Hey guys since buying a business is kind of like a job i thought i would ask here.
Has anyone tried to invest in an owner absentee type of business a few years out after working?
If you're able to earn 60k plus a year, and after three years you can save around 45k for a down payment, and buy a laundromat for example that basically runs on its own (taking into account the manger steals here and there)
Has anyone thought about doing this? While working at the same time.
Owning your own business is the best way to build wealth and I thinking about doing this once I am employed.
You can do it, but your returns won't be all that attractive on a risk adjusted basis unless you: 1) Can manage it. This is hard - read some of the better franchise restaurants requirements for new franchises (Panera is one of the most strict) and see what kind of experience those firms think it takes. Not easy to do right out of college unless you happened to grow up in an environment where your family was managing a service business. 2) Buy it really cheaply and can a) Turn it around and make it competitive b) Eat losses for a few years until the macro environment turns.
The other problem with running these kinds of businesses without "deep" pockets is that you will need to finance capex regardless of whether you build or buy and if you misproject cash flow you will end up losing all your equity to the lenders.
Why not invest in real estate (property or a REIT) for income or find some well-valued mid-cap firms to hold long run for capital appreciation?
I would use leverage. Seriously. I don't see the point in putting in that much time without the proper return. Acquiring a business or majority stake via cash/equity just won't get me there.
I was thinking about this the other day. If you buy an existing company you will need strong cash flow, and like you mentioned you have to worry about honest employees (not stealing, showing up, and cost of employee turnover).
I have also considered real estate, very intriguing. Only downside would be property management and upkeep. I am sure there are people on here that have experience owning property for income while working full time. Would be nice to hear their experiences.
Leverage is the answer or just start it .yourself not buy it. I am planning to build my business this year while at school.
I've been giving this thought too. Either buying an established small business or starting one out myself. I think the better option in this situation is a small business loan over investing your own capital. Let your cash flows pay off your loans over time and like someone mentioned above having close, SMART family members manage it
I own a two-flat and manage it myself and it is really not that difficult. Also, my tenants are section 8, so they are not the best or easiest to manage. I have looked seriously into buying businesses as well, but unless you have a good chunk of savings, it is easier to invest in real estate.
I suppose you might be talking about something smaller. I recently looked at a 5-unit property, and I think you said 2-unit earlier.
You're at an advantage if you can rope in friends or family to help you manage the asset. Friend of mine owns a handful of flats already and basically his dad is doing all the maintenance etc.
I wouldn't do this on your own if it distracts you from your day job. Your day job reputation is sacred if you're in this business for the long haul.
Keep in mind for investment properties you need at least 25% down, so that's a good chunk of equity.
For small business loans you're still going to need to put up a lot of equity as well, a bank isn't going to give you money without seeing you willing to put your own money down.
You could try buying and placing ATM's in businesses. It would be cheaper than a laundromat and is still an absentee type of business. If you are in NY though, it might be very difficult to get placement.
Why do you think that there exists zero effort investment opportunities that generate above market returns?
They do exist. But its about timing cycles, picking up stakes in distressed services businesses for a low CF multiple and getting the former owner to run it for you. This requires cash reserves. Issue with trying to do this for investment real estate is that banks tighten lending criteria, making you put up more equity and depressing your return.
@valuationGURU , I have been thinking about doing the same thing except getting a 3 unit home with at least 2BR each unit renting it out to section 8, it seems unless they trash your unit you cant lose, but by them doing that they would risk losing their section 8 eligibility if you complain to the section 8 board.
@TheodoreBonkers , I am a big proponent of it. 3 unit, 3 bed is ideal. 2 bedroom is a minimum for any unit. The most important part of this is tenant selection. I have looked into purchasing all sorts of real estate in the city I live, but the rates of return can't be matched.
edit: double-post, deleted
To re-echo a lot of what has been said, it is possible to achieve a strong return, but you will have to be prudent about you manage it.
One thing I have been hearing a lot about is these search fund networks, where you can access capital for acquiring a small business. If you google "search fund" you can find a lot of information. I believe the structure initially started at Stanford.
I think the best advice for someone just starting out is to focus on your reputation at your day job. At the end of the day, the majority of your CF still comes from your paycheck.
Thanks guys very interesting discussion. What oddly got me thinking was reading a quote about how there are two classes in society, the ones who own the means to production and the ones who sell their skills and labor at a going rate.
I realized that owning the means of production is key to building wealth. I remember one person told me that it wasn't the person who digs the ditch that gets wealthy but the guy who owns the ditch.
I think owning a business taking all risks into account should be the ultimate goal because in the end when you're paid a salary you're only worth what a company thinks you're worth and for most people there tends to be a ceiling.
Not to say business isn't risky, but lately rather than just wanting to become a high paid professional I have thought about being a business owner.
On a side note I feel like real-estate would be difficult to own, lots of problems with tenants complaining about the heat and elec bill and trashing the place and what not.
My father used to own three or four large apartment complexes in the 80's filled with low income housing tenants and he basically couldn't handle the pressure and sold it basically at break even since the buildings were zoned for low income housing and that really cuts the re-sale value of the property
I've never heard of a search fund before, will def look into that btw.
