Explore the Financing Options for a Self-Storage Loan
If you’re a first-time buyer of a self-storage business, you’ll want to explore your financing options. The best rates will come from traditional bank loans and SBA loans, but they can take an excessive amount of time to fund. If you need to close quickly, you may want to look at some alternatives.
Self-storage loans are generally commercial real estate loans with a term of 10 to 25 years. Prior to making a decision, lenders examine the business’s financial performance, value of the real estate, the surrounding market, and the potential borrower’s credit profile.
Considering all of these variables, there are multiple loan options to choose from when financing a self-storage deal. Pinnacle Storage Properties structures each asset with the financing that is the best fit for the project.
Self-Storage Loan Options
Conventional Bank Financing
The best option for prime borrowers is always going to be the conventional bank loan or Small Business Administration (SBA) Loan.
The SBA 7(a) loan-guarantee is provided to lenders to make them more willing to lend money to small businesses whose applications show weaknesses.
The SBA 504 loan is distributed among the business owner (10%), a conventional lender (50%), and the Certified Development Company (CDC) (40%).
The following chart illustrates the terms, fees, and other significant factors that differ in the SBA loans.
Secondary Market Financing
Commercial Mortgage-Backed Security loans (CMBS) are popular for commercial real estate. CMBS loans are typically a non recourse loan secured by a first-position mortgage for a commercial real estate property. If the borrower defaults, the lender can seize the collateral but cannot receive any compensation from the borrower. They are popular with commercial real estate investors for their relaxed underwriting parameters and low interest rates:
- The debt service coverage ratio (DSCR) CMBS is a measurement of the cash flow available to pay current debt obligations; it is the ratio of the net operating income to annual debt. It is determined solely by the lender and varies depending on the level of associated risk.
- The loan to value ratio (LTV) CMBS is an assessment of lending risk that financial institutions and other lenders examine before approving a mortgage; it is the ratio of the total sum of money borrowed in comparison to the value of the commercial property. The value of the loan is determined by the lender and an independent third-party appraisal firm.
These loans typically features a fixed interest rate and offer terms of 5-7 years, with 10 years being the maximum term length.
Private Money Lenders, or “hard money lenders” are non-institutional lenders that issue short-term loans for the purchase of, and sometimes the renovation of, an investment property. Private money loans are offered to short-term as well as long-term investors looking for a rehab project, quick funding, or cash-out refinancing.
A hard money loan, is more expensive than traditional financing, but may approve borrowers that would be rejected by other institutions. The caveat for borrowers is that lenders could go after their other assets in the event of a default.
According to FitSmallBusiness.com, private money lenders are right for the following types of people:
- Fix-and-flippers looking to purchase, renovate, and sell a property within 1 year,
- Short-term and long-term investors who need financing quickly,
- Buy-and-hold investors looking to purchase and renovate a property before refinancing with a conventional mortgage,
- Long-term investors who can’t qualify for a conventional mortgage, 203(k) loan, or HomeStyle Renovation mortgage, but plan on refinancing once they meet qualifications.
- Long-term investors who need to season the property.
As with any type of real estate investment, you have to take the time to understand your financing options; and, as always, seek advice from a professional regardless of the structure that you choose.