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Old 08-22-2011, 08:04 PM
 
403 posts, read 636,614 times
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I have two rental properties that provide about a 7% net dividend cash flow on my equity after expenses. It seems all well and good, but I am debating whether or not tying up my money in future real estate projects is worth it.

Instead of tying up my money in real estate and waiting 30 years to pay the thing off, it seems like I should invest in a business that produces significantly more cash flow. Where the investment could pay for itself in a couple years.
I am specifically thinking about a franchise sandwich shop in a high foot traffic urban environment.

It seems like that is a faster way to grow wealth than real estate. What do you guys think?
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Old 08-22-2011, 08:27 PM
 
3,578 posts, read 6,325,121 times
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Quote:
Originally Posted by midlifeman View Post
I have two rental properties that provide about a 7% net dividend cash flow on my equity after expenses. It seems all well and good, but I am debating whether or not tying up my money in future real estate projects is worth it.

Instead of tying up my money in real estate and waiting 30 years to pay the thing off, it seems like I should invest in a business that produces significantly more cash flow. Where the investment could pay for itself in a couple years.
I am specifically thinking about a franchise sandwich shop in a high foot traffic urban environment.

It seems like that is a faster way to grow wealth than real estate. What do you guys think?
Depends how much cash you need to buy into the franchise sandwich shop (Potbelly's?)...I love Potbelly's sandwiches. Great for urban areas.

Franchise costs can run in the hundreds of thousands. Do you have that much money because banks aren't going to lend you that type of money right off the bat unless you have significant collateral for the commercial loans.

Add that you are going to have to be running (or someone you trust) the franchise for 60 hours plus a week.

Factor this into the equation. There's a lot of work to start a new franchise business. This isn't like passive investing like renting out a couple of homes.

You win big, you could lose big in a franchise investment. Real estate investments these days are long term goals. Franchise investments, you can make a hefty profit into about 5 years. The first couple of years requires a lot of work. My buddy started his frozen yogurt franchise a year ago. So far, he's put over 200K of his own cash into the business while his wife runs the operation full time. He still works full time at his other high paying job.
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Old 08-22-2011, 10:11 PM
Status: "Enjoying the winter" (set 27 days ago)
 
Location: East of Seattle since 1992, originally from SF Bay Area
34,080 posts, read 61,975,311 times
Reputation: 38004
The last I heard, 60% of small businesses make it past the two-year anniversary. However, only 44% make it four.

A decent building in a safe, populated area will be in great demand, especially now with home buying being so slow. My business made it over 20 years, and during that time I saw 6 franchise competitors come and go, lasting 6 months to 2 years. Many are quick to take your money but not good at training and don't tell you the whole story before you write the check. If you go that route PotBelly is one of the better ones, but look into what it would cost to go out on your own and compare the cost. Then decide whether their name is worth the additional cost. If you are considering working a job at the same time, then I'd definitely go with apartments. Managing a busines is full time and that means evenings and weekends, too.
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Old 08-22-2011, 10:28 PM
 
Location: In the gawdforsaken desert
6,614 posts, read 7,874,657 times
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My dream for a long time has been to buy a small strip center and over time take over the whole place with my own businesses. The trick is you need to be able to buy the property cash out, so your only operating costs are taxes and utilities (and business costs like payroll) - but what I see causes most businesses to fail, besides bad management is having that often HUGE rent nut to crack each month.

A small sandwich shop near where I live pays $8,000 a month! That's $96,000 a year in RENT - that is all your profits! On the other hand there is a toursity area near my home where many of the businesses have been owned by the same people for many years and they bought their buildings back in the 50's for $3,500. They just operate them as a hobby and don't even care if they make money or not. It's almost a travesty, because I see all the great businesses that could go in such places and vitalize a whole community.

The other advantage to owning the building is if your sandwich shop doesn't make it, maybe a nail salon will. You can try again without going broke (hopefully).

