Short answer: When Mark started, SBA loans let buyers in with 10–15% down. Higher interest rates and construction costs mean most deals today need closer to 25–35% down, because lenders size the loan by the debt coverage ratio (DCR), not just loan-to-value.
How DCR limits the loan #
The debt coverage ratio compares a property’s NOI with its loan payment. A DCR of 1.25 means NOI must be at least 25% more than the payment. The lender sets the maximum payment from that ratio, and the maximum payment determines how much it will lend. Higher interest rates raise the payment on each dollar borrowed, so the same NOI supports a smaller loan.
In one project Mark coached, the SBA lender required break-even 24 months after leasing began and a 1.25 DCR in month 36, and relied on the feasibility report’s NOI rather than the borrower’s pro forma. The result was about 25% equity required.
Ways to close the gap #
- Bring in partners to share the down payment and the risk.
- Use seller financing or bridge capital.
- Develop in phases.
- Favor value-add acquisitions with existing cash flow over ground-up development.
- Lease part of a building or the land for other uses during lease-up.
Mark’s advice: build a conservative model, expect to need more capital than you first think, and don’t assume lenders will offer what they did five years ago. Talk with your lender and advisors about your specific situation.
Related answers #
- What financing options are there for self-storage besides SBA loans?
- Should you raise money for a self-storage deal from partners or investors?
- Is now still a good time to get into the self-storage business?
Source: Mark’s post How Much Money Do You Really Need to Start in Self-Storage?
