Self-storage financing is used to finance the purchase, renovation, or construction of self-storage units and commercial real estate buildings. The most popular self-storage loans are conventional bank loans, SBA 7(a) loans for commercial real estate, and SBA 504 loans. Other alternative loan options exist but typically are meant for short-term financing.
Live Oak Bank is one of the top Small Business Administration (SBA) lenders nationally, offering both SBA 7(a) loans and SBA 504 loans. With a lending team designated specifically to helping self-storage businesses obtain the financing they need, Live Oak Bank understands the unique needs of the industry. Connect with a loan specialist today to start the application process.
How Self-storage Financing Works
Self-storage financing usually comes in the form of a commercial real estate loan. These self-storage loans have repayment terms spanning 10 to 25 years. The longer repayment terms allow you to spread out the total cost to build or buy self-storage units resulting in lower monthly payments over the term of the loan.
When applying for self-storage financing, lenders generally review your business’s financial performance, the value of the real estate, the surrounding market, and your credit profile to make a lending decision. Due to the nature of the self-storage business, most lenders consider a self-storage loan to be a low-risk business loan.
Who Self-storage Financing Is Right For
There are many reasons why a small business owner may be interested in self-storage financing. Some of these reasons include using a self-storage loan to finance the purchase of an existing business, constructing a new self-storage business, funding the repair or rehabilitation of self-storage units, or refinancing an existing self-storage loan.
Some common uses of self-storage loans include:
- Purchasing an existing self-storage business: Those interested in purchasing an established self-storage business often seek a loan to cover the acquisition costs.
- Constructing new self-storage units: Self-storage financing can help entrepreneurs interested in constructing a new self-storage business or expanding operations by building new units at another site.
- Rehabilitating and renovating existing units: Renovating or repairing an existing self-storage operation can be costly, and owners often seek financing to cover these expenses.
- Refinancing a self-storage loan: If your original financing involved a balloon payment, an adjustable interest rate, or was a short-term financing option, refinancing your existing debt may result in lower payments and/or a longer repayment term.
Types of Self-storage Loans
Self-storage loans are most often originated by traditional lenders and loan brokers. Repayment terms vary by loan type. Interest rates and qualification requirements all vary by loan product and lender. The most common forms of self-storage financing are conventional bank loans, SBA 7(a) loans, SBA 504 loans, bridge loans, lines of credit, and hard money loans.
Best Self-storage Loans at a Glance
Conventional Bank Loan
Prime borrowers who have a high net worth
SBA 7a Loan for CRE
Smaller self-storage loan projects involving commercial real estate
SBA 504 Loan
Larger projects that may struggle getting a conventional bank loan
Short-term financing to cover a period of time between two loans
Lines of Credit
Recurring working capital needs and small renovation projects
Hard Money Loans
Short-term financing for borrowers with unfavorable credit and/or properties in disrepair
Self-storage Loan Qualifications
The qualification requirements for each type of self-storage financing varies. However, to qualify for a conventional bank loan, SBA 7(a) loan, or SBA 504 loan, you will need to have a credit score of at least 680, at least two years of business operations, and a down payment of 10% or greater. Bridge loans and hard money loans typically have less restrictive qualification requirements.
The typical qualification requirements for self-storage financing include:
- 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
Although self-storage businesses are generally considered a safe investment, they are passive income businesses, which may disqualify you from some conventional bank loans. While SBA regulations used to preclude passive income businesses from being eligible, these rules were changed in 2010 to allow passive income businesses to qualify for commercial real estate loans. If you’re pursuing a conventional bank loan, you should ask about this requirement upfront before you submit any documentation.
Each type of self-storage financing has limitations, and some are better suited for different financing needs. While a line of credit may work well for ongoing working capital needs, it would not be suitable to finance an acquisition. The best loan product for your business will be the one that best meets the needs of your business and your intended use of the funds.
Self-storage Loans for New Construction
It can be difficult 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.
The self-storage industry is very predictable, and lenders rely heavily on these market studies for new construction projects. For example, self-storage units do very well close to military bases and college campuses. Having a market study showing a low amount of storage units next to a military base would help the lender understand the potential for the success of a self-storage facility in the area.
According to Pat Dignan, executive vice president of Northeast Bank:
“Self-storage facilities are attractive because there are low barriers to entry, they are cheap to build, and revenue per square foot is relatively high. The low barriers to entry are also the greatest risk to the sector as overbuilding can be a known issue. The general rule is about 5.5 square feet of mini storage space per person in a given market.
