The self storage industry is very profitable and competitive these days. financiers Wants To invest in this type of asset despite three years of a pandemic economy and high inflation. Lenders are passionate about business and will offer a competitive loan package – provided you show them you are someone who can succeed.
We’re in an interesting time in the self-storage industry where interest rates are rising but the cost of building materials is slowly coming down. This means that if you are looking for a construction loan, you are in a good position to find financing. Numbers can really work in this scenario because you can still build a profitable business, despite the high rates. Also, new facilities tend to settle down and increase in value quickly after they are built.
On the other hand, buying an existing property is difficult in this market because you are dealing with higher interest rates and compressed capitalization rates, which means you need a higher equity infusion (down payment) to achieve cash flow for the property. The leverage of a construction loan depends on the cost of construction, but the purchase cost is tied to the income the property generates. A facility originally built at a cost of $12 million could easily be worth $20 million.
It is possible to get a loan for any endeavor in the current market, but you need to put your best foot forward and show the lenders that you deserve to get a competitive loan quote. This includes creating a competent plan for the purchase, renewal and management of your self-storage assets. Remember that the lender is investing in You are Each part is as much as your project, so be prepared to prove your worth. The following tips will help you secure competitive financing for an acquisition or major project.
If you are purchasing an existing self storage facility, obtain details of the property’s historical and current income. There are many facilities that do not keep detailed financial records, but if the asset lacks clear historical data, it will be difficult to secure prime lending. You must have detailed income statements including tax returns, profit and loss statements for the current year, and occupancy reports.
Pay attention to occupancy types. Physical occupancy indicates the percentage of units filled, while economic occupancy is the total current rent charged as a percentage of the facility’s total potential income. A property with 100% actual occupancy might look attractive, but not if 50% of the tenants are renting at a discount. If economic occupancy aligns with physical occupancy, it is more attractive to lenders.
Lenders also want to know the proposed management structure. Who will manage the facility? Will it be a third-party partner, employee or management company? Do they have experience? Is the management team local? These questions are important, and you must have answers to them to convince the lender to work with you.
Most importantly, you need a strong case for the value your ownership of the property will bring. This is where a personal resume or management resume comes in handy for underwriting support. The lender wants confidence in your ability to repay the debt, so show them how you will improve your business. You will need to indicate what value you want will In addition to a clear plan on how to achieve this. For example, if you intend to add more self-storage units, include market research that shows they can be supported by local demand.
Doing these things will give you a better chance of qualifying for a self storage loan. However, it should be noted that the acquisition will probably require you to put in more money, and the loan will be at a higher interest rate in the current lending market.
Lenders are very interested in financing self-storage constructions, however, obtaining an approved loan requires detailed cash flow projections covering the first 36 months of construction and operation, well-documented personal financial statements, and most importantly, a feasibility study. The critical first step is to gain control of the land. This must be done by title or surety, with a sufficient period of due diligence to secure permits and financing. A bridge loan may be necessary if the land cannot be obtained in cash.
Once you have the land, you need to get approval from the municipality to build. This means hiring the right lawyer and architect to work with government officials. Your team will ensure that your proposal is up to the code level. Best laid plans mean nothing if you don’t have the permits. This is where many investors stumble – if you don’t get approval from city officials, you won’t get a loan.
You also need a feasibility study to help justify the project to lenders. Rent this study early in the process, preferably before you buy the land. It should be conducted by a third party who will look at your site, site plan and income projections to assess the pros and cons of building in this market.
Income projections will be essential. The lender’s underwriters will use this information to determine whether the signer can repay the loan application. It is better to provide a forecast of 36 months at the beginning of construction. The monthly breakdown will show development expenditures along with increased occupancy.
Finally, you want your presentation to include a well-researched estimate of the total cost of the project. This means getting a real bid from a general contractor. Include development and land acquisition, third party expenses, and a contingency rate of about 10% on hard costs. This total budget will be used by the lender to determine the loan amount. Also, avoid major budget changes once the lender is involved, as this can come off as poor planning or lack of experience. Alterations can cause significant delays and put your financing at risk.
Prospective self storage owners can find a loan to enter this market provided they do their research. Read your application. Do you lend money to yourself? How could your project fail, and how will you handle that? A good way to find these blind spots is to hire an experienced brokerage firm who can help you create a well thought out application.
Dave Cotter is a principal at Integrity Capital LLC, a commercial mortgage brokerage based in Scottsdale, Arizona that has closed over $1 billion in loans. He has helped self-storage owners find financing nationwide. For more information, call 480-422-4525.