How do you turn $240 worth of compressed saw dust into $6000? Easy, cut it up and put it back together in the shape of a closet. Huh? I’m talking about custom closet construction and installation. This low-tech construction business is booming with enormous profits and the best part about it is that anyone with some carpentry skills and basic woodworking tools can do it. Custom closets are classy, easy to build, and most importantly, have huge margins. There are only a few major players so that leaves plenty of room for some competition. While it’s true people may not be buying houses, that doesn’t mean they won’t be fixing up the ones they already own.

Overview

Ok, so everyone is talking about how bad the real estate market is and how bad anything that has to do with housing is. This is all great if you’re trying to make dramatic headlines and appeal to the general public but if you look at the numbers, expenditures on residential improvements actually hit an all time HIGH in the fourth quarter of 2007. People are still spending money fixing up their old houses. My parents are a perfect example. Two weeks ago I went over to their house and I noticed that the guest bedroom had a new custom built-in closet installed. I’ll admit it, it’s nice. It’s definitely nicer then the 80’s style big heavy sliding door closet that it replaced. Being curious, I asked how much it was. $6000! I started examining the closet a little closer and I realized that it wasn’t even made out of real wood. It was made out of medium density fiberboard (MDF) which then had a thin layer of wood laminate over it. I couldn’t believe it. I thought to myself “what an amazing business, there couldn’t be more than $200 worth of wood in the entire closet”.

The Market

So who’s buying these closets anyway? Other than my parents it appears as though closets are becoming increasingly popular in general. According to the U.S Census Bureau, spending on residential improvements alone was $180,300,000 in the fourth quarter of 2007. That’s an all time record high. While I’m sure a lot of that was granite counter-tops and vessel sinks you can be sure there were a bunch of custom closets in there as well. As a matter of fact, I was able to do some digging and found out that California Closets, one of the largest players in the industry, is owned by a public company called FirstService. In looking through their annual report I found the following blurb about their California Closets division:

“The Property Services operations reported revenues of $150.8 million, an increase of 12% versus the prior year. Of the increase, 9% was attributable to internal growth, 2% to acquisitions and 1% to foreign exchange. Internal growth was led by increases in royalty revenues at our major franchise systems. EBITDA for the year was $30.6 million, 19% higher than the prior year, and the EBITDA margin increased 110 basis points to 20.3%. The margin increase was attributable to California Closets and Paul Davis Restoration, where revenue growth was coupled with reduced expenses, including the recovery of bad debts and the deferral of a franchisees’ conference.”

Basically they’re saying that the California Closets and Paul Davis Restoration businesses are operating quite well as they’re responsible for a 1.1% growth in EBITDA margin.

The Numbers

Startup Costs

These items here are just the basics. I’m sure as you progress you’ll come across more tools that you’ll need but the following should get you going. What’s interesting about this business is that it’s one of the few industries where you can collect a fairly substantial deposit up front. According to my calculations you could actually fund your entire startup with the deposit from your first job.

  • Table saw - $500
  • Circular Saw - $100
  • Router - $150
  • Air Compressor - $300
  • Staple Gun - $100
  • Cordless Drill - $100

We’ll use my parent’s closet as an example and make some assumptions based on retail pricing for the material to see just how much we can make on a single job.

Total Revenue - $6000

Expenses:

  • MDF- $240 (6 – 8’x4’ sheets)
  • Hardware - $200
  • Laminate - $300
  • Building Supplies - $100

Total Expenses including startup costs - $2090

Net Profit - $3910

As an alternative, you may want to consider using REAL wood such as Birch or Oak for your custom closets.  Real wood is more expensive then MDF but it’s typically considered a more luxurious item and commands a higher price.  Furthermore, in my opinion, real wood is easier to work with as it will not require laminating; you can simply stain it.  The cost of real wood is about 30% higher then MDF but stain is quite a bit cheaper then laminate and you’ll be able to charge more for the closet in the end.

My Take

If you like playing with wood I would take a close look at the custom closet industry. Input costs are minimal and the barrier to entry is fairly low requiring only a few thousand dollars worth of tools to get started. It’s true, the housing market is in a depression but the home renovation market is still in full swing and closets are becoming increasingly popular as homeowners struggle with storage. While it’s a low-tech business without a lot of glamour, the margins are huge. Besides, who really cares how glamorous it is as long as you’re driving around in a Gallardo; WITH your tool belt on and saw dust in your hair of course.