Tune in this episode with Mark Ritter as he shares his deep knowledge and practical tips on leveraging credit unions to secure favorable loan terms and build lasting financial relationships. Tune in to this episode to gain a deeper understanding of how credit unions can be a powerful ally in your small business and real estate investment journey.

Key takeaways to listen for

• [02:42] Credit Unions vs. Traditional Banks 
• [05:08] Why you need to have a strong relationship with your lender 
• [10:40] Types of loan products available through credit unions and how they compare to traditional bank offerings
• [14:01] The impact of recent economic shifts on lending practices
• [17:27] How the SBA loan process became a viable option for working capital and business expansion

About Mark Ritter

Mark is the CEO of MBFS and an expert in credit unions and business lending. His primary role at MBFS is overseeing the strategy of helping credit unions assist members with business needs and consulting with credit unions on planning the delivery of services to their membership.

Connect with Mark

• Website: Member Business Financial Services | Mark Ritter
• Podcast: Credit Union Conversations
• LinkedIn: Mark Ritter - Member Business Financial Services | LinkedIn

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Links referenced in this episode:

• mbfs.org

Mentioned in this episode:

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In today's world, the toughest deal to get done is that office space in the big cities or the suburban business parks, because that's where those deals are almost all underwater these days. But self storage is strong. Self storage is booming for us. We do a great job with that.

Welcome to truly passive income. I'm Neil Henderson.

And I'm Clint Harris.

Our guest today is Mister Mark Ritter, credit union expert. Mark, how are you, sir?

Pretty good. Clinton, Neil, looking forward to the conversation and digging in.

Absolutely. We were just doing a mutual admiration of the places we live. You live in the mountains of Pennsylvania.

We live down by the beach in Wilmington, North Carolina.

I love both places.

We should have done this together. We should have come to you or you should have come to us.

It's summertime up there, and then we'll do a winter episode down here.

Absolutely. I'm all in.

You've been in commercial, you've been in credit union lending for years and years. So we are to have you on and talk a little bit about crediting and lending for small businesses as well as commercial side, primarily what we do.

So why don't you get us off by starting the house for the general audience? What's the difference between a credit union and a more traditional bank?

Sure. And if you ask my family, I don't even think sometimes that they could explain the difference.

But when you're driving by, they all have drive throughs and atm, they have signs that talk about checking accounts, savings accounts, auto loans, all those types of things. And money's money, you know, our money spends the same as everybody else's money.

Well, really the difference is when you lift under the covers on the purpose of the organization and how it's structured.

And a credit union, if you really boil it down, it's a not for profit financial cooperative, and it's a cooperative just like any other type of business that's a cooperative. It's owned by the people who have accounts there and run for the people who have accounts there. There.

There is a board of directors, but the board of directors is elected by the people who have accounts there, and everybody gets one vote.

So what you have is a much more purpose driven institution than a profit and growth driven institution that hopes that you can one day sell itself out to a bigger institution. That's not really the goals of a credit union.

So it tends to be a little bit more casual, a little bit more relaxed, a little more conversational in it for the long term, where the purposes and what they're in and who they're serving tend to be pretty stable, where sometimes in the commercial banking sector, you see a little bit more. One day we're in, one day we're out, we get new management, and we switch things around.

So from a small business standpoint, we do self storage, syndication, and we used to shop six to ten different banks to try to find the right terms. And right now, with the current interest rate environment, it's like 25 to 40 to get the terms that we're looking for.

And, you know, I think that one of the things that we've really come to realize, especially I have, is that the importance of relationships and having one place to go and one person to talk to and be able to trust what they're saying. So from a small business standpoint, what are some of the benefits of using a credit union and having relationships there?

Sure.

And that's what a credit union, by its very nature, is, a relationship driven institution, because they're not just for this institute, not just for this transaction, not just for this, but for the long haul.

And you'll tend to have a conversation of, let me understand what you're doing now, but also let's talk about what you're doing in the future to make sure that this makes sense. And I'll even back up for a moment to explain a little bit more about our company, mbfs.

So, credit unions, one of the principles of cooperatives and credit unions is that they cooperate with each other.

And that's exactly why we were formed, was for those small business owners and real estate investors, because we are owned by 13 credit unions and work with over 100 credit unions nationwide for that very purpose, is to bring the credit unions together so that they can offer these services to their membership cheaper, quicker, easier, and that's building it for the long term. So, yeah, those relationships are important.

And sometimes in the commercial banking world, every time there's a merger, you tend to move down the food chain a little bit in terms of the importance to that institution.

