Business intelligence is at the heart of lead management software for
An individualized approach to lead generation web based CRM
The commissioning process is a critical factor. The lead management software for
Once the foundations have been agreed then there can be an actual plan that relates to the lead management software for
The structural implementation of lead management software for
As many beginning investors have little credit and their cash stash, if used would barely get them through until next payday! With that in mind you would want to take on something which is simple and can produce the most profits with little to no investment. The smartest most logical path you could take to get started investing in
Wholesaling? What’s that?
As A wholesaler you position is easy! Find a particular type of property that buyers/investors are looking for. Simple right? Why yes, yes it is…….. Once located you just pass the new found deal onto your buyer/investor. Basically all you are doing is acting as the middle man or a bird dog (plus a few steps) type. With this type of investing you can make upwards of 10k from each and every deal you do, depending on the type of deal you uncover. With nothing more than time invested in these deals how can you go wrong!!!!
Why this method?
The wholesaling way has numerous reasons why you should start with it.
1) Low to no investment.
a. No need to own the property you are dealing on.
b. Just locate a undervalued property.
c. No need to take ownership of the property, just get it under contract and pass the deal on to the best buyer/investor, with what is called an assignment fee (up to $10K) added on to the negotiated price.
2) Fast and almost immediate cash.
a. Most all wholesale deals close in 45 days or less.
b. No need to wait for rents or long drawn out closings.
c. Quick was to get started and get cash in your pocket immediately.
3) Once you’re good at finding deals.
a. Benefit from quick closing and cashing out.
b. Keep in mind not every deal you find will you be able to put under contract and sell.
c. Even if you can’t buy it personally you can put it under contract and negotiate it with a buyer.
d. Do as many deals as possible to become a pro!!!
a. Wholesaling gives you options unlike any other investment vehicle out there,
b. You find it, negotiate with seller. Then decide what direction you will go with it, keep it, and or sell it, whatever you want. Where else do you have options like that?
VIOLA!!!!!!!!!!- Quick cash or long term cash flow…..you decide.
This is what makes wholesaling Grrrrrrrrrreat!!!!
When considering buying or selling a home, seniors have a special set of needs that may not apply to others in the
It is important then, to make sure that the
Senior sellers may be in the process of “scaling down”, moving to a smaller home or an assisted care facility. Your agent needs to understand how to help you to figure out what you will need to take with, and suggest ways to dispose of excess items that won’t fit in your new environment. Your agent should have suggestions for companies who can organize estate sales, garage sales or help you organize a charity to pick up items which may not be needed in the new setting.
Seniors may have lived in their home for a number of years and not understand what people are looking for in today’s market. Your agent needs to know what the market may demand. If you are selling a home in a 55+ community other seniors may not demand granite counter-tops and the most updated appliances. A simple fresh coat of paint may be all you need to make the property appealing before putting it on the market. Other markets will demand more upgrades, or a sales price adjustment, which the right agent will advise you on.
Seniors may have owned their properties for a number of years, resulting in numerous tax implications. While
An agent dealing with seniors need to be understanding of special health needs which may be in the home. If health issues are a concern in your home make sure that you have an agent who will show compassion and concern in trying to show the home at convenient times for the family members with those special needs. Again, if you have an agent whose only concern is that they get the home sold as quickly as possible, compassion may give way to convenience- the
When searching for the right agent, try to find an agent who has had experience in working with other seniors and those who have been in similar circumstances to yours. Let your “gut instinct” be your guide. If you feel pushed by an agent, or rushed, as though they don’t have time for you, perhaps you don’t have the right person.
Once you do have the right agent- sit back, relax and leave the driving to them!
In recent years,
The use of
Here’s my informal definition of a
This is probably the most popular
To begin, you simply enter a city and state, provide some qualifying information like price range and number of rooms, and then click “Go.” Once you get to the actual home listings, you can sort them by price, number of rooms, etc.
One thing I’ve always liked about REALTOR.com is the way the results are presented. You can view 10 homes per page, with thumbnail photo and basic information. This lets you “eyeball” shop and weed out any homes that don’t interest you right off the bat. That way, you only have to click the “learn more” link for homes that you’ve screened first. A lot of the newer
This website offers another map-driven approach to
Personally, I didn’t like the interface because it doesn’t show as much data at a glace as other
Trulia bills itself as delightfully smart
You can use Trulia’s
From the home page of Yahoo
Hover your mouse over an icon and it will show the listing price. Click on the listing price, and it will pop up a bubble with street address, a thumbnail photo, and a “learn more” link. To get around the map, you simply click-and-drag with your mouse (as with MapQuest or similar mapping sites).
