Franchise location costs are among the largest expense factors (usually second only to payroll) you will need to manage in your small business. Your choice of location could also have a huge impact on your overall future franchise profitability. Identify a rental or property cost range that the business will be able to affordably support. That is your budget. Maintain the discipline to find a franchise location within budget. This key step will have a huge long term impact on your franchise investment's profitability.

Franchise Real Estate As a Generator of Wealth

Use the credibility of the franchise brand to help you get a loan to buy a building

Real estate has long been a means for creating wealth. In 1984, 33% of the Forbes 400 list of the wealthiest people in the US acquired their wealth from real estate and oil. In 2008, the value of real estate declined, but there is no question of its long term value. Buying a franchise to a means of getting ownership of your own franchise real estate is a compelling concept.

When a business pays down the mortgage using cash flow from operations, the business indirectly “buys” the property for the franchise owner. In this way, the credibility of a franchise with lenders and the SBA often provides the means to get a small business startup loan that is combined with real property financing. This strategy allows you to grow real estate wealth over time independently from your franchise equity.

Many franchisees will tell you, in hindsight, that they made a “living” with their franchise, but in the end earned their “wealth” and changed their lifestyles through the real estate that was paid for by the operating cash flows of the franchise.

Lease vs. Buy Considerations for a Franchise Location

When you take out a mortgage to buy real estate, lenders require a down payment, tying up a lot of your funds. Depending on the terms of the loan and local property tax rates, the mortgage and taxes could cost considerably more than a lease.

As the business grows, it may need new infusions of cash to support growth. If most available cash was used to buy the property and set it up to be ready for your business, the company may have to slow down its growth. So, owning property could slow down cash flow growth in the business itself.

On the other hand, owning the property could be a "hedge." If the franchise investment does not perform well, you still own the property. You may find reasons to sell or close the franchise and simply become a landlord. Or, you may find the franchise is "good enough" carrying the mortgage and providing an income. At some future date you could sell the property and realize a very large profit.

Real property gains are taxed at lower rates than income. Property values can grow untaxed, while income is taxed every year, and at higher rates than for taxes on real estate gains. You might be able to tap that increased equity via secured credit lines. The cost of the credit is a tax deduction. Further, when you sell, the property is taxed at much lower capital gains rates.

As of 2009, there is a lot of debate as to what types of appreciation (let alone depreciation) in values one can expect for any franchise locations you might own. Many say it will take a lot more patience than in the past decade to see solid gains on a property investment. Others say that buying NOW is an opportunity because values have come down and are at temporary lows. Also, many say that we will soon enter a time of high inflation because of recent massive increases in money supply due to government stimulus activities.

So, if you have the resources, take some time to ponder the pros and cons of renting vs. buying the property at which you will operate your franchise.

Related Franchise Real Estate Tips & Resources

How to budget for franchise real estate costs

Learn about startup cost reductions possible by negotiating tenant improvement costs   (Hint get a good commercial realtor)

How does the typical franchise real estate department's role differ from a commercial real estate broker's role?

Regardless of the approach you take, you would be wise to get help from a commercial real estate broker

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