“However, lenders will differ with respect to their determination of what a ‘market’ is and also whether it is overbuilt or not. We know there is more to a project than this one metric, which is why we take the time to understand the situation and look into the story behind each property.”
Any self-storage construction project is going to have certain expenses that you will need to pay before you can ever rent out a single unit. These expenses should be taken into consideration when determining the amount of the loan you are requesting.
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. 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.
New Construction Self-storage Loan Options
Self-storage units are less costly to build from the ground up than many other businesses, typically costing $200,000 to $500,000 for a small- to mid-sized storage facility. This relatively low-cost allows for a variety of different financing options to be used for construction financing.
SBA loans are especially good for self-storage facilities because you can finance all of the construction interest and up to two years of loan payments. This allows you some flexibility with your working capital so you can focus on renting out units rather than being concerned about immediate debt payments.
Best New Construction Option: SBA 7(a) Loan for Commercial Real Estate
With an SBA 7(a) loan, not only can you finance up to two years of payments into the loan amount, but you can also finance the construction interest you are paying—up to 10%—and a 10% contingency allowance. This financing option gives you time to increase your occupancy rates after construction, without worrying about where the money will come for your loan payments.
SBA 7(a) loans for commercial real estate offer low-interest rates and repayment terms of up to 25 years. SBA 7(a) loan rates are generally capped at 7% to 10%. SmartBiz is an SBA loan provider that can provide financing of up to $350,000 in as little as 30 days. It can also fund larger SBA loans, although larger loans will take longer to fund. You can prequalify online in minutes.
Real Estate Investment Companies or Private Lenders
Many investment companies will invest in one-off transactions in the self-storage industry because it’s a fairly safe venture. New construction is the best opportunity for these investors because it’s likely the only financing needed for a self-storage facility that is large enough for them to be interested. Private money lenders might also be helpful.
Self-storage Financing 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.
Acquisition Self-storage Loan Options
When you’re buying a business, you don’t want to lose the deal due to slow financing. While the best rates are going to come from traditional bank loans and SBA loans, they also can take 30 to 90 days to fund. If you need to close quickly, you may want to consider some of the alternative loan options.
Best Option: SBA 7(a) Loan for CRE
If you’re buying a self-storage business for the first time, an SBA loan will be the most favorable loan option if you can qualify. Unlike conventional loans, SBA loans won’t require you to have specific self-storage experience if you can prove business expertise or a proven history of owning investment property.
Additionally, SBA 7(a) loans are a good financing option if you are expanding your business through the purchase of additional self-storage facilities. With an SBA 7(a) loan, you can borrow enough to cover the value of the real estate portion of your acquisition as well as the cost to buy out the other business.
With its specialized lending team focused on self-storage financing, Live Oak Bank can assist you with financing your acquisition through either an SBA 7(a) loan or an SBA 504 loan. You can connect with one of Live Oak Bank’s loan specialists to begin the application process. If approved, you can typically receive funding within 45 days.
Hard Money Loan
If you need to close quickly or if you’re not a prime borrower, then a hard money loan or rehab loan might be an option. This will be an expensive option that you’ll need to refinance within the first 12 months of owning your new property.
Delancey Street is a national commercial hard money lender that offers loans up to $8 million. Delancey Street offers an online application, which can be completed within minutes. After submitting your application, you will be contacted by a customer service agent to review your project.
Bridge loans are another expensive option, but if you have the opportunity to buy a facility for an affordable price and need to close quickly, then a bridge loan can help. 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 and be preapproved within three days. If approved, you can receive funding in as little as 10 days.
Self-storage Loans for Expansion
Expansion loans are less common in the self-storage industry due to the sizable amount of land required to add enough storage units to make expansion worthwhile. You will likely need to acquire a new facility or build a new facility at a different location to expand your business.
However, if you are fortunate enough to have acquired enough land to allow for expansion, there are many financing options available.
Self-storage Financing Options 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.
Best Expansion Option: SBA 7(a) Loan for Commercial Real Estate
An SBA 7(a) loan works well for financing the expansion of your self-storage business as it allows you to finance your construction interest charges and up to two years of loan payments into your loan amount. While the interest rates are similar to a conventional bank loan, most traditional real estate loans do not allow for these additional expenses to be included in your loan.
Self-storage Loans for Renovation
When operating a self-storage business, it is important to maintain its curb appeal. Having a well-maintained property is important. Your customers are going to be keeping their personal belongings in your facility, so you want to instill the 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.
- 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.
Self-storage Financing Options for Renovation
The loan size for a renovation project can vary greatly depending on the type of facility you have, the repairs and renovations needed, and the amount of the property that will be affected. If you decide to renovate your facility or make significant costly changes completely, an SBA loan will likely be the most affordable option for your business.