So, yeah, if I went back to a bank, I'd probably get fired pretty quickly because I tend to be a little bit more casual these days and a little bit more longer term conversation.

And he built it in an area where there was a huge housing development just starting to build. And he opened his doors. Things are going to be great. And then the great recession hits, and suddenly his lease up stalled.

I mean, he was still leasing out, but it was pretty much as many people were moving out as they were moving in. And he had a loan with a local credit union.

At some point the interest only period was going to come to an end and his payment was going to jump up significantly.

And he called that credit union and said, listen, we're doing well, we're leasing up, but the interest owner period ends, then I'm going to be in real trouble. And they said, okay, don't worry about it, let's extend it another year. Then I think they also extended as low in another year as well.

And the year went by still not any, things were not any better. He called them again, same conversation. They agreed to do it. And I guess the point is, like you said, it's a relationship business.

And one of the challenges with these big banks is building a relationship with a big bank is very, very difficult.

And so if something starts to go sideways, the big bank is going to have very little interest in dealing with a pid libido $10 million loan, whereas a credit union is going to be a lot more, hey, lets make this work because we dont really want to take possession of a $5 million self storage facility and then try and figure out how to run, correct?

Oh, absolutely. Were great at lending and lousy if we have to take over a property.

And the one piece that you said there a little bit on that relationship side is its local money and local deposits. Credit unions are lending out their members local deposits. So we are stewards of that money.

If you think about kind of this concept of the whole shop small business, shop local, that is the very essence of a credit union into let's keep it going and let's do what's best for you, let's do what's best for us. Obviously there's limitations to that in terms of we all have to be responsible stewards of our money.

You know, wouldn't it be great if we just sort of gave money out and, you know, one day we hope to get it back? I don't think the federal government that insures us would like that concept very much. But yeah, that's exactly it.

In terms of we have the flexibility to make it work and we're not beholden to trying to squeeze out a quarterly earnings per share or trying to engineer some bigger transaction in the future.

I'm going to be transparent here. This question is wholly self serving. Obviously, Neil and I do self storage conversion projects.

Outside of that, I do still occasionally buy small multifamily properties.

And I have a property management company that is currently in the process of finalizing, finishing out the lease on the property that we rented for our office. And we're going to be buying a building, possibly buying a building that has linen facility or a building that has a rental unit as well.

So talk to me about the different types of loan products that you guys are offering.

Is it basically the same that anybody else is going to be able to get bank in terms of, like, obviously new purchases for commercial, for residential property? What about construction? Can you guys do SBA loans, things like that?

Absolutely. Our product suite looks very similar to that of a community bank, regional bank.

We do for small businesses, we do for residential real estate investors, we do for commercial real estate investors. Under the small business side, we have a really strong SBA program, because we think that's important to do.

From a mission standpoint, the SBA, sometimes people get intimidated by it, but it's actually the best money out there. Back in the old days, I'll say that it was an absolute nightmare to get done that. Those days are long since history.

They can give you the best rates, best terms, get you the most money for your small business. We do do a lot of multiple, multifamily as well. That's really a bread and butter.

And we have people who have a full time job, and we're getting into this in some smaller markets, different markets, they're kind of dipping their toes into this and starting their real estate adventure up to the. I'll say, I'll term it the large big boy real estate investors. We do deals.

We've done deals up to $40 million here internally within our credit union network and group. Once you get above that, it's more of that Wall street type money.

The mega banks, there are some upper limitations to that, but that's a very, very small percentage of listeners and deals out there.

I would say where credit unions are sometimes the weakest is in just a flat, ground up construction, buying a piece of dirt, because we do have some limitations in that process, but we do do some. It's very common for us to do renovations, rehabs, flipping purposes.

In today's world, the toughest deal to get done is that office space in the big cities, the suburban business parks, because that's where those deals are almost all underwater these days. But self storage is strong, medical strong. The warehouse self storage is booming for us. We do a great job with that.

And a lot of different segments other than, you know, the one that's weakest for everybody right now, which is that office space.

Yeah.

So there's been so much shift there, it's crazy how fast things can change in a short period of time. So, given some of the recent economic changes, obviously the interest rates are all over the place, the pandemic has changed things.

Massive changes in the commercial real estate landscape. What are some of the changes that you guys have made as a credit union or some of the things that you've been doing this for a long time?

What are some of the changes that you're seeing out there of how products are changing or terms or time length is adjusting to try to make it easier?

Yeah.

