Self-storage Financing: What It Is & How It Works

Self-storage financing is used by small business owners to finance the purchase, renovation, construction, or expansion of self-storage units. Conventional bank loans, SBA 7(a) loans for commercial real estate, and SBA 504 loans are the most popular types of self-storage financing.

Live Oak Bank is the number-one provider nationally for SBA 7(a) loans. They also provide SBA 504 loans. Live Oak has a lending team specifically dedicated to helping self-storage businesses obtain financing. Contact a Live Oak loan specialist for more information or to apply.

What Self-storage Financing Is Used For

There are several uses for self-storage financing, each slightly different, with various loans best suited to each situation.

Self-storage Loans for New Construction

New construction loans are used to build new self-storage facilities. It can be challenging to obtain financing to build a new self-storage facility unless the surrounding market is right. If the market is strong, many lenders are willing to lend for a new construction project. Having a market study done that identifies the characteristics of the general population and the current self-storage market in your area can help you get approved.

Any self-storage construction project will have certain expenses that you will need to pay before you can ever rent out a single unit. Some of these expenses include:

Unexpected costs that come up in site preparation
Operating expenses during the lease-up phase
Construction down payments
Construction interest payments

Typically, building a new self-storage facility will cost between $25 and $40 per square foot of storage space. In addition, the average new facility takes about three to four years to stabilize and reach average occupancy levels. This can help you calculate how much additional capital you will need for operating expenses like rent, loan payments, and a salary for yourself or a manager.

Self-storage Loans for Acquisition

Acquisition loans are needed when purchasing an existing self-storage facility. A lot of merger and acquisition activity in the self-storage industry is conducted by large investment companies and real estate investment trusts (REITs). It’s less common for independent storage facilities to buy others, but there are plenty of financing options if you intend to purchase an existing facility.

Self-storage Loans for Expansion

Expansion loans can be considered smaller construction loans because you’re adding on to your current facility and building those units from the ground up. Conventional bank loans are a good option for these expansions if you currently have a profitable storage facility that you’re adding on to, but SBA loans provide additional benefits.

Self-storage Loans for Renovation

When operating a self-storage business, it is essential to maintain its curb appeal. Therefore, having a well-maintained property is important. Your customers will be keeping their personal belongings in your facility, so you want to instill trust that their property will be protected and well kept.

The two most common renovation projects for a self-storage facility are:

Replacing the rolling doors: Raising the doors and lowering them constantly can create a significant amount of maintenance cost over time. This is typically the biggest capital expenditure for a self-storage facility, as it costs approximately $550 per unit to replace rolling doors.
Reconfiguring storage units: It’s common practice within the industry to reconfigure the size of various units over time. While this can often be done with cash flow, it may require structural changes, making the task more difficult and expensive.

Types of Self-storage Financing

Once you know which type of self-storage project you are pursuing, you must decide what kind of financing you will obtain. Certain types of financing work better with specific types of self-storage projects. For a complete list of the best self-storage lenders, check out our buyer’s guide.

Conventional Bank Loan

When looking to renovate your existing self-storage facility, a conventional bank loan is an excellent option. Applying for financing through a bank with which you have a relationship is often beneficial, as they have easy access to your bank accounts to evaluate cash flow. This can often expedite the lending process for qualified borrowers. Conventional bank loans are also a good choice for refinancing an existing project.

SBA 7(a) Loan for CRE

Whether you want to finance new construction, acquisition, expansion, or renovation of a self-storage facility, SBA 7(a) loans for commercial real estate are a great option. SBA 7(a) loans can have repayment terms of up to 25 years, allowing a business to fund a major project and spread the payments out over a long period of time. They also enable you to finance construction interest charges and up to two years of loan payments into the loan amount.

Also, unlike conventional loans, the SBA won’t require you to have specific self-storage experience if you can prove business expertise or a proven history of owning investment property.

If you need more information about SBA 7(a) loans or are ready to begin the application process, Live Oak Bank is an excellent choice. They are the top provider of SBA 7(a) loans in the nation.

SBA 504 Loan

If you are looking to refinance your self-storage financing, an SBA 504 Loan is an excellent choice. It will often allow you to obtain financing at lower interest rates than you were previously paying and to consolidate multiple loans into a fixed payment. The term for SBA 504 loans is five to 10 years, with an extended amortization period that allows for lower payments. This results in a balloon payment at the end of the term.

Lendio is a good choice for SBA 504 loans. Lendio is a broker that works with more than 70 financial institutions, and it will provide numerous potential matches for your application. Check out their website for more information.

Bridge Loans

While commercial bridge loans can be expensive, they are an ideal choice if you have the opportunity to buy a facility for an affordable price and need to close quickly. As long as you make payments on time with your bridge loan, it shouldn’t impact your ability to refinance quickly to a longer-term loan option.

AVANA Capital provides bridge loans to self-storage businesses to serve as interim financing between loans. You can begin the application process by entering your bridge loan needs into AVANA Capital’s loan builder—you can be preapproved within three days. If approved, you can receive funding in as little as 10 days.

Lines of Credit

A business line of credit is great to have for smaller projects or recurring capital needs. For example, when you have just a few rolling doors that need to be replaced, you don’t want to wait for a huge financing process to do it. Having a business line of credit on hand can help you deal with these smaller renovation projects, and it can ease the burden of any unexpected expenses that come up.

Bluevine offers a small business line of credit of up to $250,000. You will need at least $480,000 in annual revenue and at least 24 months of business operations to be eligible. You can prequalify online in minutes and get funded in one to three days.

Hard Money Loans

Hard money loans are typically short-term with repayment terms of 12 months. They are a good choice if you need to close quickly or have a weaker credit profile. Hard money loans are expensive short-term loans used to purchase or renovate investment properties. They aren’t as common in the self-storage industry as the other financing options.

Kiavi is our choice for the best hard money lender. It offers the lowest overall rates, with funding in five to 15 days. In addition, Kiavi lends up to $3 million for up to 12 months.

What You Need to Get a Self-storage Loan

Once you have decided what type of project you are financing, you can choose a loan type and lender. Each loan type has specific requirements and qualifications, and each loan type works best with specific types of self-storage projects.

Choose a Loan Type and Lender

There are primarily six different types of loans used for self-storage financing, each with a specific lender that we recommend. Check out our buyer’s guide for the best lender for each loan type.

Qualifications

While each specific loan will have its own set of qualifications, here are the general qualifications you are expected to meet to be approved for financing:

Minimum credit score: 680
Minimum down payment: 10%
Time in business: At least two years
Debt service coverage ratio (DSCR): 1.25x or greater
Credit history: No recent bankruptcies, tax liens, or foreclosures

Documentation Needed

Each type of financing will also require specific documentation. Here is a general list of documentation you should gather before beginning the application process:

Three years of taxes (business and personal)
A statement explaining the loan purpose
A current balance sheet with debt schedule (if refinancing)
Current profit and loss statement
Financial statements (business and personal)
Rent roll/occupancy report (if refinancing)
Market feasibility study (if new construction)
Business plan and resume of borrowers with emphasis on real estate/self-storage ownership experience

Bottom Line

There are many types of financing for self-storage loans. You should first consider which type of self-storage financing you will need before determining what type of loan to pursue. Certain types of loans work better for specific types of projects. However, SBA loans are usually the top options for financing self-storage projects.