Should You Dive into Self-Storage Financing? Unpacking the Potential for CRE Investors

Making money from self-storage is a hot topic in the CRE market, but you’ll need to know how to finance it.

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High demand, strong rental rates, and low maintenance: there are several reasons why scores of investors are looking at self-storage financing right now. 

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If you’re one of them, you’re probably excited by this opportunity but feel that your hands are tied by:

• A lack of upfront capital to buy a self-storage business or build self-storage facilities
• Insufficient loan options or knowing which type of lending is best for you
• Tough lending criteria from lenders who are reluctant to lend to anyone, especially first-time borrowers.

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Still, if you jump these hurdles, then one of commercial real estate’s (CRE) hottest asset classes is waiting for you, one that almost four out of every 10 Americans use. 

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The popularity of self-storage in the US

                                                 Source: Storage Cafe

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So, what’s the key to entering this market? The answer is self-storage financing. 

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This article will cover how to finance a self-storage facility in today’s market, including the benefits, costs, and profitability of doing so.

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Table of contents

• Is self-storage a good investment?
• What are the costs involved in self-storage investments?
• Does paying for a storage unit build credit?
• Self-storage financing: what is the best loan for storage units? 

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Got your eyes on commercial real estate but a lack of money’s holding you back? Duckfund’s Sign-Now-Pay-Later model will help you unlock those lucrative deals that you’ve been missing out on.

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Is self-storage still a good investment?

Investing in a self-storage facility may not have the glamor of fancy offices or high-rise apartments but it’s a surprisingly effective CRE investment strategy.

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First up, it boasts an impressive 92% average occupancy rate, outperforming many other asset classes in recent years. This is down to the demand for space that has risen dramatically since the pandemic, a demand that translates to consistent rental income. 

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Next, self-storage facilities often require less day-to-day management, particularly compared to multifamily housing or retail spaces. There’s certainly less that can go wrong in basic storage space than in a rental property that has temperamental tenants who might complain about noise, forget to pay rent, or cause damage to the property.

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Self-storage units also typically come with month-to-month lease agreements, allowing you to adjust rental rates to keep pace with inflation. This built-in hedge protects your investment from rising costs.

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Finally, you can enter this investment field in multiple ways. You can invest in existing facilities, partner with developers for new construction, or simply just put funds into self-storage REITs (Real Estate Investment Trusts).

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Fred Hubler,  CEO and Founder of Creative Capital Wealth Management Group, even likened it to other stable asset classes. “Self-storage could be an option as an alternative to stocks and bonds, especially if you are looking for a recession-resilient opportunity with inflation protection and income.”

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With its resistance to economic fluctuations and built-in demand, self-storage might be the key to unlocking your real estate portfolio's full potential.

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What are the costs involved in self-storage investments?

Knowing how to finance a self-storage business may offer a stable investment opportunity, but there are still various costs to consider when assessing its profitability. 

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Operational costs are one of the main expenses. These include having a budget set aside for maintenance and repairs to keep the space safe and in good condition. 

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You’ll also need to take out insurance coverage for the property and its contents in case of emergencies or customer damages. 

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Property taxes, management fees (if you use a third-party company), and marketing and advertising to attract tenants are other examples of these day-to-day costs.

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You’ll also need to work out how much it will cost you to find finance. Most lenders charge origination and appraisal fees to process your application and determine the property’s value. 

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Title insurance is necessary to protect you from external ownership claims while closing fees cover the administrative costs incurred by the lender. 

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Finally, the cost of the loan itself will be comprised of various factors, depending on the type of loan you choose and how much you borrow. Interest rates are inevitable and depend on the Loan-to-Value (LTV) Ratio that you qualify for. Higher LTV typically means higher interest rates. 

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You’ll also need to factor in the cost of monthly payments for your finance, as well as any prepayment penalties you may incur should you pay back a lump sum early. 

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Once you have these costs down, you’ll have completed one of the most important stages of commercial real estate analysis. From here, you can make an informed decision about what kind of self-storage investment you can make and start working toward a profitable venture.

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Does paying for a storage unit build credit?

Financing self-storage facilities yourself and then repaying the loan amount is a surefire way to build credit. 

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If future lenders see proof that you paid off a self-storage lending product then they’ll see you have a track record of responsibly managing debt. This will make them much more likely to lend, possibly with better loan terms and interest rates. 

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Also, when you consistently make payments on time, your repayment history is reflected in your credit report and boosts your score, making you a more attractive lending option.

