"Passive" Business with Physical Location

So I currently run WSO from a home office (in Palo Alto, CA) and I was thinking that since I work from home, I could pretty easily rent out some real estate nearby and start another business that takes some investment up front, but allows me to keep my focus on WSO long term.

I don't want a commute, but I wouldn't mind having a place to go so I don't go stir crazy. Some ideas I've had:

Co-working space. There are some already around here and the economics aren't really the best. Rents are really expensive around here and even if you were to fill a space with 50 budding tech entrepreneurs, still a tough business based on some #s I crunched.

Fitness center. More capital up front for the equipment, but can easily be leased (~$100k of equip for ~$3k/mo). My options in a 0.25-0.5 mile radius since moving here are yoga, a "bar class" and pilates...so women, women, women focused. There is an Equinox like 1/2 mile away ($165/mo) and a crossfit close ($250/mo), but that's a lot of $. Oh, and the nearest YMCA ($65/mo) is closing down Oct 1. It's pissed me off because I'd like a normal gym to work out in, besides my once a week soccer league which starts soon.

So what about a small / no frills gym with good equipment for $95/mo...not sure I could make it work given real estate costs around here, but figured if I could get a ~3,000 - 5k sf space, load it up with some decent treadmills, free weights, etc, i could capture a small % of the 3,500 Y members getting displaced. Parking is a HUGE issue, so I think that is why Y members liked it. i would consider taking it over, but the building is supposedly in shit shape. will probably go take a visit today.

Am I crazy? obviously this is a long shot, but it's fun to brainstorm and thought you guys might be able to talk me out of it or give me some good ideas.

 
Best Response

Why not a commercial building with some apts up top or something along those lines. Tax benefits, you'd have an office, no equipment to run or advertising, just basically being on site management. Plus it would not only appreciate, but provide income.

I think a gym sounds awesome, but with Cross Fit all over the place the market is saturated.

IMO, I would find a local college and teach a couple classes. Just need a masters and with your resume you could easily teach at a lot of schools in a variety of business classes. You get $4-5K per class so you could easily add $15-25K to your bottom line without a ton of effort. Once you get a physically college on your resume you can easily poach some online classes. Pay the same, but they are remote.

 

Open a spin studio and just run the front desk.

You need like 1500 sq ft, lockers, two showers, one studio with all the bikes. After the upfront cost, with the right location they make so much money...

Frank Sinatra - "Alcohol may be man's worst enemy, but the bible says love your enemy."
 

Crossfit gyms seem like a goldmine to me. Much less equipment to buy and higher fees than a typical gym. You do have to pay trainers and find a space (which may be your issue), but if u can do that there's a lot of profit.

Out in the chicago burbs they just rent 4-5k industrial spaces, install rubber flooring and basic equipment and get a few trainers. The place I go has over 300 member paying $100/month.

I'd guess the family that owns my gym cash flows $15k/month.

If you can find a good location is really consider a crossfit gym at $150/month.

twitter: @CorpFin_Guy
 

I mean correct me if I'm wrong, but the two boxes I've been members at have had VERY involved owners. A lot of crossfit is about that unique, "local" and cultural feel. If he just opens a box, buys some equipment and hires a few trainers it won't work. Probably similar to this site when you first started it. I'm guessing you put in a ton of hours during the first few years to develop the culture / content.

 

I think it's a valid concern, but either way (as a non-trainer) you'd need rockstar trainers. I agree that culture is REALLY important in a crossfit gym. My 2 experiences are:

  1. Owner basically did everything. Sales, coaching the WOD's, etc... I didn't love the workouts, didn't love the owner, not a great box.

  2. Owned by a couple. Woman is a trainer, but doesn't do anything above and beyond training a minimal number of classes a week. Guy is not a trainer, but does come work out in the morning Mon - Sat and does help build the culture a little bit. He definitely handles the "business" aspects, but I don't think he's putting in much time outside of being real positive when he's there in the morning. The programming of the WODs and to some extent sales are really handled by a main trainer. I guess this guy could have some skin in the game, but I really don't know.

Ultimately, whether it be through an equity stake or good salary, for it to be "passive" you'd need one high quality trainer. From there, you'd need a few more that take direction from the main trainer and fill in timing gaps (these would be almost a dime a dozen in major cities). Most boxes now start with an experienced trainer looking to go out on their own - this would be an ideal partner for Patrick.

twitter: @CorpFin_Guy
 

Don't forget insurance, which I'm sure is sky high for CrossFit... all the media hype around injuries, etc.

Renting out office space/apartments isn't as easy as it seems at face value... property maintenance is a pain in the ass. And, as you mentioned, the economics of coworking are tough. Maybe if you leased 1,500-2,000 sf yourself, took an office/some open space, and then rented out coworking desks. Here in Boston a single desk can be upwards of $300/month, so a few of those could offset a bit of rent.

