Except how many hours of work are going to be required to earn 25k a year? Is an employee included in the overhead? I'm not working full time for a possible $25k annual return. That's $12 an hour for a 40 hour week. Walmart pays better and there's no risk.
$25k is cashflow. That doesn’t include the money going toward paying off the loan. Even at 20 hours/week it sounds decent. And I wouldn’t expect this to be a 20 hour/week job. Renting a home for me has been about 20 hours/year so far (no, I’m not exaggerating).
Correct. 25k is after debt servicing. And no, I don't think it's possible you would need a 40 hr week employee for managing this. I am budgeting 4 hours per week.
I have 2 rental properties that are paid off and I might average 20 hours a YEAR of work. My profit is $1200 a month. And sometimes I'm annoyed with that ROI 😆
Of my six years of renting homes, this past year has been by far the worst in terms of hours invested and maintenance costs. That said, those costs were equivalent to about 4 months rent and my total time spent was still well under 40 hours for the year. So not a positive cashflow year (given the mortgage) but not by much. And that property will be paid off this coming August.
I'm cash heavy right now waiting on a housing crash. There is literally nothing on the market, that I've seen, that isn't overpriced.
I’m not expecting a crash any time soon in our area. I just hope prices don’t get too crazy by the time we’re ready to buy again. We have a few more years before we’ll have enough saved to comfortably buy something in our preferred beach town. The goal is to buy something, rent it all summer to cover the mortgage for the year, use it in the off season, then sell it after ~10 years and use the gains to buy a full-time vacation home (or just rehab the rental). Plenty of risk but it seems worth the reward long-term.
I am a partner at a PE firm and also half a dozen rental properties, and manage them all myself. Most in Colorado. It’s not really the hours - it’s the irritation. As one poster mentioned, the ROI on 40 hours per week is high, but the annoyance of fixing something yourself or hiring someone to service the boiler, eg, can be frustrating.
I actually think the IRR on the project without taking into account debt is useful - you need to assess that, called the unlevered asset return, vs the market because you can always borrow on margin to simulate the capital structure. Using 10% for the S&P is too high - 7% is better. But if you use 75% debt to buy the S&P, the returns are well over 20% after debt service, which rivals the storage units. One big difference though, is the tax deduction from depreciation on the RE. You can’t depreciate an investment in marketable securities.
I probably wouldn’t do it - this is as much a retail business as a RE play. But I know a guy who has made more than $1B building these businesses and selling them to Cubesmart. Good luck!
I am a partner at a PE firm and also half a dozen rental properties, and manage them all myself. Most in Colorado. It’s not really the hours - it’s the irritation. As one poster mentioned, the ROI on 40 hours per week is high, but the annoyance of fixing something yourself or hiring someone to service the boiler, eg, can be frustrating.
I actually think the IRR on the project without taking into account debt is useful - you need to assess that, called the unlevered asset return, vs the market because you can always borrow on margin to simulate the capital structure. Using 10% for the S&P is too high - 7% is better. But if you use 75% debt to buy the S&P, the returns are well over 20% after debt service, which rivals the storage units. One big difference though, is the tax deduction from depreciation on the RE. You can’t depreciate an investment in marketable securities.
I probably wouldn’t do it - this is as much a retail business as a RE play. But I know a guy who has made more than $1B building these businesses and selling them to Cubesmart. Good luck!
Good post. can you please explain the "borrowing on margin" concept? Is that theoretical?
Good post. can you please explain the "borrowing on margin" concept? Is that theoretical?
I am curious, too. I think he means assessing the return as if you actually invested the full $475k. But I may be wrong. Assuming I am correct, one major flaw in that assessment is, perhaps, the fact that getting a loan/mortgage to buy property is likely (again, could be wrong but don’t think I am) to be A LOT easier than getting a loan to dabble in the stock market.
I rent three storage units in the town where I grew up. I pay $50 a month for each one, it’s on auto payment with my credit card, and I’ve never seen anyone there (I signed up by dialing a phone number which I imagine goes to a third party management service). I can’t imagine there’s much maintenance involved as it’s just rows of the metal units sitting on concrete on a gravel lot. It sounds like a decent ROI and less work than being a landlord.