So YES - owning your own business I think is the way to go - BUT you gotta own the building too.
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Old 08-23-2011, 07:24 AM
 
5,460 posts, read 6,194,510 times
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Quote:
Originally Posted by jamies View Post
My dream for a long time has been to buy a small strip center and over time take over the whole place with my own businesses. The trick is you need to be able to buy the property cash out, so your only operating costs are taxes and utilities (and business costs like payroll) - but what I see causes most businesses to fail, besides bad management is having that often HUGE rent nut to crack each month.

A small sandwich shop near where I live pays $8,000 a month! That's $96,000 a year in RENT - that is all your profits! On the other hand there is a toursity area near my home where many of the businesses have been owned by the same people for many years and they bought their buildings back in the 50's for $3,500. They just operate them as a hobby and don't even care if they make money or not. It's almost a travesty, because I see all the great businesses that could go in such places and vitalize a whole community.

The other advantage to owning the building is if your sandwich shop doesn't make it, maybe a nail salon will. You can try again without going broke (hopefully).

So YES - owning your own business I think is the way to go - BUT you gotta own the building too.
If the rent is $100K a year how much cash do you need to buy the building outright? Several million? That's not a great rate of return compared to the risk.
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Old 08-23-2011, 10:05 AM
 
403 posts, read 636,614 times
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Default business vs. real estate

It's such a snooze fest to buy a piece of real estate and then wait 30 years before it's paid off by your tenant zzzzzzz.

I'm looking for a quicker return on my capital. I do understand the risks, and management headaches that come with owning these things, but it seems like a quicker return on your money. I want to enjoy the fruits of my labor when I'm relatively young..
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Old 08-23-2011, 11:40 AM
 
433 posts, read 1,139,676 times
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You could become a Hard money lender.

Or invest in some SOUND business ideas with the intent that your money comes back to you fast. ie 2-5 years. IF you mentor the people and enjoy that type of relationship, it could work great!

or you could invest in businesses that produce the cash flow to recoup your investment in 3-5 years. There are some out there. Sandwich shops are NOT that type of business.
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Old 08-23-2011, 03:08 PM
 
403 posts, read 636,614 times
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Default Hard money lending

I like the idea, but what are some types of businesses other than retail/restaurant that have quicker returns on investment?
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Old 08-24-2011, 08:57 AM
 
Location: Baltimore
1,759 posts, read 4,689,866 times
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I've had this debate with a coworker of mine that just invested his money into a restaurant instead of some property with me.

In my opinion, due to the very volatile nature of the hospitality industry, I would lose my mind trying to manage all the recurring and non recurring expenses in a restaurant. Not to mention that those same items will spoil if they aren't sold. While it can be very lucrative, the risk just seems so much higher than purchasing property.

With property you more or less know what you are getting into and can far more accurately judge the value of it than a restaurant which even in a great location can tank if the customers don't show up. I worked in downtown Annapolis for a number of years and dozens of seemingly well run and trendy restaurants shut down after 6 months despite being in a prime location.
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Old 08-24-2011, 10:39 AM
 
Location: The Triad (NC)
31,378 posts, read 69,795,705 times
Reputation: 37474
Is this thread going anywhere?
The missing detail seems to be a distinction about HOW (or if) someone earns a regular income.

If you have solid, stable job with benefits that pays enough to live off of, perhaps even live well, and still affords the ability to set aside real cash for investing purposes... most people will look for "passive" investments because this primary work, their other interests and family obligations collectively tell them that they don't have the time available to do more than that.

Well, despite how the tax code looks at it, small time land-lording (for those who don't have staff or PM's to do the actual work) is anything but passive. That isn't a bad thing to have that help, many do, but it does come at a price.

If you don't have that stable solid secure primary employment income and benefits...
then the idea of starting or buying a business will have more appeal.
The reality of this for most though... is that what your doing is "buying yourself a job".
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