Location, Location, Location - Real Estate
You've probably heard this before, but let's take a look at it. The phrase that
Real Estate agents are tossing out of "Location, Location, Location" is
what determines the price of real estate. That is to say, a piece of junk
house in Beverly Hills is worth a lot more money that a huge mansion in
the middle of west Texas. Location has a huge affect on real estate prices.
So knowing that, when you examine the market, you can take advantage
of this concept.
To a large degree, it doesn't much matter where you have your field. A field is a "destination location" business. That is to say that as long as someone can find you, and drive to your place, it really doesn't matter where it is. Which is a good thing.
If doing an outdoor field, you are going to need a lot of room. Acres and acres of land. Indoor, you are going to need a large building. The problem is, a lot of land, or a large building is going to be a bit expensive. Expensive to buy, and expensive to lease. But far less expensive if you are not in a prime location. And as long as you are not too far away - that should not hurt you much. How far is too far?? That will depend on the frame of mind of the people in your demographic. In the Dallas area, people don't think much about driving a half hour or more to get somewhere, and I have a lot of customers that come in every week that make a drive of up to an hour to visit our facility. But our place is also just off a major interstate road (I-35) in a north Dallas suburb called Lewisville, TX. And there is shopping, malls, restaurants, etc. within a 5 minute drive of our facility. This is perfect as it allows parents to drop off kids, and go to a movie, go eat, shop, etc and pick them up later. Ideally, you want a location like that if you can find one that is affordable.
So that's what you're looking for - then the big question that pops up on the forums all the time - "Should I buy or lease?"
BUY!!!
Well, you might be saying, "but I don't have enough credit and cash to
get a loan to buy." Then don't open a field. I'm sorry, and this might
be that reality check I warned about - but if you can't afford to buy
the real estate and the equipment to start - you don't have enough capitol
to start a business. The margins on sales are slim, and the expense you
have to go through with any start up business are large, and unless some
other weird factors are at play here, you will not be able to start and
sustain a business model if you are also trying to pay back borrowed money
to start.
And just so you know, no one will lend it to you - unless you have a very
rich (and very stupid) uncle. Right now banks are squeezed very tight,
and they are not making loans - unless you have unbelievable credit and
assets. And just so you understand - banks don't lend money on businesses,
they lend money on assets. And only then for part of it.
I'll go into my real estate purchase a little more in a bit - but just to use my situation as an example, I already owned another commercial building and land - the one my scuba shop is in, which was valued at 1.5 million with a recent appraisal from the bank. I only owed $560,000 on it - so here I am with a scuba business that has all of it's inventory bought and paid for (millions in inventory) and nearly a million dollars in equity in a commercial building. And I wanted to borrow money to buy a building for an indoor field. My bank would lend me 90% of the building value (most would get a max of 80%) and nothing for inventory, rental gear, finish out, parking lot, advertising and a host of other expenses. All that will have to come out of pocket, after I put a minimum of 10% down on the building.
"Ok, but why buy? Can't I lease cheaper?"
Not really. You have to look at the big picture here - and the future. You are not trying to open a field to last one month. You want this to go for years. So what is the difference in cost over years time if you buy or lease? It's just like where you live. If you rent an apartment or house - each month you throw away money. If you are buying, you are paying down a loan (by a very little bit) and gaining appreciation. Appreciation being the term for the increase in value of the property. And this is the real secret to being a successful business owner.
If you find the right property - and don't get in a hurry, wait for the
perfect deal, you can find a nice piece of property with a building that
you can buy right. Until the right one comes around, save money, and research
your future business. Wait for the perfect deal. You may want to talk
to some commercial real estate brokers, and let them know what you're
looking for - send them pounding the pavement - but remember the only
person you ever trust is yourself.
A real estate broker gets a commission on a sale - 3% to 6%, so the more money it sells for - the happier he is. So don't be afraid to put in stupid low bid amounts. And remember - the worst thing to do is fall in love with property. Fall in love with your wife, your dog, your cat - but not real estate. I don't care if it's the perfect building, the perfect location the perfect everything, "and I just have to get it." If it's not the right deal - you walk.
Ok - fine - now back to the buy vs. lease question.
If you buy right, and by buying right, you researched the area, you know
what other buildings are selling for in the area, and you are getting
a "below market price". You have checked the growth in the area, and you
have checked with the city planners and other real estate brokers and
realize the area where your building is located is on an upswing - not
a down swing. There will be new subdivisions near by. There is some economic
growth being pumped into the area with a new strip mall a few miles away.
