Self storage loans are typically used to finance the purchase, renovation, or new construction of self storage units and commercial real estate buildings. The three most popular self storage loans are conventional bank loans, SBA 7a loans for commercial real estate, and SBA 504 loans. Other alternative loan options exist, but typically are more short term.

SmartBiz is an online SBA loan provider who offers SBA 7a commercial real estate loans up to $5 million with repayment terms up to 25 years. They work directly with lenders and match them based on your unique needs, which speeds up the SBA loan process and improves your chances of getting funded. Pre-qualify online in minutes.

How Self Storage Loans Work

Self storage loans are typically commercial real estate loans. They are usually long term loans aimed at spacing out the total cost to build or buy self storage units over 10 to 25 years. Lenders for self storage loans generally look at the business’s financial performance, value of the real estate, the surrounding market, and your credit profile to make a lending decision.

These loans are almost always used to buy commercial real estate or build from the ground up and are very popular with lenders. According to Marc Goodin, Co-founder and President at the Storage Authority Franchise:

“Self storage facilities have been the most profitable real estate business, and they’re loan friendly because they have the lowest failure rate of pretty much any business out there.”

Where to Get Self Storage Loans

Typically, there are three main options when you’re looking at self storage loans:

  1. Conventional Bank Loans
  2. SBA 7a Loans for Commercial Real Estate (CRE)
  3. SBA 504 Loans

Each of these options can be found at traditional lenders, like Northeast Bank, or through a broker, such as SmartBiz. The table below compares these three options at a glance. Interest rates on all three loan options generally range between 5-7%.

Self Storage Loan Qualifications

The qualification requirements for each of the main loan options only have a few slight differences. For all of them, you’ll typically need to be a prime borrower with some collateral to put up for the loan. This means that if you meet the basic qualifications for one, there’s a good chance you’ll also meet the needed standard for the others.

In order to qualify for one of the self storage loans above you’ll typically need to meet these 5 basic qualification requirements:

  1. Credit score of 680+ (check yours for free here)
  2. Cash down payment of at least 10%
  3. 3+ Years in business
  4. Business debt service coverage ratio (DSCR) of 1.20+
  5. No recent bankruptcies, tax liens, or foreclosures

Mini storage businesses are considered to be passive income businesses, which may disqualify you from some conventional bank loans. Luckily, the SBA rules were changed in 2010, allowing passive income businesses to qualify for commercial real estate loans. If you’re pursuing a conventional bank loan you should ask about this requirement up front, before you submit any documentation.

Now that you have a good overview of whether or not you may qualify for a self storage loan, let’s take a look at when you might want to use each one based on your financing needs. Of the three options above, we will choose the best option for each situation and then provide any other alternative options that might be a fit for you as well.

New Construction Loans

Building a new self storage facility can be difficult to get financing for unless the surrounding market is right. If the market is strong with a low amount of surrounding storage facilities, then there are many lenders willing to lend for a new construction project.

Building a brand new facility can be very expensive, especially if you’re trying to build a top of the line facility that’s indoors, has temperature control, and high-end security. Having a market study done showing the number of units compared to the population as well as the general population characteristics can help you get approved. The self storage industry is very predictable, and lenders rely heavily on these market studies for new construction projects.

For example, self storage units do very well close to military bases and college campuses. Having a market study showing a low amount of storage units next to a military base will help the lender understand what your likelihood of success should be. This helps them identify pretty quick whether or not your construction project is a good investment for them.

According to Pat Dignan, Executive Vice President of Northeast Bank:

“Self storage facilities are attractive because there are low barriers to entry, they are cheap to build, and revenue per square foot is relatively high. The low barriers to entry are also the greatest risk to the sector as over-building can be a known issue. The general rule is about 5.5 square feet of mini-storage space per person in a given market.

But, lenders will differ with respect to their determination of what a “Market” is and also whether it is over-built or not. We know there is more to a project than this one metric – which is why we take the time to understand the situation and look into the story behind each property.”

Any self storage construction is going to have certain expenses that you will need to pay before you can ever rent out a single unit. You need to consider these payments when deciding how big of a loan you need. Some of these expenses include:

  • Unexpected costs that come up in site preparation
  • Operating expenses during the lease-up phase
  • Construction down payments
  • Construction interest payments

Typically, building a brand new self storage facility will cost you between $5-$8 per square foot of storage space. The average new facility takes about 36 months to stabilize and reach average occupancy levels. This can help you calculate how much you need for operating expenses like rent, loan payments, and a salary for yourself (or a manager).

