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Monday, December 10, 2012

MONEY...Real Estate..Rentals versus Storage

       If investing is about getting the absolute best return on your investment, "Getting the maximum return for the minimum expenditure," is one key to investing.  Making secure investments that do not disappear with the fluctuations in the market is another. Finally maintaining personal control so you can take advantage of opportunities as they present themselves is very important.

       As the year comes to a close it is a good time to lay out a plan for the coming year.  Sometime back, February 15, 2012 to be exact I wrote a piece entitled "From Trash to Treasures"  It told how I managed to turn getting rid of my trash from an expenditure to a profit.  My goal in this article is to share how to carry that a step farther and apply it to investments. Please bear with me as I give examples to show what I am talking about.  Over the time I have been writing I have stressed trying to be self-employed and managing your own budget.  Well this article will tackle a new way of looking at that.  I have always urged real estate as a way to invest and grow your money so you have control of it.  With real estate you have a physical asset you can see and hold.  It does not disappear with the fluctuations of the stock market or interest rates.  It may go down in value occasionally, but in the end, with sound management you still have the piece of property.  There are at least twelve articles on my blog about the how-to's of dealing in real estate.  Just type "tax sales" in the search bar and it will give you a list of articles that might be helpful.

     Simply applying the same rules I used in changing my trash from an expenditure to a source of income is one of the keys.  Most of us are not rich enough that we do not need to manage our resources wisely.  The people I gear my writing towards are those who do not have a lot of experience.  These are people who make bad decisions due to a lack of knowledge not because they are intentionally wasteful.  Here is a perfect example.  Recently I refinanced my house and in the process reduced the payment from $600 a month down to about $300.  Yes it stretched the term back out to fifteen years instead of the eight years or so that we had left.  At 66+ years my living another eight  years is iffy, especially as I have already been dead technically once already.  My spouse and I can use the extra income, "now" that our actions produced.  The main reason for doing it though was that we wanted/needed a new roof on our home.  We managed to borrow the money for that project as part of the loan.  Which was better than spending our savings or taking a second mortgage and creating a new or extra bill.  So why do I share this story, because of another story that did not turn out so good.

      I have/had a second hand business and just sold the building as part of our downsizing.  The nice thing about investing in real estate is that at some point you can turn it into cash as you need the income from it.  The trick is having enough to last you till you are gone. Still have forty five days to get out.  Anyhow the lady next door to my shop moved out and I did not realize she was gone till I was in the process of selling my building.  The young lady had a house she had paid on for over ten years and had a similar problem.  She needed a new roof but could not afford to do it.  Because of her lack of understanding she walked away from the home and moved out.  She had a ton of equity which she could have used to get a new roof and probably have cut her payment in half by simply refinancing the house.  She did not know she could do that.  Unfortunately for her we did not have this conversation till after the bad decisions were made and could not be reversed.  If you are young or even older and do not have much experience it would benefit you to seek out an older and more mature person who has been down the road and especially one you see as successful.  Often the solutions are right in front of us and within our means and we are just not looking at things from the proper perspective.

      Getting back on track with my opening statement,  "Getting the maximum return for the minimum expenditure," is key to any sound business or financial investment.   I know people who have ruined their credit trying to dabble in the real estate markets.  They used their good credit to by properties and then rented them while trying to make a normal mortgage payment.  There was not enough meat left on the bone for them to earn a profit.  When things started going wrong, as they often do, they were suddenly in over their head and in risk of not only loosing their "investment properties" but their personal properties which they had taken the equity out of in an effort to "get ahead."

      If you are going to get into the rental business the best way is to buy properties through "tax sales,"  Yes it may require some work, and some time if done right.  It will make it much easier to get by once the money starts coming in.  Mainly because you are not strapped with a mortgage payment.  Read my articles to see how this works.  My knowledge came over many years of my life.  From helping my Dad fix up properties when I was a kid still living at home.  From having made some bad financial and business decisions myself.  Also my civilian truck driving career started out working for a moving company.  If you have seen the TV series "Storage Wars," it is real and really happens all over the country all the time.  Over the years I saw it in action.  People lose their homes and put their "stuff" (read my article on "Stuffitis") in storage.  A few months later when the unemployment runs out and they can no longer make the payment on the storage unit they loose that stuff too.   Rental storage units have the "right" after ninety days to sell the contents of units that the rent is in arrears on.  It is a sad situation, but it is a fact of life.

      Sometimes people put stuff in storage and then die.  If no one in the family, or if there is no family, the rent does not get paid and the stuff goes up for sale.  From my experience people do not make the big money you see them making on the TV shows, but it does happen occasionally.  Most of the time half the stuff is nothing more than trash that should have be thrown away to start with.