What we're really seeing is the larger project you have in the larger metro areas, the larger problems that you're seeing in the particular transactions right now. Because much of the world in 2nd, 3rd tier cities, we're not seeing a blip in occupancies and numbers.

And what we're seeing, other than obviously the increase in interest rates. So we're seeing strong demand, we're seeing strong numbers.

When your rates 3%, when your rates three and a half percent, you have a lot of wiggle room to screw up and to manage your properties, maybe a little bit less efficiency. If you're a newer investor, you're getting some returns that probably weren't historically in line.

You see property values increasing, you see rates low, there's a lot of room to make money. So if you can adjust to kind of that 1.181.25 cash flow coverage with the newer rates. Yeah, that works. And manage your expenses.

Property and people are having to manage their businesses appropriately and they have much less margin for error, is what we're really seeing now. That being said, to make the deals, cash flow.

If you're buying at the top of the market, sometimes you got to put in a little bit more money to make the deal. Cash flow, property. The worst thing that we can do is set somebody up to fail.

Sometimes people get, you know, there's these credit folks behind the scenes who can annoy the heck out of everybody, but many times their numbers are dead on. Right? So when we sit down and talk with somebody and say, hey, this is what we're seeing. What do you see?

Tell us where we're off, we want to make sure it works for everybody, because like you said, we don't want to be owning the properties.

I want to circle back for a second in regards to SBA loans, and you had said the world has definitely changed a lot. And I always used to. Coming from the self storage self.

SBA loans were much sought after, but also much maligned because it was often described as getting a tax audit and a proctology exam at the same time and a little less enjoyable. Has that changed at all?

Yes. And what you have seen is the big shift is that the SBA used to get money allocated by Congress every year, just like every other government agency.

And they said, this is how much money you're going to have to go spend it and whatever. So customer service was not a priority. Now, the SBA is a self funding agency. They don't get money from Congress anymore.

The only money they get is through the fees that they have for the program. Well, what happens if you provide lousy service? What happens if you have a horrible process?

People don't want your loans, no matter how good of a deal it is. So they've really streamlined and automated the process, because it used to be there was all, every metro area had their own SBA office.

These were old time bureaucrats who didn't really care for speed and service.

So the process is much more automated and streamlined and universal, so that when we talk with somebody, we know exactly how long every step in the process takes.

We know what documentation we need, we know what the standards are, and you know the rules going into it where previously you didn't, and in today's world, I don't know if you guys have heard this, but inflation is a lot higher than it used to be. So businesses have really seen working capital get chewed up. They don't have that excess money sitting around.

So the SBA is a great place to get working capital that you need and finance it over an extended period of time. So it makes sense. So that's where we think the SBA program is going to be important. So many businesses started during the pandemic.

People started up new ventures, they started up new businesses. They had a change in careers. And you're seeing a lot of these businesses mature and grow to the point where they need more capital.

They need to continue that journey and keep moving. But they're having difficulty sitting around money because inflation is just chewing everything up. So, yeah, that's where the SBA is a good fit.

Interesting. I didn't realize that you could use an SBA loan to give one. Yeah, that's huge. That's good for me to know.

Right now, our company is expanding and obviously looking to buy an office as well and working capital, something always part of the conversation.

I think one of the things that I see that's valuable is like, having someone like you or someone else in the credit union that I can go and be like, hey, look, here's what we're trying to accomplish over the next few years. This is what the end goal is. Help us work backwards from that.

In terms of what does it look like in terms of our access to capital or our access to funding to go purchase a property or anything like that? And kind of having someone, it's not just about the next deal, right?

And a lot of times I tell people, if you're trying to scale a real estate portfolio, portfolio, it's really not about the next property, it's about the one after that.

And making sure that you're not making a decision on the next one, that's going to completely stall you out and stop your trajectory of getting towards the final goal. I see the value there certainly working backwards. Like, what are some of the keys to success for small business or getting into real estate?

Like, what are you guys looking for from a small business? And us showing up, that's going to help us successfully move through that process, whether it's SBA or anything else.

How do we make a your job easy and make sure that we have success and what we're going after to attain that long term goal?

Sure. There's really two pieces that we are looking at, and the first one is the easy part.

And this is what a lot of lenders focus too much, and that's the quantitative part.

And what I would tell somebody is when you meet with that lender, they're going to give you a list of documents that they need, you know, one through twelve. Give them documents one through twelve and your life in the process will be much easier.

And we want to understand the numbers, and that's the easy part. And the other thing we like to go back is, okay, this is what we're seeing. Where are we off?

