Navigating The Self-Storage Craze

Terrydale Capital

Aug 11, 2022 18 Min read

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Here is a mind-blowing fact; a whopping 19 million Americans have a hoarding disorder.

Are you thinking of venturing into commercial real estate?

Consider investing in self-storage facilities if you are a potential real estate investor, business, or a real estate investment trust. A Mordor intelligence study valued the self-storage industry at over $48 billion and growing, meaning you can make a killing if you decide to invest.   

From mom and pops to nationally acclaimed businesses, self-storage mania has taken the country by storm. Reports indicate approximately 10% of Americans pay an average of $91 monthly for a self-storage unit, hence the more than 50,000 estimated self-storage units stateside.

Now, that sounds like a sound investment, right?

But, do you have the funds to cater for the $25 - $70 per square foot needed for construction, assuming you already have land?  

If not, no worries. Keep on reading for deeper insights into self-storage facilities and self-storage financing.

About Self-Storage Facilities

A self-storage facility is a space you provide to allow a party to rent convenient and fortified storage units to store their valuables.

Self-storage facilities are classified into:

• Class A - modern and high-quality units constructed within the last 15 years. They have ultra-modern amenities, are professionally managed with high-end tenants, charge the highest rent, but have the highest tenancy rates.
• Class B - older than class A, and the tenants are mostly middle to low-income earners. They are well maintained, but some may have cases of deferred maintenance. However, with proper renovations, you can easily upgrade these units to class A.
• Class C - 20 years or older. Their location is less than ideal, resulting in the lowest tenancy and low rent. They have tons of maintenance issues and require lots of renovation to earn you ROI.

No matter the class, various parties require storage units because:

• To supplement their existing storage
• For a safer and convenient storage location
• Home renovations
• For archiving and decluttering
• Various transitions in life
• When they are on the move

Every tenant wants a storage space that'll award them total control. With self-storage, a tenant has total control, security, and 24/7 access to the storage unit.

Why Invest in Self-Storage Facilities

The current real estate market is hot and ripe, owing to the low mortgage interest rates. Nevertheless, before you proceed, we thought you should have a clearer picture of the pros and cons of investing in self-storage units so you can make an informed decision.

Pros

Competitive Lending Structures

You can access self-storage financing from multiple sources, each with varied lending structures. For instance, Terrydale Capital offers conventional financing at an average rate of 5.75% and non-recourse bridge loans with up to 85% loan-to-value and an average rate of 7.50%. On the other hand, SBA loans are available with three acceptable and affordable base rates with 90% loan financing.

Stable Income Producing Assets

Self-storage units can provide you with stable and consistent cash. With reduced overhead, such as maintenance, repairs, and management, you can rest assured of making a decent profit.

Self-Sufficiency

Thanks to ultra-modern technology, most storage units require minimal supervision. By installing smart systems, you can control important systems such as security remotely. Additionally, you can automatically set certain conditions for the optimal operation of the facility, such as auto climate control.

Resiliency to Recession

The self-storage sector has stood the test of time, with a projected approximate 135% compound annual growth rate (CAGR). During the financial crisis of 2008, the self-storage market was recession resistant.  When the economy is strong, people tend to buy houses or upgrade to larger houses, both of which require renting self-storage units during the transition between moving residences.  In addition, people tend to accumulate material possessions when the economy is strong, which also bodes well for the self-storage industry.

Lower Barrier of Entry

​​​​Self-storage investment is a great opportunity for new investors as there are lower barriers to entry compared to other assets in the market.   Self-storage financing via SBA 504 loan programs offers LTC (Loan to Cost) of up to 90%  depending on the loan amount.  In this instance, of the 10% down payment required, the investor is allowed to borrow the down payment, essentially increasing a 100% financing scenario for investors in some scenarios.  The loan terms on the 504 products are typically longer in length (up to 25 years), which eliminates the need to refinance every five, seven or ten years.  The interest rates are generally competitive with other asset types. While lenders are concerned about a borrower's commercial real estate experience when acquiring other asset types, the investor of a self-storage property does not need to have self-storage industry experience.  This makes purchasing a self-storage asset for a first-time investor worthwhile.

Cons

More Time-Sensitive for Smaller Properties

Self-storage units vary in size. The larger the space, the more valuables a tenant can store. A tenant might rent a small unit but accumulate more valuables over time, forcing the tenant to move to a larger unit. You need to look for another tenant looking for a small-sized self-storage unit soonest if you are to continue making a profit; else, you'll have to pay the few operating costs out of pocket.

Competitive Bidding Wars on Viable On-Market Opportunities

In some cases, real estate investors buy existing self-storage facilities with potential for growth and success. When such investors learn of such a unit in the market, they begin a bidding war. Such bidding wars can get competitive, resulting in hiked final property values more than most small-scale investors can afford.

