Financing is a key part of a self storage acquisition. The type of loan you get will primarily depend on the strengths of the transaction and how much capital you are injecting. The following outlines several options and the corresponding stipulations:
This type of loan usually requires a 30-40% injection. The injection can be less, but that’s usually because a borrower has a long-term relationship with a bank and has a lot of personal strength/outside income. Conventional financing generally will amortize over 20-25 years but mature (balloon) after 3-5 years. Rates are lower than with SBA financing discussed below, currently around 4-5%. However, there will normally be a prepayment penalty, and there will be financial covenants, which allows your lender to require accelerated payments or other considerations if a problem arises.
Guaranteed by the federal government, these loans can also fund some working capital for initial advertising along with the real estate purchase. They are 25-year, fully amortizing loans (no balloons). Rates are higher than conventional: Prime + 2.25% to Prime + 2.75%, adjusting (currently 6-6.5%). However, they require a lower downpayment, usually 10-20%. There is a prepayment penalty, but only for the first three years. After that, there is no penalty for refinancing.
This government program can only be used when there is no goodwill: the purchase price does not exceed the property’s appraised value. 504 offers two loans: a conventional first mortgage (usually with a longer maturity than conventional, either 10 or 20 years) and a second mortgage held by the government that fully amortizes over 20 years. Both loans have prepayment penalties. Rates are a little lower than the 7a program, but the injection will generally be 20%.
These loans provide better financing than conventional lending, but are usually reserved for strong borrowers with stabilized properties.
There are a number of factors in determining your type of financing. Whichever suits your transaction, be sure you work with a bank with knowledge of your requirements. Good luck with your financing!