The road it's on has a plan to be widened and expanded in the near future
according to the city zoning and planning commission. You may have your
building! But more work is needed first.
Now you have to get your broker to shoot a stupid low ball price to test
the waters. For example, in my case, they were asking right near 1.2 million
for the building - 26,000 feet on 2 acres of land. I offered $700,000.
Just over half the asking price. They countered with an offer of $840,000...
I countered with $750,000 - they re countered with $775 - and I said yes,
and tossed down a $10,000 earnest money to tie up the property for 60
days contingent on the city accepting my request for a certificate of
occupancy.
Ok.. fine
- now back to the buy vs. lease question. Fine... I digress...
To lease a comparable building in this area would run easily $9,000 a
month (being conservative). And you can plan on the rent going up after
a few years. It's also going to be a chore to convince someone to lease
to you for the purpose of having an indoor field - as they are sure
you will trash their building (and they are probably right.) But we'll
assume you can lease for the 9 grand mark. Buying it with 10% down - you
are looking at a payment, with a good interest rate of closer to $5500
per month, and then another $1500 per month to pay your property taxes
at the end of the year... so netting out $7,000 per month in expense.
So there is a $2000 per month or $24,000 per year savings... but we're
not done. If you did everything right, and bought right, your property
is probably going to appreciate at 3% a year (maybe much better) which
is another $20,000 a year. So now we're up to $44,000 a year, and take
into account that while not much in the beginning, you are paying down
a little of your note, so maybe another $5,000 a year in debt reduction.
When you crunch all the numbers, you are probably looking at nearly a $50,000 a year difference between owning and leasing, and with any small business, $50,000 out of our bottom line might be the difference between a successful business, and filing bankruptcy.
Not enough for you? You want more?? Ok. Let's look at a few scenarios here if you're renting. There are really one of two choices with your outcome. You're going to do good... or you're going to do bad. If you have a long lease, and you are doing bad - you have to close the doors, jump the lease and get your credit ruined and sued for the term of the lease. If you sign a short lease and are doing good - your rent gets jacked up rapidly as the owner sees you're doing good. Or, worse yet, he sees you're doing great! And his nephew Dilbert always wanted to run a paintball field, so they jack your lease to the point to where you can't stay, he kicks you out, and has Dilbert walk right in and glean your customers out from under you thanks to all the hard work you put in... and it will take too much time and money for you to go find another building and start over.
Would it be possible to build all this into contracts to avoid these scenarios with non-compete clauses, fixed rate hikes, etc - yea, maybe. But lots of luck on that when they really don't want to rent their building to "kids who want to shoot guns".
Now if you've bought the building, and things go bad - what da' heck. You bought a building where the note is now 6 - 7,000 a month with your taxes - but it can rent for $9,000 a month - or even drop the price down to rent it quick. Rent the sucker and kick back to start your business another day.
So find a way to buy... even if it means bringing in the rich and stupid uncle who would love to have a building interest, and you can work out a deal with him where if things are going good, you cut him in for a little piece, but you get to buy the building from him at a X % profit for his investment after 1 or 2 years. But control the property - or you may have all your time and effort go for nothing.
As an additional note - I just got contacted about my building. It turns
out it is sitting over one of the natural gas pockets in the Dallas area,
and a gas company is going to set up about 1/2 mile away, and angle drill
below me, and their is a signing bonus in the $40,000 range, plus 25%
of what they bring up, which could be nothing if they hit a dry well -
but could also easily be $10,000 per month of extra revenue. If I was
leasing.... nothing. So buy your building!
I've known many small business owners, and realistically, most businesses
will go under at some point - the market changes, something happens, and
they can hardly ever sell their business for much if anything. But if
they owned the building for all those years they ran their business, they
have equity in the commercial real estate and can retire off the building
sale - or at least finance a new venture - So buy
your building!
There were other indoor fields in this town... all leased - all gone - and nothing to show for it but debt. If the entire industry ground to a halt tomorrow, a world wide ban, - I wouldn't even lose a wink of sleep. I've got a building that now has about $500,000 in equity since I bought real right - and I can lease it for about $5,000 more a month than my payments, and I'll get another $10,000 (knock on wood) from the gas reserves. So buy
your building!
And Visit our Indoor Field Site
Visit our Location
582 E Hwy 121
Lewisville, TX 75057
(972) 956-5500 Fax: (972) 956-5514
info@gatsplat.com
All text and images © GatSplat
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