It is not cheap to buy properties, and the money we use to buy for that is also expensive. The big question is, “Does bank financing work for storage deals today?” In this episode of the Self-Storage Investing Podcast, we discuss whether bank financing is still a viable option for self-storage deals in today’s market. Stacy Rossetti shares her insights on the current state of bank financing and what investors need to know to be successful. What are you waiting for? Hit that play button and learn more from Stacy on navigating into the self-storage space.

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Is Bank Financing A Viable Option For Self-Storage Deals In Today’s Market?

We’re going to be talking about financing. I had a couple of emails over the past couple of weeks, asking about the financing, the funding, and what’s going on with the market right now. This is a very big topic, and so I figured I would talk about it and go over it. The truth of the matter is that money is expensive right now. Money is very expensive. You have two qualifiers. One of them is commercial real estate in itself is expensive. It’s not cheap to buy commercial property. That has always been that way. That hasn’t changed. It’s expensive to buy commercial property. On top of that, now you have the money you’re borrowing or the money you’re using to buy the properties is also expensive.

You have these two big factors in the market screwing up how deals are played out. Understanding financing right now and understanding what we’re doing internally to help our students get deals under contract is key. If you don’t understand these things, you’re not going to be able to buy a deal. I’m telling you right now that I am seeing more and more people bow out of getting into this niche, or even getting out of this niche if they got into this niche.

Internally, we have fifteen virtual assistants that do nothing but call owners and make offers. My team has called every storage facility in the secondary and tertiary markets in the country. We’ve asked the owners if they are open to getting an offer. Think about that. I’m your competition. I have fifteen people working for me, doing nothing but making offers on properties.

The truth of the matter is when you call an owner and talk to an owner, then it’s just a numbers game. That’s all it is. It was not really a numbers game. Years ago, when I was calling and talking to owners, it was so easy to find storage facilities. It was awesome. It was the best time. When nobody was thinking about storage, I was buying deal after deal.

 

Once COVID came into play, everything changed in the last couple of years. Everybody was moving from residential over to commercial. They were either getting into multifamily or they’re getting into some commercial aspect of the industry, which people are still doing right now. I’m sure a lot of you tuning in right now were in residential. Residential is too difficult and now, you’re looking for another niche to get into. This is a typical story.

Interest Rates: From 2015 To The Present

The truth of the matter is from 2015 to 2019, interest rates were where they should be. Interest rates were 5% to 6% in commercial real estate. That’s where you want to be. The down payment was 20%. When I was teaching people how to invest in self-storage back in the years, I was saying that it’s the 80-20 rule. Twenty percent down and a bank will finance it. You’ll get anywhere from 5% to 6% interest and then you can run your numbers that way.

Of course, COVID happened. From 2020 to 2022, the interest rates all went down. It was 3% to 4%, let’s say. The down payment stayed the same. It depends on what type of loan you get. I’m putting this down as a conventional loan. If you were getting an SBA loan, you would have 10% to 15% down, depending on your experience or the asset itself.

This is what we saw in 2015 to 2019. From 2020 to 2022, it started to be like 15% to 20%, let’s say. I rarely ever saw a deal where somebody wanted 25% down. This was a conventional loan and then SBA is always 10% to 15% down. Not always, but typically 10% to 15% down. The interest rate was at 3% to 4%. What happened is that for the prices for properties, the cap rates were higher. I could find properties that were like 12 or 10 caps out in secondary and tertiary markets.

During COVID, the cap rates were low. Is it lower? If it’s four, is that a low or a high? I don’t know what that is. You tell me. Let’s say cap rates were upward for secondary and tertiary markets. I could buy my properties. I was teaching people to buy double-digit cap rates. This is what I was teaching. I was like, “Look for double-digit cap rates.” Let’s do double digits. My first twelve properties were double-digit caps. I’m making amazing cap rates. I’m upwards of 25% to 30% cap rates on my deals. That’s how good they were.

What Happens During A Down Cycle

Cap rates in the 2020 to 2022, all of a sudden, were super low. That means that it was less than 10%, but typically I would say 5% to 7%. Actually, let’s do that. Let’s do 5% to 7% cap rates. The cap rate is basically the value of the property based on what the market calls for. Every single market is different and cap rates are always different. Honestly, the truth is that the cap rate is a way for you to calculate what that market that you’re in, that number, or that valuation is worth.

