I can’t believe I haven’t wrote about this until now. This is something that I’ve been thinking about for months now.
But first, let’s talk a little about the storage business, something you’re probably only familiar with from the greatest show of all time, Storage Wars. Okay, worst show of all time. Who knew storage lockers always had at least one interesting item in them?
It’s essentially another way to invest in real estate. Most storage businesses these days are set up so folks storing their crap can have 24/7 access to the place, just in case grandma feels the need to fondle her nick-knacks. Just kidding. Grandma is dead. WILL 2016 EVER END? WHY DOES THIS YEAR KEEP KILLING PEOPLE?
A small storage business only needs a part-time manager, while one that’s a few hundred units will probably shell out the extra cash to hire someone full-time to run the place. There are a few things to do like keep the place clean and whatnot, but for the most part it’s passive income. Many people pay for years before throwing up their hands and letting Dave Hester buy it for pennies on the dollar.
The storage business isn’t just about lockers, at least up here in Canada where every approximately 76% of us have decided having an RV is a good use of capital. There are plenty of people who not only pay maintenance costs and depreciation on an RV, trailer, or fifth wheel, but they also pay to store said monstrosity. This continues to boggle my mind, but there’s no indication the “camping” trend is going away.
The storage business I’m looking at
You kids want the deets, huh? Well, guess what? YOU CAN’T HANDLE THE DEETS.
Yeah, that’s right. I’m on the cutting edge of pop culture here. That joke was so bad Italics Man just offed himself.
No I didn’t.
Well, you should have.
This storage business is small and relatively simple. It consists of (with monthly rents in brackets afterwards):
- 8×10 locker ($95)
- 8×10 locker ($95)
- 8×20 locker ($135)
- 8×16 locker ($125)
- 8×12 locker ($95)
- 8×12 locker ($95)
- 14×24 garage ($150)
- 8×20 shed ($95)
- 15 RV rental spots ($25)
As is, when fully rented, this place has the potential to churn out some pretty serious income. It could do $15,120 in annual rent. Since there aren’t many expenses besides property taxes — which are about $1,200 a year — we’re looking at profit of around $13,000, give or take.
There’s just one problem. The place isn’t close to full. Half of the storage lockers are vacant. I’m told the RV part of the business is consistently full. So approximate rental income is about $10,000.
The big appeal is potential. Income could go up by 50% by just filling the four vacant storage units. And according to the seller, there’s room for an additional 21 RV lots. I’m not sure I buy that there’s that much potential for expansion — because, frankly, adding additional RVs seems about as easy as saying “sure, you can park here in exchange for money” — but I did go check the place out and there’s definitely some extra room. Let’s say there’s room for 8 more to be conservative.
Thus, total revenue potential looks something like this:
- 8 lockers/sheds/garages — $10,620
- 23 RV spots — $6,900
- Total — $17,520
That’s best case scenario. Let’s do one more set of calculations at what I’d consider to be a realistic “best case,” at 80% occupancy:
- 8 lockers — $8,496
- 23 RV spots — $5,520
- Total — $14,016
So we have something that generates approximately $10,000 per year today in annual revenue, with the potential to grow it between 20% and 40%. The current owner does a pretty poor job of advertising the place, with nothing but a sign in front and an ad in the local paper. I think an additional $500 per year would easily increase the top line by $1,000 or $2,000. Nobody really knows the place exists today.
How much is it worth?
It started out for sale at $115,000, which was way too rich for my blood, even though it represented a cap rate of close to 8%. It has since been reduced to $95,000.
Here’s the way I look at the storage business. This place is, admittedly, a small-time operation. All it would take for somebody to run serious competition is having a bit of land and some capital available to buy a couple of Sea Cans. Those aren’t expensive either; they can be bought used for about $4,000, including delivery.
I’m also concerned about the future of the business. Minimalism is very much a thing today. Although I think this does change somewhat as many minimalists start having families, the trend is clearly towards having less stuff, not more. Although that may just be a product of my environment. Go ahead, ask your normal friends about minimalism. They’ll look at you like you’re a crazy person.
So I need a succulent return before I’m going to venture into such a thing.
I’m thinking I need a minimum of 12% after property taxes, preferably closer to 15%. I need a margin of safety to get into the storage business. It’s just too easy to compete.
How much can I pay? Here’s a table looking at return rates using today’s income ($10,000 – $1,200 in property taxes) and realistic potential income ($14,000 – $1,200 in property taxes).
|Price||Return (on today’s income)||Return (on potential income)|
Ultimately, it comes down to what I can earn from the place. If I think $14,000 in annual rental income is realistic, then I could pay up to $100,000 for it. If I’m being cautious, I want to base what I pay on today’s income. A purchase price of between $70,000 and $75,000 would be the better choice.
Let’s wrap it up
The good news, for me, is that this place has been for sale for months now, assuming somebody hasn’t gone ahead and bought it while I’ve sat on my hands. It’s already been reduced by $20,000, showing there’s some motivation there. And let’s face it; there’s a certain amount of work that comes from running a storage business.
I’ll turn it over to you kids in the comments. Tell me if you’d buy this and if so, what price you’d pay for it.