When I first got started in the self-storage business, you could realistically get in the game with as little as 10% to 15% down if you used SBA financing. That was one of the key advantages of starting back then — the low down-payment loans with SBA financing made the barrier to entry much more accessible for first-time investors.
What’s Changed?
Today, in theory, the SBA still allows high loan-to-value deals, sometimes up to 85% or even 90%. But the reality on the ground is quite different. Two big things have changed:
- High Interest Rates
Interest rates have gone up dramatically, and that makes monthly payments much higher. That increase impacts the debt service coverage ratio (DSCR), a critical metric banks and SBA lenders use to underwrite deals. - High Construction Costs
The cost to build facilities — whether new developments, expansions, or conversions — has also risen significantly. Between materials, labor, insurance, and the cost of capital, it’s just more expensive to develop self-storage than it was 5 or 10 years ago.
These two forces combine to reduce how much a bank or SBA lender is willing to loan you — not because they don’t want to do business, but because the project itself can’t generate enough income (on paper) to safely support that much debt under their guidelines.
The On-The-Ground Reality
I am coaching/consulting with a group right now that was approved for a self-storage project with parking involved. Due to the low income the parking was going to generate — given the trade area’s competing rental rates for that product — they have pivoted to just doing the self-storage at this time.
The SBA lender that they are most likely going to use has lending requirements of break-even 24 months after leasing commences and a DCR of 1.25 in month 36.
What the DCR really means is that in month 36 the NOI needs to be at least 25% more than the loan payment. This bank relies very heavily on the feasibility report’s NOI as opposed to your pro forma (another reason I preach about getting a good feasibility report).
Whatever that 1.25x ratio is determines the maximum loan payment that the loan can be. Whatever the amount of debt that payment can support is how much they will lend. See where the high interest rates can affect the loan proceeds?
This group, in effect, has to put in about 25% equity on this project for the SBA financing. They still will most likely do it because of the benefits of being able to have access to interest reserve and negative cash flow proceeds SBA financing offers.
So What Do You Need Today?
Most of us playing the game of self-storage in today’s climate will need closer to 25% to 35% down on almost any self-storage project to meet the lender’s requirements.
One potential option is private debt financing capital groups. We are doing a large development project today with 80% financing from a private debt capital group. The terms are mid-7’s on interest and a 25-year amortization, five-year call. One needs to have a track record, some high-net-worth individuals, and a fairly large project to use this alternative financing source.
For most people getting in the business today, bank financing or SBA lending is the route we will take.
If you’re pursuing SBA 7(a) or 504 loans, here’s what you’ll typically need:
- Usually around 20% minimum down (could be higher like above). How much is a function of the DCR as described above.
- 25-35% using traditional bank financing on most new construction or conversion deals due to debt coverage and risk.
- Sometimes 35% or more if you’re trying to force a deal that just doesn’t cash flow enough in the early years.
In other words, the bank can quote a loan-to-value amount, but whatever their DCR ratio is really determines the loan amount. They are hyper-focused on the facility generating enough NOI to comfortably make the monthly loan payments. And the reality is today: many deals don’t unless you bring more cash to the table or reduce the loan amount.
How We Can Adjust
Some ways to deal with the current challenges are:
- Bringing in partners to split the down payment and reduce risk.
- Using seller financing or bridge capital creatively to close the gap.
- Developing in phases to spread out capital requirements.
- Focusing on value-add acquisitions instead of full-blown new developments (initial cash flow helps).
- Leasing part of a building or land for other uses during lease-up.
The Bottom Line
You can still get into the self-storage business today, but it will take more capital than it used to. The “10% down” dream isn’t gone — it’s just harder to find and structure under today’s financial conditions.
If you’re serious about entering this business, do your homework, build a conservative financial model, and be prepared to raise more capital than you initially expected. And don’t assume the lender will lend you what they did five years ago. Those days, at least for now, are on pause.
But if you can find a trade area with unmet demand and work through the current challenges, it is still a great business to be in. Every time has challenges. If you are waiting for the perfect time, you will be on the sidelines a long, long time. Be smart but get in the game if you can.
It’s a game worth playing.