You don’t want to get too deep into that, but I’m telling you that the cap rates were very low or even lower sometimes. If you’re in a primary market, it was like 4%. That’s 2020 to 2022. From 2022 to 2023, interest rates are way up. Interest rates toward the end of 2022 to 2023 started going way up. Now they’re at 8% or up to 12%, depending on where you’re at right now. I’m going to get into all this. Give me this time to explain it before you start going crazy like, “I don’t understand what Stacy is saying.” Give me 30 minutes to explain this. We know interest rates are super high right now.

Interest rates towards the end of 2022 to 2023 started going up, and now they're at 8% or 12%. Click To Tweet

The down payment is around 25% to 50% down. This is what banks are asking for. This is a conventional loan. An SBA loan is still 10% to 15% down, but the interest rate is very high. The interest rate is 10% to 12%. That’s why I said 8% to 12%. Interest rates are going up, based on what the Fed calls for or what the Fed says the number is going to be. In the last few years that I’ve been doing this, the market is very cyclical. It was up and down. It was going up and now it’s going back down. What happens in a down market is that it’s typically harder to find money and there are more properties to buy.

It's hard to find money and more properties to buy in a down market. Click To Tweet

This was 2008. Here’s 2015, and then 2019. Here’s 2022, and now we’re in 2023. We are still going down. This is supposed to be an 8 to 10-year cycle or something like this. It looks like that. I think it was ten years. How many years are we going to be in a down cycle? When did the down cycle start? I don’t know. I would say 2022 or 2021. How many years are we going to be in this down cycle? People are asking, “How long is this crazy chaotic market going to be for?” Typically, down markets and up markets are 8 to 10 years. We could be in this down market for a long time.

The question is when is the interest rate going to get to 5% or 6%? That’s the big question. Which is a good interest rate to be at? Are we going to be stuck at this 8%? Are we going to be stuck at a number for a while? That’s the big question of the day not only for residential property but also commercial property. When you think about whether or not you want to get into this market, you have to decide, “Am I willing to pay a high-interest rate for a property? If so, what are my personal parameters? What are my guidelines? What are my boundaries for buying a property?”

When I talk about people who are bowing out, a lot of people bow out on the downturn. They bow out on the downturn because interest rates are so high and the down payments are up. It’s very hard for people to come up with 30%, 40%, or 50% down, which is what a lot of banks are asking for because the banks want to protect themselves. They want to make sure that the asset is safe.

I see it started happening in 2023 that a lot of people are getting out of storage investing. I don’t know about all of commercial real estate marketing, but definitely in storage investing. Over the course of this time frame right here is when everybody was like, “There are storage facilities in the world and I should be investing in them.” Everybody went out, went crazy, and bought a whole bunch of storage facilities.

What happened during these periods right here is that the prices changed. The prices were pretty low, honestly. Low purchase price. I got amazing deals in this period. I got very good deals on property. Now, because the market went up so high, I’m tripling or quadrupling the property’s values of what I purchased during these years.

What happened is the prices of property during this time, we know, are super high prices. Now, you have all these high prices with these low-interest rates. You have good normal prices and good prices with good interest rates. The 2015 to 2019 years are where you want to be in the commercial market. The interest rates, down payments, cap rates, and prices of the properties were good. You want to be in this area.

Here we went high with low interest rates. It’s like, “I got a 3% or 4% interest. Let’s go buy whatever.” They were not paying attention to how many storage facilities were in a location. Now the big question is this. Is your location over-saturated? When you’re looking at a property, you want to make sure that there are not too many storage facilities in the area because the way you calculate your storage facility is whether or not a storage facility is going to make money. It’s called net capita per square feet.

You want to calculate all of the population in an area and then the total amount of square footage in the area. You want to divide that and then you want to come up with this number. It’s a whole formula. What’s happening is that there is a lot of saturation in certain areas. I would say most of the saturation is going to be in your primary market. Some saturation is in your secondary market. Tertiary markets don’t have a lot of saturation, but it’s getting to the point where you still want to know, “Are there too many storage facilities in this little tiny town compared to how many people are living in this town?”

