Purchase commercial real estate w/intent to start business

[Luca Mastrangelo]

I want to buy commercial real estate as an investment with the intent of using some of the space to do something in the food space.  I'm on cape cod MA, upper cape specifically, where hundreds of thousands of tourista flock each summer but also live in a town that has enough year round residence and business that a food place can stand on it's own.  My first step would be coffee and expand from there. I currently work a regular well paying 9_5 job but would quit down the Rd once the business is launched and work for free/significantly less than I make now.  

On cape cod the zoning  for a cafe/food establishment is very challenging. Places that can support a restaurant/food are very difficult to come by because of septic and zoning requirements.

I've looked at about a half dozen places over the last year. None of them had the right mix of variables to get a coffee shop going.

A small +1800 sq ft bldg just had a for sale sign put up on it. It currently has 2 business with 1 year leases. Leases are 1100 and 1200/month. Taxes are $3800/year. Insurance is $800/year. One side is an antique store the other is a ductless ac showroom/installer. Bldg was sold to current owner in 2016 for $239k. Owner added $80-120k in improvement. Gutted and all new. New electrical, new windows , siding , roof , paved 14 spot parking lot. , New handicap accessible bathroom on both sides etc....

Owner is going to list at $429. I don't think he'll go less than $399 and maybe not even that.

Here's my plan. Need help. Poke holes and please point me in the right direction.

Buy bldg for $399k ish. I would have to get a commercial loan.  Since I wouldn't have a business in there right away I would not qualify for a small business loan up front. I would haveto take a commercial investment loan. 25% down and has to cash flow 1.25x ebitda. Using 5.25% and 20 year amoritization schedule the month payment would be $2021. I would plan on keeping tenants for the remainder of their leases and in August when the antique store lease is up move into that space. I'd like to keep the heat pump place for another year or two while I build out the business.

Doing just coffee I'd have to so about 150-175 people a day @$3.5/person. This assumes a $1200 rent for the space 2 employees at $15/hr and 25% cogs of revenue on coffee. Doesn't include any other revenue sources. Just trying to get into the ballpark of things. Location is A+ (right off highway with easy on/off) and the Cape in general and this area in particular is a food dessert. There's a a Dunkin or 2 and another bakery in a down town setting within 5 miles. Not to say there isn't any competition around but no legit good coffee and none as conveniently located.

In broad strokes plan would be to:

1. Buy now

2. Collect Rents trhu Aug next year

3. Continue working my reg 9-5 now while I finalize concept and shop for some used equipment

4. Work with town to get zoning in place. Won't be an issue. Has septic with grease trap and in the right zoning. Needs a waiver.

5. Launch coffee next Sept

6. Grow business and quit current job. Essentially buying a new job. I already have a 401k nest egg I can let mature for 10 years and retire from so money isn't primary motivation

7. Expand into other side of bldg when time is right.

My next steps are to figure out what cap rates are and what retail spaces rent for on a sq ft basis in the area. with that info I should be able to more accurately determine what's a good sale price for the building.

when I was looking into cafes/ coffee shops before, I read a lot of the facts about how many fail and why they don't work etc... I've lived in the cape for three years now, which is not a long time, but since I've been here I have noticed that there is absolutely no unique food options. I shouldn't say none but very few. The cape is about 10 years behind  Boston and Boston is about 10 years behind New York in terms of food and drink.  I don't think there's any ramen shops out here. No unique donut places either. One or two third-wave Coffee locations on all the cape. That type of stuff just doesn't exist here. I think there's a lot of pent-up demand for that type of offering. people are seeing that more and more and would make the stop if that's their cup of tea so to speak.

Tandem coffee in Portland Maine is the type of coffee destination that I seek out when traveling.

Good info/facts on cap rates that at least help frame the problem.

https://www.calkain.com/research_reports/net-lease...

