Self-storage facilities are becoming more and more sought-after as investments. IBIS World estimates that the self-storage market has grown significantly in recent years and will generate $39.5 billion in revenue by 2020. If you’re considering making an investment in a self-storage facility, you might be asking how to set up a financing arrangement to generate the most profit. We’ll discuss the many financing choices available in this blog post as well as the ideal transaction structures.

Understand your financing options

Understanding the various funding choices is vital before you begin structuring a business. Several popular financing choices for self-storage properties are listed below:

1. Traditional Bank Loan:Self-storage properties frequently finance their purchases using conventional bank loans. These loans often have terms of 10–25 years and fixed interest rates. Banks, however, could have stringent financing requirements and large down payments.
2. Small Business Administration (SBA) loan: A government-backed loan with lower interest rates and longer durations is known as an SBA loan. These loans are appropriate for small business owners that require funding for equipment or real estate. Unfortunately, the SBA loan application procedure can be drawn out and challenging.
3. Private equity: Another financing choice for self-storage facilities is private equity. With this choice, investors combine their funds to buy a property. Private equity investors frequently anticipate substantial returns on their investments (ROI), hence the financing might include a larger equity part in the asset or a higher interest rate.
4. Crowdfunding: This is a more recent method of financing that enables numerous people to make modest financial contributions to a project. Although this choice may be a wonderful way to raise money quickly, it could also have a higher interest rate.

Evaluate the property’s income potential

Once you’ve determined your financing alternatives, it’s important to assess the self-storage property’s earning potential. These are some things to think about:

1. Location: An attractive location will result in better rental rates and a reduced vacancy rate for a self-storage facility.
2. Market demand: Assess the area’s need for self-storage. Is there a lack of storage options or additional local self-storage facilities?
3. Size and type of units: These variables can affect rental prices. Climate-controlled flats may be in more demand and require a premium rental price.
4. Operating expenses: The potential revenue from a property might be impacted by operating costs including maintenance, insurance, and property taxes.

Determine the financing structure

It’s important to choose the financing structure after assessing the property’s potential for income. These are a few typical financing models:

1. Debt financing: Self-storage properties frequently use this type of financing. Under this arrangement, the investor receives a loan from a lender and pays it back over time while accruing interest.
2. Equity financing: On the other hand, entails the investor selling ownership stakes in the property in order to raise funds. Investors might get a cut of the property’s earnings or a portion of the value when it’s sold.
3. Joint venture: These are partnerships between two or more investors to invest in real estate. Each investor contributes money, and gains and losses are split according to the terms set forth in the agreement.

Negotiate terms

It’s time to bargain the conditions once you’ve chosen the financing structure. Here are some words to think about:

1. Interest rate: If you borrow money, the interest rate will affect how much the loan will ultimately cost. Make the interest rate competitive by negotiating it.
2. Loan term: The length of the loan affects both the monthly payment and the overall cost of borrowing. Even while a longer loan period can mean cheaper monthly payments overall, the cost of borrowing will be higher.
3. Down payment: The down payment can affect both the investor’s cash flow and the amount of borrowing required. Make sure the down payment is manageable by negotiating it.
4. Ownership stake: When selling ownership stakes in a property, discuss ownership percentages as well as the duties and rights of each owner.

Monitor the property’s performance

After you’ve set up the financing arrangement, it’s crucial to routinely check on the performance of the asset. Following are some metrics to monitor:

1. Occupancy rate: This is the proportion of occupied housing that is rented out. A higher occupancy rate increases the property’s revenue.
2. Rental rates: Keep an eye on them to make sure they’re still reasonable compared to those at nearby self-storage facilities.
3. Operational expenses: Keep an eye out for possibilities to cut costs and boost profitability by routinely reviewing operating expenses.
4. Cash flow: Keep an eye on the cash flow to make sure the property is bringing in enough money to pay the bills and the debt.

Storage facilities may offer a profitable investment opportunity. Understanding the many financing choices available, assessing the property’s potential for revenue, deciding on the financing structure, negotiating conditions, and routinely monitoring the property’s performance are necessary for structuring a financing contract that maximizes profits. You may build a financing arrangement that offers a consistent income stream and a strong return on investment with proper planning and monitoring.

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.