Invest in commercial restaurant space?

Question

Hello! We own 11 doors, 3 of which are Airbnb's and we live in a resort town. So far I've only invested in Multifamily but we've learned of a property for sale for roughly 430k that is currently built out as a restaurant on the main floor but the upstairs is built out as a condo but without kitchen or shower (would require 40k to make it airbnb worthy.). The current tenants pay $2600/month Plus all utilities on a contract and they want out. We think we could get $3000/month on a NNN lease for the restaurant area (huge clean kitchen) and $300/night for the airbnb which would be booked VERY often (highly desirable location) and the space is amazing with a lake view.

What am I not thinking about besides restaurant vacancy and the fact that I have zero experience owning or even looking at a restaurant to determine what makes it “good”? It’s very clean.

What am I not thinking about besides restaurant vacancy and the fact that I have zero experience owning or even looking at a restaurant to determine what makes it “good”?  It’s very clean.

Bob Langworthy · Answer

Don't do this deal, I know a guy in Maine who may be interested....

Kidding.

This sounds great. If I were in your position I would:

1) Try to talk at length with the current tenant to learn more about the industry and what problems they have encountered.

2) Confirm that $3000/month is reasonable. You may have to do some work to find out if that's a solid number, but it would be worth it.

3) Regarding the AirBNB, is the noise from the restaurant going to be a deterrent?

4) Be careful with who you let in as a restaurant tenant. As @Ronald Rohde mentioned, turnover is high in the restaurant industry.

I like that you have AirBNB experience, that greatly mitigates the risk of purchasing the building. If you hadn't done either restaurant or AirBNB, I'd be a little nervous.

Hope this helps,

Greg Dickerson · Answer

@Jessica Wood this sounds like it could be a great deal.

As far as the restaurant space goes if you have equipment in the space you want to make sure the tenant performs regular maintenance on all of the equipment mechanical systems etc.

Make sure you get a copy of the menu and are OK with the concept they would like to put in the space.

you also want to check financials of the tenant make sure they are experienced operators.

Joel Owens · Answer

See if you can land a national or regional tenant to sign a long term lease.

I was in the restuarant business before getting into commercial real estate 15 years ago.

Most restuarants as a franchisee now with competition are hitting 10% gross profit before taxes. So if sales are 500k maybe 50k to owner at the end of the year. Not worth it. Top 20% of restaurants can make big bank like one locations could be 200k to 500k profit or more etc. but they are rare.

I like owning commercial retail as tenants pay the rent to you and they run the intensive businesses. For them making 50k to 100k a year might be a good living so that is why they do it and deal with all this stuff that comes with it. When your young you tend to want to take over the world. As you get older you tend to want to make a system for more money and easier returns so you can enjoy your golden years and not work as much.

Ronald Rohde · Answer

Restaurant turnover is very high, costs to place new tenants will hit your cash reserves. As long as you can keep filling it, managing a built out restaurant is better than being the tenant.

Jessica Wood · Answer

@Greg Dickerson I am glad to hear you think so!  There is a LOT of equipment in the space. The current tenant upgraded a lot of it. It’s all clean and regularly maintained. We will definitely vet the tenants.

Invest in commercial restaurant space?

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