So last week we talked about AirBnb. I told you kids about how I had a garage I was interested in converting into an apartment, which had the potential to do a 40% annual return. That, my friends, is the very definition of succulent.
I won’t likely pursue this, for a number of reasons. First off, I’m kinda lazy. I don’t want to go and babysit a unit like that. Go somewhere else, you damn kids. I prefer more passive sources of income. And perhaps most importantly, after a short discussion with someone who is reasonably aware of local zoning laws, I was told my chances to convert my garage were slim to none. Interestingly, however, my chances of converting it into a bedroom or home office were good. Perhaps I’ll keep that in mind for the future.
It’s easy to argue I’m going about the AirBnb business the wrong way. If I was serious about it, here’s what I’d do.
All about protecting capital
Most people don’t have thousands of dollars to spare, just sitting around to convert space into something that can be rented out. Hell, most people don’t have space for their mountains of crap, never mind guests. Actually, I take that back. Most of us have too much damn space. We just like stretching out, that’s all.
Think about all the expense of buying a condo to rent out this way. You’d have to scrounge up at least 5% down — although 20% is more likely — spend money on insurance, taxes, and all the furniture it takes to make such a place happen. In a market like Toronto or Montreal, you could be looking at $100,000 just to get started.
That’s nuts, especially when we consider the uncertainty surrounding these types of places. At this point, most cities don’t care much about folks renting out apartments like hotel rooms. This could change, especially in cities that have high local taxes on hotel stays. The government always gets their cut.
The far easier way is to simply rent a place on a monthly basis and then use it as your base of operations.
The biggest advantage is it lowers the cost of entry. All you need to come up with is first month’s rent, last month’s rent, and cash for furniture. Instead of spending $100,000 to start, you’re looking at a bill of less than $10,000. Hell, if you’re a Craigslist master, you probably won’t need much more than $5,000 to get going.
Just stay out of the intimate encounters page, champ. ACTUALLY NO TAKING A HOOKER BACK TO YOUR AIRBNB PLACE IS GENIUS.
It also allows you to be nimble. Pick a bad location? No problem. You’ll lose one or two months rent, max. That’s far less than paying some broker 5% of the value of a condo to get rid of it. Being nimble is a good thing.
Expansion potential is much better, too. Earnings from one unit can easily be reinvested in another, which allows you to start building up an empire with very little capital out of your own pocket. Landlords like it too; it’s much easier to sue a business guy with some assets than a random dirtbag who rents an apartment.
Or, better yet, partner with your local landlord. Offer to do all the work for 33% of the profits. Or 20% of the profits. Whatever works for you. It’s better to take an even lower return in that situation, simply because you have no capital at risk. It’s the same concept as using seller financing, which is the ticket.
Wrapping it up
I’m a little skeptical this whole AirBnb thing will continue forever. I have nothing against the concept, I just think local governments will eventually ask these folks to start coughing up the same taxes hoteliers pay. This immediately eliminates AirBnb’s competitive advantage.
But there’s nothing stopping you from getting on the gravy train. The best way to do so is to keep as much of your money firmly inside your wallet. Capital is precious; use it wisely.
Because, hey, who should be a better credit risk than yourself? (Immediately defaults)
Here at the ol’ FU machine, we’re all about giving you kids some of the most unusual investing ideas out there. I’ve outlined everything from putting your cash to work lending dirtbags money to buying a storage locker business. And that’s just in the last month. I’ve come up with more odd investment ideas in the past six months than most people do in their lifetimes.
There’s a reason why I do this. Most investment bloggers (and, hell, personal finance bloggers too) do nothing but chronicle their very predictable actions. There’s very little to gain by retracing the beaten path. The real opportunities are in the bushes where nobody is looking. Probably because there are snakes. Or spiders.
At first glance, you may not realize the benefits of something like giving yourself a loan. Why would such a thing be beneficial? You’re literally just taking money from one pocket, charging yourself interest, and then putting less of it back in the other pocket. It seems like action for the sake of action.
But there are actually two very interesting reasons why you’d want to give yourself a loan. Let’s look at each of them.
Starting a company
Every company needs a certain amount of start-up capital.
Most people fund their companies in a very predictable way. They use their own savings as initial capital.
Say you bought a fast food joint for $200,000 and immediately incorporate the thing as its own business. You decide to put in $50,000 of your own money into the company as shareholders equity and lend the corporation the other $150,000.
Most people lend their corporation money interest free because they want the business to succeed. The business then pays back the loan as it can afford it.
But there’s no rule that indicates this loan has to be interest free. In fact you can, in theory, charge yourself all sorts of interest. As long as it’s considered to be the going rate, you’re good to go.
What most people do is research a little and see the rate a bank would charge them to do the same loan. If a bank would charge 6% in a similar situation, you could easily charge your corporation the same amount.
Remember that you’ll have to make this a legit loan. Paperwork will need to be done and the corporation would have to make the designated payments. You can’t just give yourself a loan and have the terms be “I’ll pay back whatever whenever I want.” Do you really want to make your accountant cry?
Give yourself a mortgage
This one is a little more complicated, but it can be lucrative for a very small percentage of the population. It turns out it’s possible to hold your mortgage in your RRSP.
It works something like this. There are all sorts of different investments you can put in your RRSP. It’s not just stocks, bonds, or ETFs, either. It turns out you can totally invest in certain qualified mortgages inside of your RRSP. This is how those private mortgage companies can get away with saying they’re RRSP eligible.
Even though I’m in the private mortgage business I’ve never examined the possibility of holding them inside my RRSP. As far as I can tell they need to be first mortgages only, and they need to be insured by one of the various agencies that do this.
It’s less complicated to hold your own mortgage inside your RRSP, although it’s certainly not easy. Here’s how it works.
- You pay someone to set up the deal for you. Only certain financial institutions will do so and you’ll have to pay CMHC insurance fees.
- You have to make sure that you have enough contribution room to pay for the whole house, not just the part mortgaged.
- The interest rate you give yourself must be competitive with comparable mortgages. I’m thinking you’d pretty much be locked into giving yourself a loan at 4.64% which is sure better than a GIC but could easily be beaten by stocks.
I’ve pretty much only touched on the basics. There are a number of companies that will do this for you. Do some Googling and talk to one of them before you get started. I’m not getting too involved in this because, frankly, I think it’s kind of dumb.
This is the end
It’s not that hard to give yourself a loan if you’ve got a corporation. There are a number of advantages for self-employed people to incorporate, as I outlined in this post. Getting a little interest from your own corporation is another, but you could argue that doing so is just shuffling money from one pocket to the other.
Ultimately, I won’t spend much time doing this, but it could very well make sense in certain situations. Your accountant can probably help out with this more than I can.
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).
||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.