     The final way I learned that storage units can be a sound investment is looking at banks and delivering goods to many of the building materials chains.  While trucking I delivered custom made kitchen cabinets to the companies that purchased them.  Say you go to Home Depot, or Lowe's and you buy all the materials to build a house.  You order the kitchen cabinets, appliances and many other items that are just for your home. The store orders the materials when you make the purchase.  You may not need it for ninety days or so.  The custom items may be delivered in about thirty days or so.  Well the stores do not have the space to hold all the orders they have coming in.  Their solution is to rent a storage unit and put the stuff in till it is time for it to be delivered.  Hopefully you can see that there is a huge demand out there for storage units.  Little businesses do the same thing to store stuff for seasonal sales.  That is why you are seeing an explosion of storage units across the country.  Starting your own small business, well here is the solution to one of your logistical problems.

      Around where I live the average unit runs about fifty cents per square foot per month.  A ten foot by ten foot unit would be about fifty dollars a month.  How does that compare to renting a house.  Well where I live rentals run on average from $450 a month to $600 a month.  They average from 1500 to 1800 square feet of space.  That means a rental house would make between twenty five cents per square foot and forty cents per square foot.   The upside of the rental storage unit is not that it pays more.  The real upside is that there are no utilities to keep up, (i.e. Furnace, water heater, air conditioner)  No tenants calling in the middle of the night, no holes in the walls and  no carpets to replace because of pets or kids destroying them.  Nobody moving out in the middle of the month or night and leaving  you hanging for the rent.  No fighting the courts to get out a deadbeat tenant.  If you put in place a good security system and control your units there is a lot of upside to storage unit versus a house rental.

      Also banks understand the concept as they are masters at it. The branch bank I deal with has safety deposit boxes.  Mine runs about $35 a year.  The little vault they have them in is about 6 foot wide and 6 foot tall.  It is about 16 inches deep.  Based on what I can see and what I pay that unit makes at least $3780 dollars per year.  That is a pretty good return on about ten square feet of floor space.  I figure that one little box pays most of  their utility bills.  Now that is maximizing your income.  So if you prepare your pitch well and you are even half ways decent at carpentry work you could get into the storage unit business very reasonably.  The variable is how tough the building codes and rules are where you live.  You could easily put 150 rental units on one acre of land.  If they were all full for a year the potential rent is around $90,000 a year.  It is something you can start small at and work your way up.  A twenty by twenty four foot garage could be converted to four units at roughly 10 foot X 12 foot  or a monthly rent of about $240.  Three garages would be a little less than 1500 square feet and the rent would be roughly $720 a month.  You can easily see it pays more than a house would return.  With a lot less risk.  Also if  a deadbeat does not pay his rent and you sell his stuff after 90 days you at least should get your rental money back, if not a lot more.  I would like to issue a warning here about using existing structures.  You need to know what  you are getting into.  I recently had a deal go south, mainly because I backed out of it.  I had misgivings about it and prayed about it.  While I may have lost a friend at least I can live with my conscience that I did not rip the person off.  After finding what he wanted to use the building for I am more convinced I made the right decision.  He may not see it that way.  Sometimes deals are not about money, if your conscience bothers you pray on the matter.  Even if you lose money and are at peace with yourself and God, that is all that matters.  If we had done the deal and he found out the building would not have worked out the friendship would have probably have suffered anyhow.  It was/is a 112 year building that has probably outlived its usefulness.  It will take more to fix the building up than it would cost to build new one. It is part of why I am writing this article to advise other people so they do not get into the same situation.

     One acre could handle six to eight houses depending on local zoning laws.  Even if you go with eight houses and rent at $600 the best you could do with houses is a gross of about $57,600.  So making the property into rental units has the potential to make $32,400 more on your investment.  The question is are you in it for the money or the return.  I can not tell you what the depreciation or appreciation would be on  the storage units verses the houses.  I know the rent will probably follow the market as will rental income from houses.  My goal is not to advise anyone to make a decision to pursue either house or storage rentals.  My goal was to show those who do not understand the market the potential that is out there and why rentals might be a good way to go.

     American's are not going to get over their bad case of Stuff-itis any time soon.  Americans hoard stuff because getting "STUFF" is what Americans do best.  However if we go over the "Fiscal Cliff"  personally I would lean toward storage units over houses.  It is estimated three to four million people will lose their jobs.  One of the government cutbacks is to do away with unemployment extensions.  It will not take long for the housing market to fall off another cliff.  Housing will drag us even farther down into a financial abyss.  The incompetent Congress has no clue how to end the slide.  A better way to say it is they know we need jobs, but they are taking no actions to create them. As more and more people lose any source of income the Great Depression will look like a cake walk. I would venture a market collapse and a bottom of 1600 to 2400, but I don't know anything,  I just study the Great Depression and realize we have not learned a thing.  At least back then the government was solvent, which is not the case in this day and age.


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