If there’s too much storage and there are not enough people, then you’re not going to be able to make money. When you talk to banks, this is one of the things that they’re looking at. They’re looking at feasibility. They’re looking at how many storage facilities are being built in this area, and then within the next 2 to 5 years, are you going to have too many storage facilities in this area? This is a major concern and that is because of this crazy building time and all this stuff that happened in the last couple of years.

What Type Of Loan Do You Get

In 2023, interest rates are 8% to 12%, depending on what type of loan you get. When your interest rate is this high, then you have to make sure that your purchase price is at the right price. The way that banks work, you have conventional loans. You also have SBA, which is typically the two ways that you’re going to fund secondary and tertiary market deals. Less than $2 million or less than $3 million, you’re going to go this way.

When you get into bigger facilities, you could do commercial mortgage-backed securities and stuff, but we’re little people. We can only afford so much. I’m going to show you how to get your foot in the door. Typically, you are going to be going through one of these two options on the bank side. On the conventional loan right now, what I’m seeing is 30% down and 8% interest.

We are running our numbers at 30% down and 8% interest. We’re running the market cap rate at 7%. In a primary market, it would be different. In a tertiary market, honestly, for secondary and tertiary markets, that’s where we’re at. We’re going for a 7% cap. That is what we’re doing. On top of that, these are fixed loans so they’re not changing. This is it. The terms are typically a 5-year balloon and it’s amortized over 20 years. Sometimes you can get 30 years, but it’s the amortization.

Amortization is like, “Let me try to spread that mortgage out over 20 or 30 years.” You make that mortgage as small as possible. That’s what I’m talking about. You’ll have a balloon. This is a typical conventional loan. When I say conventional loan, if it’s under $1 million, then you’re going to go with a local bank. If it’s above $1 million, you could still do local or you could do it nationwide.

Nationwide banks want bigger deals. They don’t want smaller deals. Most of them always say they could do a smaller deal, but in the end, they don’t want to do smaller deals. What I tell my students is, “If we find an $800,000 deal that we want to buy, go talk to your local bank.” A local bank is going to be like a community bank.

 

It’s like a land bank or farm and trust. It’s nothing like Wells Fargo, Bank of America, or something like that. You’re going to look for, in that town or in that area, the smallest bank that you can find. They love storage facilities. If you’re interested in an area and you’re like, “I only want to buy something in my area,” then you should talk to every single bank in your area that’s a local bank and say, “I want to buy a storage facility. Do you fund storage facilities? If so, what are your terms?” You could keep track of all the banks that you talk to, and all the different terms.

The smallest bank you can find loves storage facilities. Ensure that you're talking like you're interested in that area. Click To Tweet

The thing about commercial real estate is it is an asset-based lending. Asset-based lending is based on the income of the property. How much money can this property produce? They’re basing what the mortgage is going to be based on how much money that property can produce. That’s how commercial real estate is. As the person, they may check you out and stuff like that but typically, it’s asset-based lending. You could say, “I want to buy a property. I want to buy a storage facility. What would be the terms typically that you’re using to fund a storage?”

Deal Analyzer

They can give you the terms. They’ll say, “For storage, we’re typically at prime plus two,” or whatever. That’s conventional lending. This is how we are running our numbers. If you buy the deal analyzer and go to the financing tab, which is at the bottom, there’s a way for you to run five different offers at the same time. We do cash offers, creative deal structures, bank financing, and private lending. With the bank financing, you will put 30% down, 8% interest, and a five-year balloon over either 20 or 30 years amortized so that when you’re running your numbers, you can make an offer on this.

This is another thing with banks. This goes for any type of bank. What they look at is what’s called the debt service ratio. The debt service ratio is some way that they compute how much money they can lend based on the value of the property or however they do it. Right now, they want to be at 1.3%. I have talked to many banks and looked at many deals over the entire 2023, and banks are requiring a 1.3% or higher now. When you run your numbers or your purchase price, the main thing that you have to do is make sure that your DSR is at 1.3%. Banks will not fund a deal right now unless it’s at 1.3%. It’s super tough.

Maybe you might find a diamond in the rough, but we’ve seen banks over and over saying, “I’m sorry, but no. You need to have that income higher or the purchase price lower.” It’s a 1.3% DSR. When you’re running your numbers for commercial deal analysis, make sure you get this. Whether you don’t use my deal analyzer or whatever deal analyzer you use, you want to be at a 1.3% DSR and you want to be at 30% down at 8% interest.

