Posted by ray@lcorn on February 28, 2008 at 14:11:29:
Jimmy,
Might be a play, but it depends on how much time and effort you’d want to put into it.
Taking your numbers and exit plan… say the houses need zero work and sell for $35T each, $30T after closing expenses (taxes, commissions, etc.), $60T net.
You’ve got $80T in the storage units, $3600 ea. You don’t mention size, so I can’t give an opinion on whether they are worth that on a replacement cost basis (land + building value). Assume they also need no work to put on market.
At lease-up, say 90% occupancy, at $75 mo. x 20 x 12 = $18T per year. Figure 20% OpEx(?, may be high), for an NOI of $14,400, or a return of 18% pre-tax, pre-carrying cost.
By carrying cost I mean the costs involved in renting the units (ads, concessions, interest (or lost return on cash), etc.) and the time it will take to do it, because during that time you will not be getting the full income.
Probably take a year to do it all… sell the houses, rent the units, then maybe resell.
That property might sell for a 11% cap or so. On a $14T NOI, that’s a sales price of about $127T, net after sales expenses of $120T or so, for profit of about $40T pre-tax (and less any unplanned costs).
If you used typical financing (75% LTC, 15 yr.) from owner or bank, that puts you in the deal for $35T, plus any fix-up costs, which could pencil to a 100% return, but in cases like this I look at the dollars rather than percentages.
The questions is whether you’re willing to sell the time required for $40T! If you can do it on the side and not let it turn into a time sucker, then it may be worthwhile. Only you can decide that.
ray