non recourse loans v3.1

What’s up guys? All right, today we’re talking about non-recourse loans. Now, before we get into this, if you could like and subscribe, it really helps our channel out because that appeases the YouTube gods. It makes the algorithm work and it shows this content to more people. Now, let’s get into non-recourse loans. This is a great subject, but this can also be a very, very deep subject that has a lot of intricacies and a lot of details that are gonna be specific to obviously timing and property. We wanna talk about this subject and understand how you can access it and how you can use it to your overall strategy when dealing with self-storage. It is one way that we have been able to grow at the pace that we’re growing and able to reduce risk, able to take on more debt, and also just to sleep better, which a lot of people care about. At the end of the day, we buy great properties that we don’t think we’ll ever go under. Ever. But we know we don’t have control over everything and we don’t know what the future holds. Now, when you’re dealing with regular single-family homes, lots of this is predicated on your individual income because it’s not important necessarily what the overall market does with the house as it is that you’re able to afford it. That’s actually how I think everyone should buy homes, meaning what the price of that home does should be irrelevant to why you’re buying that home. You should buy that home based upon what your needs are and what you can afford and what is responsible for you to be purchasing. Commercial real estate’s not like that. Commercial real estate is a actual investment that is utilized within society and is infrastructure. The government needs commercial real estate, right? We need office space. We need housing like multifamily. We need industrial. We need self-storage. We need all of these different types of asset class just so society can work. We have to have big buildings. We have to have major retail centers where businesses can operate out of and they can sell their products. All of this is absolutely crucial for our society to function. But because the use of it is changing, as we’ve seen in retail, and because the loans and the risks are so large, they’ve had to figure out a way that we can develop products to loan on this as it’s more like a business, meaning it’s not based upon that person’s income. If that was the case, we would be capped at part very small assets. These assets cost hundreds of millions of dollars sometimes, billions of dollars, building stadiums and skyscrapers. Of course, traditional financing makes no sense when you’re dealing with products like this. That is a massive advantage in commercial real estate and one we get to take advantage of in self-storage. A lot of people don’t even know that this advantage exists. In fact, I’ve talked about it online. You could check out my Instagram where I talk about some of these things. And a lot of people say this is either a Ponzi scheme or you’re tricking investors or something weird. And it amazes me the lack of knowledge surrounding this product type. The reason being is we’re so accustomed to traditional financing, meaning a 30-year mortgage or a credit card. That’s not how the majority of the market actually works. The real market, which is the bond market or the debt market is ginormous. It is way bigger than the stock market or any other market on earth. It is where companies go to get debt so they can grow their company. It is where everything happens, real estate. But the bond market functions differently than just a traditional bank. How it works is this, the bond holders are investors. Now, where does a bond come from? So if I wanna get a non-recourse loan, I go through a bank. But the bank isn’t actually the one that is lending the money. They are the ones that are collateralizing the debt, meaning they take my debt and they take other people’s debt. They put it all in a package together and they sell it on the bond market. I make my payments. Those payments go to the bond holders or the investors. That’s how the debt works. Now, because mine is packaged in and collateralized with other assets, the likelihood of that bond failing is way, way lower. So investors take the risk, not me. The bank doesn’t hold the debt. None of our originators actually hold or administer, they don’t hold them, but administer the bonds at all. They’re packaged, sold off, investors have it, and now it’s another party that’s administering it. The point being is this is a transfer of risk from banks to willing participants that hold bonds. It’s a safer way for the end user and the investor to get a return and take out and hold debt. Now, a lot of people, you start talking about this, this is a Ponzi schemer. This is gonna be the big collapse. This has been going on forever. This is actually a concept that started in Europe a long, long time ago. Hundreds of years of debt and risk analysis have been based on. This is not something new. This isn’t something that was just rolled out. And I think a lot of the negative correlation comes from the housing market. What happened with collateralized debt obligations or packaging up loans and selling off the insurance to those loans, and then when they defaulted all at the same time, it caused a massive crisis. This is very different. They’re not collateralized in the same way. We don’t have CDOs. We don’t have the same types of structures or investments. This is the same thing that has been going on for a long, long time. This makes it so me as an investor, I can buy a property, invest my capital in it, I can improve it, then I can refi out, I can take my money out, I can move it