Most people think of real estate investing as buying rental properties or flipping houses. But there are other types of real estate investments, like buying a restaurant. A lot of people ask themselves if buying a restaurant is a good real estate investment. Most of the time, the answer is, it depends.
And there are a lot of different options out there. You could, as mentioned, buy a fixer-upper and either flip it or rent it out. You could buy commercial property and lease it to a business. Or, you could buy a business – like a restaurant – that comes with commercial real estate.
But is buying a restaurant as a real estate investment a good idea? Let’s take a closer look.
The Pros of Buying a Restaurant as an Investment
There are some perks to buying a restaurant as an investment. For starters, the restaurant will already have everything you need in terms of commercial kitchen space, dining area, etc. So, you won’t have to put any money into build-out or renovations (though you may want to do some cosmetic updates). Additionally, if the restaurant is already up and running, you’ll have immediate income from day one. And, if it’s successful, the income can be pretty significant.
Another pro is that people are always going to need to eat! So, even when things go south, a restaurant that’s not overpriced can maintain its loyal customer base. And, since people have to eat multiple times per day, there’s potential for a lot of repeat business.
On top of those, here are a few other reasons why restaurants are good investments:
1. Restaurants are recession-resistant
In tough economic times, people might cut back on spending in other areas, but they still need to eat. That’s why restaurants tend to be fairly recession-proof businesses. Of course, that doesn’t mean that every restaurant will thrive during a recession—but as a whole, the industry tends to hold up better than most during tough times.
2. Restaurants have low overhead costs
Compared to other businesses, restaurants have relatively low overhead costs. Once you’ve purchased the property and made any necessary renovations or improvements, your ongoing costs will primarily consist of things like utilities, supplies, and labor costs. And since most restaurants tend to be relatively small businesses, those costs can be easily managed and controlled.
3. Restaurants usually appreciate in value
Like any other kind of real estate, the value of restaurant real estate can go up or down depending on market conditions. However, over the long term, restaurants tend to appreciate in value at a rate that is above average for other types of commercial real estate investments. So if you’re looking for an investment that will provide you with some solid returns down the road, restaurant real estate is worth considering.
But if you’re thinking of opening a new one, you’re probably wondering how much your property will be worth down the line. After all, one of the main benefits of owning a restaurant is that it usually appreciates in value over time. Of course, there are no guarantees in its property market appraisal. However, if you do your homework and choose a prime location for your restaurant, you’re likely to see a healthy return on your investment. Professional property appraisers can give you a good idea of what to expect from the market. And with the right property management in place, you can maximize the value of your restaurant for years to come.
4. Restaurants can provide income from multiple sources
Another great thing about investing in restaurant real estate is that it can provide you with income from multiple sources. In addition to the rent you’ll collect from the tenant, you can also generate income from things like leasing out space for storage or parking, or charging a percentage of sales as part of the lease agreement. This can help minimize your risk and maximize your return on investment.
5. Restaurant investors often enjoy special tax benefits
Lastly, it’s worth mentioning that investors in restaurant real estate often enjoy special tax benefits that are not available to investors in other types of commercial real estate. For example, many restaurateurs can deduct the cost of their improvements and renovations from their taxes—something that most other commercial landlords are not able to do. So if you’re looking for a tax-advantaged investment opportunity, investing in a restaurant may be right for you.
Now, there’s no such thing as a perfect investment. Restaurants have flaws in themselves, too. It’s just not the same thing you’d expect from a run-of-the-mill business like a mom-and-pop shop.
The Cons of Buying a Restaurant as an Investment
Of course, there are also some negatives to consider before buying a restaurant as an investment. The biggest one is that restaurants are notoriously difficult businesses to run, even for experienced restaurateurs. There are a lot of moving parts – from sourcing ingredients to managing staff to marketing the business – and if any one of those things falls through, the whole operation can come crashing down.
Additionally, margins in the restaurant industry are slim, so it doesn’t take much for profitability to slip away. For example, if the cost of your ingredients goes up or your rent increases, that could put your entire business into the red very quickly. And lastly, recently released statistics indicated in its report that sales at restaurants open at least one year fell 0.7 percent in 2017 compared with 2016 – which just goes to show how volatile the industry can be.
Investing in restaurant real estate can be a great way to diversify your portfolio and generate income from multiple sources. And because restaurants tend to be relatively recession-proof and have low overhead costs, they can offer investors some great opportunities for long-term growth potential and financial stability—even during tough economic times. But it’s not perfect and may come with some relatively tough downsides.
Though, if you’re thinking about investing in commercial real estate, definitely give restaurants some serious consideration—you just might find that they’re the perfect investment opportunity for you!