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                                                Source: Investopedia

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Ticking the above two boxes means you’ll score highly in terms of credit history length and payment history – two factors that make up 50% of credit report criteria, according to Investopedia. 

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Self-storage financing: what’s the best loan for storage units? 

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The lending market might be tough at the moment, but there are several ways of getting a self-storage loan, be it for a down payment or the full purchase. The key is knowing where to look.

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Here’s a run-through of the self-storage financing options available to borrowers right now. 

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1. SBA Loans

Backed by the Small Business Administration, SBA loans for self-storage facilities are a viable route for many investors and come with attractive interest rates and repayment terms for those that qualify. 

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Popular options include the SBA 7(a) loan program, ideal for acquiring existing facilities or purchasing land for new construction, and the SBA 504 loan program, which focuses on financing fixed assets like buildings and equipment.

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The sticking point, however, is that SBA lending criteria tend to be high, with only around half (52%) of applicants receiving approval.

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2. Bank loans

Traditional banks and credit unions offer several loan products for self-storage investors. 

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These loans can be used for acquisition, refinancing, or construction, but typically come with even stricter credit score requirements and higher down payments than SBA loans.

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Many investors find traditional finance to be out of reach, which has pushed many toward alternative small business loans instead.

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3. CMBS loans

Commercial Mortgage-Backed Securities (CMBS) loans pool mortgages from various commercial properties, including self-storage facilities, into tradable securities. 

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This allows lenders to offer competitive interest rates, but also comes with stricter underwriting processes and may not be ideal for all borrowers.

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4. Hard money loans

Hard money real estate loans from private lenders can be a solution for investors facing time constraints or needing financing for a specific niche project. 

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If you know how to flip commercial real estate, then fix-and-flip loans are an example of this. They base repayments on the after-repair value (ARV) of a self-storage unit once the investor has restored it. 

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Ground-up construction loans where the lender finances the building of the unity are another example while time-sensitive lending product are where funds are quickly made available to push through a deal.

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These loans offer quick turnaround times but come with higher interest rates and shorter repayment terms as a result. Some lenders may also exploit investors in need of quick funding.

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5. Earnest money lending

Earnest money deposits (EMD) are now a common requirement in all types of CRE deals, including self-storage deals. 

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This is simply a sum of money that the investor puts on the table to show the seller they’re serious about buying the property, yet it can reach up to 10% of the real estate’s value. Often deals fall through because investors don’t have this capital to hand. 

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EMD lenders specialize in providing this money quickly so the buyer can secure the property ahead of investors, a useful tool to have in the competitive self-storage property market.

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Many offer fast approval and high acceptance rates, while some providers (like Duckfund) even let investors ‘sign now and pay later’ which allows them to work on multiple deals without dipping into their own capital.

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6. Line of credit

A revolving line of credit can be a good option for established self-storage owners who need working capital to cover ongoing expenses or unexpected repairs. It may also be enough to secure mini storage financing for a small project to get you off the ground.

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This facility provides flexibility but requires careful management to avoid overextending your credit line, a lot like a business overdraft. 

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Secure your self-storage facility today with Duckfund’s Sign Now Pay Later 

Can’t find working capital to fund your next move? Hit by cash flow issues? These shouldn’t stop you from snapping up that self-storage facility you’ve got your eyes on.

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Duckfund's innovative Sign Now, Pay Later model can be your secret weapon for securing self-storage construction financing without draining your business funds

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Fast, secure, and effective, here’s how it can work for you. 

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Bridge the earnest money gap

A sizeable earnest money deposit can tie up your capital and limit your ability to pursue multiple deals. 

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Duckfund acts as a bridge without being a bridge loan, providing the upfront deposit (soft deposit) within 48 hours. This frees up your cash flow for other critical business needs.

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Focus on growth, not delays

Say goodbye to lengthy bank approvals and stalling your project momentum. 

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Duckfund's streamlined process allows you to secure the property quickly, with just your signature, giving you a competitive edge in the self-storage market.

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Multiple deals, one solution

Unlike traditional business financing with strict loan terms, Duckfund's model is designed for flexibility. With low fees and high approval rates, you can pursue multiple self-storage opportunities without dipping into your funds pool.

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Simple and secure

Our secure LLC structure safeguards your funds while our AI-powered approval process goes beyond traditional credit scores. This makes financing more accessible to a wider range of business owners.

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Stop letting earnest money deposits hold you back. Unlock your self-storage investment potential right now with Duckfund's Sign Now, Pay Later.