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Franchise location costs will often be one of your largest expenses (often second only to payroll). Your choice of location could have a huge impact on your future franchise profitability (and startup viability), so discipline yourself to minimize your rent. Real estate could more likely fund your retirement than your franchise investment.
Franchise Real Estate As a Generator of Wealth
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Franchisee Earnings
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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.
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
There are over 2,500 franchises for sale to evaluate.
We've screened thousands over the past 10 years.
Let us help you strategize your best future path.
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