Self-storage investing is a niche in the real estate market that is very lucrative and currently, largely untapped. If you are looking to get into real estate investment, this is one of the best forms of alternative investments available.
Self-storage is the top-performing real estate business and has a stellar reputation with one of the lowest rates of defaults when compared to other types of commercial real estate. This works to your advantage, as any real estate investor would want to have these types of assets on their balance sheets.
Additionally, this asset class is in high demand among real estate investors, especially as a result of the Covid-19 pandemic and the resulting market crash.
Unfortunately, many US companies had to shut their doors and are looking forward to reopening, but in the meantime, they need storage space.
Storage facilities are also termed an essential service, so they cannot close due to lockdowns.
But all these pluses do not automatically guarantee your loan application will be successful – so, how do you get approved for a loan? What can you do to improve your chances?
This week’s podcast will help you prepare yourself before applying for a loan and teach you how to assemble a top-notch loan package. Follow this roadmap to start your journey into self-storage investment.
Understand What Lenders Look For
From the get-go, understand that banks want to see good credit. If a borrower has a shaky credit score – this may be due to foreclosures, a late mortgage payment, or bankruptcy – it is unlikely their desired loan amount will be approved.
But this is quite obvious, so here are a few other aspects to consider that you might not know about:
- The market value of the property: A proper valuation will help determine the amount of financing required and the security a lender can request, as well as dictating the down payment amount. A realtor might not give you an accurate valuation, so it is usually wise to engage a professional appraiser to assess the value.
- Available cash reserves: In case your investment does not go as planned, banks will need to know that you can still pay back their money. This is especially true if you are diversifying your portfolio. The lender will underwrite you globally based on the strength of the rest of your investments.
- Experience: The more successes you have had in real estate will determine how much money you can borrow. For people new to the market, have a guarantor with proven experience in real estate, preferably self-storage.
Ultimately, you want to choose one bank and create a relationship. If they feel that you will become a faithful customer, they are more likely to help your investment succeed.
Perform Your Due Diligence on Facility
It is important to know what lenders will ask for, so performing comprehensive due diligence will make sure you are prepared. Information you need to collect regarding the property includes:
1. Management reports: These are financial and operating reports that detail the facility’s day-to-day operations.
2. Rent roll: This is a document that gives details about rental units, including the unit number and lease details.
3. Unit mix: This gives a detailed description of the size and features of the units on the property.
4. Three-year profit and loss analysis: For existing properties, this statement is proof that the business has been generating an income, managing expenses, and creating a profit.
5. General ledger: Investors will use these financial statements to:
- determine the value of the property
- check the sources of financing
- calculate profitability
- assess risks
6. Current property bank accounts: You can get these from the seller, but make sure they are not intermingled with other accounts for other investments.
7. Three-year federal tax returns: These confirm that the business is operating within the law.
8. Property appraisal: The property valuation forms the basis of all investment property loans.
On a personal level, you will also have to provide proof that you can manage the investment and repay the loan. When assembling an investment deal, borrowers often have to provide:
- Personal financial statement and credit history
- Three-year federal tax returns
- Accounting statements to show liquidity
- Resume of past experience
- Business plan for this project/ facility
- Cash flow from existing businesses
Conduct a Comparative Market Analysis
Beyond comparing properties similar to your proposed investment property, the key to success is to conduct a comprehensive market analysis.
This process not only looks at storage facilities in the area but also gathers information about economic, political, social, and even employment issues.
You can opt to do the market study yourself, ask your local real estate agent, or consult with professionals who can give in-depth analyses.
This feasibility study provides your mortgage broker with information to determine the rate of return on different properties. Cap rates help investors estimate the potential payback of their capital so take the time to determine your cap rate.
Prove You Can Cover the Debt-Service Coverage Ratio
The debt-service ratio is a measure of a business’s ability to pay all debts using its operating income.
Companies in the real estate market have to be able to pay the principal plus interest rates on all short-term and long-term loans.
The general rule of thumb is that a ratio of two or higher is ideal. A higher ratio indicates that a company can handle more debt.
A loan officer who is involved in real estate lending will use this ratio as proof that you have sufficient funds. The main way to improve this ratio is to increase rent, making the investment more attractive to lending institutions.
Ways to Increase Rents
Rent is the main source of income that a real estate investor can rely on as a sign that their investment properties will offer good returns. You can increase the rental amount by:
- Improving operations: You could hire a management company that provides consistent training to employees and has a level of automation. Creating a website would be a way to create an automated system for customers to access their details, including any rental down payment they may have made.
- Upgrading the investment property: There are ways to upgrade the property to meet industry levels and attract more buyers. Some affordable measures include refurbishing the interior and improving access roads and landscaping.
- Create new profit centers: Selling more than storage space to buyers is a way to generate additional money. With some research and creativity, you can increase your income to improve the debt-service ratio.
Succeeding in Self-Storage Real Estate Investing
Wow! That’s a lot of information, right? We have tried to break it down and make it easy for anyone to understand, but we do know this can become overwhelming.
We aim to give you the latest information about the self-storage market and on how to choose the best investment property loans.
We provide the tools for you to gain success as a real estate investor, and even if you are a beginner or looking for a mentor, Self-Storage Investing is your go-to guide as you dive into your self-storage investing adventure.