“100 Percent” Financing for Self Storage Facilities
At Green Commercial Capital we help a lot of small business owners with 100% financing and because we promote that fact, we get a fair number of calls from real estate investors looking for a small business loan for rental property with the hope that 100 percent investment property financing exists. Well, it does and it doesn’t, which gets me to the subject of this post.
I put 100 Percent in the above headline in quotes because while this post is about whether or not 100 percent investment property financing is possible, what we are talking about here is a very viable means of getting to “100% financing” for self storage, mini storage or boat and RV storage properties as long as you have the ability to put down 10%, BUT since that 10% can be borrowed, you can effectively structure 100% financing – just with a asterisk.
So basically, at a minimum it is 90% financing, but if you have the ability to borrow the 10% down payment (and many people do) or if you have a self directed IRA or 401k from a former employer with enough in it to put down 10%, then you can structure 100% financing.
I resisted giving this post the title 100% investment property financing lest I sound too much like a “no down payment” late night infomercial from back in the day, BUT I wanted to make the point that this is an extremely realistic option for many novice and experienced real estate investors – many of whom do not know it exists or never considered investing in or owning self storage…or perhaps assumed they needed 25% or more down to get a deal done.
Self Storage Financing Eligibility Requirements
Here is the skinny if you are contemplating doing this. At the very least, you need:
- Good credit and good credit scores
- Good job/source of income
- Investment property experience OR enough “business savvy or real world experience” to get a lender comfortable with your ability to own or manage a storage property
- 10% down (that you can borrow) and…
- you must be able to prove that you can handle the payments for that borrowed money from your “regular” income or income from your spouse
Let me explain further:
As mentioned above, we get a lot of calls from experienced (and aspiring) commercial real estate investors looking for no down payment commercial loans or 100% investment property financing. Sometimes these people are very unqualified and sometimes they have what it takes, but they may not know it yet.
Most of the time they are calling about multi-family or apartment loans and each time I have to tell them that we cannot do it, BUT what I can tell them is that it is possible to structure 100% financing of self storage/mini-storage or boat and RV storage facilities IF you have the ability to borrow 10% to put down and meet the rest of the SBA loan requirements.
Self Storage Or Apartments?
Lots of real estate investors are aware of self storage and think of it as “investment property,” but many who are contemplating purchasing investment property do not know as much about mini storage since multi-family and apartments are generally what is most talked about by real estate investors.
Ironically, mini-storage can be financed as an owner occupied business property with an SBA loan. The reason for this is the majority of self storage businesses are owned by “mom and pop” small business owners who either actively manage the property, have an employee who manages it or have an arrangement with a 3rd party manager, but nevertheless are “involved enough” in the day to day operations to be considered a “small business” and therefore able to pass the SBA eligibility test.
What I have found is that many borrowers have the ability to come up with the down payment either by borrowing against their home, an investment property, from a finance company, a relative or a retirement account. Gift funds are okay too and you can have “investors” as long as you have either enough of your own skin in the game (or some other quality that causes a lender to feel that you are a good risk) and you keep any investors under 20% ownership.
Even those real estate investors I have helped who own 1-4 family or apartments and who had some self storage knowledge had no idea you could buy or build a facility with 10% down and that the 10% could be borrowed. In each case, they started thinking about how nice it might be if they could take the majority of the “human” element out of the their business. In other words, if someone does not pay their bill you can quickly and without much drama say goodbye to them as a tenant as opposed to evicting a family.
SBA Mini-Storage Highlights
Here is a rundown of some of the good and bad:
- You only need 10% down for a purchase or for ground up construction.
- If you are doing ground up construction, you can actually finance enough operating capital into the loan to get the property to breakeven. (You might want to re-read that, because this means the first few years of payments on the loan are baked into the loan). Think about that.
- The facility must breakeven 24 months after Certificate of Occupancy per SBA rule.
- A feasibility study from a reputable consultant may be required for construction.
- Some lenders do not like previous bankruptcies and some SBA lenders are okay with a bankruptcy if it is at least a few years old.
- Some lenders will not do loans under 500K/others will go as low as 350K or possibly lower.
- The max loan with 10% down is between $9 million and $10 million.
- The max loan with 15% or 20% down is much higher ($20 million+) and case by case.
- It is possible to use a professional third party management company, but only a few are approved by SBA.
- If you are only putting down 10% AND you have more than 25% equity in another property, you may have to live with having a small lien on that property for additional collateral, but this can be case by case as well.
- The SBA loan fees are not cheap, but they are financed along with most other closing costs.
- The 10% down SBA program only has a short 3 year prepayment penalty and the penalty is only 1% after year 2.
- Many people are using this program to get a facility built and leased up with 10% down on the total project costs with an eye towards refinancing after 3 years when their self storage facility is worth a lot more.
- All of the above applies for Boat and RV Storage although if building outdoor Boat and RV Storage you may need some structure on the property (canopies, small building, etc.) to be eligible with some lenders.
Bottom line, this “SBA loan for real estate investment” offers incredible leverage and an excellent way for you to get a small business loan for rental property.
Please get in touch if you would like more info: jking (at) green commercial capital (dot) com.
If you own a small business and you are looking to finance 100% of a property that your business will legitimately occupy at least 51% of, then you can get some good info here.