“NeighborhoodScout is a web-based patent-pending neighborhood search engine that uses neighborhood statistics to build neighborhood profiles that allow individuals and families to instantly find the best neighborhoods for them, in any part of the United States they choose.”
So if you’re relocating to a new area, this website might help you refine your search by narrowing it to a few select neighborhoods.
A Word of Caution
When using any
Also, while a
* You may republish this article online if you retain the author’s byline and the active hyperlinks below.
How Do I Buy the Space?
If you have enough capital to actually buy a place, that’s great! If you are just starting off your business and can’t afford to buy space, you may need to rent or lease. This can be a little trickier. Lease contracts are complicated, and it is wise to have a lawyer take a look at the contract before you sign. Many inexperienced tenants accept a landlord’s contract without making any changes, and this can be dangerous. You could end up agreeing to a contract that gives the owner of the building too much power over you and your business, or you might even overpay for an inferior space. If you decide to buy, have the building inspected for structural problems so you do not get saddled with any unexpected maintenance costs. You want to be sure you know what you are getting into before you sign.
When Should I Buy/Lease?
If you have, or know you are about to have, products to store or employees who need a workspace, then it is time for you to get a place. You also want to make sure you can afford the property. Capital, from your business or investors, will need to be saved in advance for this purchase. You should also be sure that once you have the space, your business will be making enough money to continue renting. Timing is very important.
Where Should I Buy/Lease?
Location is key. If you are opening a store, restaurant, or any establishment that needs human traffic to make money, you want to be somewhere that gets a lot of pedestrian activity. Downtown city areas are good examples. You should also do some research to make sure there is not another established business similar to yours nearby that will produce competition. Do more research to make sure that your business is in demand wherever you decide to open up shop.
When you are walking through a property you are considering for purchase, you should always do so with a pad of paper and a pencil handy. Start at the outside of the home and walk around the grounds. Make note of the roof, gutters, exterior paint, windows, garage door, etc… To help yourself remember later, when you are not at the property, make notes on each item and whether they are in good shape or need some work. If work is needed write down exactly what you believe is necessary.
Once you enter the property start the dishwasher, washer, dryer, heater, A/C and any other systems in the home which will come with the property. Let these items run a bit while you look in other areas of the home, and make notes on them as well.
At each sink in the kitchen, bathrooms, and garage, turn on both the hot and cold water. Check to make sure both hot and cold water come out and check beneath the sink to look for any possible leaks. Again, make notes for yourself which you can refer to later.
When you walk through the other areas of the home such as living rooms and bedrooms, make sure to check for any flooring issues. Additionally, look at all of the interior and exterior doors in the home and check them for damage. Make notes of any flooring or door issues you see.
Once you have completed your walk-through of the home, you now have a listing of all of the obvious material issues which may need to be addressed. From this list you can now determine the approximate costs of repairs and make a more informed decision on whether or not to purchase the property.
The search for Lewis Smith Lake
Before you dive in head first, there are many things that you should consider in order to secure your long time happiness on Smith Lake. Following price, the number one concern of which you should be aware is whether or not your chosen property is located on seasonal or year round water frontage. Smith Lake is designed to normally fluctuate about fourteen feet between full pool and winter pool. Full pool is identified by the elevation of 510 feet above sea level. This means that if you purchase a property that has a depth of only 10 feet at your dock, then your dock will probably have no water under it during the winter draw down period.To insure year round use of your Smith Lake property, I would recommend you find a property that is at least 20 feet deep at the shallowest part of your dock when the lake is at full pool. This will provide you with uninterrupted use of your Smith Lake get away. If you are only interested in using your dock during the warmer months, then you might consider the purchase of
You might think that the only elevation that is important is that of full pool. You also need to be aware that Alabama Power owns a flood easement on your property all the way to the 522 feet elevation. In the last few years, FEMA has also gotten involved with flooding concerns in the Smith Lake area, and now you will have to have flood insurance if your home is not strategically positioned above the 524 feet elevation mark.
