Owning businesses versus real estate??

Question

So I am curious those of you with percentages to real estate assets versus buying businesses.

The businesses tend to throw off really high cash flow but I only look to buy absentee owner type models where cash flow is high and layers of management is in place.

That versus buying a value add real estate play that might not have as much cash upfront but more equity and cash flow on the back end. I have seen some restaurants that profit after expense 250k a year but are selling for 350k as the owner is motivated to retire and leave the country. Management is already in place. I could put 50% down with finance and recoup my capital almost in one year.

If I instead took a value play retail strip center there would be more outlay upfront for TI and LC's but more equity and cash flow on the back end once stabilized. I might consider buying one of each.

I want equity growth and high cash flow so maybe a portfolio mix is good.

Joel Owens · Answer

Love the discussion so far.

I do see businesses for sale with the real estate but I find they want a premium for the real estate with an insane number. I don't even look at those because I know the land does not have that kind of value to it.

Now if I saw a situation where the owner of the strip center gave me an option at a fixed price to buy the center in so many years where the business leases that might be appealing or even if the owner financed something in etc.

I do not touch new businesses at all. You will see those all the time for sale. It will say something like 1 million spent on interior and sales great first year. Now the newness has worn off and they are treading water and putting in a boatload of hours. Those ships are very hard to turn around.

I like businesses where there is a burning need to sell such as partnership split, death, health reasons, inherited family doesn't want it, retirement, other businesses need their attention where the capital outlay is greater and they are not doing well etc.

I like the business to be open for decades and have strong profit. Those types of businesses have the grandfather, father, and son all coming to eat at the place.

The biggest thing that scares me is the no FFC ( fixed food contracts) for the little businesses versus owning a national franchisee and a government that is pushing higher wage increases where the public will not pay a huge increase on food to offset. Also if rents are fixing to increase but sales stay the same profit will erode. I know one thing owners do not account for is re-imaging the store to pop every 5 to 10 years. You have to put aside the money to invest in new equipment and interior improvements and technology to stay efficient.

What I see is owners typically want 3 times net earnings. I go for 2 times or less when I see they are motivated and try to get them to accept 30 to 50% down. You have to give them a decent down payment to replace the income stream they have.

I might look through 200 businesses to find only 2 or 3 I have interest in. The rest are overpriced junk. I see it all the time. Someone retires with 250k IRA money. They say "Hey let me open a restaurant and that will be fun". They spend something insane like the 250k for a build out for a sandwich shop. They open the doors and work 50 hours a week and only make 40k a year for themselves after paying everyone. The public thinks they are rich but have no clue how expensive stuff is. Most people eat lunch or dinner at peak times so assume business is always like that around the clock. Stuff like that is nuts to me. They then will sell it almost at any price to get out but now have a high lease payment because of the location and the new buyer must be franchise approved and sometimes they force you to be an owner operator etc. Sometimes these places just shut down. That is why I would want to recoup my capital within a year and then have an out clause in the lease. I could then liquidate the equipment for 15 cents on the dollar and it would be straight profit as I already have my capital back.

I was talking to a Marco's pizza owner the other day picking up my pizza. He said with coupons and overhead they are making just a little over a buck a pizza. They spent about 350,000 on the build out. I thought to myself that this is crazy. I would rather take that money and put it into a value add deal. The guy I worked for before owns over 100 of the national pizza chain locations of the biggest three. Some stores make breakeven and others make 500,000 a year profit. So it's kind of a crap shoot.

There is a guy in my areas that has a bar and food place that does great sales and profit but I am just not into that scene. I will also see things like liquor stores etc. Certain businesses I can't own due to moral complications etc. and how I feel about it.

The more I think about it the more I am leaning to a no on businesses.

If I keep income streams to three then I think I might have the life I want:

- Closing transactions with my commercial clients

- Buying commercial property directly for myself

- Starting a fund or syndicate to go after retail turnaround properties.

Even when you make a lot of money it's all about the residuals so they come in no matter if you are working or not. Last year I had health issues and couldn't work for so many months.

I ended up having to get tonsils, adenoids removed and also sinus surgery, septoplasty, and rhinoplasty at the same time. Surgery was supposed to be 6 hours and took over 8. ENT doc said I was a mess and needed it. Before I felt like a 5 pound weight was sitting on my face. I played sports heavily as a kid and also did martial arts the last decade. I had a bunch of built up issues that needed fixing. My 6 year old nephew gave us the flu Christmas 2013. We thought he just had a cold but it appeared like that because he had the flu shot so symptoms were reduced. Went to the ENT doc as symptoms for me were not getting better much after 3 weeks. He said I had underlying issues that the flu pushed over the edge.

So that experience taught me that as you get older (40 now) "I know it's young to a lot of people but I am still getting used to it! lol" that you might not can always be working. You need those residuals as you get older for unexpected events that occur.

Joel Owens · Answer

Thanks for the comments.

Before I went into real estate I was in the restaurant business for decades. I even owned one before.

I know the business very well.

