Franchises
Rental Property Investor · Middletown, CT · Member since 2015 · 45 posts · 11 votes
Hello everyone:
I am a recently new member to BP, and wanted to reach out to the Bigger Pockets community and seek advice regarding Franchises.
I am looking at acquiring a commercial property on a heavily trafficked location-the building was recently rehabbed, but is currently vacant. If I can get the property for the right #, my thought is to use one of the units to open a pizza franchise and rent out the second unit.
Any of those in the community have experience opening and operating franchise locations?
Hi Phillip,
I have no experience in operating a pizza franchise, but I do have a couple of stories about pizza franchises:
Story #1: my dad’s friend opened a pizza franchise and worked well over 80 hours a week for several years to barely make it. After struggling for several years he ended up selling the property and made more profit from the sale of the building then he did from all the years of working 80 hour plus weeks combined. As you can imagine this is what got him involved in real estate.
Story #2: my dad owned a commercial building and was looking to buy a subway or dominoes franchise since he could essentially get the land for free (minus opportunity cost and taxes). The commercial real estate agent advised my dad against it, he advised that he had seen several people attempt the same thing over the years and it almost always fails because the franchise in itself is a full time job unless you can afford to hire a manager to care for the operations.
9 out of 10 restaurants fail in their first year, 9 out of 10 of those fail in their second year, and so on.
I am not trying to discourage you from running a pizza franchise, I am only bringing this up to see is this really what you want to do? Are you passionate about food and will you do anything to make the pizza franchise work? Or are you just doing it for real estate purposes and because it’s a cool idea? If you aren’t passionate and if this pizza franchise isn’t your calling then I would recommend against it. However, if its been a dream of yours and you are willing to do anything to make it successful (including working 80 + hours) then I say go for it!
-John
Well let me ask you, do you want to be a pizza guy or a real estate guy, because you arent likely to have enough time to do both
If I own one location that's being a "pizza guy", if I own multiple location that's being a "real estate" guy; I am, an want to continue to remain the latter, but the concept will start with the initial location.
The idea is to use the building to parlay into owning a businesses franchise. Currently, this particular franchise is waiving the initial franchise fee, and installing the pizza ovens at no-cost.
It is my understanding that this is not typical, and usually the start up cost would be much much higher to purchase a franchise. With the incentives in my market and the location, the start-up cost would be extremely low.
I personally think that aside from owning real estate, owning multiple business franchises would make for a great avenue to increase my monthly cash-flow and grow my net worth.
@Phillip Richardson I think the concept of owning a franchise to build income to enable you to purchase more investment property in the future is sound.
Have you always wanted a pizza store or is this something that just looks like it will work for the location? Personally I am not a fan of franchises as there are so many caveats and you are for the most part buying into a job that you have very little control over.
I am sure you are doing your due diligence on the franchise end just be sure to read all the fine print. Keep us posted!
@Phillip Richardson I think the concept of owning a franchise to build income to enable you to purchase more investment property in the future is sound.
Have you always wanted a pizza store or is this something that just looks like it will work for the location? Personally I am not a fan of franchises as there are so many caveats and you are for the most part buying into a job that you have very little control over.
I am sure you are doing your due diligence on the franchise end just be sure to read all the fine print. Keep us posted!
Karen:
It is something I have begun researching recently while looking into purchasing a commercial property. I haven't always wanted a pizza franchise, but along with real estate, it looks like it might make for a great secondary source of income.
Real estate is my main business, but my personal investment philosophy is to stay away from stocks and bonds and own the actual business. The best way to protect your assets is to manage them yourself.
It looks like this deal might work because of the location and the initial start-up cost being so low. Otherwise it may not be something I would be investigating, which is why I wanted to reach out to the community and see if there are other members that have successfully launched franchise locations as a supplement to their real estate business.
Well let me ask you, do you want to be a pizza guy or a real estate guy, because you arent likely to have enough time to do both
Because there are no other people here working 40+ hours per week at _____ job, while also being a real estate guy...
@Josh Caldwellmakes a good point. With that being said @Phillip Richardsoncan make this plan work if he is prepared to train managers to run these businesses.
Hi Phillip,
I have no experience in operating a pizza franchise, but I do have a couple of stories about pizza franchises:
Story #1: my dad’s friend opened a pizza franchise and worked well over 80 hours a week for several years to barely make it. After struggling for several years he ended up selling the property and made more profit from the sale of the building then he did from all the years of working 80 hour plus weeks combined. As you can imagine this is what got him involved in real estate.
Story #2: my dad owned a commercial building and was looking to buy a subway or dominoes franchise since he could essentially get the land for free (minus opportunity cost and taxes). The commercial real estate agent advised my dad against it, he advised that he had seen several people attempt the same thing over the years and it almost always fails because the franchise in itself is a full time job unless you can afford to hire a manager to care for the operations.
9 out of 10 restaurants fail in their first year, 9 out of 10 of those fail in their second year, and so on.
