As my wife and I move closer to having our first child (3 months to go), I often wonder about what it is going to be like. One of the interactions that I look forward to is when your curious kid asks you a thousand questions about anything and everything. Looking back, I find it amazing as to how many of my endless questions that my father answered (or at least attempted to answer!). As I apply this to my situation now, I get a little bit of anxiety thinking about what my child is going to ask.
The title of this article is meant to be one of those questions that your kid asks you, that you might not know. In fact, before I began my career in real estate, I had no idea either. The answer to this question will lead to insight as to what my group (Commercial Investment Group) does in our day-to-day business.
If you were to break down a typical fast food restaurant, you would find that there are actually three owners involved. The first owner of that Taco Bell is the Franchisee that operates the actual restaurant. They are in charge of hiring and firing employees, ordering food, keeping the store clean, and running a profitable business. These Franchisee operators manage anywhere from one restaurant to well over a 100 restaurants.
The Taco Bell Franchisee pays a percentage of their income to the second owner or, Franchisor, which in this case would be YUM! Brands. For instance, if a particular restaurant of a Taco Bell Franchisee sells $1M worth of food and beverages in a year, they would pay around 5.5% or $55K to the Franchisor (YUM! Brands) for the right to operate that store.
The third owner of that Taco Bell is where we come in. This is the person that owns the actual Real Estate (building and land) that the Restaurant runs its business out of. This person is referred to as the Landlord or Investor. We help these Investors in the acquisition and disposition of this type of Real Estate.
In summary, when you are asked, “Who owns that Fast Food Restaurant?”, you now know that it is a three-part answer:
1) The Franchisee – Operates the restaurant
2) The Franchisor – Charges a fee to the Franchisee for the rights to operate the restaurant
3) The Landlord – An Investor that owns the land and the building that the restaurant operates out of
Let us now take a look at these properties from the perspective of the Property Investor:
These types of properties are unique for a couple of different reasons. First off, they have long leases that can last up to 20 years and longer. Secondly, they do not require any active management. Because the Franchisee (Tenant) has their business on the line each and every day, they prefer to be responsible for all maintenance, as well as the payment of taxes and insurance. This leaves the Investor (Landlord) with nothing to do but collect a rent check month in and month out.
These types of Real Estate investments are ideal for a few groups of people:
1) Highly Paid Individuals - Have money to invest but no time to manage property
2) Real Estate Novices - Have money to invest but know little about Real Estate
3) Cash Flow Investors - Savvy investors seeking passive income from a secure source
The cost of the real estate that is behind a fast food restaurant can vary from $500K to $2M. The price is based on the location, the lease, the tenant, and the store sales. In today’s market, an investor can expect to receive a return of 7%-9% for this type of property. That means if you bought the real estate that had a tenant such as Taco Bell for $1M, you would receive an annual return of $70K-$90K. This number would increase over the years as the rent increases.
As you can imagine, it would make more sense for a highly paid athlete to acquire a few of these during their playing years as compared to 10 cars and a mansion. These investments would help to ensure a stable income stream once their playing years came to an end.
Although these properties are excellent vehicles for investment, no two are exactly the same. There are many aspects of these investments that need to be considered closely before acquisition. The underwriting process requires everyone on your investment team to be involved. This would mean your real estate professional, who is able to explain the difference between a good investment and a bad one; your tax professional, who can tell you what the tax advantages and disadvantages of the property would be; and lastly an attorney who specializes in Real Estate transactions who can help to investigate deeper into leases, title issues, and contracts.
Highly paid individuals such as athletes must realize that they have 99.99% of the battle won due to the large incomes that they receive during their playing years. The other 0.01% of that battle that many fail to master is what they do with their money once they have it. Owning the Real Estate behind a fast food restaurant is an excellent way to receive secure passive income for a long period of time. Referencing previous articles, this can only happen for the highly paid athlete that is disciplined with their spending and investing habits.
Wouldn’t it be a better question if as you pulled through the drive-through and your child asked, “Daddy, why do we own this Taco Bell?”
"Helping to ensure that your real estate investments work harder than you do."