@prospie , The 5 unit you were looking at is gonna require around a 50% DP.... I wanted to do that and was told by the loan officer thats what it required, also any home you buy is gonna need maintenance and repairs, but I think that boilers, hot water heaters, roofs, big things of that nature should be inspected before diving in obviously, but all the other "little" things come as expenses to all properties. Also you wanna make sure you hire someone thats licensed and knows their shit, cause if not you as home owner are liable for anything so thats why dont repair anything your not licensed to do. Sorry to steal the question but id feel it an injustice not to help out.
@prospie @TheodoreBonkers , a 5 unit would be a commerical property, so that is a different animal in terms of financing. I handle small items, but most things are done by outside people. Maybe spend 5 hours a week on the phone/dealing with tenants, etc. Probably less. After property taxes, insurance, and the mortgage payment, the property makes about $1400 a month (based on $2,000 in rent). Maybe $300 a month in expenses so far. Put a portion of the cash flow away for future large expenses/taxes.
That's a pretty good ratio/margin. Is the $300 an average over the course of a couple years that includes turnover (prepping the unit for the next tenant)? The problem with these tenants is that they aren't like you and me. They can completely fuck everything up. Going through a new refrigerator in 12 months, for example. Any thoughts?
Would you want to own more than a couple units, or do you think it would become a 2nd job? I suppose another aspect I haven't mentioned (when it comes to several units) is the bullshit involved with leasing.
@TheodoreBonkers , I'm not worried about the financing. That wasn't what I was asking about (I can do better than 50%, by the way). And I wouldn't be worried about being held "liable" for something. If I knew how to fix shit, I'd fix it myself. That is how a lot of small-time operators avoid having their returns gobbled up by R&M. You have to remember who we're talking about here. Some of the people who own these things can't even spell "license." Also, I'm not talking about old boiler issues that are discovered during due diligence before you even close. I'm talking about ongoing maintenance, over time and into the future.
It depends on what kind of business it is. This is where your network will help. If you have a TRUSTWORTHY friend who is not working as much as you or if you both work on different schedules you can buy any business if one of you has experience in the business your looking to buy.
The most important part is that you or your friend has to know the business inside out. If you buy a restaurant and your friend managing the restaurant has never managed or even worked in one; your business has a very high chance of failing unless your friend is an absolute superstar.
By the way I know quite a few people who a business model like the one I described above and would be considered rain maker's by WSO standards. Of course not everyone is successful even if you think you know everything.
If I were you OP, I would see if you have someone who can mentor you who already has an established business.
I think the best "side hustle" is real estate. I never did the rental thing but I did flip a few. The game is now messed up for the little guy, since institutional investors are buying up all the good properties.
The goal now is to buy a low rise unit with let's say 4 leasable floors. I would lease out 3 and keep one (rent free) for myself
Real estate is alright if you have no one else to work with but if you know anyone knowledgeable who can run a retail or service business you'll get a much higher return.
I can agree with that. The only I say real estate, is because it's easier to be in complete control of. Especially if you have a limited amount capital and want to limit your downside risk. The metrics are easier to manage and may or may not take a lot of time to oversee.
And as for me I only delt with foreclosed properties. Take a property that's worth 100M. Say you get it for 90M and its in decent shape but not spectacular. Say rent is 1,100/month. That's 13.2M/yr or a return of 15%. If you bought it distressed or foreclosed for 55M and spent 10M renovating it. Now you could argue that it should pull about 1,200+ a month, but we'll stay at 1,100. You've now increased your return to 20%. Those deals are harder to find but there out there. But add in borrowing costs or management fees, only the second option works. But for me, since I didn't want to be a landlord, in this scenario, I would have sold the property for 100M (maybe even 95M), netted about 15-20M and kept on pushing. In hindsight, and with the money I have now saved, I would use cash financing and negotiate down to 45M (quick closing, no contingencies) do minimal reno and unload to a portfolio investor at 70M, within a few weeks instead of waiting months on a retail buyer. Plus, I did a good bit of the reno myself. This allowed me to gain knowledge of trades and where to find good prices on materials. Now when I turn them quicker (using tradesmen) I'll know what to look for.
As for the other avenues you've mentioned, you're right, they can be lucrative, but you place a considerable amount of trust in either a) your SME, or b) your partners. Hiring a SME to consult with you is cool, if you trust them, because they're complete in control. The partnership thing is cool too. But you need to have very strong business relationships with them. They need to be financially strong themselves and level headed. I've seen lucrative businesses fucked up because one partner decided he wanted to hire his mistress at the business or wants to pull out funds when the money comes in because he's ready to ball out. Going this path will be determined by how much capital you can afford to put up (risk) and how long you'd be willing to forgo returns while you ramp up operations. Unless you've got the right people on board, I'm not sure how "absentee" you can be...especially in the beginning. If everyone involved knows more about the business than you, you're putting yourself at risk. Beware of absenteeism, until you know what the fuck is going on first. IMHO....
Just buy real estate. I own a residential multi-family property and it runs itself. Property manager takes 10% (going rate in the area the property is located), and they do EVERYTHING. Marketing, bookkeeping, tenant issues, you name it. They only call me with major issues which are more expensive than their limit to spend or if a tenant wants a short-term lease or discounted rents.
Or don't buy real estate, leave it for me. If you are interested in real estate, read The Real Estate Game by William Poorvu (HBS professor at the time of the writing, not sure now).
Running a small company alongside employment? (Originally Posted: 01/26/2015)
Out of interest, what are the BB banks stance of an employee running a small company alongside their employment (in whatever free hours they have) ? Is this a no go zone? Surely bankers have outside interests to some degree, e.g. property on rent etc?
Bump
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