Should we buy this storage facility?

[Rural]

 Just got a call from the guy who has been operating the storage facility where we have a small unit rented. I asked him several years ago to let us know if he decided he wanted to sell.


 I don't yet have a lot of the details so this may be more of a "what should we be asking about" post than a "should we do it?" question at this point.


 First, the property is not just a storage facility but also a 3000 square-foot shop, zoned commercial. He has been running an electric company out of it – small engine repair, I believe. It has three phase power, which both the owner and my husband say is a good thing. But we don't need a shop – we might be looking at renting it out.


Also on the property  is a 4000 square-foot mini storage warehouse.  It has approximately 30 units of varying sizes and the owner says it brings in $1000 a month, so it doesn't bring in any more than that for sure. Our unit is 10 x 10, I believe, and we pay $40 a month – low-cost of living area here.


The place  is about half a mile down the public road from our home.  It sits on 1.17 acres.  The county values the property at $116,000; he's asking $135,000. He paid just over $1400 in taxes last year and just under that the year before.


So, what should I be thinking about?


Does anybody operate a storage facility? What is that like?


It's zoned commercial – does that mean a different sort of mortgage product than a residential mortgage? I assume it must.  We could raise a 20% down payment, but it would wipe out our emergency fund temporarily.  We wouldn't have to do anything drastic in case of an emergency at the same time – we could put it on the card and pay it off within a month as long as the house didn't burn down. We own our home free and clear, so this wiould be our only mortgage.


 Should we be looking at incorporating a business if we did this? I don't yet know if we need a business license to operate a storage unit in this county, but I'll find out.


 

[mousebandit]

Without running any numbers, I will say that storage facilities are a type of business my husband and I have talked for years about getting into.  We think they're great.  In our neck of the woods, the house rental market went bazonkers in the last 2 years and everyone is moving around, living with friends and family and there are literally no open storage units within 60 miles!!  We are about to clean out our last one and have joked about sub-letting it for a higher price, LOL! 

I would look closely at the prices, but I would totally be game! 

MouseBandit

[BTDretire]

I'll take a stab at it to get things started.
 Are you prepared to be available to rent out units when the customer is there to fill it?
You might want to find the applicable laws regarding how you get possession of a unit
when the customer doesn't pay, and how many months rent you lose while getting possession.
And then how you must dispose of those possessions.
 How much maintenance is required immediately, and how much each year.
Da money!
 First, to make it easy I'll do cash on cash, forget any leverage.
Can you get another $1,000 for the 3,000 ft shop?
 I have to assume something, so...
$12,000 for the 30 units and $12,000 for the shop. Gross $24,000
Expenses, Taxes, $1,400, electric, $1,200, maintenance, $2,400,  insurance, $1,200 and , $1,000 as a pad.
  Total $7,200,  then $24,000 - $7,200 = $16,800.
$16,800/$135,000 = 12.4% return on cash.
However, If you spend 10 hours a week 50 weeks a year, that 500 hours.
Giving yourself $12hr, is $6,000.  Adding that to your costs will bring the return down to,
$10,800/$135,000=8%
   You can go ahead and rerun the numbers with 20% down and a mortgage payment,
although I don't know if a bank will lend on such a property with 20% down.
   I'm sure someone more experienced will add some things I missed and may be a little less conservative.

[onlykelsey]

Can't speak to owning a storage facility, but am vaguely familiar with commercial lending and I agree with the previous poster that most banks would not lend (at least at workable rates) with only a 20% down payment.

[Rural]

 Thanks, both of you. What's typical for a down payment on a commercial property like this, then?

[onlykelsey]

Thanks, both of you. What's typical for a down payment on a commercial property like this, then?

My gut is that LTV would need to be ~60 for a small facility.  http://www.crefcoa.com/self-storage-loans.html  (no affiliation, not sure if they're legit, but look legit) seems to say 55, which lines up with my gut.  But then you seem to have other options open (i.e. getting a HELOC on your house if you're comfortable with the risk).

[Rural]

Thanks, both of you. What's typical for a down payment on a commercial property like this, then?

My gut is that LTV would need to be ~60 for a small facility.  http://www.crefcoa.com/self-storage-loans.html  (no affiliation, not sure if they're legit, but look legit) seems to say 55, which lines up with my gut.  But then you seem to have other options open (i.e. getting a HELOC on your house if you're comfortable with the risk).

Thanks. Hadn't thought of the HELoC; we'll add it to our discussions over the weekend, but I bet it's a no-go for my husband (may be for me, too).


I have discovered we don't need a business license - not even available in unincorporated areas of the county, which this is. Do we need to incorporate, though?


Still thinking on it. May be leaning against it.

[Rural]

I'll take a stab at it to get things started.
 Are you prepared to be available to rent out units when the customer is there to fill it?
You might want to find the applicable laws regarding how you get possession of a unit
when the customer doesn't pay, and how many months rent you lose while getting possession.
And then how you must dispose of those possessions.
 How much maintenance is required immediately, and how much each year.
Da money!
 First, to make it easy I'll do cash on cash, forget any leverage.
Can you get another $1,000 for the 3,000 ft shop?
 I have to assume something, so...
$12,000 for the 30 units and $12,000 for the shop. Gross $24,000
Expenses, Taxes, $1,400, electric, $1,200, maintenance, $2,400,  insurance, $1,200 and , $1,000 as a pad.
  Total $7,200,  then $24,000 - $7,200 = $16,800.
$16,800/$135,000 = 12.4% return on cash.
However, If you spend 10 hours a week 50 weeks a year, that 500 hours.
Giving yourself $12hr, is $6,000.  Adding that to your costs will bring the return down to,
$10,800/$135,000=8%
   You can go ahead and rerun the numbers with 20% down and a mortgage payment,
although I don't know if a bank will lend on such a property with 20% down.
   I'm sure someone more experienced will add some things I missed and may be a little less conservative.

Thanks for running those numbers. The guy selling thinks the shop would rent for $750, which I'd say is more in line with the local area. I do think your maintenance is high (husband would do it, so supplies only), as is electric (just a pole light, I don't think the units have power, and I don't intend to take on powering the shop). Still it might not be as good as your projection because of the shop rent.


We would not have someone available all the time for rentals. That's a downside, but not as bad with such a small facility, I think. Still the previous guy worked in the shop there.


Thanks again. Still thinking here.

[Jim2001]

Posting to follow the thread.  Let us know how it goes.

[Rural]

Forgot to update at the first of the week - we've decided to pass for not just financial reasons, though the numbers were a bit iffy anyway and we would probably have passed regardless. But we've decided neither of us is in a place to take on running a business now, so.


This should at least inspire us to clear out that storage unit.


Thanks again for the advice, everyone!

[thd7t]

You should get copies of all the tax and utility bills from the owner, covering the last year. There's no reason to guess what those expenses are, or to trust him. Do a visit and check out the shop. I would be shocked if it doesn't have electrical service.

[Rural]

You should get copies of all the tax and utility bills from the owner, covering the last year. There's no reason to guess what those expenses are, or to trust him. Do a visit and check out the shop. I would be shocked if it doesn't have electrical service.

As I said above, the shop has three-phase power, but we've decided not to buy the place. If we had, any renter in the shop would have had to get electric service for themselves.


Taxes are public record - I went straight to the county, not to the owner - much more reliable source. :)