06 Aug Critique our plan – what we’re going to do with $1MM
My partner and I did some 5 year planning. This is what we're looking to do! This isn't meant to be a brag session. And I know its just a plan but I figured people might enjoy getting a look at whats going on in my business right now.
In 2017 we rolled our profits from our little old sweaty startup into a real estate development and we finished construction of a self storage facility in Ithaca NY. We spent $2.4M (75% financed by a local bank). We purchased an additional property in October of 2018 across the street for $400k. I own 40%. My partner owns 40%. Investors own 20%.
Its nearing stabilization ($55k in revenue in July and $12.5k in expenses for $42k in EBITDA) or $12,500 for each Dan and I in cashflow and $15,500 each in income. It's a great asset and it's going to be hard to part with that monthly recurring revenue.
But the plan is bigger than that so we have it listed for sale.
We got an offer for $4.9MM a few months ago but we're aiming for the $5.2MM mark. We're getting a lot of interest and have had action lately.
That sale would spit off about $880k each for my partner and I to reinvest. To differ the taxes into the future we'd do a 1031 exchange and find "like kind" assets to purchase with the income.
IF we sell it here is our plan.
We'd plan to bank $380k (less after taxes) each for a rainy day or a smoking opportunity in the future or just as an insurance policy. So we'd have $1MM between us to reinvest and grow our real estate holdings.
We'd locate five or six poorly managed but high potential storage facilities at a total value of about $4MM. Leverage about $1MM in cash and borrow another $3MM on the assets.
The facilities we’d target would be between 10,000-25,000 rentable sf each in secondary markets (20,000-100,000 population). Small enough properties and cities that the big dogs like Public Storage aren’t in the market to buy them and drive the cap rates down to 5-6. We’d manage them remotely (without a full time manager in an office on site) and contract with a local cleaning company to do the onsite punch list weekly.
Since we can manage them remotely while others have more overhead we could buy them at what would be an 8 or 9 cap for others but is a 11-12 cap for us.
That means EBITDA would be about $460k a year. $156k a year would be interest payments and $84k would be principle ($3MM at 5.25% over 20 years).
So that would be $220k a year in free cashflow and $304 in income on our $1MM investment.
We’d get to claim $145k a year in depreciation reducing our taxable income to only $159k a year on that $304k in income.
The assets would appreciate by about 5% a year which is $200k a year in equity we’d have on top of the cashflow. We think we can get it appreciating much faster with our management.
So we’re seeing about $504k in value and only paying taxes on $159k a year.
That would start the snowball. About 3 years later after raising rents pretty aggressively and achieving $550k or so in EBITDA we'd sell the portfolio for a 7 cap on trailing 12 month cash flows.
Sell for $7.8MM. That would turn our initial $1MM cash in investment into about $3.8 MM in 36 months.
The best part is that we'd have the ability to do another 1031 exchange to differ all of the tax on that appreciation and then buy $15.2MM worth of storage facilities at a 10 cap which would generate $1.52MM a year in EBITDA.
But we'll take it one step at a time.
We also will have made a great return for our initial investors who bought in and owned 20% of our first facility so they would happily re-invest the proceeds ($1MM) into new developments with us.
They bought in on a pro-rata basis. Meaning if they put in 5% of the project costs they got 5% ownership. They took a second position to the bank. We then financed our ownership through the bank and took the debt service on ourselves.
So while we're going around buying and building our own profile we'd also build 2 more development projects in really great markets. We'd build them for about $2.5MM each, own them for 2 years during lease up, and according to our projections these buildings, similarly to Ithaca, would be worth about $5MM each.
We'd sell these to realize the appreciation again and likely use the investor money to build more and our profits to buy cash-flowing assets like the plan above.
Any feedback, positive or negative, is appreciated and thanks for reading!