 

2 suggestions outside of fitness:

  1. some other website (as CorpfinanceGuy suggests), but I'm not sure if that satisfies your desire to rent out space.

  2. Something related to real estate, possibly specific to individual real estate investments. This may be a website or other type of service. Other than biggerpockets.com (which is just a forum) or "gurus" that pitch ridiculous systems there's not a ton out there. I don't know if it's helping people find properties, marketing them yourself, etc... but I think there's a market there.

Related to #2, but not too "passive" unless you get a good manager - property management. If you can get to scale it's 90% systematic.

twitter: @CorpFin_Guy
 

If you're interested in a Gym, I'd look at something akin to what New York Sports Club does, or a Bally's/Retro Fitness/Club Metro. It provides competition and serves a space that isn't there (an affordable gym). NYSC comes to mind, but I don't know if they have expanded on the West Coast as well.

I would also look at businesses that are fairly hands off, if you just want a space. Not knowing the market around the Palo Alto area, but I would also look at just renting out a small office space if you just need a place for yourself. As far as passive sidebusinesses, how close to Palo Alto does it need to be? I remember a few threads being discussed about unsexy businesses (like coin op laundromats that could generate a reasonable revenue) that popped up a few times. Does it need to be in Palo Alto?

 

What makes you so set on a physical business? Is it largely to avoid working from home on WSO 24/7 or is the extra income a big factor or for the new learning experience?

At first look, it sounds to me like it would be a huge headache and not necessarily leverage your very unique and valuable background. Unless the physical location is important to you, I would think that there are easier ideas with less capital required to give a go at. I have no idea what those easier ideas are, but I'm sure there's something out there haha.

 

Take this with a grain of salt as gym economics are outside my wheelhouse. I see a few problems with this. The YMCA is a nonprofit organization and they are closing shop, presumably due to not meeting their costs in your area and the cheapest alternative was nearly triple the price. The median home price in Palo Alto is $2MM (a lot of that is this last cycle) and the median income is 163k. You're basically looking to open up a bargain service in an area where everyone looking for bargains has been gentrified out. I'd also bet money that many of the tech companies offer to pay for gym memberships, and their goal is to offer it as a perk so the eye candy walking around Equinox would be a perk vs a YMCA type gym and those people aren't looking for a bargain because the company is already paying it and probably getting a group rate. Not to mention your time, being tied to a lease and tying up that much capital.

 

yeah, you make a lot of good points...just trying to think of a business that could efficiently use 1,500-2ksf of space and generate a decent return with some legwork and capital up front with not an insane amount of risk...

I don't care it it's laundromats, drycleaners (saturated near me), barber shop (pretty saturated) beer garden or anything else. the idea of a no frills gym is similar to cross fit (just a box / warehouse), but instead of trainers, you lease equipment... I hear you on the demographics, gentrification, but even rich people are cheap and like a good deal. I think the scarier thing is the companies offering it to their employees as a perk...which is why you probably see a lot of pliates, yoga, etc catering to women (more stay at home moms vs stay at home dads in a techy area i'd assume)...

I think the issue is that the rent would be very high in this area, so the economics are tough...frustrating

 

I think that's why the question of how far are you willing to travel is important. You bring up the subject of economics and what are the economics of being in Palo Alto? Compare that to San Francisco proper versus San Jose or Oakland. I hate to bring up the classic maxim of real estate, but location is key.

Conversely, are you willing to put the legwork and find the right people (cough cough wink wink nudge nudge boozehounds nudge nudge wink wink cough cough) to get your vision off the ground. Have you thought of investing and bringing in a team to do it for you?

 

It's very tough to find a worthwhile side business that isn't completely hands on. In your shoes if I had an internet based business like WSO, you would probably find me in a place like Goa, Seychelles, Madrid or the Côte d'Azur. If you have full time staff that might be a problem, although Goa would probably have a lot of discounted tech talent. You could probably live very well and cover your "all in" living expenses for half your current rent in Palo Alto. I hate the cliché but a penny saved...

 

Another unsexy one that I think probably generates some decent cash flows are the quick oil change places. There is a '15 minute' place over here that I go to religiously with great service and decent prices, I even do tire rotations and minor stuff like wipers and replacing lights, etc. The smart thing about them is that they only do those couple things so it doesn't take much in the way of skilled labor or inventory for different parts.

This to all my hatin' folks seeing me getting guac right now..
 

What about something like seeding an entrepreneur (I'm thinking burger shack, or something more hipster given your area) but being a part/leading the cultural development and marketing of it. Small, unique, trendy food shops can churn out cash nicely

Food for thought

 

Pat, I get the bluetooth design, but it needs an "Insert Device Here" slot just to make it more badass. Personally, I like it. It has Ghetto Blaster built in with the nature of being heavy duty.

As to the other issue - are you dead set on space in Palo Alto?

