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Thread: Self Storage Financing: Fact from Fiction

  1. #1
    Golfman530 is offline Junior Member
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    Default Self Storage Financing: Fact from Fiction

    Hello everyone,

    I have a question about financing self storage facilities and I have talked to a couple of different people (other investors and a banker) and I have been hearing so many different things and I don't even know what to believe anymore. It is truly making my head spin.

    Okay, this post is about financing already existing facilities and not so much about financing new developments. I know there are many, many investors out there who fund their acquisitions of new facilities through banks and then also investors, both equity partners and debt partners. I know the reason for this is because they either don't have enough capital on their own for the down payment the bank requires or they don't want to tie up all of their capital into one deal.

    I spoke very briefly with a commercial banker who said that the banking practices at his bank have changed drastically over the past couple of years. He said that it used to be that a person could come into the bank, get a 75% LTV loan, get a 10% carry back from the seller, and get 10-15% from an investor and all of this would be perfectly acceptable in their eyes. He said that a lot of people ended up doing these no money down deals and some actually walked away from the closing table with a check in hand because they borrowed more than they even needed.

    He said now however that to get a commercial loan, they are looking for a person to bring 30-40% in cash and they will only loan 60-70%. He also said that many banks won't allow a second mortgage on any properties such as a seller carry back or even debt partner servicing, thus ensuring that the down payment is your actual cash and not borrowed.

    A couple of investors I have spoken to said that owner finance deals do exist but that they are not very common and that they can be at times difficult to negotiate and work successfully.

    I say all of that to ask this. If this stuff is true, how in the world can an average person begin investing in self storage if they have to work for years and years and years just in order to save enough for a down payment? Also, I know that people use investors and if this stuff is true, wouldn't that mean that investors would be out of the question in today's lending practices?

    I also know that Self Storage is the only type of investment property that can be bought with an SBA loan and that it can be all the way up to 90% LTV but if you are buying a $1 million facility, does that mean that you still have to have the $100,000 in cash yourself?

    I guess I really need guidance and information as to how this all works and how people can begin in the business if this stuff is true and they don't have a lot of money on their own to start with.

    Thanks a lot.

  2. #2
    MZC&D is offline Senior Member
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    Default Re: Self Storage Financing: Fact from Fiction

    This is not an easy or cheap business to get into. I have never bought an existing facility, but I did just build my first facility about 2 years ago and these days it is not easy to find a bank to mortgage a development of this size. The short answer is yes we got a 75% ltv loan and the partners had to front the other 25%. Basically if you are borrowing that 25% the bank will probable see that as a second loan and they want to be the first in line when you fail. I have learned that for the most part the banks assume you will fail, so they want to minimize their losses. The best advice I can give you is you need to have some partners, I do not recomend having partners, but sometimes it is neccesary to make the deal work. One the up side if you BUILD your first facility then you have some sweat equity and can at a later time refinance for more and draw that cash out to build another site, or buy.

  3. #3
    Steve_hajewski is offline Senior Member
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    Default Re: Self Storage Financing: Fact from Fiction

    Golfman> My experience and is in new construction financing. And yes, 10% of a million dollar project is a whole lot of downpayment. Plus, keep in mind that you have to make the payments on the place while it is renting up.

    So how to people new to the industry do it? Well, most don't start with million dollar facilities. Starting too big is a great way to go belly up. To be honest, even those entering the business without much cash still need to have some kind of net worth - equity in a home, assets in a retirement plan, and ideally a steady income from other sources.

    Some tips on getting started with little cash:
    - Get a good deal on your land
    - Buy only the land you need so that you are not paying interest on non-income producing property. A big parcel with room to expand is nice, but that's a luxury.
    - Phase your buildings to minimize up front expenses
    - Build a small project to start. One million bucks buys a LOT of storage units.
    - Many of our customers dig into their retirement plans for startup cash. Some plans may have an option to lend money to yourself. Home equity is also a common source.
    - Partnering with someone that has more money than time can work, or partnering with someone who owns the land. The land itself can serve as equity in the project to help get a loan.

    Note that your first project may be so small that you can't hire a manager. Run it yourself to start build close to home or work so that you can tend to it a bit without too much hardship. As you grow in occupancy and site size, you'll be in a better position to hire a manager. In the market where I live, there are no on site managers unless you drive 30 miles to Madison.

    Feel free to contact me with questions.

    Steve Hajewski
    Marketing Manager
    Trachte Building Systems
    608 327-3208

  4. #4
    Golfman530 is offline Junior Member
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    Default Re: Self Storage Financing: Fact from Fiction

    Thank you guys for your responses.

    I used $1,000,000 just for ease of use not because I think I have to start with a property this big.

    So for acquiring existing facilities, many times people do use partnerships in order to purchase properties today? I was just confused about that due to the fact that a couple of people told me that there are some banks who are not allowing a second mortgage on a property. When you say using partner,
    The best advice I can give you is you need to have some partners
    are you talking about debt partners or equity partners?

