@Bob Vollmer
a. Do you plan to do more Self Storage? If not, don't do this deal. If you do, then the learning part of this is worth it, if the numbers come close.
b. Market strength- Someone has to be the low-cost provider. Thats your strength in this market. Do a rent rate analysis on the 80 10x10's. Don't worry about the other sizes, you don't have that many. Even with your future rate hikes are you still the low-cost provider by say $20/$40 per month? You're not competing against the other new locations. 6,000 people, this is a market of around 400 units; Count the number of units existing. Are there lots of people outside the town?
c. Financials: Change these figures to boots on the ground.
Rent- $62,000 per year, don't use your "improved" numbers.
Insurance- $2,500
Prop tax- $5,000
Maint.- $3,000
Electric- add. $2,000
Camera and alarm system- $500 per year, about $25,000 up front to install.
Gate and fence- don't do, tear out the old fence and do something that looks good. $0 per year.
Management- you, do you live local.
Water/fire hydrant- don't do.
Old portables- either 20 foot cargo containers for $4,500 each if available, or $7,000 for 8 x 20 portable metal. No property taxes, permits, or fire hydrant.
Depreciation expense- do as much year one write-off to get up front cash flow, from reduced taxes.
P/I at $2,500 per month at say 5% interest = $2,625 per month times 12 = $31,500 per year.
Income taxes= $?????
After all of the costs above, depreciation- then add back for cash, income taxes, interest expense; let's say cash flow of $45,000.
Less P/I of $31,500 per year. Keep in mind each $2,500 you pay in each month, your building equity.
Net cash flow of say $13,000 per year.
Is this a good deal?
No- $550,000 less $75,000 down. $2,500 per month would be about a 16 year payback. Better than most investments but not within our parameter of 8 to 12 years. Now take the $2,500 per month, add in the additional Cash flow of $13,000 per year, for a potential payment of $33,000 per year; then a payback of $550-$75/$33= 14.39 years.
Yes- Still not where I like, but you are building equity in a market where stocks and bond don't look good and fighting for SFH/MFH deals is hard and you need appreciation as your goal. Most importantly though, back to my first question, are you going to do more than one deal? Then the learning will be worth it.
The Deal:
a. This is off the market. Lock down the deal. Make an offer, with a due diligence period of 45 days. Put down a redeemable deposit of $10,000 to lock the deal down.
b. Lock down the rent roll first. Do the rate comparison on the 10 x 10's next. Make sure you will be far enough under market to attract the Cost Conscious.
c. Offer Starting point- three-day offer, Total of $530,000; $75,000 down, 5% interest, 5-year balloon, with $2,000 per month principal payment plus interest, $100,000 noncompete agreement as part of the $530,000; Everything is negotiable, explain that to them. I would start with the overall number that works for you, then work your way up. IE change the $530,000 as needed.
d. Break the offer down as follows, do an asset purchase and not a company purchase: This will help support a Cost segregation for tax purposes. This is the last year you can do 100%.
- $100,000 Noncompete agreement- 15 year amort life, thus you can write off in year one for tax cash flow, loss carryforward if not used.
- $200,000 Concrete pad structures- keep as much away from this as possible since longer depreciation
- $100,000 portable buildings- based on conditions, do 15 year life and write off.
- $20,000 roads- 15 year life or less write-off
- $10,000 fence- 15 year life or less, write-off
- $100,000 land- keep as low as possible since you can't depreciate.
Talk with your Tax person and see if you can do year one tax write-off. You're a real estate agent? Ask them about your professional standing.
Keep a little cash on the side for repairs. a. Doors, b. Road, c. Paint, d. Roof overlay.
If there is a lot more demand and this is in a great location, use it as your advertising. Then find a spot out of sight you can send people to.
Calculate your Failure:
Do a few Failure scenarios. Then determine if this is acceptable. Most people never invest, not because of the profit or success potential, but because of the boogey man or failure and they don't wrap their arms around it. Failure can still be positive cash flow, just not as good as you projected. But at least you started down the road.
Start small and Make Your Big Mistakes Early.
