Starbucks: Buy the Real Estate, Not [Just] the Coffee

Starbucks is a vice that is widely accepted in today’s society. There’s nothing like a $5 shot of energy to start your day or get you through the 2:30 lull. But what if, instead of spending $5 a day, you could make $77.50 per day from the popular coffee chain?

Michael Morris, the author of today’s guest post, suggests that you could be that gal or guy. How does the math work out for such an investment? Michael makes some projections below, and advises you to put yourself on the receiving end of a portion of that $5 latte or whatever your morning beverage of choice may be.

What Does This Investment Look Like?

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According to net lease advisor, the average purchase price for a Starbucks property is $2,700,000 and let’s assume, using a good commercial real estate broker, you find one to purchase at a 6.5% cap rate, which equates to an annual rent of about $175,500, or $14,625 per month. The bank will make you put down at least 20%, or $540,000, so you will need to have significant cash reserves or find a couple of partners to split the deal with you.

But let’s look at the monthly cash flow on that $540,000 down payment. At a 4.75% interest rate with a 25 year amortization, your monthly payment on your loan equates to $12,300 compared to the $14,625 you receive in rent. So each month, you’re cash flow positive in the amount of $2,325 or $27,900 per year!

Ok, so we know that interest rates have spiked here recently and at the time I am writing this article, loan rates for commercial property are right around 5.25%. So why did I use a 4.75% rate when looking at this investment?

Financing & Interest Rate Hikes

Well, we are actually developing a Starbucks property at this moment, and we were lucky enough to lock in a rate at 2.95% prior to the rate hike, but how can you help improve your returns by getting the best rate? First, Starbucks has great credit, and if you purchase a property with a long term lease in place, such as 10 years, you should be able to push the rate down off the average.

A major component of your return from real estate investments is the loan paydown. Basically, you are using the tenant to grow your equity in your asset, so each month, the tenant pays you rent and you pay down the loan to increase your position in the property.

Loan Paydown

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