The flood easement is not the only easement that can affect your property. You need to research whether the property has an access easement, and if the property offers easements to others such as ingress/egress easements, power company easements, and water company easements.
You need to research the property of interest and find out if there are any additional building set backs, restrictions, or HOAs that will affect your use of the property. Many subdivisions require minimum set backs, minimum square footage, and some even require construction with specific architectural design. It is very important for you to be aware of these covenants and the fees associated with them before you commit to the purchase of any
Some other issues that many people forget are to make sure power and water are readily available at the site in question. If not, you need to determine the costs associated with the installation of such services. You also need to determine if the property has city water or well water. If it has well water, collect a water sample and send it to the health department for examination and look into available filtration systems.
Please make sure you obtain a recent survey for any
If the property already has a boat dock, check with Alabama Power about transferring the dock permit and to make sure that the dock is in compliance with their rules. If your property does not have a dock, contact Alabama Power to make sure that it can be permitted. You will be greatly disappointed if you discover later that your new home can not have a dock for some unforeseen reason. Also, observe the boat traffic in the area that interests you. Sometimes being on the main body of the lake is both an advantage and a disadvantage.
As a long summer of lazy unstructured afternoons comes to an end,
There is no doubt that you need to make a little extra time during those first few weeks to get everything heading in the right direction with the kids. Here is a quick back to school guide that will help you to keep the necessary focus on your business while helping your children have a successful start to the school year.
Schedule for Peace of Mind
One of the most important aspects of getting all of your goals accomplished as a
When you keep your family and work calendars separate, you will inadvertently schedule a meeting with a client, over a child’s school activity and vise versa. By color coordinating all of your Realtor appointments and mother appointments on the same calendar you can easily see where your focus is on a daily basis. By syncing your Top Producer with your Treo, you will have all of your appointments, work and personal, with you wherever you go.
Organizing For At Home Success
Next, use your Top Producer system to keep you organized. Take a few minutes to record the teacher’s contact information. Most
One of the most crucial times for you to establish family routines is during those first weeks of school. Set up such things as the after school routine with homework, snacks, and chores. My daughter has her “daily five” that she needs to do everyday after school that includes homework, cleaning her room, cleaning her bathroom, unloading the dishwasher and feeding the dog. Once the foundation of this time of the day is set and becomes a habit for your child, you are more able to focus on your job as a
Your job and your clients can be demanding. That doesn’t need to stop you from being a good parent and getting your home life in order. Take the time necessary to organize each of these aspects of your life, by being a
Restaurants are a favorite commercial property for many investors because:
- Tenants often sign a very long term, e.g. 20 years absolute triple net (NNN) leases. This means, besides the rent, tenants also pay for property taxes, insurance and all maintenance expenses. The only thing the investor has to pay is the mortgage, which in turn offers very predictable cash flow. There are either no or few landlord responsibilities because the tenant is responsible for maintenance. This allows the investor more time to do important thing in life, e.g. retire. All you do is take the rent check to the bank. This is one of the key benefits in investing in a restaurant or single-tenant property.
- Whether rich or poor, people need to eat. Americans are eating out more often as they are too busy to cook and cleanup the pots & pans afterwards which often is the worst part! According to the National Restaurant Association, the nation’s restaurant industry currently involves 937,000 restaurants and is expected to reach $537 billion in sales in 2007, compared to just $322 billion in 1997 and $200 billion in 1987 (in current dollars). In 2006, for every dollar Americans spend on foods, 48 cents were spent in restaurants. As long as there is civilization on earth, there will be restaurants and the investor will feel comfortable that the property is always in high demand.
- You know your tenants will take very good care of your property because it’s in their best interest to do so. Few customers, if any, want to go to a restaurant that has a filthy bathroom and/or trash in the parking lot.
However, restaurants are not created equal, from an investment viewpoint.
Franchised versus Independent
One often hears that 9 out of 10 new restaurants will fail in the first year; however, this is just an urban myth as there are no conclusive studies on this. There is only a study by Associate Professor of Hospitality, Dr. H.G. Parsa of Ohio State University who tracked new restaurants located in the city Columbus, Ohio during the period from 1996 to 1999 (Note: you should not draw the conclusion that the results are the same everywhere else in the US or during any other time periods.) Dr. Parsa observed that seafood restaurants were the safest ventures and that Mexican restaurants experience the highest rate of failure in Columbus, OH. His study also found 26% of new restaurants closed in the first year in Columbus, OH during 1996 to 1999. Besides economic failure, the reasons for restaurants closing include divorce, poor health, and unwillingness to commit immense time toward operation of the business. Based on this study, it may be safe to predict that the longer the restaurant has been in business, the more likely it will be operating the following year so that the landlord will continue to receive the rent.