New Construction Loan Options

Self storage units are less costly to build from the ground up than many other businesses, typically costing $200K – $500K. This makes each of the top commercial real estate loans a potential option for a new construction project in the self storage space.

In fact, SBA loans are especially good for self storage facilities because you can finance all of the construction interest and up to 2 years of loan payments. This can give you some breathing room to work on renting out your units instead of worrying about making your payments right away.

Best New Construction Option: SBA 7a Loan for CRE

With an SBA loan, not only can you to finance up to two years of payments into the loan amount, but you can also finance the construction interest rates you’re paying, up to 10% and a 10% contingency. It’s the best financing option, giving you time to grow your occupancy rates after construction, without worrying about where the money will come for your loan payments.

SBA 7a loans for commercial real estate are the best option for everyone but the most expensive projects. Most self storage facilities are going to be in the hundreds of thousands of dollars to build, but they won’t be over $1 million. Many lenders won’t look at your project for an SBA 504 loan at those financing amounts because they must split the money they lend with a CDC (community development company).

Real Estate Investment Companies or Private Lenders

There are many investment companies that will invest debt into one-off transactions in the self-storage space because it’s a fairly safe bet. New construction is the best opportunity for these investors because it’s likely the only financing need for a self storage facility that is large enough for them to be interested. Private money lenders might also be helpful.

Acquisition Loans

Acquisition loans are needed when you’re looking to buy an existing self storage facility. A lot of the mergers and acquisitions activity in the self storage units goes to large investment companies and Real Estate Investment Trusts (REITs). It’s less common for independent storage facilities to buy others, but there are plenty of financing options if that’s your goal.

Acquisition Loan Options

When you’re buying a business, you don’t want to lose out on the deal because of slow financing. While the best rates are going to come from traditional bank loans and SBA loans, they also can take awhile to fund (although Northeast Bank speeds up this process for you). If you need to close quickly, you may want to consider some of the alternative loan options.

Best Option: SBA 7a Loan for CRE

If you’re buying a self storage business for the first time, you’re going to want to use an SBA loan, if possible. These loans won’t require you to have specific self storage experience if you can prove business expertise or a proven history of owning investment property. Conventional bank loans could get hung up on this.

SBA 7a loans are also good to purchase self storage facilities if you’re adding on to your self storage business by acquiring another one. With a 7a loan, you can borrow enough to cover the value of the real estate portion of your acquisition, as well as for the cost to purchase the business.

Hard Money Loan

If you need to close quickly or if you’re not a prime borrower, then a hard money loan or rehab loan might be an option. This will be an expensive option that you’ll need to refinance within the first 12 months of owning your new property.

Bridge Loans

Bridge loans are another expensive option, but if you’re getting the opportunity to buy a facility for an affordable price and need to close quickly then a bridge loan can help. As long as you make payments on time with your bridge loan it shouldn’t impact your ability to refinance quickly to a longer term loan option.

Expansion Loans

Expansion loans are rarer in the self storage industry than in others because it takes a sizable amount of land to add enough storage units to make an expansion worthwhile. You will likely need to acquire a new facility or build another new facility from the ground up instead.

However, there are some facilities that buy enough land when they originally build to potentially expand in the future. These projects will typically have their choice of many financing options.

Expansion Loan Options

Expansion loans can be considered smaller new construction loans because you’re adding on to your current facility and building those units from the ground up. Conventional bank loans are a good option for these expansions if you currently have a profitable storage facility that you’re adding on to, but they’re not our top choice.

Best Expansion Option: SBA 7a Loan for CRE

The SBA loan is the best option because you’re able to finance your construction interest charges and up to 2 years of loan payments into your loan amount. And you can do it with similar interest rates and loan payments to a conventional bank loan.

Renovation Loans

Many self-storage facilities are judged by their curb appeal. It’s a very strong advertising message because your customers are going to be keeping their personal belongings in your facility. The facility needs to look like those belongings will be taken care of.

Generally, there are two types of renovation projects for a self storage facility:

1. Replace the Rolling Doors

The doors are one of the most important pieces of a storage facility. It’s the only thing keeping your customer’s belongings safe from theft or outside damage. It also can bring sentimental value for customers because the unit they’re renting is behind “their door” which makes it feel like ownership. That’s why the doors need to be kept looking nice and appealing.

The doors are also, in many cases, used frequently. Both individuals and small businesses use mini storage units as extra home or business storage. Often this is due to a lack of space where they live or work. These customers need to get into their units to bring new items or to retrieve belongings pretty regularly.