I rent three storage units in the town where I grew up. I pay $50 a month for each one, it’s on auto payment with my credit card, and I’ve never seen anyone there (I signed up by dialing a phone number which I imagine goes to a third party management service). I can’t imagine there’s much maintenance involved as it’s just rows of the metal units sitting on concrete on a gravel lot. It sounds like a decent ROI and less work than being a landlord.
The calculation I made (IRR) assumes that you are reinvesting the cash-flows at market rates. This may seem like over-thinking, but most consulting firms that analyze corporate investments use these calculations to decide the most profitable projects.
The Private Equity poster referencing “borrowing on margin” is saying that if you invested the 125k down payment + if you were to take out a loan the same loan and invest it in the stock market (this is the borrowing on margin).
I used the discount cash flow model and took the present value of the future cash flows (57k per year), the initial investment (475k), then spread the cashflows for 25 years. You cannot deduct the loan payment directly from each years cashflow because they are being discounted and this will affect actual values.
The returns of the S&P 500 are cumulative -- so 125k * 10% = $12500, following year 12500 + (137500*10%) = $26250 ... etc.
Using the NPV and IRR functions in excel can get you your desired #'s -- I calculated your down payment as 25% so 118,750 (I see you mentioned 125k). You can use either NPV or IRR to choose your investment. If you plan to sell the business after 10 years, then these numbers would be different. Should take about 8.5 years to make your money back with non-discounted cashflows.
I am an MBA student and I am pretty sure these are right (still learning quite a bit in Finance) but I sent this scenario to my Professor so she can confirm. Hope this is insightful!
I'm still struggling here with why you used 475 as the initial investment, when that actual initial, which you mention later, is 125k. You also mention making your money back. I'm not sure that is applicable since we are assuming your are selling at purchase price or higher. There is no money to make back. It's paying down further debt.
Nonetheless, 29k in free cash flow from day one is not possible with sp500. I understand how it could be later, but then also don't have appreciation in cash value and you are talking about a perfect sp scenario to assume 10 percent. So could be selling a 475k property for 750 in 10 years depending on interest rates.
Disclaimer: I'm not formally trained in financial analysis.
I used the discount cash flow model and took the present value of the future cash flows (57k per year), the initial investment (475k), then spread the cashflows for 25 years. You cannot deduct the loan payment directly from each years cashflow because they are being discounted and this will affect actual values.
The returns of the S&P 500 are cumulative -- so 125k * 10% = $12500, following year 12500 + (137500*10%) = $26250 ... etc.
Using the NPV and IRR functions in excel can get you your desired #'s -- I calculated your down payment as 25% so 118,750 (I see you mentioned 125k). You can use either NPV or IRR to choose your investment. If you plan to sell the business after 10 years, then these numbers would be different. Should take about 8.5 years to make your money back with non-discounted cashflows.
I am an MBA student and I am pretty sure these are right (still learning quite a bit in Finance) but I sent this scenario to my Professor so she can confirm. Hope this is insightful!
I'm still struggling here with why you used 475 as the initial investment, when that actual initial, which you mention later, is 125k. You also mention making your money back. I'm not sure that is applicable since we are assuming your are selling at purchase price or higher. There is no money to make back. It's paying down further debt.
Nonetheless, 29k in free cash flow from day one is not possible with sp500. I understand how it could be later, but then also don't have appreciation in cash value and you are talking about a perfect sp scenario to assume 10 percent. So could be selling a 475k property for 750 in 10 years depending on interest rates.
Disclaimer: I'm not formally trained in financial analysis.
Or...IRR may not be the best way to compare a storage facility purchase to s and p index investing. Learning as I go here.
Storage facility. Not a first tier facility. Gravel parking. No electricity, all drive up.
87 units. 67 K revenue when full, 57k NOI. Owner says it is 95 percent full. Most rates are 15 percent below market and only major unit in town.
6.5 percent interest rate, 25 year term, 25 percent down.
Paid 475k for facility.
Default on storage units is higher than any other real estate sector. I hope you like dealing with other people's abandoned junk. It's not nearly as "sexy" as Storage wars portrays it to be.
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