For franchised restaurants, a franchisee has to have a certain minimal amount of non-borrowed cash/capital, e.g. $300,000 for McDonald’s, to qualify. The franchisee has to pay a one-time franchisee fee about $30,000 to $50,000. In addition, the franchisee has contribute royalty and advertising fees equal to about 4% and 3% of sales revenue, respectively. In turn, the franchisee receives training on how to set up and operate a proven and successful business without worrying about the marketing part. As a result, a franchised restaurant gets customers as soon as the open sign is put up. Should the franchisee fail to run the business at the location, the franchise may replace the current franchisee with a new one. The king of franchised hamburger restaurants is the fast-food chain McDonald’s with over 32000 locations in 118 countries (about 14,000 in the US) as of 2010. It has $34.2B in sales in 2011 with an average of $2.4M in revenue per US location. McDonald’s currently captures over 50% market share of the $64 billion US hamburger restaurant market. Its sales are up 26% in the last 5 years. Distant behind is Wendy’s (average sales of $1.5M) with $8.5B in sales and 5904 stores. Burger King ranks third (average sales of $1.2M) with $8.4B in sale, 7264 stores and 13% of the hamburger restaurant market share (among all restaurant chains, Subway is ranked number two with $11.4B in sales, 23,850 stores, and Starbucks number 3 with $9.8B in sales and 11,158 stores). McDonald’s success apparently is not the result of how delicious its Big Mac tastes but something else more complex. Per a survey of 28,000 online subscribers of Consumer Report magazine, McDonald’s hamburgers rank last among 18 national and regional fast food chains. It received a score of 5.6 on a scale of 1 to 10 with 10 being the best, behind Jack In the Box (6.3), Burger King (6.3), Wendy’s (6.6), Sonic Drive In (6.6), Carl’s Jr (6.9), Back Yard Burgers (7.6), Five Guys Burgers (7.9), and In-N-Out Burgers (7.9).
Fast-food chains tend to detect new trends faster. For example, they are open as early as 5AM as Americans are increasingly buying their breakfasts earlier. They are also selling more cafe; latte; fruit smoothies to compete with Starbucks and Jumba Juice. You also see more salads on the menu. This gives customers more reasons to stop by at fast-food restaurants and make them more appealing to different customers.
With independent restaurants, it often takes a while to for customers to come around and try the food. These establishments are especially tough in the first 12 months of opening, especially with owners of minimal or no proven track record. So in general, “mom and pop” restaurants are risky investment due to initial weak revenue. If you choose to invest in a non-brand name restaurant, make sure the return is proportional to the risks that you will be taking.
Sometimes it is not easy for you to tell if a restaurant is a brand name or non-brand name. Some restaurant chains only operate, or are popular in a certain region. For example, WhatABurger restaurant chain with over 700 locations in 10 states is a very popular fast-food restaurant chain in Texas and Georgia. However, it is still unknown on the West Coast as of 2012. Brand name chains tend to have a website listing all the locations plus other information. So if you can find a restaurant website from Google or Yahoo you can quickly discern if an unfamiliar name is a brand name or not. You can also obtain basic consumer information about almost any chain restaurants in the US on Wikipedia.
The Ten Fastest-Growing Chains in 2011 with Sales Over $200 Million
According to Technomic, the following is the 10 fastest growing restaurant chains in terms of revenue change from 2010 to 2011:
- Five Guys Burgers and Fries with $921M in sales and 32.8% change.
- Chipotle Mexican Grill with $2.261B in sales and 23.4% change.
- Jimmy John’s Gourmet Sandwich Shop with $895M in sales and 21.8% change.
- Yard House with $262M in sales and 21.5% change.
- Firehouse Subs with $285M in sales and 21.1% change.
- BJ’s Restaurant & Brewhouse with $621M in sales and 20.9% change.
- Buffalo Wild Wings Grill & Bar with $2.045B in sales and 20.1% change.