    Also, I was wondering if anyone knew anything about owner finance when it comes to purchasing existing facilities relating to how somebody can break into the business. I realize that finding a seller who is willing to finance 100% or even 80-90% would be difficult and that they would have to be very motivated for whatever reason.

    I definitely can see the benefit of building your own facility for the many reasons stated but I think that developing my own is further in my future and I would rather start by purchasing an existing facility.

  5. #5
    MZC&D is offline Senior Member
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    Default Re: Self Storage Financing: Fact from Fiction

    I was talking about equity partners. Basically we my partner and I go to the bank and everything is in both of our names, if it is a 50/50 partnership then we each put in half of the cash and this wouldn't be considered a second mortgage, now how you come up with that cash is another story. I would not recomend a 50/50 partnership though, someone has to have the majority controll so if there is ever butting heads then one of you has the final say. That being said you can have more than one partner, I assume the banks would like multiple partners because then they have more people to go after if business goes bad.

    We don't buy facilities because if we found one that was up to our standards, most likely it wouldn't be for sale. However the development of a storage facility is a very large undertaking so I can understand not wanting to build your first one. Our facility took 6 months to build, but the total development process was probably over 2 yrs.

  6. #6
    Golfman530 is offline Junior Member
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    Default Re: Self Storage Financing: Fact from Fiction

    Thanks MZC&D!

    I can totally see your point about the possible danger of a 50/50 split. I have heard from countless people in many different types of businesses that this can be very difficult for the same reasons in which you mentioned. You are basically putting the entire business or investment in the hands of the other person you are dealing with because you can't make any final decisions on your own. This can be especially bad if your partner is a family member! I also know that sometimes this is a way to get a steal of a deal in purchasing an existing facility if the partners suddenly can't stand each other and just want out at almost any cost!

    If you have done a 50/50 split, I am just curious as to how you made it work? Did you delegate different tasks between the two in an attempt to make the work even? How did you deal with the expenses as far as who was responsible for paying them?

    I have also heard of some equity partnerships where one person brings all the money for the down payment and the other person does all the operations of the facility and they somehow agree on a fair split. I would think that this type of partnership might be difficult to find but that there might be some out there who would do it.

    We don't buy facilities because if we found one that was up to our standards, most likely it wouldn't be for sale. However the development of a storage facility is a very large undertaking so I can understand not wanting to build your first one. Our facility took 6 months to build, but the total development process was probably over 2 yrs.
    This is exactly what I was hoping to avoid while just trying to get into the business. I feel like it would be an overwhelming process for a beginner.

    You also make a good point about the quality of facilities that are for sale not being up to your standard. I do have a thought about this though, couldn't it be easier to purchase one of these properties that needs work for a discount and then reposition it to the quality that it should be? I know this can't be done in every situation but wouldn't it be easier, cheaper, and less time consuming that building from scratch? Maybe I am way off on that but I just wanted to ask.

    Thanks

  7. #7
    Madman's Avatar
    Madman is offline Moderator
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    Default Re: Self Storage Financing: Fact from Fiction

    If it was easy, everyone would be doing it!

    The fact is for an independent getting into the business it just isn't easy. Because it requires serious money and SERIOUS debt you need to approach it patiently and informed. Starting small is a great idea and getting your feet wet in the business is essential as it's all business these days. Good facilities command a good price. Poor facilities can be had for a low price and this all happens for a reason. There is nothing easy about turning around a facility and whichever way you cut it you need to work hard and smart with your money and guarantees on the line.

    I'm in Canada and have noticed that when new inexperienced folk enter storage for the first time they are starting conservatively, with partners and in many cases self financing or financing with very little leverage. And I know many of them hit a ton of challenges along the way but they are prepared for the unknown and they battle ahead.

    In this economy there isn't any easy way about it or a get rich quick system. Even moreso, consider a heavy leveraged investment stalling or going sideways. Sure the equity is tied up but what about the debts you have guaranteed or the cash flow you now have to subsidize unitl break even.

    You have good real questions and I'm not being pessimistic at all but I am being 100% real and hate to see people get hit by big surprises.
    Last edited by Madman; 9th November 2012 at 03:49 PM.
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  8. #8
    Golfman530 is offline Junior Member
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    Default Re: Self Storage Financing: Fact from Fiction

    Thanks Madman.

    That makes a lot of sense. I certainly realize self storage isn't a get rich quick system or something that requires very little work. This is exactly why I am trying to reach out to people who have done it before me so I can learn from them and their mistakes. I would NEVER venture into my first property without being educated first. I also think that the saying, "Rome wasn't built in a day" applies very well to this situation also. I would much rather start slow and steady with a solid foundation than try to grow very quickly and get over my head.

    Thanks for your input!

 

 
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