We have taken a pleasant journey from a one-acre lot to a more oversized 10-acre lot. We built barn houses, RV hook-ups, and mobile homes. Today, we will buy a mega-sized commercial property already operating our business of choice.
Welcome back to the Self-Storage vs. Mobile Home vs. RV Park series (Part 1, Part 2), where we discuss passive income through real estate and business. I will again be referencing these books; “Growing Wealth in Self-Storage,” “How to Invest in a Mobile Home Park,” and “How to Start, Run, and Grow an RV Park.” Let’s jump into buying and owning a large commercial business property.
Why buy an existing business? Simple, someone else has done the most challenging part. Getting all the permits and zoning for these businesses will be a major headache. Plus, you can evaluate the business and see where you can add value.
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The book “40 Ways to Increase the Net Income of Your Rental Property” is a great read to improve your business mindset. For example, if you buy an RV park, it may not have a laundry mat or convenience store. How would adding those increase your income?
Can you add VIP parking spaces, a pool, or guest passes for a mobile home park? Self-storage has even more options, such as climate-controlled storage, a package store that sells boxes, tape, supplies, and boat and motorcycle storage.
When looking at these properties, you are looking for an under-performing asset to improve aesthetics and add revenue streams. But you aren’t the only one looking. You will be competing with substantial real estate investment trusts (REITs) at this stage.
There are REITs for self-storage and mobile homes. These REITs are now buying marinas to add to their portfolios. I don’t know of any RV park REITs, but I am sure they are coming. If you just plan on buying one, you can probably squeeze out a good deal.
Business Financing. How will you pay the millions of dollars it costs to buy these properties? Simple, leverage. We are going to take a business loan from the bank. We already talked about building your business credit in the last article, so let’s talk about the business proposal.
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The book “How to Start a Microbrewery” has an excellent section on writing a business proposal. First, you would need to present your market research and market analysis. Luckily, you’ll have hard data and numbers because of pre-existing business.
You can then show them how you intend to decrease the number of vacancies, reduce expenses, and add extra income streams. They will look at the business’s .current net operating income (profit) and multiply it by a factor. That would give you the cost of the property.
For example, if the NOI for your mobile home park is $300,000 with a multiple of 10, it would give you a $3 million price tag. The factor varies per business’s region and business type, so only your bank would know the number.
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The chances are that the bank will only give you a loan for 80% of the business. That leaves you with 20% of the amount to produce, so what are your options?
Private lending. I talked about private lending in my article “Creative Financing in Real Estate 104” and also in “Become a Private Lender.” The book “10 Other Real Estate Investments” also discusses private lending.
In a nutshell, you would want to tap your family and friends for the money. However, you treat the process just as you would a bank loan. You present to them your business proposal. The most important numbers they care about are return on investment and timelines.
You could give them a debt position or an equity position. Issuing debt means that they would give you a specific amount of cash; you provide them with an interest rate and a timeline for repayment.
An equity position gives them a piece of the ownership of the business. They would become shareholders in your company, and the shares entitle them to a cut of the profits (dividends). In general, you want to avoid equity stakes unless you’re desperate. You don’t want too many voting members. Debt positions are the way to go.
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Seller Financing. You can also ask the property owner to finance the 20% that you owe. This allows the owner to still receive passive income from the property for another 3-5 years, without the headache of managing the property.
Management. No matter the type of commercial business you are buying, you will need to install management. In addition to the above books, I recommend reading “The Book on Managing Rental Properties.”
You need to have a firm grasp of managing properties before seeking a property manager. It is extremely difficult to find an above-average property manager. In the case of self-storage, you will need to find someone who can run your on-site store and manage the storage units.
For a mobile home park, you may be able to find someone who would live on the property for free in exchange for managing the place. The good thing about mobile home parks is that you don’t own mobile homes. So, you are not in the maintenance business; you only need to provide utilities.
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Finally, you will need someone who has a background in RV parks and working outdoors for RV parks. RV parks, depending on the type, can be very complex. You can have long-term rentals, short-term rentals, campers, and overnighters.
The best passive large business. So which sizeable commercial property is best for a passive retirement income? Let’s look at the pros and cons and make a buying decision.
Self-Storage has many ways to increase the value of the property via income streams. You can also adjust the sizes of the units to best suit your demographics. Plus, you don’t have tenants, and the customers expect you to raise the rent every year. You will need to invest in solid security measures, maybe even a full-time security guard. With the proper management, you’ll have a very passive business.
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Mobile Home Parks can be very passive with the right management. However, you are dealing with long-term tenants. They will get mad every time you raise the lot rent, which will require your attention. Dealing with people will always require your attention as the owner. Plus, you may have to deal with the city regarding environmental or health issues. You would have to keep your phone on standby.
There is another way to make passive income with mobile homes, and that is by owning the loans, not the mobile home park. You would buy the mobile homes and use seller-financing to sell the “notes” to homeowners—building a portfolio of “notes” and passive income. The book “Making Money with Mobile Homes” is an excellent deep-dive into this topic.
RV Parks can be complex, or they can be simple. The more amenities you add, the more you may have to involve yourself with the park. If you keep it simple, you would just issue utilities and collect rent. Your property manager can handle that easily. However, you’ll have to hire more people by adding recreation centers, campgrounds, and laundromats. If you want a passive business, keep the RV park simple.
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Best passive business winner. Overall, I would give the win to self-storage. You don’t have tenants, only customers. Most self-storage customers expect their rents to increase 3-5% yearly. You won’t have to fight with them about rent increases or utilities.
You can add different types of storage (boat, RV, motorcycle), storage for collectibles, climate-controlled storage, and even business office rental spaces. The “sky’s the limits,” and did I mention you don’t have tenants.
If I were to retire with one of the commercial properties, I would choose self-storage. Remember, your primary customers will be from nearby (1-10 miles) apartments. The main risk with self-storage is that anyone can saturate the market. A busy center could turn into a ghost town if too many competing self-storage units move in close proximity.
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Conclusion. This series has been entertaining and rewarding. It is good to compare what seems like random competitors, but they are actually more similar than they appear.
The most important takeaway is that you create ideas, develop concepts and build the business mindset. We don’t know how the future will play out, but the more ideas we have, the better we can navigate retirement.
These ideas may help you start a business in the metaverse. What if you create a virtual RV park where travelers roaming new virtual lands can meet and greet one another?
How about a virtual self-storage business that allows users to move their NFTs between different worlds? If a particular metaverse world doesn’t survive, users can keep their goods and services.
That is why it is essential to keep reading and forming complex (yet simple) thoughts. You cannot put a price on having a sharp mind and the motivation to make things happen. Thanks for reading, and I’ll have more comparisons coming your way soon.
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing
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