What I’m telling my students over and over again is that whatever the purchase price is, that equals based on the income. You’re going to put your income and your purchase price. Whatever the income is and whatever purchase price that you come up with have to equal a 1.3% DSR with 30% down and 8% interest. This is where I would be running the numbers.

If you guys are seeing something else, let me know. I would love to know if anybody is seeing anything else. For me personally, this is where we’re at with the banks. This is what we’re seeing on all the offers that we’ve put out. We’ve put a lot of offers out in the last couple of months and this is where the banks are coming back at. That’s conventional loans.

The next thing is SBA. SBA is a Small Businesses of America or something. SBA is a government-backed agency that loans to small businesses. Any type of business, but they love storage facilities. A lot of people get SBA loans and what is enticing about an SBA loan is that they want 10% to 15% down. You don’t have to put that much money down in order to get an SBA loan. People are like, “I could go buy this million-dollar property and I only have to put $100,000 down. That’s awesome. I would love to do that.” The thing is that they have variable rates and it’s all based on what the Federal government is telling you. It could be prime plus 1, 2, 3, or whatever it’s at right now, but typically for SBA, I’m seeing rates between 10% and 12%.

We have a student who got as little as 11.99% alone. Back in 2010 to 2015, you were up in the high 10% and 15% bracket. You remember that this time from 2008 to 2015, what was happening was that there was no financing or very little financing and lots of properties for sale. If you wanted financing, the interest rate was super high. That’s basically what was happening on the upswing from the bubble.

There were a lot of properties for sale, but there were no banks that wanted to finance them. Now we’re getting back into this. There’s going to be a lot of properties coming up. There are 800 storage facilities for sale in 2023. When I got into storage in 2015, there were 200 storage facilities for sale. That was it for the whole country. Now there are 800. There are a lot of properties for sale. When a lot of properties are coming in, you’ll know that we’re getting back into this cycle of a lot of properties for sale and no financing or very little financing out there, or I could say maybe expensive financing. It’s going to be expensive financing with lots of properties.

This is where we’re headed. It’s expensive to buy a property. I’m not trying to scare you off. I’m trying to be honest with you. You need to have money, either your own money or you need to get somebody else’s money, to buy the property. Also, what you have to be good at is you have to be good at running numbers and you have to know what the DSR is going to be. In SBA, the DSR is 1.15%. You can have a lower DSR, which means that your purchase price can be higher but you want to have a big enough spread in the deal on the backend for your opportunity cost. You need to have a bigger spread for SBA loans to work. You want to be at 50 cents on the dollar, maybe 60 cents, but I’d say 50 to 60 cents on the dollar or less. That’s SBA loans.

For instance, we bought a facility in May of 2023 in Tennessee for $2.4 million, and it’s valued at $5.5 million. I bought it at 50 cents on the dollar. It’s a huge spread. We actually got an SBA loan and we’re paying almost 13% right now. A hard money loan is what it is. Remember, it’s a variable rate. As the rates go down, our interest rate will go down. Is that going to happen in this timeframe? We have our loan. We’re only going to hold onto this property for three years. In three years, are we going to be able to get to 5% to 6%? No, probably not. In my personal opinion, I don’t think it’s going to go down that fast.

Run Your Numbers

You have to make sure that you’re running your numbers where it works. That’s why you need such a big spread. Does that make sense? We bought a $2.5 million facility and had to put $350,000 down. The reason we had to put $350,000 down is because we put 10% down, which is $250,000. The fees for SBA was almost $100,000. I think it was maybe at least $75,000 in fees. It was a lot. I was like, “That’s a lot of fees.”

On top of that, not only are we putting only 10% down, so we bought a $2.5 million facility for $250,000 or $350,000, but we had to pay $75,000 in fees. We had to make sure that that 13% interest rate worked on the cashflow. Guess what? It doesn’t work on the cashflow. We have a mortgage of almost $20,000. It’s $17,000 to $18,000 a month.

We’re having to make sure that we’re making that much money, which we’re not because it was a severely mismanaged facility. We’re having to come out of pocket every single month until we actually stabilize that property. On top of that, a whole bunch of CapEx needed to get done. We’re in the hole right now on that property. If you want to get an SBA loan, these are very good for mismanaged facilities and they’re called projected-based loans, which is what we got.