With small businesses those doing net 80k to 100k a year generally it is an owner operator type. They work 40 hrs to 50 hrs a week. If I have to replace that owner with a manager the profit drops to 40 a year.

This is why I only look at businesses that have been open many years and have established sales. When you look at their books they have a general manager and then assistant managers being paid and they still profit 200k plus a year.

I would never by myself a job as I already have a very profitable business transacting commercial real estate for my clients.

So my criteria with any investment is that it cannot be a job but has to be structured with a passive or minimal involvement component to it. I just remember back to the restaurant days and that is what keeps me from doing it again. Also with a business the taxes or higher than owning real estate.

I am going to make some investments this year. I will just have to see which way I want to go.

Rocky V. · Answer

Something to think about in any business is - Do you own that business or does the business own you?  I choose not to grow my construction co. because I would still have to put in a lot of my time and effort in order for it to run smoothly.  However, my rentals require very little of my time and give me true freedom and this is why I continue to pick up rentals.  If a restaurant is selling at $350K with the owner netting $250K there has got to be more to the story.  If you have the cash and time I would consider a mixed portfolio.  You never know you may enjoy owning a restaurant.

Kendall T. · Answer

I have bought multiple businesses, and am now in real estate while operating businesses, I like real estate more, as people really need a place to live, so I feel it has more probability of being more secure, whereas with a business, it is quite easy to lose business accounts, as I found out with my latest janitorial business acquisition.  I realize that that not all businesses can be judged the same, but for me in the providing service industry, it is really easy to lose accounts.  For instance we had a janitorial account for a insurance office, and they decided to cut ties with as there was a single mom working there and needed to make more money, so they allowed her to do the cleaning.  Aso there can easily be turnover when a  new property manager, comes in and wants to use his guy etc, with rentals if a tenant leaves u just put someone else in.

Jason Stone · Answer

I own a nearly fully automated online business. So, I can offer a suggestion based on my experience.Product based business are awesome. It works like this:Product is made at the manufacturer, its shipped to a fulfillment center wherein your orders are interfaced with the online store to the fulfillment center. They pick, pack and ship automatically.You need two employees: customer service rep for phone orders (if you do them) and a manager to oversee mfg orders and the CS rep. Of course, these could be outsourced via contractors as well.This is how mine is set up and takes less than an hour a month to manage. If you get a good manager, they'll actually grow your business for you.If you're interested in starting your own, or want to know more about the process, PM me. I  made a resource to help some of my friends and could pass the info on to you.

Tom Yung · Answer

@Joel Owens

You, as well as I know knowing buying a restaurant without investing into the land & building at the same time is like buying a job for $50K a year.

Investing in a restaurant (cash flow driven)with both land & building( asset driven); together creates the best opportunity from the cash flow aspects of the business.During my 10 year commercial broker experience(1998- 2001). A good  restaurant business provide best return before the IT world comes in, than  any business under 4 million sales that I have seem & sold.

Also a restaurant without a bar service is like cutting 60% of their fast cash. It is extremely hard with the high food cost & overhead cost today.

Restaurant is not for old (over 40) people that does does not have creative idea, willing to change & adapt the new trend or ahead of the wave.

restaurant business takes a lot of time, money & effort to update; to maintain the customer base every 3 to 5 years, Much shorter life span for bar business. Unless you can create a niche that your location is a meeting spot for the 1% people(top earners) to show their face, entertaining their clients, letting their colleague know that they are  still doing business & connection.

I have my restaurant business for 36 years & is retiring this year. I went through the 1% market to family to hip to general public in my career as population are moving away from the downtown to sub; and after waiting 18 years, the young & highest income & spending  potential customer base is moving back to downtown now in the last 2-3 years. I am too old for this business now. But I am cashing in on my land value(10X) more than the business value(3X). restaurant is still the most sought after business every time I post a vacancy in my retail locations.

BTW, my location is in Canada. So it may be a bit different scene than US.

Roy N. · Answer

@Mike H.

I had over 20yrs of being an entrepreneur before turning to real estate.  Real Estate, at least buy-and-hold as we practice, is an asset driven business which is a little different than my other businesses which have been knowledge driven product/service businesses.  However, at the core, the principals are the same.   In, fact, I would argue that being a landlord is more of service business than simply providing use of an asset.  The more service you provide your tenants, the more value add you can create to your business.

Every business has its risks - real estate is no different - the key is to know your knitting and stick to what you know.   Many years ago, I was talking with my Uncle about an IT startup venture I had just launched with a partner.  My Uncle, who had been a farmer all his life, thought it a very risky use of capital - despite the fact we had two significant customers already, because he did not understand the business.   Conversely, he thought nothing of buying 3500 head of cattle and raising them for market -- something which I saw as inherently risky (one illness and you could loose half of your investment), because I lacked the knowledge required to properly manage the risks.

Franklin Romine · Answer

I'm constantly looking at businesses for sale, analyzing them see which one would work for me.  I look at new startups and existing.  I just haven't found one that wouldn't be labor intense from me.  I came close to buying a laundromat a few times.  SBA has a good loan program to help you buy the commercial real estate for you business.

Frank

Owning businesses versus real estate??

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