The 4th Rule of Thumb & the 2nd Key to Talking to Self-Storage Lenders

As you are preparing for your lender interview, you need to understand how you are going to pay back the loan on the property. When you get a residential mortgage, they expect for you to pay for the property out of your own income. When you get a commercial mortgage, they anticipate that you will also be using the income from the property to repay the mortgage. This gives you more purchasing power.

The first Key discussed your credit. The second key is going to look at your ability to repay the loan. They want to make sure that you know how you are repaying the loan. Are you planning on just using the gross operating income to cover the mortgage? If so, is there enough income to cover the mortgage, the expenses and your profit? If there isn’t, are you planning on paying for part of the mortgage out of your pocket?

They want to know if you have any kind of a slush fund if there is a bad month? They don’t want you to use every penny you have to get into the property and then be unable to make the payments or do the needed upgrades. They are going to want you to have money in savings when you close on the property for a rainy day.

If the property is already an existing property, then they are going to look at the property’s financials to see how well it has been performing. They will take that into account when they are determining if this is a good investment.

They will also look at the debt coverage ratios to make sure that there is enough money even if you have a bad month. Be sure to ask your lender what they want to see in a debt coverage ratio.

When you are buying new construction, there is no history to review. That means that the bank may want to see more out of pocket from you. There is nothing to prove that your building can pay for itself. Because of that, they may ask for more skin in the game. You may need to bring in private equity partners to help fund the property until it is off the ground. Depending on the type of loan you are getting, you may be able to borrow some of your upfront expenses.

Make sure that you have a good understanding of how you are going to repay the loan and how lenders qualify you for your financing before you start talking to commercial lenders. As always, happy investing.