However, for smaller-scale repairs and renovations, like reconfiguring a portion of your facility, an SBA loan will not be worthwhile for either you or the lender. Under these circumstances, you may want to consider a business line of credit or a hard money loan.
Best Option: Conventional Bank Loan
A conventional bank loan will be a good fit for the self-storage facility looking to renovate a single aspect of their facility. Applying for financing through a bank that you have a relationship with 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.
SBA 7(a) Loan
An SBA 7(a) loan offers an affordable long-term financing solution for renovation projects. SBA loans for commercial real estate can have loan terms that extend up to 25 years, which allows for lower monthly payments.
SmartBiz offers an expedited loan process for SBA 7(a) loans in amounts up to $350,000. To be eligible, you will need to have a credit score of at least 680 and at least two years of business operations. You can prequalify online in minutes and, if approved, receive funding within 30 days.
Business Line of Credit
A business line of credit is great to have for smaller projects or recurring capital needs. 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. To be eligible, you will need at least $100,000 in annual revenue and at least six months of business operations. You can prequalify online in minutes and get funded in one to three days.
Hard Money Loan
These loans are typically short-term with repayment terms of 12 months. 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.
Refinancing Your Self-storage Loans
Refinancing can occur for several reasons in the self-storage business. Typically, you’re either refinancing an expensive loan you needed to acquire or build a new facility, like a bridge loan, or you’re refinancing to take your equity out of the real estate you own. Refinancing an existing successful self-storage business is generally the easiest self-storage loan to obtain.
When refinancing a current loan, the lender will not only be interested in your credit profile and business performance, but they’ll also review your payment history. If you’ve struggled to make timely payments, it will generally be more difficult to refinance your current debt.
Self-storage Refinancing Options
Having a successful self-storage business generally gives you the leverage to compare financing options to determine which will offer you the best terms. Generally, the most affordable options will be either an SBA 504 loan or a conventional bank loan.
Best Refinancing Option: SBA 504 Loan
Refinancing your existing self-storage loan with an SBA 504 can be advantageous. It will often allow you to obtain financing at lower interest rates than you were previously paying and allows you to consolidate multiple loans into a fixed payment.
Live Oak Bank offers SBA 504 financing for self-storage businesses. If you have maintained timely repayment of your existing debts and are seeking to refinance contact Live Oak Bank’s self-storage financing specialists to begin the application process.
Conventional Bank Loan
Self-storage businesses with a successful history, in both revenues and timely payments, will be able to negotiate a good refinancing deal to lower their debt payments through a conventional bank loan. At this stage, a conventional bank loan will likely offer you the most favorable interest rates and lowest payment options.
Business owners that need a fast short-term financing solution, or that are unable to qualify for long-term financing may want to consider alternative loans. These loans are typically expensive with very short repayment terms and should only be considered if you are unable to wait for a long-term loan or if you don’t qualify for one. Alternative loans from online lenders are generally a fast source of funding.
Self-storage Financing Frequently Asked Questions (FAQs)
A lot of information has been covered in this article about self-storage financing, including the various types of self-storage loans, and which ones are best for various loan purposes.
Are self-storage businesses profitable?
Self-storage businesses can be profitable if they are located in an area where demand for the service is present. The most profitable self-storage businesses will be located in areas that have a steady source of residential turnover, such as military bases, college campuses, or large apartment complexes, as this provides ongoing customer demand.
How much does it cost to build a storage facility?
The average cost to build a self-storage facility ranges from $25 to $40 per square foot. This cost per square foot only accounts for the construction of the structure and does not include any infrastructure, site work, or utility costs that may also be necessary.
Is self-storage considered owner-occupied?
The SBA considers self-storage to be owner-occupied for the purposes of SBA 7(a) and SBA 504 loans. However, lenders may classify them as nonowner occupied. The difference here is the way that the lender will report the loan on its call report to the Federal Deposit Insurance Corporation (FDIC) and has no impact on the borrower.
Self-storage facilities have traditionally been a great commercial real estate investment option, which means you have plenty of loan options to choose from. Depending on what you need the money for, your loan choice will vary. However, the best option for prime borrowers is almost always going to be a conventional bank loan or an SBA loan.
Live Oak Bank offers both SBA 7(a) loans and SBA 504 loans for self-storage financing. Its dedicated self-storage lending team understands the unique needs of self-storage businesses and can help you obtain the financing your business needs. Connect with a loan specialist today to start the application process.