I need help on how to store towels and washcloths

Get one of the 3 or 4 plastic drawers sets on wheels, take the wheels off.

I like to fold them in half lengthwise, then in half width-wise and then roll them up from the hemmed edge and store them in a basket.

I love baskets...roll your towels and washcloths and put in a pretty one.

Yikes, that is tiny. I take it there is no linen closet in the house? The one in mine is a joke, so I understand completely. How about baskets stashed in your closet? Is there room for shelves on the walls? That would be another option.

Hang a basket on the wall over your towel rack with the bottom of the basket against the wall, roll up hand towels and washcloths and just layer they from the bottom up. Basket can be any shape, but needs to have no handle and sides that are about 6" deep. I also have a larger basket on the floor that holds bath towels, but I have more floor space then you do. You could use a rectangular basket that is about 4" wide with sides 6" or so and use that for bath towels against the wall across from your toilet.

Can you make something with two side boards and dowl rods to hang on the wall or stand on the floor, and then hang the towels and wash cloths on the rods?

You can put a shelf over the bathroom door, and use baskets. You can also move the towel rack to the wall in front of the toilet, or behind the bathroom door, and place 3 shelves above the toilet. Just make sure to close the toilet lid before flushing.

Replace the towel rod over your toilet with one that has multiple rods and easily mounts through your door hinges. Here is link. I have these in each of my bathrooms. Then mount 2-3 shelves over your toilet and fold the towels and wash cloths to fit the shelves or use baskets to store them and other small items that create clutter in a small bath. Also a shelf over your door (like someone else mentioned) is great to store items you don't need every day.

I used a metal wine stand. Roll two large towels and place in lower section. Next is second level. Fold and roll a set of hand towels. Place on one side. You can do the same for back up hand towels. Then the top section fold in half washcloths. Begin to roll and place.

During holidays~ Decorate.

I put up a thin set of rails on my wall using command strips and used my wall to hang bath towels. The command strips come off only when you want them to.

What I would do is take down the mirror and remove the vanity. Then get a smaller vanity, a matching thin pantry cabinet, a medicine cabinet and a smaller light. I like the on the door hinge towel storage that Debi53 mentioned. Then put a storage cabinet or shelves above the toilet.

I usually get one of those over the toiiet storage units, or put up a shelf over the door for my clients to store towels. https://www.google.com/search?q=picture+of+storage+over+bathroom+door&client=opera&hs=oKX&tbm=isch&tbo=u&source=univ&sa=X&ved=0ahUKEwjwoqDlpuzZAhUO3WMKHSDdAPIQsAQIowE&biw=1311&bih=583

https://www.walmart.com/ip/Mainstays-3-Shelf-Bathroom-Space-Saver-Satin-Nickel-Finish/24775812 I like the metal ones, they store more. You can move the towel rack somewhere else, or get a smaller round one... https://www.walmart.com/browse/home-improvement/towel-ring/1072864_1045879_1230879_1230987