 

regarding the gym idea, all the equipment will break 2x as fast a you planned and 2x as often (do not underestimate this...it probably is more like 3x as fast and 3x as often). Also, understand you will be WAY more involved in the business than you planned. This is FAR from a passive investment. Double the utility costs too. I have some friends who own retail businesses and have gone through the numbers with them vs their projections pre opening.

Honestly, I'd say this is not a great idea. You'd be better off putting more time into WSO or a separate non capital intensive business, that is easy to walk away from. Put the money in the markets and you'll get better risk adjusted returns especially if you factor in time.

 
MoneyTalksMonkeysWalk:

regarding the gym idea, all the equipment will break 2x as fast a you planned and 2x as often (do not underestimate this...it probably is more like 3x as fast and 3x as often). Also, understand you will be WAY more involved in the business than you planned. This is FAR from a passive investment. Double the utility costs too. I have some friends who own retail businesses and have gone through the numbers with them vs their projections pre opening.

Honestly, I'd say this is not a great idea. You'd be better off putting more time into WSO or a separate non capital intensive business, that is easy to walk away from. Put the money in the markets and you'll get better risk adjusted returns especially if you factor in time.

I second this opinion. I think a gym is a bad idea as a passive investment. I live in Canada, so I am sure there are some differences but from what I understand, the best gyms (in terms of cash flow) are the ones who have a very local presence with the right person at the front desk. Furthermore, from what I see, you need to attract the right customers (which means higher marketing costs) in order to have a steady cash flow. Not too judgmental, not too lazy, and etc. I can go on, but I have a hard time categorizing a gym as a passive investment (at least for the first few years).
 

Bear with me since I don't know the first thing about Palo Alto as a place to live, but if I was in this situation I would try to think of something fun to do. As an example, you could investigate the opportunity to open up a craft beer bar - you take care of business stuff, setting up the place, sourcing/picking the beers (that's the fun part) and then hire some people to run the place day-to-day. In a place filled with 20-somethings with a lot of money to burn working (well, compared to finance) not too bad hours, I feel like it would fit right in (and there are probably already a ton).

 

If you expand the market area considerations to a 5 mile radius from PA proper, there is a very nice 24 fitness for ~$40/mo. The students have a university gym, and are less likely customers. The daytime population in PA is supposedly 100k+, but many people have cars/ride the bus (average daily commute time is ~20 mins), so identifying a smaller market area may be less helpful. Given the willingness to commute a bit, it would probably be more competitively advantageous to have a gym that caters to a niche customer base, rather than compete on a direct basis (particularly with larger gyms like 24 fitness which, I believe, operates on a more national business model, may be able to achieve better profitability on higher volumes despite lower $/customer, or rely on other outlets to provide profitably while using the local outlet for brand or customer acquisition purposes). However, I'm not sure that a need for a new gym (or type of gym) in the area currently exists.

 

Patrick, look into 9round, it's blowing up nationwide. my girlfriend goes to it and actually looked into investing in it and starting her own (money didn't work out and got a great job offer), the closest one to you is San Ramon. it has everything you're looking for in small space, different from crossfit, etc. you have my email, let me know if you want to pursue this further, a family friend is a top 5 owner nationwide. he can go over all of the ins and outs with you.

edit: downside is you have to hire trainers if you don't want to do it yourself (what most owners do for the first few years), upside is it's a franchise and the upfront costs are low because the model is established.

 

I was born, raised, and am now working in a family business one town over from PA. Here is my completely self-serving two cents: open a bar that makes a decent drink. Yes, Old Pro is a good place to watch a game and Nola can be entertaining, but there is a huge void on the Peninsula when it comes to getting a really high quality cocktail. Getting a well made old fashioned should not require an act of God. The Varnish in Los Angeles and Angel’s Share in New York come to mind as bars that have been successful with a small footprint. If nothing else, I can guarantee you would have at least one customer.

 

Agree with a lot that is being said above, but I'll add that...

franchises are very owner intensive, especially if you first start out. Need to scale to have a laid-back approach to it. I will also avoid the food business in general. Everyone and their uncle thinks they have what it takes to run a restaurant. Nothing can be further from the truth.

With that being said a gas station is not as labor intensive for the owner, and can could provide a steady stream of cash. Margins are tight but worth the effort if competition is low. (Depends on Location).

All in all retail estate is the easiest form of investment I can think of that provides consistent cash flow for a "backseat" owner/investor." Outside of the markets of course.

 

@"Wallstreetoasis", so the no car thing dictates all. That definitely limits your options. And you're right, doing a restaurant/bar would be difficult. The economics are hard and there is a high enough chance for failure that you might lose it all.

And what I mean is some kind of flip down spot to insert your iphone/droid/ipod to hold the device/sync it if it's an older model device. Something you'd see on most older iPlayer accessories.

 

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