Lower Net Operating Income (NOI)

Self-storage units have a reduced NOI as compared to other real estate properties. For instance, a 15 * 15 self-storage unit rents for $120. With an expense ratio of 40%, you can make $80. On the other hand, a multi-family three-bedroomed house that rents for $1200, with an expense ratio of 50%, can fetch you $600. While they both have similar returns, they vary in cash flow dollar value.

Self-Storage Financing

There's been increased popularity and traction in self-storage investment assets, leading to lenders developing a competitive appetite for commercial real estate financing.

The good news is, various financing structures can cater for your self-storage financing, such as basic loans, exotic loans, and tensor-based, to name a few. But, before you access the financing, a lender will take a look, see your business's financials, the value of the self-storage units, your credit qualifications, and the surrounding market.

How Self-Storage Financing Works

Varied self-storage lenders provide varied loans with repayment periods ranging from 5 – 25 years. This way, you can balance the costs of the self-storage units and allow you to have reduced monthly repayments.

The basic qualifications for self-storage financing include:

• A 640 minimum credit score
• Place a 10% minimum advance payment
• Be in business for the last two years
• Have a 1.25 or above debt service coverage ratio (DSCR)
• Have a clean credit history, which means no recent bankruptcies, foreclosures, or tax liens

If you are not sure whether or not you qualify, head on to your preferred lender for a detailed consultation.

Sources of Self-Storage Financing

The good news is, there are various sources of self-storage financing at your disposal. All these have varied terms and conditions.

Among these loans, two stand out: self-storage bridge loans and conventional loans.

Terrydale Capital Bridge Loans

Are you worried that you fail to meet the qualifications for the conventional bank loan to finance your self-storage investment? Well, we have a solution for you.

A bridge loan is a short-term, high-interest loan with a typical repayment period of six months to three years and is available to both individual real estate investors and businesses. A bridge loan gives you the fastest access to self-storage financing, as long as you have real estate collateral and meet the bridge loan lender's credibility. The icing on the cake, you can refinance a bridge loan with a conventional bank loan.

Benefits of a Bridge Loan

If you are seeking self-storage financing, consider bridge money because:

• Fast and convenient access to funds, owing to the as fast application process.
• Competitive and readily available in the real estate market.
• You can fund commercial real estate projects that government-backed funding can't fund.
• Lenders don't apply elimination algorithms used by banks.
• More flexibility, giving you some months free of payment.
• Consistent low risks and high rewards when compared to investments yielding fixed incomes.

Drawbacks to a Bridge Loan

• Potential additional costs, such as appraisal, administration, notary, wiring, and escrow fees, to name a few.
• Higher risk exposure to both you and the lender.
• The shorter repayment period means you need to work round the clock to be able to repay on time

When Bridge Money is Ideal for Self-Storage Financing

Acquiring self-storage financing is the initial step necessary to begin your investment journey. Reasons vary for seeking self-storage financing.

These reasons include:

Acquisition and Construction

You may spot a potential self-storage unit that's in the market but lacks enough funds for acquisition. Keep in mind that if you've spotted such prime real estate, chances are others have as well. Similarly, you may wish to start the self-storage business from scratch, meaning you need to buy land and begin construction. With self-storage financing, you can acquire land and construct self-storage units or acquire existing units.

Renovation and Expansion

Like any other real estate, self-storage units require renovations after a certain period. Remodeling real estate property gives it a newer face and might attract more tenants. In addition, you may have an influx of tenants and lack enough space. Self-storage financing can facilitate renovation and expansion.

Refinancing

If your current self-storage loan isn't favorable, such as high-interest rates or payment timetable, you might consider refinancing.

Refinancing your loan will allow you to save more on interest, giving you an influx of cash that you can reinvest in the business for other purposes, such as remodeling or installing ultra-modern amenities.

Working Capital Boost

Some day-to-day operational costs of the self-storage units need to be met, such as inventory. Some of these might be time-sensitive, such as in moments of slow business. If you don't have the funds, financial structures could come in handy, such as a bridge loan to meet these costs.

Conventional Loans are One of The Best for Self-Storage Refinancing

While the global pandemic has changed many aspects of the world today, the real estate market has changed for the better. Let conventional money cater for your self-storage financing and start reaping the rewards, including:

5-10 Year Fixed Terms

• Up to 30 years of amortization
• Rates as low as 4.75% (5.50% average)
• Improvement and expansion costs included in the loan
• Working capital for payroll or marketing included in the loan

When you're ready for the most competitive financing structure in the market for your self-storage deal, contact Cody Baker at Terrydale Capital.

Don't dally, get a quote today, mention code "CRAZE", and get a free appraisal cost waiver with Terrydale Capital financing.