We gave them a proposal and said, “We’re buying this for $2.5 million.” We’re running our numbers at $5.5 million. There’s a huge spread on this deal. We can afford 12% or 13% interest but we’re going to have to put a whole bunch of CapEx into this thing and we’re going to have to come out of pocket for the first 18 to 24 months.

This is a proposal that we put together for SBA. We convinced them to give us the loan and they did. Now we’re coming out of pocket until we stabilize this property. What happened? How did I afford that? Essentially, I raised $900,000. I raised enough money to afford our mortgage for two years for the money that we put down to close, and on top of that, also the CapEx that we needed. I raised $900,000 or more. I can’t remember what it was.

That’s how that worked on that deal. SBA will not work for a deal that is less than $1 million. If you’re looking at a small deal, it’s going to be very hard to fund with an SBA loan over the course of the next couple of years. All those SBA lender brokers, think how busy they were. It was like they were so ridiculously busy because they were doing this 3% and 4%.

People were getting loans after loans. Guess what? If you got an SBA loan from 2020 to 2022, you have screwed yourself over because your interest rate is now 12%. Remember, SBA loans are variable-rate loans. From 2020 to 2022, you’re betting on a 3% or 4% interest rate. On top of that, you’re betting on all those rate increases because you remember all the units were $50 a month and they went to $60, $70, $80, $100, $150, and $200. You’re like, “I’m making so much money,” and you made a lot of money. If you bought something in 2021 or 2022, you made a lot of money on those facilities.

Now all those people want to sell their deals from SBA, betting on 4% and a high income. We’re right now going into the downtime. It is screwing everybody over. That is why all of those properties are on Crexi right now because they ran their numbers in the wrong way and they screwed themselves over. Those properties are very hard to fund because they bought those properties at such a high purchase price, probably the wrong purchase price. Now they’re having a hard time selling them, so they’re going to screw themselves over. The down cycle is going to be very interesting to see what happens but it’s going to be a lot of opportunity if you can truly understand how to finance properly.

 

On top of that, understand how the banks are working right now. Also, where are you going to get this? That is key. If you want to buy a million-dollar property, you need $300,000 to buy it. If you want to buy a $500,000 property, you need $150,000, $200,000 probably to buy that. A couple of students found amazing deals for $700,000 to $800,000 and the banks want $275,000 down to buy those. They have $100,000 or $150,000 and that’s it. You think in your mind that $150,000 should be able to buy a $700,000 property but it doesn’t.

That’s how the market is. The purpose of this exercise is to make sure that you’re running your numbers properly on your deals and that when you make your offers, you’re using the right terms in your inputs for your financing. If you have to go to a bank to get a loan, this is the formula to get a loan. Somebody is asking, “What’s a typical flow on a million-dollar property?” I don’t know. Every million-dollar property is different. What if it was only making $25,000? What if it was making $50,000, $75,000, $100,000?

Not to be rude, but you can’t ask a question like that. What I was suggesting is to practice putting offers in. Go onto Crexi, look at million-dollar deals, get all the information from the broker, put it into the deal analyzer, and then start familiarizing yourself with how the numbers work and then put your bank financing terms in if that’s how you’re going to have to finance it so you can start getting a feel for how analysis works.

The analysis that I did two years ago is completely different from now. The analysis that I did five years ago is completely different from now. As you go through the cycle and as you go through the market, you are educating yourself on what financial analysis for a property looks like on an upturn, on a high point, and on a downturn. That’s what you’re looking at.

As you go through the market, you are educating yourself on what financial analysis for a property looks like on an upturn, on a high point, and on a downturn. Click To Tweet

Conventional and SBA loans were the two things that I wanted to talk about. Somebody says, “What is your minimum goal in terms of cash-on-cash?” We are looking at 10% cash-on-cash or higher. That’s where we’re at. That’s always where I tell my team to be, at least. In all of my deals, we do not go lower than that. There are deals out there that are like this, as long as you make sure that you have your financing inputs correctly. That’s the same thing.

Financing and understanding the banks and what they want was the purpose of this session. Just so you know, on the deal analyzer, we run our numbers five different ways. It’s actually more than five different ways. There are at least 6 to 9 different ways, but typically it’s 5 different ways. We do a cash offer and then a bank financing offer. This is how we’re running our numbers. We do creative deal structures. The creative deal structure could be a wrap. It could be a lease option and it could be owner finance. Those are the typical ones. We could do a subject-to.

