Self Storage University Podcast: Episode 45

Can I Get Pre-Approved?

Self-storage investing typically requires getting a loan on the property, with the buyer paying the required down-payment and the bank extending credit on the rest. But is it possible to get pre-approved for this type of loan? That the topic of this Self-Storage University podcase, where we’ll go over this concept and its ramifications.

Episode 45: Can I Get Pre-Approved? Transcript

You can get it on a single-family home but can you get it on a self-storage facility? This is Frank Rolfe, we're talking about being pre-approved for a loan. Many people wanna know, can I go ahead and get pre-approved to buy a self-storage facility? Well, it's not quite that simple. And let me explain why. First, let's go over how self-storage lending works in the first place, you basically have three types of lending, seller financing, bank financing and CMBS, what's called conduit financing. And they all come with different amounts of down payment. Seller financing, well, it's all over the map. It can be anything the seller agrees to, it could be 0%, 5%, 10% 15, 20, there's no limitations. Banks however are a little more confine. They typically want about 20% down, although sometimes as much as 30% down. And then your CMBS conduit lender well they want 70% loan-to-value, which is kind of a way of saying 30% down, but not always it's based on what the appraisal comes in at. And here's the problem, none of these three lending sources on self-storage do any form of pre-approval. Now, why don't they? 

Well, the problem is that there's two parts to any loan, there's you, I would call that the character, and then there's also the collateral. In the single-family home market, we've all just gotten so spoiled over the years that we assume that any price that someone offers a home at is pretty much the right price. Because there's no way to analyze a single-family home based on income. It's not an income property, can't really apply a cap rate, so what's happened is that most appraisers just always give the lender what the guy is asking for on the property, and therefore evaluations don't mean a whole lot.

So on a single-family lender, looking mostly at the character of the borrower, not so much of the collateral, now that changes completely though, when you get into income property. Because the seller, if he carries the note and the bank and the CMBS conduit lender, they're more interested in the collateral, than the character of the borrower. It only makes sense, the seller finance, that's non-recourse death, the worst they can do if you don't make the payment is take the property back. Same with the CMBS conduit lender. The only person who actually has any skin in the game, in any of these lendings is you personally on a bank loan that has recourse, but even then the lender doesn't really know if there's a problem with the loan, will you have any money anyway. You might have been when you got the loan, but years later, did you already use all that money up on some of the project. So that's why they can't do pre-approval is because most of their decision isn't about you, instead it's all about the collateral itself.

Now, people then say, well, what can I do then? If I wanna borrow money for a self-storage facility. Then what do I have to do to get ready for that? How do I get ahead of the game on that stuff? Well, there's a lot of things you can still do, even though you can't get pre-approved. Number one, have your capital ready to go, we all know that buying something other than 0% down, seller financed requires cash, capital, something in the bank. If you're going to go ahead and put money aside to buy that storage facility, let's moat it in liquid form, because the bank is not gonna take you seriously if you say, well, now to get my down payment, I've gotta sell this or sell that. No, that doesn't really count. So get your capital ready, number two, have a really good looking loan package ready to go. What's the loan package? That's the thing you take to the lender, and it talks all about why this is a good loan for them, and part of it is just why self-storage itself is a good idea, and then part of it will be about the property and part of it will be about you.

You can find any number of resources online of people showing standard bank loan packages, it's not copyright and it's not patented. Basically, it's just a really good sales pitch to the bank saying, you should make this loan, this is good for the bank. So go ahead and start getting that written because you know what, other than dropping in the details on the property itself, there won't be much changes regardless of which property you select to try and buy. Also only go to the bank with really, really good deals, things that the lenders really want. You're in for nothing but rejection, if you start trying to buy things that don't fall in line with what the lenders like. The locations, the condition, all of these factors, many lenders have similar viewpoints on. You need to share their viewpoints. So again, if you have a really good loan package and if you're buying stuff or trying to buy stuff that's exactly what lenders like, then that's almost as good as pre-approval 'cause you're probably pretty sure you'll get the loan. Also, give yourself plenty of time in your contract to get the bank loan. Since you can't be pre-improved, don't imagine for a moment this is like a single family loan because it's not.

Single-family loans are pretty simple and easy, now they may not be after the next great crash, they weren't that easy after 2007, 2008 were they? So no, don't for a minute think that this will go on forever in the world of single family, 'cause it won't. At the same time though, you have to give yourself on any income property, given the fact that bank cares so much about the collateral, plenty of time to get third-party reports, run it through a committee, bless the deal, and have their attorney draft the papers. Don't back yourself into a corner. How much time do you need? Well, nobody knows for sure where things are in the post-covid world or even... Are we post-covid? I'm not really sure. But we know things have slowed down dramatically.

We used to take a month or two, now you better check out another month or two on top of that. It would not be uncommon today to find a self-storage deal taking up to four months to get a loan from beginning to end. But if you ask for four months on the front, and that probably will scare the buyer away, so you might only ask for perhaps 30 days of diligence and 60 days of financing with the theory that you can always go back if you need to to buy more time and that excludes seller financing because seller financing, that's all done by the seller, so you don't have to get an attorney and a lot of those third-party reports are jettisoned. The bottom line to it all is that although you can't get pre-approved for a storage loan, nevertheless, there are active things you can do in advance. Things that will help your odds of success, things that will speed the process up.

But you'll never ever have a period, I've never seen a period ever in real estate in which you could get pre-approved for any old income property you wanna buy. Most lenders are not geared up for that, they care more, but here's the good news, because they care more, you have fewer bus cycles. That's what happens to single-families and since no one's really minding the store on values or really questioning the appraisals or anything, that's how some of these homes can go up in value to insane proportions and then come completely crashing down. Now we haven't had a big crash recently, but it wasn't that long ago, that we had the great recession, do you remember where things went. Condominiums in Las Vegas went from $400,000 down to $40,000. How is that possible, you might say. How did that happen? Well, what happened was, when people did appraisals and were buying these things, there wasn't nearly nobody caring. They just thought, well, if the person wants to buy it, well what the heck. Lenders all seemed happy to loan the money, so there never was any tie in between anything and the actual value, and that's not a safe way to run something, so you should actually like the idea that banks are gonna scrutinize your deal, because at the end of the movie, that's not only what keeps you out of trouble, but that's also what keeps the market itself out of trouble.

And that works in your favor. Every time. This is Frank Rolfe for Self-Storage University podcast. Hope you enjoyed this. Talk to you again soon.