- Raising Cane’s Chicken Fingers with $206M in sales and 18.2% change.
- Noodles & Company with $300M in sales and 14.9% change from.
- Wingstop with $382M in sales and 22.1% change.
Lease & Rent Guaranty
The tenants often sign a long term absolute triple net (NNN) lease. This means, besides the base rent, they also pay for all operating expenses: property taxes, insurance and maintenance expenses. For investors, the risk of maintenance expenses uncertainty is eliminated and their cash flow is predictable. The tenants may also guarantee the rent with their own or corporate assets. Therefore, in case they have to close down the business, they will continue paying rent for the life of the lease. Below are a few things that you need to know about the lease guaranty:
- In general, the stronger the guaranty the lower the return of your investment. The guaranty by McDonald’s Corporation with a strong “A” S&P corporate rating of a public company is much better than a small corporation owned by a franchisee with a few restaurants. Consequently, a restaurant with a McDonald’s corporate lease normally offers low 4.5-5% cap (return of investment in the 1st year of ownership) while McDonald’s with a franchisee guaranty (over 75% of McDonalds restaurants are owned by franchisees) may offer 5-6% cap. So figure out the amount of risks you are willing to take as you won’t get both low risks and high returns in an investment.
- Sometimes a multi-location franchise will form a parent company to own all the restaurants. Each restaurant in turn is owned by a single-entity Limited Liabilities Company (LLC) to shield the parent company from liabilities. So the rent guaranty by the single-entity LLC does not mean much since it does not have much assets.
- A good, long guaranty does not make a lemon a good car. Similarly, a strong guaranty does not make a lousy restaurant a good investment. It only means the tenant will make every effort to pay you the rent. So don’t judge a property primarily on the guaranty.
- The guaranty is good until the corporation that guarantees it declares bankruptcy. At that time, the corporation reorganizes its operations by closing locations with low revenue and keeping the good locations, (i.e. ones with strong sales). So it’s more critical for you to choose a property at a good location. If it happens to have a weak guaranty, (e.g. from a small, private company), you will get double benefits: on time rent payment and high return.
- If you happen to invest in a “mom & pop” restaurant, make sure all the principals, e.g. both mom and pop, guarantee the lease with their assets. The guaranty should be reviewed by an attorney to make sure you are well protected.
Location, Location, Location
A lousy restaurant may do well at a good location while those with a good menu may fail at a bad location. A good location will generate strong revenue for the operator and is primarily important to you as an investor. It should have these characteristics:
- High traffic volume: this will draw more customers to the restaurant and as a result high revenue. So a restaurant at the entrance to a regional mall or Disney World, a major shopping mall, or colleges is always desirable.
- Good visibility & signage: high traffic volume must be accompanied by good visibility from the street. This will minimize advertising expenses and is a constant reminder for diners to come in.
- Ease of ingress and egress: a restaurant located on a one-way service road running parallel to a freeway will get a lot of traffic and has great visibility but is not at a great location. It’s hard for potential customers to get back if they miss the entrance. In addition, it’s not possible to make a left turn. On the other hand, the restaurant just off freeway exit is more convenient for customers.
- Excellent demographics: a restaurant should do well in an area with a large, growing population and high incomes as it has more people with money to spend. Its business should generate more and more income to pay for increasing higher rents.
- Lots of parking spaces: most chained restaurants have their own parking lot to accommodate customers at peak hours. If customer cannot find a parking space within a few minutes, there is a good chance they will skip it and/or won’t come back as often. A typical fast food restaurant will need about 10 to 20 parking spaces per 1000 square feet of space. Fast food restaurants, e.g. McDonald’s will need more parking spaces than sit down restaurants, e.g. Olive Garden.
- High sales revenue: the annual gross revenue alone does not tell you much since larger–in term of square footage–restaurant tends to have higher revenue. So the rent to revenue ratio is a better gauge of success. Please refer to rent to revenue ratio in the due diligence section for further discussion.
- High barriers to entry: this simply means that it’s not easy to replicate this location nearby for various reasons: the area simply does not have any more developable land, or the master plan does not allow any more construction of commercial properties, or it’s more expensive to build a similar property due to high cost of land and construction materials. For these reasons, the tenant is likely to renew the lease if the business is profitable.
