the Self-Storage University Podcast. Hope you enjoyed this. Talk to you again soon.