1st Self -Storage Deal. I NEED Advice

11 Replies

I’m a newbie in the self storage business and I’ve managed to negotiate a deal that includes seller financing. Here’s the deal: Purchase price - $900,000 Down Payment- $500,000 Balanced financed by owner $400,000 Terms 3 years interest only @ 6.5% Earnest Money $10,000 Due Diligence 45 days Closing on or before October 23, 2018 My situation: NO capital to invest, bad credit. How do I close this transaction without putting any money down?

Clearly you will need to raise the $500k privately given your current credit situation. Your best bet, in my opinion, is to bring in one or more equity partners. Is there enough profit in this deal for it to make sense if you give up half the equity? My thought is, you do all the work and sign for the $400k seller note. The money partners put up $500k for 50% of the deal. In my experience, the deal will need to net the investor somewhere in the 15-20% range to get the excited. Can this deal handle that?  What's the projections for annual cash flow and Value after say 3-5 years?

So if those projections are sound, it would seem you have room to share the equity. You'll probably want a full.fledged business plan showing the investors you know what to do to hit those numbers. $500k will required a pretty good presentation. Definitely doable though!

You can probably rule out a hard-money lender as they'll want to be able to own the property if you default and if the current owner has a $400K stake, that may complicate that. I'm with Michael in that you'll probably need to bring in equity partners. It looks like if you both take 50% of the deal, you would each clear $74,000/yr or a 14.8% return on the $500K. Now, with that said, what is the future value of the property going to be if you can get cashflow to $178K in year 3? This might be a $300,000 pot of equity gold at the end of 3 yrs. Split in half, that's $150K over 3 yrs or $50k/yr. That in and of itself is a 10% return on investment for a total of 24-25% ROI over 3 yrs not including principal paydown (which won't be that much with the $400K loan being interest only. Assuming a 20 yr loan, that is approximately $36k/yr bringing your portion of the profits down to $38K/yr cleared. But on a no money down investment, that seems pretty good. I must say that you'll likely have to structure the deal as a 10% preferred return for the $500k investor so he/she knows they are going to get paid first but if you are confident in the numbers, it seems like a pretty good deal for everyone.

Another option is to do an SBA loan and you'll only need 15% down, you'll probably get a better interest rate and 25 year fixed rate on 1/2 of the loan amount through SBA.  The other 1/2 will be variable with 5 year loan terms.  This would require you to find a partner who is willing to bring $135k to the table and use his credit and you would operate/manage the property.  This would amount to approximately a $5,000/month ($60,000/yr) payment and if you use 40% operating expenses ($59,200/yr)  you clear $28,800/yr.  If you split that 2 ways, you come up with $14,400/yr.  That is a 10.7% return for the $135K investor not including principal paydown.  You also only make $14,400/yr which is significantly less.  But, if you're looking to make a splash with the investor and provide a no-brainer deal, this is it....and here's why.   If you get the same $300k appreciation over the next 3 years, you are giving your investor another $50k of value each year ($150k/person divided by 3 years).  That brings their total return up to $64,400/yr or a return of 47.7% per year (I know, I know, I didn't factor in the increasing cashflow - I did that to be conservative).  Now that is a return that an investor could really get on board with.  It always comes down to what is the investor's philosophy - cashflow now or better overall returns later?  

With option #2, you might be inclined to take a "finder's fee" or whatever else they call it of 2% of the deal knowing that the investor is going to get killer returns.  With option #1, I feel like you're already asking someone to bring $500k to the table which would make it tougher to tack on a finder's fee.  Not to mention, with option #2, your investor only needs to bring $150k or so (with finder's fee) to the table which makes it easier than finding $500k.  Just a thought.  

Looks like a good project all around but you certainly need to present it professionally to get this kind of dough from someone especially if you haven't done this before.  Or maybe you give someone 15% of the deal (me! - JK) and have them help you present it professionally to investors.  There are some guys out there that have this process figured out and would probably be a good resource.  

Feel free to PM me to discuss further options.  Good luck!

Originally posted by @Josh Collins :

You can probably rule out a hard-money lender as they'll want to be able to own the property if you default and if the current owner has a $400K stake, that may complicate that. I'm with Michael in that you'll probably need to bring in equity partners. It looks like if you both take 50% of the deal, you would each clear $74,000/yr or a 14.8% return on the $500K. Now, with that said, what is the future value of the property going to be if you can get cashflow to $178K in year 3? This might be a $300,000 pot of equity gold at the end of 3 yrs. Split in half, that's $150K over 3 yrs or $50k/yr. That in and of itself is a 10% return on investment for a total of 24-25% ROI over 3 yrs not including principal paydown (which won't be that much with the $400K loan being interest only. Assuming a 20 yr loan, that is approximately $36k/yr bringing your portion of the profits down to $38K/yr cleared. But on a no money down investment, that seems pretty good. I must say that you'll likely have to structure the deal as a 10% preferred return for the $500k investor so he/she knows they are going to get paid first but if you are confident in the numbers, it seems like a pretty good deal for everyone.

Another option is to do an SBA loan and you'll only need 15% down, you'll probably get a better interest rate and 25 year fixed rate on 1/2 of the loan amount through SBA.  The other 1/2 will be variable with 5 year loan terms.  This would require you to find a partner who is willing to bring $135k to the table and use his credit and you would operate/manage the property.  This would amount to approximately a $5,000/month ($60,000/yr) payment and if you use 40% operating expenses ($59,200/yr)  you clear $28,800/yr.  If you split that 2 ways, you come up with $14,400/yr.  That is a 10.7% return for the $135K investor not including principal paydown.  You also only make $14,400/yr which is significantly less.  But, if you're looking to make a splash with the investor and provide a no-brainer deal, this is it....and here's why.   If you get the same $300k appreciation over the next 3 years, you are giving your investor another $50k of value each year ($150k/person divided by 3 years).  That brings their total return up to $64,400/yr or a return of 47.7% per year (I know, I know, I didn't factor in the increasing cashflow - I did that to be conservative).  Now that is a return that an investor could really get on board with.  It always comes down to what is the investor's philosophy - cashflow now or better overall returns later?  

With option #2, you might be inclined to take a "finder's fee" or whatever else they call it of 2% of the deal knowing that the investor is going to get killer returns.  With option #1, I feel like you're already asking someone to bring $500k to the table which would make it tougher to tack on a finder's fee.  Not to mention, with option #2, your investor only needs to bring $150k or so (with finder's fee) to the table which makes it easier than finding $500k.  Just a thought.  

Looks like a good project all around but you certainly need to present it professionally to get this kind of dough from someone especially if you haven't done this before.  Or maybe you give someone 15% of the deal (me! - JK) and have them help you present it professionally to investors.  There are some guys out there that have this process figured out and would probably be a good resource.  

Feel free to PM me to discuss further options.  Good luck!

 no way he gets a SBA loan with no money and no or bad credit..   in my mind this is something to flip to someone who can actually close it and operate it.. and I am surprised an owner got this far with out vetting the OP as a real buyer..  Just sayin.

@Jay Hinrichs   I'm not saying he'd use his credit for the SBA qualification.  You'd still need a partner who will put up the cash and sign for the loan.  My thoughts are that the OP doesn't have any money so that immediately disqualifies him for the SBA loan.  Haha.

I'm also surprised (maybe a little impressed) that he was able to get this far with the owner.  However, it may be a family friend or acquaintance.  Either way, I'll tip my cap to him based on the little knowledge I have of deal.