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- Ditch Real Estate To Build Cash Flow
I wanted to be a real estate mogul in 2018.
I listened to all the popular real estate podcasts. I read all the books. My strategy was simple: earn money through our franchises & invest it into real estate.
That's what I was supposed to do. That's how you build financial freedom..... right?
Most real estate investors get started buying single-family, duplex & triplex. Low barrier to entry, affordable & gets your feet wet before taking on more debt & risk with larger properties.
I put together beautiful spreadsheets & took action. We ended up buying a handful of single-family homes.
Three-Headed Monster
People buy real estate for three main benefits:
Cash Flow
Tax Benefits
Appreciation
Cash Flow - you collect rent, then pay expenses, mortgage & save for capital expenditures.
You model out $400 in cash flow per month per property. Then you get hit with a new roof, clogged sewer pipe, insurance increase & a tenant that won't pay.
Suddenly, the $4,800 annual cash flow turns into a negative $10,000. You make up for those large capex expenses over 3, 5, or 10 years. However, that doesn't help you today.
Tax Benefits - the tax code heavily favors real estate investors.
Most real estate investors pay very little in taxes due to "accelerated depreciation". The IRS allows you to pull forward multiple years of expenses into the first year or two.
Appreciation - real estate values have steadily risen over the long term.
An investor can realize that increase in value by selling the property or refinancing it, pulling out the cash in the form of debt.
Real estate is a long-term game. This is perfect for some people who don't want immediate cash flow. I know many professionals (doctors & lawyers) who buy real estate purely for the tax benefits.
Building a franchise is a much quicker path if you want cash flow now.
Let's say our goal is $10,000 of monthly cash flow ($120,000 per year)
Real Estate Route
In real estate investing, $400 "per month per door" cash flow is a good return. We're talking pure cash flow after your mortgage, taxes, insurance, property management, vacancy, maintenance & cap ex reserves.
(1 single family home = 1 door. Duplex = 2 doors, Triplex = 3 doors, etc)
You need 25 doors to generate a $10,000 monthly cash flow.
Let's say we could buy off-market homes for $350k. You'd have to invest at least $50k per house in a down payment, closing costs & renovations to get it ready.
You would need $1.25 million of CASH to buy 25 homes ($50k x 25 homes = $1.25M) plus taking on $7.8 million of debt to generate $10,000 per month cash flow.
Franchise Route
Let's compare that to buying & operating a franchise.
You can get into a great service-based franchise for a cash investment of two homes ($100k).
We're talking about painting, roofing, flooring, plumbing, moving, junk removal, blinds, B2B sales, education, sports, & more.
Let's look at a single-unit window blinds franchise. It is not as sexy as being a "real estate investor" but stick with me.
Investment starts at $105k
In this brand the average single-van owner/operator franchisee had "adjusted earnings" of $130k in 2022, assuming no-debt service.
It's a full-time job being an operator & you want "passive" income
No problem, let's scale it. You hire a manager to replace yourself & pay them $65k.
The profit drops, but now you can focus on growth. You triple the business by adding more vans and buying more territory.
We now have $234k per year of cash flow.
We can double down again and build to $500k/year cash flow by adding more vans, territories & expanding the team.
Franchises can become very scalable once you figure out how to rinse & repeat.
The Three-Headed Monster
Cash flow - see above. ✅
Tax Benefits - businesses also have some great tax benefits. The QBI deduction reduces your taxable income by 20%. In this $500k example we reduce our taxable income by $100k (20% x $500k), saving ~$30k in taxes.
Like real estate, you can accelerate depreciation on asset purchases (large equipment, trucks, etc). Employment tax credits (WOTC) can be huge depending on the industry. ✅
Appreciation - most small service businesses sell for 2.5X to 3.5X profit. The higher the profit, the bigger the multiple. At $500k/year with a solid team, we could sell for $1.5M to $2.0M (3.5X to 4.0X) to a turn-key buyer. ✅
Not All Franchises Are Equal
The problem is many franchises are terrible. No support + no community + poor training + poor leadership.
My team helps you find the best franchise based on your goals, budget, skills & location.
Book a call today if you want to learn more
Cheers!
Brian