I recently assisted a fellow investor acquire his first retail shop. We found an ideally priced Thai Massage centre in Maroochydore QLD that was opposite a popular beach and caravan park. The gross rent was $21,350 per annum and the outgoings were $7,220 per annum leaving a net annual rent of $14,130.
The shop was only 35 square metres, however it was ideally located at the base of a large holiday letting complex of 47 units. For me it’s proximity to the buildings main foyer and the suitability of this business type made it a solid investment, I mean if you can’t get a massage when on holidays when can you?
Based on the net rent we made an offer of $157,000 being a 9% return on our capital. To our delight the offer was accepted by the owner and we immediately flew up from Sydney to interview the tenant and find out all we could about her business and the massage industry in general.
The first thing we needed to do was to establish if the business was sustainable and had the ability to reliably generate the $21,350 in gross rent while leaving a reasonable profit for the operator. We introduced ourselves to the tenant who was a Thai lady in her mid-thirties. After we told her we were looking at purchasing the shop and wanted to ask a few questions about her business she was more than happy to chat with us.
My first questions were aimed at understanding the finances of her business to see if the money added up and the current rent levels could be sustained. Fortunately her price list was on display and I could clearly see she was charging $75 for an hour massage and $115 for a 90 minute massage. I know from getting massages myself that her fees were almost identical to what I pay for a massage in Sydney. I asked her the following questions;
How many days a week do you work? 6 Days a week she replied, in the holiday season I can take bookings on Sunday if it’s really busy and I’m not too tired
How many massages do you do a day on average? I typically do 4 to 5 a day
Do your hands get sore after 5 massages, is that sustainable? Sometimes I get sore hands but I’m used to it now and have found 4 or 5 massages a day is OK on my hands
Do you predominantly do 60 or 90 minute massages? It’s about half and half, but slightly more 60 minute massages, I normally have two 90 minute bookings a day.
It’s only a small shop what are your major expenses? My costs are not major, I have expenses on laundry and my massage oils which are not major. Keeping the shop cool is probably my biggest expense but even that is only $150 per month in electricity.
I notice you have two massage rooms, do you have an assistant masseuse? Yes, I have a lady that works for me when I get busy. I need her fulltime in the peak holiday season from November through to March but she is studying and can’t always be here. I need to find some extra help.
I note your lease expires in 14 months and you have a 3 year option available to exercise. If I was to waive the 3% annual increase for next year would you exercise that option now? She quickly replied, Yes, why wouldn’t I.
That’s a good sign your business is going well, are you committed to stay? She laughed and replied, I’m young and I’ll need to work 20 more years. I have my house to pay off.
I notice your certifications hanging on the wall, are you certified to claim against the major health funds? What do people typically get back if they claim your massages on their health fund? Yes, I am certified and you can claim my treatments on your private health insurance. You get back about $38 per treatment.
Are your customers mainly holiday makers from the units above? No, I have many regulars that live locally. I do get regular business from the holiday units and it can be crazy in the summer. I get bookings all year from the units but I have enough locals as well to keep me busy.
There are several positives I take away from this interview. Firstly, the tenant was committed to the business and her intention was to remain in the shop long term. She was a guarantor on the lease and owned her own home offering me security over future rent payments. She was certified to perform massages for the private health funds enabling people to claim back $38 against the $75 fee, so regular customers would only be out of pocket $37 for an hour massage, very affordable. She had local clientele as well as the high volume holiday clientele.
She was willing to exercise her 3 year option which signalled a clear message to me that the business must be supporting herself and family. In fact she shook our hands and agreed to sign an agreement to lease exercising her option before we exited our due diligence period giving my buyer the reassurance he needed.
Taking a look at the numbers based on an average day:
- 2 X 90 minute Massages $230 / day
- 2 X 60 Minute Massages $150 / day
- Profit on the 2nd room $ 70 / day (conservative allowance)
Total $450 per day
So working a 6 day week she would bring in (6 X $450) = $2,700 a week.
The business itself was largely a services labour intensive business that did not have any expenses of a significant nature. I estimated her expenses as follows;
- Rent $410 / week
- Electricity $ 35 / week
- Oil’s & laundry $ 65 / week
Total $510 / week
So my estimate was that she was clearing ($2,700 – $510) = $2,190 a week in wages, that’s an annual income of $105,000 based on a 48 week year.
I was comfortable that the business is profitable and the rent could be easily sustained. I had not factored in any allowance for the busier summer months when she would be making more profit with her second masseuse. Also I had not allowed any additional income for periods when she would work longer hours or 7 days a week to meet the demand. I was extremely comfortable that this business was a sound investment based on the gross rent being paid. I was confident in supporting my colleague to proceed with purchasing this retail shop.