Starbucks: Invest in The Real Estate, Not Just The Coffee
Starbucks alone sells more than 4 million cups of coffee a day. Americans are hooked on coffee. It is an integral part of their day, and Starbucks is the most popular destination for those looking to get their fix.
Rather than implore you to cut back on your caffeine intake to save a few dollars per day, would you consider that there might be a viable investment in the coffee chain to cover your addiction and then some?
Starbucks currently operates 15,966 locations in the United States, with approximately $36 billion in revenue annually. Almost all of the stores are owned by individual investors and leased back to the Starbucks Corporation, providing entrepreneurs an excellent opportunity to share in the success of the coffee giant.
Here’s a closer look at what this investment looks like and determine whether it will fund your daily caffeine intake.
What Does It Cost To Buy a Starbucks?
According to Net Lease Advisor, the average sale price of a Starbucks in the U.S. is $2,727,822. For simplicity, let’s say you’re able to find one to purchase for $2,500,000. The bank will require a 20% downpayment, which means you must come up with $500,000.
While this is certainly a lot, keep in mind that you can find Starbucks investment properties for much lower prices. Consider looking in more rural markets and hire an experienced commercial real estate agent to help you find a good deal.
If the downpayment is still more than you’re willing to contribute, find a partner you trust and go in on the investment together.
How Much Does Starbucks Pay in Rent?
So you bought the property for $500,000 down and a $2,500,000 total sales price; how much can you expect to receive in rent? Investment properties are purchased on what’s called a cap rate, which is expressed as a percentage return on the investment.
Starbucks properties are currently trading at an average cap rate of 6.5%, which translates to $162,500 per year in annual rent ($13,550 monthly) on the $2,500,000 purchase price.
The great thing about Starbucks is they sign long-term leases, usually 10 to 20 years, and are responsible for all maintenance, taxes, and insurance expenses incurred by the property.
This type of lease structure is what makes commercial real estate such a great investment.
Starbucks pays you each month via direct deposit, so you receive what is dubbed “mailbox money” without the typical headaches of being a landlord, allowing you to live your ideal lifestyle without the hassle.
How to Finance The Purchase
These days, we’re all very conscious of where interest rates are, and yes, they will affect your investment and the $2,000,000 you need to borrow. As of this writing, the current interest rate is 5.8% on average.
Banks will typically give you favorable rates for an investment property, especially considering a BBB+ credit rating backs Starbucks leases. So if you shop around and talk with some of your local banks and credit unions, you can likely achieve a 5.25% rate for this investment.
On $2 million, that translates to a payment of $11,984.95, or round up to an even $12,000, based on a 25-year amortization schedule.
Return on Investment
Now that you understand the numbers, what’s the overall return on investment for a Starbucks property?
Cash flow is so important when considering any investment, but it is not the end-all for a secure, low-risk investment property like this one.
With that said, this property provides a positive cash flow of $18,500 per year based on $162,500 in rent, less $144,000 in loan payments.
Tax Benefits (Depreciation & Interest Expense)
There are many tax benefits to owning real estate, but the two considered most notable are depreciation and interest expense.
Depreciation of commercial real estate is calculated based on a 39-year period, so in this particular case, you reduce your tax liability by more than $64,000 annually ($2.5 million/39 years).
The actual savings amount will vary depending on your tax bracket, but for reference, that’s $20,480 in savings every year for individuals and couples in the 32% tax bracket.
Interest expense attributed to your loan is another common write-off real estate investors take advantage of. According to a loan calculator, the total interest paid over the 25-year period is $1,500,000, which equates to an annualized interest expense of $63,800.
Coincidentally, the decrease in liability and tax savings from interest expenses are about the same, related to depreciation.
As time goes on, you will continue to take the rent you receive each month from Starbucks and use a portion of it to pay down your loan balance.
Your equity in the property will continue to rise until year 25 comes around, at which point you own the property free and clear.
Typically, real estate in the U.S. appreciates at a rate of 3% annually. In this case, calculate the appreciation based on expected rent increases. Starbucks and many other retailers agree to 10% rent increases every five years.
So in year 25, Starbucks should be paying approximately $261,000 in annual rent. Based on the 6.5% cap rate, that translates to a market value of $4,015,000 or a total appreciation of $1,515,000.
The total investment, based on all the numbers over a 25-year period on a $2.5 million property with a $500,000 down payment, summarizes:
- Cash Flow: $462,500 ($18,500 annually)
- Tax Savings (Depreciation & Interest): $1,000,000 ($40,000 annually)
- Equity & Appreciation: $3,650,000
Total Return on Investment: $5,112,500
So over a 25-year horizon, you’ve made $5,112,500 on a $500,000 initial investment, or a 1,022% return on your investment. This is the power of real estate.
Invest in Real Estate
Real estate is the best investment, above all else, for anyone who can shift their mindset and take a long-term view when it comes to investing.
In this example, 25 years matched the term of the loan, but you can always sell or refinance the property after 10 or 15 years to pull cash back out or invest in more property.
So for those looking to create generational wealth for you and your family, contact a local real estate agent today to start planning your future.
Josh is a financial expert with over 15 years of experience on Wall Street as a senior market strategist and trader. His career has spanned from working on the New York Stock Exchange floor to investment management and portfolio trading at Citibank, Chicago Trading Company, and Flow Traders.
Josh graduated from Cornell University with a degree from the Dyson School of Applied Economics & Management at the SC Johnson College of Business. He has held multiple professional licenses during his career, including FINRA Series 3, 7, 24, 55, Nasdaq OMX, Xetra & Eurex (German), and SIX (Swiss) trading licenses. Josh served as a senior trader and strategist, business partner, and head of futures in his former roles on Wall Street.
Josh's work and authoritative advice have appeared in major publications like Nasdaq, Forbes, The Sun, Yahoo! Finance, CBS News, Fortune, The Street, MSN Money, and Go Banking Rates. Josh currently holds areas of expertise in investing, wealth management, capital markets, taxes, real estate, cryptocurrencies, and personal finance.
Josh currently runs a wealth management business and investment firm. Additionally, he is the founder and CEO of Top Dollar, where he teaches others how to build 6-figure passive income with smart money strategies that he uses professionally.