I am not trying to discourage you from running a pizza franchise, I am only bringing this up to see is this really what you want to do? Are you passionate about food and will you do anything to make the pizza franchise work? Or are you just doing it for real estate purposes and because it’s a cool idea? If you aren’t passionate and if this pizza franchise isn’t your calling then I would recommend against it. However, if its been a dream of yours and you are willing to do anything to make it successful (including working 80 + hours) then I say go for it!
-John
Hi Phillip,
I have no experience in operating a pizza franchise, but I do have a couple of stories about pizza franchises:
Story #1: my dad’s friend opened a pizza franchise and worked well over 80 hours a week for several years to barely make it. After struggling for several years he ended up selling the property and made more profit from the sale of the building then he did from all the years of working 80 hour plus weeks combined. As you can imagine this is what got him involved in real estate.
Story #2: my dad owned a commercial building and was looking to buy a subway or dominoes franchise since he could essentially get the land for free (minus opportunity cost and taxes). The commercial real estate agent advised my dad against it, he advised that he had seen several people attempt the same thing over the years and it almost always fails because the franchise in itself is a full time job unless you can afford to hire a manager to care for the operations.
9 out of 10 restaurants fail in their first year, 9 out of 10 of those fail in their second year, and so on.
I am not trying to discourage you from running a pizza franchise, I am only bringing this up to see is this really what you want to do? Are you passionate about food and will you do anything to make the pizza franchise work? Or are you just doing it for real estate purposes and because it’s a cool idea? If you aren’t passionate and if this pizza franchise isn’t your calling then I would recommend against it. However, if its been a dream of yours and you are willing to do anything to make it successful (including working 80 + hours) then I say go for it!
-John
John:
Thanks for sharing-I wouldn't say I'm particularly passionate about pizza, but I am passionate about running successful businesses. I would say my thought process is very similar to your Dad's. I'm thinking about purchasing a commercial building that is currently vacant-while thinking about possible tenants, the idea of opening a franchise myself came into the thought process. I thought it may be a way to earn an even better return on my investment, rather than just the proceeds from rental income.
The idea is to avoid a scenario where I'm spending 80+ hours making pizza. It is to apply an already successful business model and managing a business, ideally with multiple locations. If it's one location, it's a job. If it's multiple locations it's a business.
The blueprint for success already exists-it becomes a matter using the platform and properly managing employees and costs.
@Josh Caldwellmakes a good point. With that being said @Phillip Richardsoncan make this plan work if he is prepared to train managers to run these businesses.
That is the idea. To find and train managers who can effectively and efficiently run the locations.
I think it is a no brainier you already own the building if you can get a pizza franchise off the ground then opening multiple locations would be a easy next step. You can also sell the business take back paper and collect rent if it does not work out .Creating a viable business in your commercial space really increases the property value .
I have a friend who owns/manages his restaurant and it is very hands on and time consuming. You may find it easier just to purchase and set up the commercial space and then just rent it out to someone else and let them deal with running the business.
I think it is a no brainier you already own the building if you can get a pizza franchise off the ground then opening multiple locations would be a easy next step. You can also sell the business take back paper and collect rent if it does not work out .Creating a viable business in your commercial space really increases the property value .
Exactly!
I have a friend who owns/manages his restaurant and it is very hands on and time consuming. You may find it easier just to purchase and set up the commercial space and then just rent it out to someone else and let them deal with running the business.
I totally agree. It may be easier to rent out the space and collect a rent check, but I would like to optimize my return and increase my property value as much as possible. I'm thinking that if I open up a franchise myself it may a way to do that, and begin setting up an additional passive income source with multiple locations.
I certainly appreciate the feedback. Is your friend's restaurant a franchise? Does he own multiple locations, or just the one restaurant?
I have a friend who owns/manages his restaurant and it is very hands on and time consuming. You may find it easier just to purchase and set up the commercial space and then just rent it out to someone else and let them deal with running the business.
I totally agree. It may be easier to rent out the space and collect a rent check, but I would like to optimize my return and increase my property value as much as possible. I'm thinking that if I open up a franchise myself it may a way to do that, and begin setting up an additional passive income source with multiple locations.
I certainly appreciate the feedback. Is your friend's restaurant a franchise? Does he own multiple locations, or just the one restaurant?
My friend started out in college as a delivery driver at a local joint. He was a good employee and worked his way up to being the manager. He did that for a few years. Then he convinced the owner to set up a franchise operation. My friend got some assistance securing the new location and getting some equipment from the owner of the original location. He runs the new location full time now and puts in about 60 hrs per week. He's been doing that for about 4 years now. It is successful but he isn't in a position to repeat the process because he doesn't have anyone who can handle the management without him.
I have a friend who owns/manages his restaurant and it is very hands on and time consuming. You may find it easier just to purchase and set up the commercial space and then just rent it out to someone else and let them deal with running the business.
I totally agree. It may be easier to rent out the space and collect a rent check, but I would like to optimize my return and increase my property value as much as possible. I'm thinking that if I open up a franchise myself it may a way to do that, and begin setting up an additional passive income source with multiple locations.
I certainly appreciate the feedback. Is your friend's restaurant a franchise? Does he own multiple locations, or just the one restaurant?