Raising the doors and lowering them constantly can create a significant amount maintenance cost over time. This is typically the biggest capex (capital expenditure) for a self storage facility.

2. Reconfigure Storage Units

It’s common practice within the industry to reconfigure the size of various units over time. This is typically due to a certain size of units constantly being sold out. For example, if you have an influx of customers wanting to purchase a 20×10 space, but all of your available units are consistently being used, then you may want to reconfigure some units to make more available.

While many reconfigurations can be done with cash flow, sometimes reconfiguring storage units can include some structural changes, making it more difficult and expensive. These projects often require financing before construction can begin.

Renovation Loan Options

Renovation loan sizes can vary greatly depending on what type of facility you have, how much of the facility needs to be redone, and what type of project you’re tackling. If you decide to completely renovate your facility with a mix of all new rolling doors with many space reconfigurations, then an SBA loan might be a great fit.

However, most renovations will be on a smaller scale. For single project renovations, like reconfiguring a portion of your facility, you’ll need a much smaller loan amount. This may make an SBA loan not worth it for either you or the lender.

Best Option: Conventional Bank Loan

A conventional bank loan will be a good fit for the self storage facility looking to renovate a single aspect of their facility. It will also be much easier for a bank you’re familiar working with to easily approve you for a loan to renovate because they’ll be familiar with both the numbers of your business as well as the actual facility.

Business Line of Credit

A business line of credit is great to have for smaller projects. When you have just a few rolling doors that need to be replaced you don’t want to wait for a huge financing process in order to do it. Having a business line of credit on hand can help you deal with these smaller renovation projects, and it can ease the burden of any unexpected expenses that come up.

Hard Money Loan

Hard money loans are expensive short-term loans used to purchase or renovate investment properties. They aren’t as common in the self storage industry as the other loan options in this article, but they are an option. These loans are typically repaid within 12 months.

Refinancing Your Self Storage Real Estate

Refinancing can occur for a number of reasons in the self storage business. Typically you’re either refinancing an expensive loan you needed to acquire or build a new facility, like a bridge loan, or you’re refinancing to take your equity out of the real estate you own. Refinancing an existing self storage business that is successful is generally the easiest self storage loan to complete.

Self Storage Refinancing Options

Having a successful self storage business generally gives you the leverage to see what financing option offers the best terms. It’s hard to go wrong if you choose any of the options mentioned above for a refinancing project.

Best Refinancing Option: Conventional Bank Loan

Self storage businesses with a successful history, in both revenues and timely payments, will be able to negotiate a good refinancing deal to lower their debt payments. Since your business is a proven commodity, a conventional bank will likely love to work with you. At this stage, they’ll likely give you the best rates and lowest payment options.

They’re much more likely to negotiate a strong refinancing deal compared to an SBA loan where you get what you see. This is especially true if you have a successful history of working with that bank.

Bridge Loan

A bridge loan is a financing option that covers a gap. For refinancing, this could mean getting a bridge loan instead of paying a big adjusted rate mortgage (ARM) that is coming due soon. A bridge loan is a temporary solution that either helps you close a transaction, or helps you get through to your next financing. Typically, you’ll want at least 30% of existing equity.

If you’re refinancing to take equity out of your property for a renovation, or other cost, then a bridge loan might help you get by until you qualify for a more long-term solution. For example, you may need to upgrade your facility before a conventional bank will offer you a more affordable long-term loan. The same bank offering the long-term solution may even offer you a bridge loan in the short term.

Alternative Financing

If you’re not a prime borrower, or just need a fast short-term solution, then alternative loans are available. These loans are typically expensive with very short repayment terms, and should only be considered if you can’t wait for a long-term loan or if you don’t qualify for one. But alternative loans from online lenders can generally get you funded quickly.

When you’re refinancing a current loan, the lender will not only be interested in your credit profile and business performance, but they’ll want to know about your loan payments. If you’ve struggled to make timely payments, then it will likely hurt your ability to get approved to refinance your current debt.

The Bottom Line

Self-storage facilities have traditionally been a great investment option in commercial real estate, which means you have plenty of loan options to choose from. Depending on what you need the money for, your loan choice will vary. However, the best option for prime borrowers is almost always going to be a conventional bank loan or an SBA loan.

If you’ve been in business for 3+ years, plan on occupying at least 51% of the building, and have a credit score above 675, you may qualify for an SBA 7(a) loan with SmartBiz. SmartBiz is an experienced SBA lender that offers rates as low as 7.00% and loans up to $5MM.