In general, the interest rate is a bit higher than average for restaurants due to the fact that they are single-tenant properties. To the lenders, there is a perceived risk because if the restaurant is closed down, you could potentially lose 100% of your income from that restaurant. Lenders also prefer national brand name restaurants. In addition, some lenders will not loan to out-of-state investors especially if the restaurants are located in smaller cities. So it may be a good idea for you to invest in a franchised restaurant in major metro areas, e.g. Atlanta, Dallas. In 2009 it’s quite a challenge to get financing for sit-down restaurant acquisitions, especially for mom and pop and regional restaurants due to the tight credit market. However, things seem to have improved a bit in 2010. If you want to get the best rate and terms for the loan, you should stick to national franchised restaurants in major metros.
When the cap rate is higher than the interest rate of the loan, e.g. cap rate is 7.5% while interest rate is 6.5%, then you should consider borrowing as much as possible. You will get 7.5% return on your down payment plus 1% return for the money you borrow. Hence your total return (cash on cash) will be higher than the cap rate. Additionally, since the inflation in the near future is expected to be higher due to rising costs of fuel, the money which you borrow to finance your purchase will be worth less. So it’s even more beneficial to maximize leverage now.
Due Diligence Investigation
You may want to consider these factors before deciding to go forward with the purchase:
- Tenant’s financial information: The restaurant business is labor intensive. The average employee generates only about $55,000 in revenue annually. The cost of goods, e.g. foods and supplies should be around 30-35% of revenue; labor and operating expenses 45-50%; rent about 7-12%. So do review the profits and loss (P&L) statements, if available, with your accountant. In the P&L statement, you may see the acronym EBITDAR. It stands for Earnings Before Income Taxes, Depreciation (of equipment), Amortization (of capital improvement), and Rent. If you don’t see royalty fees in P&L of a franchised restaurant or advertising expenses in the P&L of an independent restaurant, you may want to understand the reason why. Of course, we will want to make sure that the restaurant is profitable after paying the rent. Ideally, you would like to see net profits equal to 10-20% of the gross revenue. In the last few years the economy has taken a beating. As a result, restaurants have experienced a decrease in gross revenue of around 3-4%. This seems to have impacted most, if not all, restaurants everywhere. In addition, it may take a new restaurant several years to reach potential revenue target. So don’t expect new locations to be profitable right away even for chained restaurants.
- Tenant’s credit history: if the tenant is a private corporation, you may be able to obtain the tenant’s credit history from Dun & Bradstreet (D&B). D&B provides Paydex score, the business equivalent of FICO, i.e. personal credit history score. This score ranges from 1 to 100, with higher scores indicating better payment performance. A Paydex score of 75 is equivalent to FICO score of 700. So if your tenant has a Paydex score of 80, you are likely to receive the rent checks promptly.
- Rent to revenue ratio: this is the ratio of base rent over the annual gross sales of the store. It is a quick way to determine if the restaurant is profitable, i.e. the lower the ratio, the better the location. As a rule of thumb you will want to keep this ratio less than 10% which indicates that the location has strong revenue. If the ratio is less than 7%, the operator will very likely make a lot of money after paying the rent. The rent guaranty is probably not important in this case. However, the rent to revenue ratio is not a precise way to determine if the tenant is making a profit or not. It does not take into account the property taxes expense as part of the rent. Property taxes–computed as a percentage of assessed value–vary from states to states. For example, in California it’s about 1.25% of the assessed value, 3% in Texas, and as high as 10% in Illinois. And so a restaurant with rent to income ratio of 8% could be profitable in one state and yet be losing money in another.
- Parking spaces: restaurants tend to need a higher number of parking spaces because most diners tend to stop by within a small time window. You will need at least 8 parking spaces per 1000 Square Feet (SF) of restaurant space. Fast food restaurants may need about 15 to 18 spaces per 1000 SF.
- Termination Clause: some of the long term leases give the tenant an option to terminate the lease should there be a fire destroying a certain percentage of the property. Of course, this is not desirable to you if that percentage is too low, e.g. 10%. So make sure you read the lease. You also want to make sure the insurance policy also covers rental income loss for 12-24 months in case the property is damaged by fire or natural disasters.
- Price per SF: you should pay about $200 to $500 per SF. In California you have to pay a premium, e.g. $1000 per SF for Starbucks restaurants which are normally sold at very high price per SF. If you pay more than $500 per SF for the restaurant, make sure you have justification for doing so.
