We're living in a very exciting era for the self-storage sector, and savvy investors everywhere are wasting no time in capturing attractive double-digit returns. They realize the opportunities available in the storage industry today may not be repeated for a very long while.
One challenge owners and investors may run into, however, is funding so I thought I would share a bit of what I’m seeing in the market.. I’ve had some good luck securing conventional loans with 20% down payment but that was several years ago and I am seeing more and more banks looking for 25-30% dow. Now, if it’s your first rodeo, and you don’t have experience or you are dealing with a low occupancy, value add type project, the banks are likely going to want more security. Right now, with 20-30% down payment I’m seeing interest rates hovering in the 5-5.5% range.
I do like conventional loans. They’re my first choice for a property that is running at 60-75% capacity or better. For properties that fall into this category, conventional loans are likely going to be your first and probably the least expensive choice (unless of course, seller financing is on the table). More often than not though we’re chasing value add deals that are performing so poorly, that conventional lenders are a little skeptical about them. With 10-50% occupancy, the cash flow from these deals is often negative for 6-12 months. Now, unless the conventional lender has experience (and a lot of it) in the storage business, and really knows the asset class, it’s going to be a hard sell. And this is where the Small Business Administration (SBA) loan kicks in. With SBA loans, you’re still dealing with a normal bank, but they follow the SBA guidelines, which means, the government guarantees a part payment of the loan (usually 50%), to the lender. This means the lender has much less of its own money at risk. What’s the catch? Well, these loans come with slightly higher interest rates and there will be more fees associated with the transaction. That said, you can actually roll some of these fees into the loan, and get a 90% loan to value (LTV). This could mean less money out of your pocket up front.
My one piece of advice is that if you’re going for an SBA loan, make sure you do it with a bank who’s experienced with giving SBA loans. You don’t want to get stuck with a bank who is learning the SBA process while your deal is ON THE LINE! These loans can be a bureaucratic nightmare even for experienced banks and you want to stay away from any lender who is new to the SBA game. I alluded to seller financing above and it is almost always my FIRST choice when it comes to getting a deal funded. As such it's always a part of the conversation I have with sellers. I always ask them whether or not they're willing to take payments over time rather than a full upfront payment. Oftentimes their knee jerk reaction will be, nah, no, I just want the big payday. But if you can develop rapport with them and simply have a conversation about the tax benefits of seller financing and show them why they'll actually make more money by holding paper, they may come around. The worst thing they can do is say no, right? The truth is, with seller financing, we'll be paying them some interest over time as well as allowing them to save tens or hundreds of thousand dollars in taxes if you structure it in the right way. As such, they will almost always warm up enough to consider the idea and often times they will decide that holding paper is indeed a good idea.
So what do you do if neither the bank or the seller want to fund the deal for you? What options do you have left? Simply put, you’ll need to look for private money. That is, individuals who invest in other people’s deals. This money is offered in exchange for debt, equity or a combination of both debt and equity. Debt is pretty straight forward; it’s simply a private individual acting just like a bank would. Whereas an equity investor is going to have an ownership stake in the property and that may be anywhere from a 10% to 50%. It all depends on how you structure it.
The last, and increasingly popular option, is a combination or a hybrid structure. Essentially, in exchange for funding your deal, you're going to offer them a preferred return, which is a fixed interest rate. As an example, let’s say 7% interest on the money that they give you. And then they're also going to get a piece of the profits from the deal (cash flow and equity).
I realize that funding deals is a stumbling block for many new investors. This article was just meant to be a generic overview. As the saying goes, there’s a thousand ways to skin a cat...and, similarly there’s a thousand ways to fund a deal. If you’d like to learn even more, you should consider joining us inside the Storage Rebellion UNIVERSITY!