Is Acquiring a Foreclosed Self-Storage Facility a Smart Investment Today?

In the evolving landscape of the self-storage industry, a notable trend is the emergence of previously foreclosed facilities from the shadows of bank portfolios. These properties, perhaps ambitively launched and now struggling, beg the question: Are they wise investments?

The answer leans towards affirmative, contingent on a savvy acquisition strategy. The cornerstone of such a strategy is valuing these facilities based on their current net income rather than speculative future earnings. This approach grounds your investment in the reality of present-day financials, sidestepping the pitfalls of optimistic forecasts that may never materialize. When considering a facility with a 50% occupancy rate, resist the temptation to project earnings based on higher occupancy rates. This is a common trap set by brokers and banks eager to offload the property.

A critical aspect of due diligence when considering a foreclosed property is understanding the reasons behind its failure. This insight can help you avoid inheriting a problematic asset. For instance, a facility failing due to an unsustainable debt burden might become a lucrative deal if acquired significantly below market value. However, a location with inherent flaws, such as being situated in an inaccessible or undesirable area, warrants caution.

Securing financing for such ventures poses a significant challenge. Convincing a bank to back a project that has previously failed is no small feat. Including a financing contingency in your contract can provide a safety net, making it a crucial negotiation point.

Despite these hurdles, investing in foreclosed self-storage facilities can be highly profitable with the right approach and due diligence.

Preparing a Financing Package: The Essentials

Navigating the financial landscape to secure a loan for refinancing or purchasing property requires more than good intentions. It demands a combination of market insight and preparedness that can significantly influence the lending decision.

In today's competitive lending environment, being well-prepared is not just advisable—it's imperative. A common misconception is that refinancing or acquiring a loan is a straightforward process of signing a document. The reality is far more complex, requiring a comprehensive package that showcases your financial health and the potential of the property in question.

Lenders prioritize borrowers who are proactive and organized in their loan application process. Think of it as packing for a camping trip—you wouldn't leave without the essentials. Similarly, lenders have a checklist for loan submissions, typically including:

A detailed Personal Financial Statement (PFS) offering a snapshot of your financial situation.

  • A current Rent Roll.
  • Clear, comprehensive photos of the property.
  • Year-to-Date Profit and Loss (PnL) statement.
  • Tax returns from the past three years.

Mistakes in these documents, such as inaccuracies in your PFS, can jeopardize your loan application. Ensuring that your rent roll is up-to-date and that your property photos present the property in its best light can significantly impact the underwriter's decision.

Moreover, consistency between your PnL statement and tax returns is crucial. Discrepancies can lead to loan denial. Lastly, when engaging in purchase transactions, ensure all negotiations are concluded before presenting the deal to a lender. Lenders operate within the constraints of fluctuating market conditions, and delays in contract finalization can disrupt the loan process.

In summary, securing a loan in today's market is akin to being a well-prepared Boy Scout. With thorough preparation and attention to detail, you can navigate the complexities of the lending process and secure the financing needed for your investment.

Frank Rolfe has been an active self-storage investor for around two decades, with self-storage units in many states throughout the U.S. His nuts and bolts knowledge of what makes for a successful self-storage facility has led to a three-decade career without a single failed property.