After some feedback from the small business forum on Reddit and some more investigation  this is where I'm at: 

Biggest risks are over paying for bldg and zoning from town. I've talked to town and it requires a waiver but shoulsnt be an issue since it's not in a historic district and has the right septic system

Any experts with knowledge of Retail space renta on upper cape? Cap rates?

[Charlie MacPherson]

@Luca Mastrangelo  Lots to pick apart - sorry.

1. The Cape is a great place for a small business from Memorial Day to Labor Day.  Then they roll up the sidewalks.  Tourists are gone, summer workers are gone and a good number of residents are gone - or will be before the first snow.  That means two things:  a). You had better make a TON of money in the summer, because it's going to have to carry you through the fall, winter and spring.  And b) launching in September, when a large part of the population is evacuating isn't the best idea.

2. Coffee?  In Dunkin's back yard?  You can't swing a dead cat around here without hitting a Dunkins.  Not to mention that Starbucks is still growing and giving Dunkins a run for their money.  Don't forget Honey Dew and a couple of hundred independent coffee shops.  

https://www.menupix.com/capecod/c/19/Coffee-Shops-...

Heaven help you if Tim Horton's puts on another push to the south. They have their systems really dialed in.  (There are still a bunch in Maine.  The MA location closed.)

What are you going to do to stand out in that crowd?  Hint: coffee is a commodity.  The experience doesn't have to be.  Just don't try to be the low-price provider. That's a fast track to going out of business.

I know you think that there's a shortage of competition, but what happens if Dunkins plunks a new location down across the street from you?  Looking at it another way, if your location would support a coffee shop, don't you think Dunkins, Starbucks, Mary Lou's or Honey Dew would already be there?

The barriers to entry are very low.  Find a facility, do the buildout, get the requisite licenses, buy the equipment, brew the coffee and open the doors.  When barriers to entry are that low, new competition is always around the corner.

PS - McDonald's coffee is very good.  And it's $1.00 for any size.

2. You're talking about running a cash business as an absentee owner.  I can tell you from extremely painful personal experience that your employees, left unsupervised by you, will siphon off a ton of cash.  In my retail business (thankfully sold in 2015 at only a $58,000 loss), people I liked and trusted stole many tens of thousands of dollars over the 11 years I owned it.  They disguised it very well - your employees will too.  The deviousness and ingenuity of employee/thieves is an incredible thing to witness.  Mine were PhD-level experts at stealing money and hiding it.

3. So, you want to be a commercial landlord?  Be prepared for a tenant's failing business to stiff you.  HARD.  It will take you a long time to replace an evicted tenant too.  You'll have plenty of rental candidates, but you need to be sure that their business is viable, properly funded and Amazon-proof.  Even better if their business complements yours, but it's unlikely you'll get to be that choosy.

Make sure that you do NNN leases and get personal guarantees from tenants.

4. Capex. If your septic fails, you can be in for a VERY large expense - well into 5 figures. There are others too - like a central air system that can cost you $15,000 or more when it goes down. Be sure you have a good amount set aside for capex.

5. Buying a job.  Glad you recognize that's what you're doing!  Say goodbye to the freedom of taking off for an impromptu weekend away.  A real summer vacation.  Sick days.  Bereavement leave.  Going home after your 9-5 and shutting off your "work brain" when you get through your kitchen door.  Leaving the company in somebody else's hands when you end your shift.

Say hello to managing minimum wage employees (may God have mercy on your soul!)  Checking the register tapes like you're dissecting the Zapruder film.  Customer complaints - about *everything*.  Employees saying something on social media that damages your reputation.  Early mornings and late nights.  Payroll.  False accusations of discrimination.  Supplier screw-ups.  Crazy people leaving bad Yelp reviews.  Paying your own health insurance.  Bookkeeping.  Dealing with abusive customers.  Managing your own advertising.  Long sessions of paying bills.  More than likely, you're buying yourself a job that pays badly, demands everything and never let's you relax.

I think overpaying for the real estate is the least of your problems.