into non-recourse loan, and I still own it, I still own the wealth and the income from it. For an investor, this is like magic. That means I’m getting all my risk out, not all, you can never get all your risk, but the vast majority. I’m not liable for the debt anymore. My risk of capital, I’ve now taken out, right? So if it goes under, I hand the keys, I walk away. After that refinance point, I already had my money back. This is a method that we coined the BIRD. You may have heard the BIR method, but the BIRD means we buy, we improve cash flows, we reduce risk through taking our money out and refinancing it into non-recourse, and then we do it again. And because of this debt product and the way that it’s formulated, we can do this over and over and over again. So who does this debt work for? Generally speaking, right now, the market and the transaction that I explained is done on the CMBS market. There’s also insurance companies or investors that may offer privately to do this. So non-recourse loans, you can get from major insurance companies. Insurance companies have what they call float. This is money that has to be invested that secures the insurance from the premium payers. So if there’s an insurance claim, they have to have a certain amount of money, right? That’s able to cover them in case they have lots of losses. Insurance companies reinvest. Well, they do this in the same way that you may do when you go to a bank and they collateralize your debt into the bond market. They’ll do it on their behalf. They take out the debt. Generally speaking, we see that insurance companies want you to put more down. Now, is there some drawbacks to doing this type of debt? Of course there are. Because the debt is only secured by the asset, the lenders are gonna look at the asset very differently. They’re gonna want large reserves. They’re gonna want certain things like reporting, and they’re gonna wanna monitor that asset to make sure that the asset’s okay. So in some of our assets that we have, we have to have a lot of money on hand just in case things go wrong. This may not be right to start out with. But at the end of the day, in markets that we’re at today, the tighter it is, meaning the more money there is, the more debt products have to compete to take out debt, the better the terms get. So right now where we’re at in the market cycle, which could change any minute due to large inflation and what we’re seeing with interest rates, it’s very competitive market. And the terms associated with non-recourse loans are much better than when we started taking out non-recourse loans back in 2010. Before that, we did it all personally. I didn’t even know that there was such thing as a non-recourse loan. We did it personally for a long, long time. I still do it personally, but we do it personally guaranteed loans to get them to the point where we put them into non-recourse loans. Because the other drawback with non-recourse loans is the prepayment penalty schedule. Now the prepayment penalty schedule is in there because remember, it’s part of a bond. If you wanna pay it off, it’s not just like the bank pays it off and walks away. They actually have to use the money to pay off the holders of the bond. This can be a benefit as well as a negative. One of the reasons it can be a benefit is because the bond holders, it’s paid off a spread of the interest rates. So actually locking in non-recourse loans at a low interest rate, as interest rates rise, that debt is assumable in lots of cases, meaning the asset is more valuable because whoever wants to buy the asset can assume that loan at a lower interest rate. But if it’s the opposite way, high interest rates go to low interest rates, the bond holder’s getting a payment at a higher amount. So if you wanna refinance it and now we have a lower interest rate, you gotta pay the investors the difference. That’s the prepayment penalty. So because of the lack of simply being able to pay it off and move it around, we wait till we’ve improved the asset up and we’ve gotten a lot of that yield out and that we can refinance getting a huge return and taking all of our money out. We don’t do it immediately. The only way that we would do it immediately is if we knew that it was a stable, good asset and we weren’t able to extract high yields moving forward. Another problem that you may have, because it’s dependent very much on the asset, it’s also dependent on the operator, meaning whoever’s giving you the non-recourse loan wants to make sure you’re not gonna screw that up. They’re gonna wanna track record. They’re gonna wanna see what you’re gonna do with the asset. That’s easy to overcome if you don’t have it because you can just have a sponsor come onto the deal with you that does. I don’t know when you’re watching this video and the terms, conditions of non-recourse loan like Alldebt may have changed. The point is though, it’s a great tool to have and one that differentiates commercial real estate in general, but for storage facility owners, it is immensely powerful. It allows you to scale up in ways that you just couldn’t otherwise while not taking on incremental risk as you scale. All right, well, I hope you understand a little better the pros and cons of non-recourse loans and how they’re used. It’s a subject that I talk about a lot on the podcast. Go to the podcast, Self Storage Income, and check it out where we’ve actually interviewed experts that are collateralizing these debts. It’s a wonderful episode. There’s a link in the show notes. Check it out. Go to my Instagram and see the properties that we’re doing it. And please like and subscribe. Continue to support us so we can put this content out. Thanks everybody.