- Rent per SF: ideally you should invest in a property in which the rent per SF is low, e.g. $2 to $3 per SF per month. This gives you room to raise the rent in the future. Besides, the low rent ensures the tenant’s business is profitable, so he will be around to keep paying the rent. Starbucks tend to pay a premium rent $2 to 4 per SF monthly since they are often located at a premium location with lots of traffic and high visibility. If you plan to invest in a restaurant in which the tenant pays more than $4 per SF monthly, make sure you could justify your decision because it’s hard to make a profit in the restaurant business when the tenant is paying higher rent. Some restaurants may have a percentage clause. This means besides the minimum base rent, the operator also pays you a percentage of his revenue when it reaches a certain threshold.
- Rent increase: A restaurant landlord will normally receive either a 2% annual rent increase or a 10% increase every 5 years. As an investor you should prefer 2% annual rent increase because 5 years is a long time to wait for a raise. You will also receive more rent with 2% annual increase than 10% increase every 5 years. Besides, as the rent increases every year so does the value of your investment. The value of restaurant is often based on the rent it generates. If the rent is increased while the market cap remains the same, your investment will appreciate in value. So there is no key advantage for investing in a restaurant in a certain area, e.g. California. It’s more important to choose a restaurant at a great location.
- Lease term: in general investors favor long term, e.g. 20 year lease so they don’t have to worry about finding new tenants. During a period with low inflation, e.g. 1% to 2%, this is fine. However, when the inflation is high, e.g. 4%, this means you will technically get less rent if the rent increase is only 2%. So don’t rule out properties with a few years left of the lease as there may be strong upside potential. When the lease expires without options, the tenant may have to pay much higher market rent.
- Risks versus Investment Returns: as an investor, you like properties that offer very high return, e.g. 8% to 9% cap rate. And so you may be attracted to a brand new franchised restaurant offered for sale by a developer. In this case, the developer builds the restaurants completely with Furniture, Fixtures and Equipment (FFEs) for the franchisee based on the franchise specifications. The franchisee signs a 20 years absolute NNN lease paying very generous rent per SF, e.g. $4 to $5 per SF monthly. The new franchisee is willing to do so because he does not need to come up with any cash to open a business. Investors are excited about the high return; however, this may be a very risky investment. The one who is guaranteed to make money is the developer. The franchisee may not be willing to hold on during tough times as he does not have any equity in the property. Should the franchisee’s business fails, you may not be able to find a tenant willing to pay such high rent, and you may end up with a vacant restaurant.
- Track records of the operator: the restaurant being run by an operator with 1 or 2 recently-open restaurants will probably be a riskier investment. On the other hand, an operator with 20 years in the business and 30 locations may be more likely to be around next year to pay you the rent.
- Trade fixtures: some restaurants are sold with trade fixtures so make sure you document in writing what is included in the sale.
- Fast-food versus Sit-down: while fast-food restaurants, e.g. McDonalds do well during the downturn, sit-down family restaurants tend to be more sensitive to the recession due to higher prices and high expenses. These restaurants may experience double-digit drop in year-to-year revenue. As a result, many sit-down restaurants were shut down during the recession. If you consider investing in a sit-down restaurant, you should choose one in an area with high income and large population.
Sale & Lease Back
Sometimes the restaurant operator may sell the
- He cannot maximize the cash out as lenders often lend only 65% of the property value in a refinance situation.
- The loan will show as long term debt in the balance sheet which is often not viewed in a positive light.
- The interest rates may not be as favorable if the restaurant operator does not have a strong balance sheet.
- He may not be able to find any lenders due to the tight credit market.
You will often see 2 different cash out strategies when you look at the rent paid by the restaurant operator:
- Conservative market rent: the operator wants to make sure he pays a low rent so his restaurant business has a good chance of being profitable. He also offers conservative cap rate to investors, e.g. 7% cap. As a result, his cash out amount is small to moderate. This may be a low risk investment for an investor because the tenant is more likely to be able to afford the rent.
