New to Self-Storage Ownership? A First-Time Investor’s Guide to Getting Loan Money
|Copyright 2014 by Virgo Publishing.|
|Posted on: 09/09/2011|
By Joseph Cacciapaglia
"How do I buy my first self-storage property if I need industry experience to qualify for a loan?” I frequently hear this question from would-be self-storage owners. Lenders know that owning and operating self-storage is very different from owning other commercial real estate investments. Leases are shorter, and operations more closely resemble a retail business than a passive real estate investment. For this reason, and especially in this tough credit environment, lenders only make loans to experienced borrowers.
“I’m going to hire an experienced property manager. Isn’t that enough?” This is the question that usually comes next. While it’s often helpful to add a professional self-storage management company to your team, it usually isn’t sufficient to quell the lender’s fears. The problem is the property manager is not the one on the hook for the mortgage payment each month. Additionally, if the borrower isn’t experienced, he may not be able to properly manage his manager.
“So how does anyone get into this business?” There are several answers to this question. You can buy a property with all cash; you can partner with an experienced owner; you can inherit a self-storage facility; or you can convince your lender you’re an experienced borrower despite never having owned a self-storage property. Many lenders will not accept anything other than actual self-storage ownership experience. However, some can be swayed by presenting the experience you do have in the right way.
Give Your Lender Confidence
What lenders really want to know is you’re going to be able to repay the loan. That’s it. (Well, sometimes they also want to know they’ll be able to sell your loan, but those aren’t the lenders we’re discussing right now.) All underwriting criteria is designed with repayment in mind. Understanding this point makes it possible to persuade your bank to lend you the money for your first self-storage purchase. There are a number of ways to give your lender the confidence that you’ll be able to repay your loan. Here’s how.
Hire a third-party management company. If you don’t have any experience on the operations side of the self-storage business, this is a crucial first step. This makes the lender a little more confident the business will be run professionally. But, as mentioned above, it doesn’t completely solve the problem.
Highlight your real estate ownership experience. Hopefully, you’ve owned other real estate in the past. If this self-storage property is your first investment, you may be out of luck. If you have other experience, let the lender know.
For example, I know several apartment investors who have made the switch to self-storage. In each case, it was critical to show the lenders this experience and explain how it relates to self-storage. For extremely experienced real estate investors, this might be all that is necessary. However, in most cases, the lender will still want to see someone on your team with self-storage experience, even if it’s just the third-party management company mentioned above.
Highlight your retail experience. Self-storage is very close to being a retail business. Most lenders will quickly see the value of a borrower with a deep level of retail-operations experience, but it has to be more than just a summer at Burger King during high school. One investor I know spent several years building and running a well-known retail chain, and lenders were happy to have him as a borrower.
Strengthen other parts of the loan application. Having a strong application in other areas can often minimize the experience requirement. For example, one lender recently made a loan on a self-storage property to a doctor whose only experience involved single-family rental housing. However, the doctor had significant assets and income and a fantastic credit score. He was also hiring an experienced manager.
Knowing this borrower could pay back the loan even if the self-storage operation failed allowed the lender to make this loan despite the borrower’s relative inexperience. Making a larger down payment or pledging additional collateral will also strengthen your application.
Show lenders you’re knowledgeable. This doesn’t mean telling them about the books you’ve read or the real estate guru boot camps you’ve attended. It means coming to them fully prepared. Presenting lenders with a complete and professional loan package up front reassures them that you know what you’re doing.
Your package should include a detailed market study, pro forma and business plan. It should also include your résumé that highlights whatever experience you do have, and the résumé or brochure for the third-party management company you’ll hire. If you’re planning to make any changes or rehab the property, you need to include a budget and description of what you’re planning to do and why.
Bring in an experienced partner. If you’ve presented all of the information above and your lender is still not satisfied with your experience, you can always bring in an experienced partner. If you’ve found a good deal and you’re putting up most of the equity, you shouldn’t have trouble finding an experienced operator to join your investment.
It’s important to paint the entire picture for your lender. Don’t try to hide your inexperience; acknowledge it, and then quickly present your case using the points above. While this strategy won’t work with every lender, it gives you the best shot at obtaining a loan on your first self-storage investment.
Joseph Cacciapaglia is a commercial loan officer at BMC Capital. He arranges financing for self-storage owners and investors throughout the United States. To reach him, call 979.218.2286, or read his blog at www.usstoragenews.com .