My friend started out in college as a delivery driver at a local joint. He was a good employee and worked his way up to being the manager. He did that for a few years. Then he convinced the owner to set up a franchise operation. My friend got some assistance securing the new location and getting some equipment from the owner of the original location. He runs the new location full time now and puts in about 60 hrs per week. He's been doing that for about 4 years now. It is successful but he isn't in a position to repeat the process because he doesn't have anyone who can handle the management without him.
That's awesome that he's been able to leverage his experience into his own restaurant. That is a great success, and not very easy. But it sounds that his approach is a little bit different than mine-rather than starting a business from the ground up, I'm going to look to find management that can handle and run the business without me.
My main focus would be to manage the managers, and grow the business and expand the number of locations.
In my opinion the concept sounds viable. My only warning would be the complexities of managing people. As a manager yourself, I'm sure you already know how time consuming people management can be. With an industry such as pizza franchises, I'd wager you'll find yourself dragged into the day-to-day, at least until you can find a solid group of employees. And then there's the fact that any employee worth the time and effort will eventually move on to greener pastures. Especially since you won't have the existing corporate structure to allow for vertical or even lateral movement at first.
Additionally, in order to be approved for the franchise you'll probably have to commit a decent amount of your current time to training and development. These places do well because they have extensive training programs aimed at providing a baseline for success.
Having said that, I hear Papa John's is virtually giving away franchises at the moment so it's a worthwhile consideration. On paper it's a great way to reduce overhead and drive the bottom line (as long as you're not holding too large of a note).
Jim-thank you for your advice and input. Would you mind sharing the typical startup costs for opening a subway? There is usually a franchise fee, correct? What does a build out typically cost?
Jim-thank you for your advice and input. Would you mind sharing the typical startup costs for opening a subway? There is usually a franchise fee, correct? What does a build out typically cost?
Once you moved onto the second store, did it become easier to open additional locations?
Now that you own 8 franchises, how much time do you spend at each individual restaurant? What kind of hours are you working now to manage the 8 franchises? If you decide to sell the franchise portfolio, what type of metrics would you use to determine value?
Phillip,
Typical startup cost for a Subway is around $180 - 200 K however that would be for a new store. With 28,000 stores in the US alone, there are very few places to put a new store. You end up having to buy an existing store - average volume store will sell for around 4 - 500 K. First franchise fee is $15,000 but then the second store is around $7500.
Jim
In my opinion the concept sounds viable. My only warning would be the complexities of managing people. As a manager yourself, I'm sure you already know how time consuming people management can be. With an industry such as pizza franchises, I'd wager you'll find yourself dragged into the day-to-day, at least until you can find a solid group of employees. And then there's the fact that any employee worth the time and effort will eventually move on to greener pastures. Especially since you won't have the existing corporate structure to allow for vertical or even lateral movement at first.
Additionally, in order to be approved for the franchise you'll probably have to commit a decent amount of your current time to training and development. These places do well because they have extensive training programs aimed at providing a baseline for success.
Having said that, I hear Papa John's is virtually giving away franchises at the moment so it's a worthwhile consideration. On paper it's a great way to reduce overhead and drive the bottom line (as long as you're not holding too large of a note).
Ryan:
Papa John's is the franchise I'm looking into. If I purchase the two-tenant commercial building, the start up costs to "buy" a franchise will be very little. Right now they are waiving the franchise fee of $25k, they are installing ovens in new locations free of charge, and if I already own the building that was recently rehabbed, the cost to fit-out will be relatively small.
Rather than start a business from the ground up and create and build everything from scratch, I like the idea of buying into an already successful business, they're doing something right! Franchises already have systems in place; a blueprint (essentially) to run a successful location.
Phillip,
Typical startup cost for a Subway is around $180 - 200 K however that would be for a new store. With 28,000 stores in the US alone, there are very few places to put a new store. You end up having to buy an existing store - average volume store will sell for around 4 - 500 K. First franchise fee is $15,000 but then the second store is around $7500.
Jim
Jim:
Help me understand the real estate portion of your locations. Do you own the buildings, or do you lease out space?
Phillip,
I own the real estate for four of the locations.
2 in downtown "row building" locations
1 in building with 1 other tenant
1 in a small strip center.
All of the above are leased from my LLC's to Subway Corporate Real Estate Corp. who then subleases it back to my Subway Corp. This way Subway Corporate ties up the location so I can't kick them out and open up "Jim's Subs". The other 4 locations are in large strip centers. The owner of the strip center leases to Subway Real Estate Corp and in turn they sublease it back to my Subway Corp. Hope that answers your question.
Phillip,
I own the real estate for four of the locations.
2 in downtown "row building" locations
1 in building with 1 other tenant
1 in a small strip center.
All of the above are leased from my LLC's to Subway Corporate Real Estate Corp. who then subleases it back to my Subway Corp. This way Subway Corporate ties up the location so I can't kick them out and open up "Jim's Subs". The other 4 locations are in large strip centers. The owner of the strip center leases to Subway Real Estate Corp and in turn they sublease it back to my Subway Corp. Hope that answers your question.
Do you see a difference in the profitability between the locations you own, and those you rent?