Hi BP, my partner @Jon Sanborn and I recently bought a commercial mixed use property in Philadelphia, PA 19132: 3 Total Units - 2 Bedroom Unit, 1 Barber Shop Unit, 1 Hair Salon Unit. The tenants we inherited are great, but the Salon Shop was on a month to month lease, and after 15 years of running her business she’s planning on retiring in January.
This is our first experience with Commercial Tenants, and we’re curious what people would suggest for our next move for this unit?
The Salon tenant is planning on selling her Salon Business, which includes the database of clients and salon equipment (6 hairdryers, 10 salon chairs). The previous owner charged $1000/mo in rent for this Salon Unit, and had the tenants pay for Electric.
Plans we’ve considered:
- Searching high/low for another Salon tenant who will buy our current tenant’s business outright and run their own Salon from our unit. Ideally, we would find someone who is currently running their own Salon business, but needs to upgrade to a larger unit like ours. More realistically/likely, we think it’d be a hair stylist that is looking to start up their own business.
- Buy the tenant’s equipment ourselves, and rent out the Salon Chairs individually ourselves to individual Hair Stylists. This route sounds less passive, but could have a profitable upside.
- Would we need a hair styling license to rent out the individual salon chairs weekly/monthly, even if the hair stylists have licenses? And does anyone have experience doing anything like this?
- Buy tenant’s equipment ourselves to then resell, which we estimate is worth around $3K between the used salon chairs and hairdryers. Then with the unit emptier, we would search for another different type of Commercial Tenant.
Any advice is appreciated!! Thanks
Wow, that's really red! What did you end off doing? I'm in a similar situation - I'm acquiring a very small commercial building that is equipped to be a salon... I'm debating a)rent out the whole space to a stylist and let them run it; b) rent out by the chair to stylists; c) rent out to someone unrelated to hair. I'm leaning towards "A' but looking for feedback based on people's experiences
@Dan L. Haha candy-cane red!
It's funny timing that you commenting on this. Through an insane amount of outbound tenant searching, we were able to find a new Salon tenant for the unit. We literally called the top 100 salons on Yelp in Philly, along with the Beauty and Cosmetology Schools, and ran multiple Craigslist Ads before filling the unit. Unfortunately she just told us a few days ago that she cannot afford the place because of COVID. So it's vacant again and we're back to the drawing board. We put it back up on Craigslist for $200 cheaper w/ a short-term lease just to get someone in there for now. Fingers crossed!
We've only done Option a.) that you listed above. We like that option since it's the most hands-off. There's potentially more more renting out per chair though. It also depends on your state (or county) as to the legality of renting out per chair. From what we Googled, it didn't seem legal in our market but does differ per area! I would look into that as well if you go that route. Good luck!
Hi @Alex Capozzolo I'm sorry to hear about your tenant! Yeah it seems like it's a rough time for the personal service industry. Have you 'surveyed' the people who have declined renting and ask why did they? Meaning, is it the cost, location, layout/colors, COVID-19, etc?
How about try letter C?
As far as 'my' salon... This seller & I "verbally" (on Facebook) agreed to terms.. I submitted a written contract just as we agreed to. Then she had her lawyer re-submit a contract with different terms, including no inspection period! She agreed to go back to the original terms on everything EXCEPT inspection! Obvious red flag, she would not budge on allowing an inspection, so the deal is canceled.
Your experience is telling me maybe I'm better off...
@Dan L. All part of the game! No worries.
We're getting a ton of applicants that aren't qualified. Most we have actually denied during our screenings because of credit score / other factors. The ones that have declined usually comes down to rent. $1000/mo is what we're asking since that's what the previous tenants have paid. It's difficult to find someone who is at the right time in their current hair cutting business that is ready to expand to a bigger space who are transitioning from cutting at someone else's salon.
Ah gotcha! Sorry to hear it's cancelled. It's not easy but can still be a good opportunity so I'd stay open to things like this.
As far as renting out the salon as a different commercial space, that all depends on what the neighborhood demands in terms of business. In Philly you see lots of salons / barbers / day cares.
Someone inquired about owning a salon without lic. In NY you could be owner non operator, you'll need a business lic. and all hair stylist will need to be lic. to limit your liability. If this become your choice and you have commission employees you will need a manager/reception/ cashier to maintain the business in your absence. Hope this help.
The red checker salon is dated. An upgrade would get you a better response. Or lower the cost to allow for upgrades. If you're the owner and salon can't be sold... you have to make a decision to get your unit rented out to a new concept. I understand the situation but business must go on. I would have a discussion with salon owner referencing this concern.
All the best
@Eva Brock thanks for the feedback, and I think you're right because we've had others tell us that to - to renovate the salon and update it ourselves, and then try to rent it out.
Our initial concern was that if we did do that, then the next potential salon tenant would come in and want to still put their own spin/style into the place, and change everything again (paint, flooring, etc.).
I think what we were asking was too steep!
We're currently reviewing applicants, and we're offering a free 1 month of no rent for them to do their own renovations inside during that time. If none of these applicants work out, we will be renovating ourselves and using neutral colors, and then putting up for rent again. Fingers crossed!
@Alex Capozzolo What criteria did you use to evaluate potential tenants? The salon I was looking to buy is now back in the picture and wants to deal. I'd also like to get at least $1,000/mo rent to make it worth it for me, but based on your experience I'm leery if I'll find someone! How many sq ft is your place? This one is 800 sq ft. What credit score, history, etc did you use? And you had alot of applicants? Did you charge an application fee? Thanks!
Renting during covid is tough. If you want it to remain a salon you could always advertise for a business partner who is a stylist (with a business head) and work out a deal. Changing the concept is the other option to renting this space. Advertise the footage not the salon. I'm sure you'll attract interest.
@Dan L. I do an initial phone screen, where I can find out pretty quick if someone is qualified. I had someone tell me recently 'I'm thinking about opening up a salon.' I immediately was like..'You're thinking about it?' Yeah no, sorry. So basically on the phone I ask "Tell me about yourself, your past business experience, how long, etc" Ideally, we will (and finally have) find people who currently run/own a salon and are looking to move locations and expand their business. I also tell them we will be checking credit, background, and income.
Once phone screened, I show them the place, and if they like it, have them apply. We ideally want to see at least a 600 credit score (our salon isn't in center city philly...so we have to be realistic with this, typically we want to see 650+), a clean background, and income/savings that is substantial. Usually with our residential rentals, we look for 2-3x the rent depending on the area, but with the salon we look for 3-4x the rent, plus savings. We ask for tax returns and bank statements to check this info.
A huge factor is experience, though. If the tax returns are from a different job, they don't hold nearly as much weight as they do from someone who has ran a business and their tax returns show exactly how well the BUSINESS has, can and should do.
Our space is about 1,200 sq ft
Thanks @Jon Sanborn ! That's great info. You're right, 3-4x does make more sense since they still have to pay for insurance, supplies, marketing, etc.