The reason I’m bringing all these creative deals structures up is because in a downturn, this is where owners start to get creative. If an owner wants to sell their property, they’re desperate to sell their property because they bought it in 2021 at a high price and they have the SBA loan and it’s a variable rate loan. Let’s say they bought it at a $50,000 income and they took it to a $100,000 income. They doubled the value of that property at least, if not more. They want to compensate. They want to get that money that they made. They want that equity in that property.

 

A bank is going to say, “That property was worth $1 million, but now it’s only worth the 1.3% interest. It’s only worth $750,000. We’re only going to finance $750,000.” The owner says, “No, I want $1 million for this property. I paid $500,000 for it. I’ve paid off $100,000, so I owe $400,000 on the property and I want the property for $1 million.” They could do something like, “Why don’t you give me $400,000 down? I’ll pay the bank off and then I’ll seller finance that $600,000 to you.” I’m seeing this over and over again. That would be a creative deal structure. That’s owner finance. I own a wrap. It’s like, “I owe $400,000 on this property, so why don’t we do a wraparound mortgage? I’ll keep the mortgage in place and wrap a new mortgage around that mortgage, and then you will have to pay two different mortgages. One is to the bank and one is to me or whatever it is.”

Even if you’re seller financing, one to the first owner and one to the second owner. We have that going on right now as well. We have one right now in South Carolina, where the owner of the property wants to sell the property for $450,000. She got that property seller financed to him for $350,000. In the past two years, he paid $50,000. He owes $300,000.

This is owner 1 and this is the owner 2. Owner 1 owes $300,000 and this one here, he owes. He then wants to sell the property for $450,000. He’s trying to make $150,000 on the deal. This is the actual owner. We talked to this owner about the finances. He was like, “Just assume my loan. That’s fine. I don’t care who pays the loan as long as somebody pays the loan.” There’s an assumption, which I didn’t put on here.

This $150,000, he is like, “I will also seller finance this.” That means there’s going to be two mortgages. One for $300,000 and one for $150,000. I think that she has to put some money down or whatever, but that’s basically it. You can assume a first loan and finance the second loan or you can wrap. You can have two mortgages and you could wrap one around the other, which is basically what’s going to happen here. There are so many different ways to do stuff.

In these types of deals or creative deal structures, every deal is completely different. Every owner has different needs and wants. You’re trying to figure out what the owner is like. What do they need? What’s the issue? You work the deal out and you create a win-win situation on both ends. You are going to see this more and more.

These types of deals happen in an extreme financing situation like what’s going to happen next year. I think it is getting better. I’m super excited about 2024, but a lot of people bowed out. Remember, a lot of people bow out when this type of stuff happens. If you do not understand these types of creative deal structures, which is what I teach, make sure you’re following me. If you’re not understanding that, you’re going to miss out on a lot of opportunities and you’re going to be one of those people who are like, “I can’t finance anything, so I’m out of here. Banks suck. I’m out.” That has happened to many people that I’ve seen. You have to understand this.

When you’re running your deal analysis, our deal analyzer runs these for you. What happens is you hand over an offer letter that has not only a cash offer and bank financing offer but also a whole bunch of creative deal structures. A lot of times the owner are like, “I never expected to get five offers, but I’ll make this much money if I actually do this instead of this.” It starts to get their mind open to a whole bunch of different scenarios of what they could be doing to help them in their situation, and to create a win-win situation for them and us.

That’s why I pushed the deal analyzer and I’m going to push it more and more. This time period is when you need to be pushing and making a whole bunch of different offers. Whether you use my deal analyzer or somebody else’s deal analyzer, this is what you should be doing because bank financing is so stringent and conservative. It will be very hard to get deals done over the next couple of years. You have to learn how to do this. You have to learn how to do that.

That’s my 2 cents and I’m sticking to it. I hope you have fun educating yourself on investing in self-storage. I’ll be teaching whenever I feel like teaching. Make sure you get the course and the deal analyzer. Join the Facebook group and check out my websites and stuff. I appreciate you hanging in there until the end and I’ll see you next time. Take care.

 

Important Link

• Facebook Group – Storage Nerds