- Significantly higher than market rent: the operator wants to maximize his cash out by pricing the property much higher than its market value, e.g. $2M for a $1M property. Investors are sometimes offered high cap rate, e.g. 10%. The operator may pay $5 of rent per square foot in an area where the rent for comparable properties is $3 per square foot. As a result, the restaurant business at this location may suffer a loss due to higher rents. However, the operator gets as much money as possible. This property could be very risky for you. If the tenant’s business does not make it and he declares bankruptcy, you will have to offer lower rent to another tenant to lease your building.
Occasionally you see a restaurant on ground lease for sale. The term ground lease may be confusing as it could mean
- You buy the building and lease the land owned by another investor on a long-term, e.g. 50 years, ground lease.
- You buy the land in which the tenant owns the building. This is the most likely scenario. The tenant builds the restaurant with its own money and then typically signs a 20 years NNN lease to lease the lot. If the tenant does not renew the lease then the building is reverted to the landowner. The cap rate is often 1% lower, e.g. 6 to 7.25 percent, compared to restaurants in which you buy both land and building.
Since the tenant has to invest a substantial amount of money (whether its own or borrowed funds) for the construction of the building, it has to be double sure that this is the right location for its business. In addition, should the tenant fail to make the rent payment or fail to renew the lease, the building with substantial value will revert to you as the landowner. So the tenant will lose a lot more, both business and building, if it does not fulfill its obligation. And thus it thinks twice about not sending in the rent checks. In that sense, this is a bit safer investment than a restaurant which you own both the land and improvements. Besides the lower cap rate, the major drawbacks for ground lease are
- There are no tax write-offs as the IRS does not allow you to depreciate its land value. So your tax liabilities are higher. The tenants, on the other hand, can depreciate 100% the value of the buildings and equipments to offset the profits from the business.
- If the property is damaged by fire or natural disasters, e.g. tornados, some leases may allow the tenants to collect insurance proceeds and terminate the lease without rebuilding the properties in the last few years of the lease. Unfortunately, this author is not aware of any insurance companies that would sell fire insurance to you since you don’t own the building. So the risk is substantial as you may end up owning a very expensive vacant lot with no income and a huge property taxes bill.
- Some of the leases allow the tenants not having to make any structure, e.g. roof, repairs in the last few years of the lease. This may require investors to spend money on deferred maintenance expenses and thus will have negative impact on the cash flow of the property.
Even though this seems obvious, a definition is a good place to start with such an important topic.
A real estate appraisal is a process to determine the value of a home or other property for pretty much one of three reasons:
- A potential borrower wants to borrow money against the value of a property.
- A person wants to buy or sell a house or other property.
- Someone is involved in a family situation (such as executing a will) and they need to determine a property value.
The person who actually makes the valuation of the property is an appraiser, state licensed and regulated, trained, and experienced in real estate in the area where the property is located.
There is a big difference in appraisers, based on their training, experience, and attention to detail. The opinion of value in an appraisal report is an estimated fair market value. In other words this is the price a normal buyer would expect to pay a normal seller for the home if it were for sale. The appraiser uses local market information to arrive at this opinion of value.
Real estate appraisals are conducted for commercial, residential, and industrial properties, including leased agricultural trust lands, but for most people, what they really need is a valuation for a home. they want to be able to buy one or sell one or borrow against one.
Real estate appraisals are used for buying and selling while an insurance value appraisal is for determining insurance coverage amounts. And while there is often a degree of mystery in how they are conducted, real estate appraisals are a necessary step in the property buying process. There is a lot of confusion out there regarding the truth about appraisals.
Real estate appraisals are the next best thing to having your own private real estate assistant and when you are looking for one, reputation is everything. Without using an appraiser with a great reputation, you always run the risk of having your property over or under valued. While this might seem like a great deal at the time, when it comes to your property and your finances, you really only want the truth.
A real estate appraisal gives you a professional view of how much someone will offer or ask for a property in your area. With true professional appraisers, you will not only learn about the valuation methods used in your appraisal, but also understand what that value means in the specific situation for which you need the valuation.
Reputable appraisers will share all the information they have obtained with you and will go out of their way to watch out for the best interests of all the parties involved in the transaction. Reputable appraisers will not take sides in any negotiations because the truth is their reputation rests upon yours and the real estate agents referrals. In my personal experience, a professional reputable appraiser is worth usually double or triple the fee they receive, making their service one of the best bargains in the real estate world.
And the best of the best will answer any question you have, honestly, truthfully and in language you can understand.