And the first time you get into this dance with somebody, that's the most difficult one. That first deal is always the toughest because us understanding you, you understanding them.

And then the second piece of that is really where I think is more important. And that's the qualitative piece of let me understand what's behind your numbers. Let me understand why it looks like this.

And also let me understand you. What are you looking for? What do you want? What does that next transaction look like? Tell me about your family life.

Tell me about your goals and dreams. You know, I always said no real estate investor gets into this because they have this dream of owning a piece of property.

They're doing it because they have financial goals behind it so they can achieve their personal goals. And that's what we want to make sure that's what's important to us is where do you want to go with this and where are you going?

A lot of people, you mentioned the number of institutions you have to shop at to get a deal done. And people kind of think of financial institutions as a monolith. You lend money, I need money. It's all the same.

It couldn't be farther from the truth. Even credit unions tend to be a little more homogenous. But there's all sorts of different credit unions out there.

In North Carolina, theres self help credit union, which really is going into underserved areas, underbanked areas, and then theres different people who focus more on commercial real estate. Theyre small businesses, but not everybody is the same. You have to treat it like a restaurant.

You dont go into sheets say youre going to get a five course, five star meal. You know, it's quick, cheap, easy, and it's a little more expensive.

And then you go to a nice restaurant and you get meals, you know, you get a very expensive, nice meal and it takes longer. And you really have to treat your financial institution that way. They're not all selling the same service.

Recent economic changes, interest rates, you know, the impact of the pandemic influenced commercial real estate lending through credit unions. And what kind of adjustments have you guys made to your lending strategies in regards to that?

Well, I'll tell you the dirty secret behind everything that people, your local banker, does not tell you about, and that is liquidity. Nobody ever calls up their bank and says, hey, I need a deal. And they say, we don't have money. I can't lend.

Sorry, what they say is, well, we've tightened this condition and we've tightened this condition and our terms are now this, we now can lend 60% and we only can do this term. But what's going on behind the scenes is you're seeing the deposit base just eroding of financial institutions.

And those pandemic era savings are just getting chewed up. When people go to the grocery store and buy bacon and eggs, when they finance a house, it's a lot more expensive. So those deposits go out the door.

When they finance a car, its now five to ten grand more. So those deposits go out the door. So youre seeing this cumulative effect of money just being chewed up.

So what you have to have is that blunt conversation of do you have money to lend? Are you in the market today? Because if youre not, just tell me and thats okay and we can be friends. But many bankers don't want to tell you that.

Basically an economic indicator, like just looking at where they are with the lendings and the LTV, if they're tightening up and it's tied to spending as a whole, you know, everyone's talking about how, oh, inflation, it's so much better.

But what people don't talk about is when inflation goes up and then when it comes down, a lot of times the cost of goods and services do not come, they stay up. And people are feeling it right now.

Right now people are taking it on the chin every time that they, they're going to the grocery store or filling up their car or have to replace their car or forced to move right now with different interest rates.

And it's really interesting that that's basically a cumulative economic indicator on the back end just because those deposits aren't hitting the bank the same way they used to.

Yeah, absolutely. And they had a lot of deposits sitting there. Maybe people had their stimulus money or different programs.

You got through the pandemic eradic when there was money pouring in. Well, all of that is just eroding and it's eroding quickly.

Well, Mark, listen, we could probably go on for another 30 minutes and talk about this, but I want to be respectful of your time.

I think I have quite a few things.

I'm going to follow up with you after this because I want to unpack our scenario of what we're trying to accomplish with our business, and I'd really appreciate your advice on that. Besides that, I feel like I got a better understanding of a little bit some of the nuance difference between credit union.

Thanks.

Appreciate that. Thank you for your time.

Well, if any of our listeners want to find out more about you and what you're up to, I know you've got a podcast. Tell us what the best way to find you would be.

Sure. My podcast is credit union conversations.

If you ever looked in and wanted a little bit more insight into what's going on into the credit union business. My day job is the CEO of MBFS, which we just help businesses and real estate investors get access to credit credit unions.

We're owned by credit unions for their members, and we work with different people nationwide. You can catch us@mbfs.org or search me up on LinkedIn.

We're very active, and if we don't have a credit union in that marketplace, we have a lot of friends of similar companies, similar credit unions, and we try to connect you with somebody local that you can talk to about your situation.

Thanks, Mark. This has been a great conversation. Appreciate your time.

Thanks, Mark.

Appreciate it. Thank you for having me.

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