When you step into your favorite coffee shop and plop down $3 to $5 or more to get your daily caffeine fix, do you ever wonder where that money goes? I mean, you can make a simple cup of coffee at home for much less.
There’s the cost of ingredients, labor costs for the barista, supplies like disposable cups and lids, and perhaps a franchise fee to cover. Also, in most cases, the coffee shop owner is paying rent to the owner of the building they occupy.
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.
Author bio: Michael Morris founded Pursuit of Passive Income with the goal of helping its readers achieve financial freedom and create a life they love. He is living proof that every failure is just one step closer to success, having started and shuttered many failed businesses. Michael now makes a full time income from Pursuit of Passive Income and strives to help others create passive income streams of their own.
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?
We love real estate as a top source of passive income, and here is everything you need to know about making your first commercial real estate investment.
What Does This Investment Look Like?
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!
Financing & Interest Rate Hikes
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?
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.
So let’s say we’re at 5%, it’s time to start shopping around.
Sure, we can go to Chase Bank, Wells Fargo, Truist, etc. but we also want to make sure we give our local community banks a shot. It’s not uncommon for the community banks to offer some sort of promotion for lending on secure assets.
Also, make an effort to build relationships with local lenders at these types of institutions. I’ve found they are much more lenient as far as the rate they can get through committee and if the loan officer trusts you, the good ones can help push it through.
So you’re looking at a well-established tenant like Starbucks (BBB+ Credit Rating) with a long term lease, and after a good lunch meeting with a local loan officer, you’ve pushed the rate down to 4.75% for your purchase!
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.
For instance, after 25 years of owning this property, the entire balance of the loan will be paid off and you’ll own the property free and clear. So with no out-of-pocket expenses, your equity in the property has gone from $540,000 from the down payment to $2,700,000.
Of course, with increased equity, you can now borrow against this property anytime you’d like. So let’s say you want to take half out, there’s $1,350,000 in tax free money you can now use to go out and purchase another property.
Real Estate tends to appreciate at 3% per year. So if we consider the same time horizon, after 25 years your $2,700,000 property is now worth $5,653,200.
Again, you can borrow against this amount tax free to purchase additional assets and grow your net worth. Or you can sell the property and initiate a tax-deferred exchange (1031 exchange), which defers your capital gains tax and allows you to roll 100% of the proceeds into a larger property that will grow in value quicker than your previous investment.
Maybe this allows you to purchase a small strip center with 5 or 6 tenants, giving you more to manage, but mitigates risk in the event a tenant decides to leave.
In the case of the Starbucks, if they leave, your rental income goes to zero. But if you have 6 tenants paying rent and one leaves, you have 5 others that continue to pay until you can fill the vacancy.
Ok, so let’s review some of the tax benefits of owning this property. Any interest you pay is tax deductible, so in the first year alone, you are responsible for $101,603 in loan interest, so if you claim $100,000 in income on your tax return, your liability is reduced to zero.
Over the course of 25 years, the total tax deduction is $1,535,000 that you’re able to write off!
Additional Benefits To Owning Real Estate
Here is the summary of additional benefits of owning this property:
- As you pay down the loan, your equity increases
- After 25 years, you will own the property debt free
- Real Estate appreciates in value, so 25 years later the property is then worth almost $5,653,200 at 3% annual appreciation
- The interest you pay on your loan is tax deductible, therefore reducing your tax liability
- Long Term Leases mean Starbucks continues to pay rent without vacancy
- 10% Rent increases are typical every 5 years
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So let’s take all of this into consideration if we expect to own this property for 25 years, keeping Starbucks as a tenant with 10% rent increases every 5 years.
- Total Rent For The Period: $4,945,131
- Proceeds From The Sale of Property: $5,653,200
- Tax Savings & Depreciation are Dependent On Your Income
- Total Loan Payments: $2,989,294
- Initial Down Payment: $540,000
Return on Investment:
Your final ROI is $7,069,037 or a 1,309% return. Even over the course of 25 years, where else are you going to find a return like that?
Summary: Buy Starbucks Real Estate
So if you’re in a position to purchase commercial real estate, it can be one of the most rewarding investments, especially if you expand your time horizon.
Sure, a Starbucks is going to be one of the most expensive commercial investments you can make, but consider starting with a local property in your market that has great potential.
Once you build up your income and net worth, graduate to a larger credit tenant like Starbucks or Culvers and leave a legacy your children will love you for!
What’s your take on commercial real estate investing?
2 thoughts on “Starbucks: Buy the Real Estate, Not [Just] the Coffee”
” 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!”
Minus the property tax on that $2,700,000 commercial building, which is also omitted from the “Expenses” and “Return on Investment” sections just above the summary . Property tax is often one of the largest operating expenses for owners of commercial realty.
Hi! Great article, and really fills a niche (commercial retail REI instead of residential) very few physician bloggers are discussing.
How do you find a development deal for Starbucks?
One important benefit you didn’t mention was 100% bonus depreciation which you can take advantage of this year (then it begins to phase out).