In recent years, self-storage buildings have grown in popularity as an investment. They present the possibility of long-term capital accumulation and passive income. However, financing for these properties can be challenging because there are numerous options available, each with benefits and drawbacks. In order to assist you choose the best choice for you, we will compare and contrast recourse versus non-recourse financing for self-storage units in this post.

Recourse Financing

In a loan known as recourse financing, the borrower is held personally liable for the debt. In other words, the lender has the right to pursue the borrower’s personal assets to recoup the loan balance in the event of a default. Recourse loans are frequently used for self-storage buildings in the commercial real estate sector.

Advantages of Recourse Financing for Self-Storage Properties

Recourse financing’s key benefit is that it is frequently simpler to get than non-recourse borrowing. This is because, in the event that a loan is not returned, the lender will feel more secure knowing that they can seize the borrower’s personal assets. Due to the increased security, lenders are able to offer loans at lower interest rates, which can save borrowers a lot of money over the course of the loan.

Recourse financing also has the benefit of being more flexible when it comes to loan terms and repayment alternatives. Given the increased security provided by the lender, the borrower may be offered more favourable terms, such as extended repayment terms or reduced monthly payments.

Disadvantages of Recourse Financing for Self-Storage Properties

Recourse finance has a higher level of risk for the borrower, which is its principal drawback. The loss of the borrower’s personal possessions, such as their house, car, and money, is a potential consequence of defaulting on the loan. This could have long-lasting effects and be a considerable financial burden.

Non-Recourse Financing

In a non-recourse loan, the borrower is not held personally responsible for the debt. Instead, if the loan is not repaid, the lender can only pursue the assets of the property being financed. Although they are less common in the commercial real estate sector, non-recourse loans are still an option for self-storage facilities.

Advantages of Non-Recourse Financing for Self-Storage Properties

Non-recourse financing’s key benefit is that it presents a lower amount of risk to the borrower. The borrower cannot lose their personal assets if they default on the loan because they are not held personally accountable for the obligation. For the borrower, this might bring comfort and lessen financial pressure.

Non-recourse financing also has the benefit of better protecting the borrower’s credit score. The borrower’s credit score may be negatively impacted if they default on a recourse loan. Future financing applications can become more challenging as a result of this. A non-recourse loan, on the other hand, has less of an effect on the borrower’s credit score.

Disadvantages of Non-Recourse Financing for Self-Storage Properties

Non-recourse financing’s main drawback is that it is frequently more challenging to get than recourse financing. Because there is less security for the lender, they might demand a larger down payment or charge higher interest rates. Over the course of the loan, this may lead to higher costs.

Non-recourse financing also has the drawback of possibly providing less flexibility in terms of loan terms and repayment choices. The lender can be less eager to negotiate good conditions for the borrower because they have less security.

Which Choice is the Best Fit for you?

It can be challenging to choose between recourse and non-recourse financing for a self-storage facility. The best choice for you ultimately depends on your unique financial position and investing objectives. Recourse financing can be the best option for you if you have a lot of personal assets and don’t mind taking on greater risk. However, non-recourse financing might be a better choice if you have few personal assets and want to reduce your risk. Remember that it can have greater costs and less latitude in the loan terms.

It’s crucial to consult a financial counselor or mortgage broker that specializes in financing self-storage properties before making a choice. They can assist you in weighing your options and deciding which type of financing best suits your need.

Recourse and non-recourse financing each offer benefits and drawbacks when it comes to financing self-storage properties. You may choose the option that is best for you by understanding the distinctions between these two financing options. You can locate the funding that best suits your needs and aids in the realization of your investment objectives by giving it due thought and listening to professional guidance.

F2H Capital Group is a debt advisory firm specializing in negotiating the best terms for your commercial real estate projects. The company offers a range of financial products and services, including fixed loans, bridge loans, and construction loans across all asset types. Please contact us for any of your financing needs.