When I was in my 20s, a partner and I purchased a smaller multi-unit building. The building had 5 commercial spaces on the first floor and three residential apartments on the second floor. Soon after we purchased the building, one of the commercial tenants moved out. We tried everything to rent the space to a new commercial tenant.
After 12 months with no rental income from this unit, we began considering the idea of starting our own business in this space. In other words, we were going to become our own tenant.
The business we were considering was a coffee shop. This was years ago before coffee shops became so popular. We had everything lined up to start this business including all of the renovations, equipment, vendors and licenses and the total investment was going to be around $50,000. Right before we pulled the trigger on the business, a friend asked…
“How many cups of coffee do you have to sell in order to get your $50,000 back?”
This was a very important question. It’s actually THE most important question.
After factoring in rent, utilities, payroll, taxes, advertising, insurance, and the costs to make the coffee, we realized we had to sell over 200,000 cups of coffee in order to get our investment back. Obviously, we were hoping to sell other items to our customers with their coffee purchases, but this little analysis quickly highlighted our challenge.
There were no other coffee shops in this particular area. This was one of the reasons we wanted to open one. However, we had no clue what demand would be and there was no way for us to test demand before making the investment. Had there been another coffee shop in the area, we could have spent a few days in the coffee shop counting the number of customers and estimating the revenue generated.
This wasn’t an option, so we ultimately decided to pass on the business. It was too risky.
Oddly enough, a few months later we ended up renting this particular space to a bakery. The bakery also sold coffee! Guess what happened?
They didn’t survive their first year. They ended up moving out in the middle of the night leaving most of their equipment. We could have used their equipment and started our coffee business saving a lot of money on the upfront cost. But we didn’t. We held firm on our decision. It was the right decision. (We ended up selling their equipment.)
Ever since this valuable lesson, I’ve never started a business unless I could gauge demand in advance. It is critically important to know what the business’s revenue will be BEFORE you start the business. I also do my best to never invest without knowing what the returns will be BEFORE making the investment.
If you’ve watched Billions (my favorite TV show), you’ve seen this strategy employed at Axe Capital. The problem is they make their investment decisions based upon inside information, which is slightly illegal! Okay, it’s not slightly illegal. It’s 100% illegal.
One of the questions Bobby Axelrod asks before making investment is: “Are You Certain?”
He won’t invest unless he knows the outcome of the particular investment BEFORE the investment is made. Consider this short clip from the “Currency” episode in season two where his son shares the most important rule when betting:
“Who makes a bet if they don’t already know how it’s going to turn out? – SUCKERS!”
Never make a bet unless you know the outcome in advance. (This will typically mean you don’t bet. If you do bet without knowing the outcome, you’re probably the sucker.)
Never start a business unless you know the revenue and income in advance. (This will typically mean you must know the demand for the product or service before starting the business.)
Never make an investment unless you know the annual return on investment in advance. (This will typically mean you must have a reasonable estimate of income and expenses before making the investment.)
A few years ago, I was in a similar situation with a different commercial building I owned. I had a large vacant space (4,000 square feet) and couldn’t get it rented. I cycled back through the idea of starting my own business in this space. I ended up meeting the guy who started Fit Body Bootcamp at a mastermind meeting in California. I liked the business because of the recurring monthly membership income and the small investment required to get started. I had the space and am extremely interested in health and fitness. Everything lined up.
Before starting the business, I ran test advertisements in our local newspaper and the phone rang off the hook. Based on the number of phone calls from the test advertisements, which included the monthly membership price, I was able to conservatively estimate the business’s monthly income. I started the business with a partner and we did quickly enrolled many new members. Things went well until a Planet Fitness opened one mile away offering gym memberships for $10 a month. I ended up selling the business (and the building.)
One of the reasons I love this new Airbnb business is because there is a way for us to see how much revenue other Airbnb hosts are making in our area. We can SEE demand and what the average daily Airbnb rental rates will be BEFORE getting involved in the first property. This means we can estimate what our profits will BEFORE investing $1.00. There aren’t many businesses where we have this same opportunity.
If you’d like to learn more about creating a significant income stream on Airbnb without owning any real estate, register for this free webinar I’m hosting this week. Even if you decide this business opportunity isn’t for you, you’ll still walk away with a template for what a “dream” business looks like.
You can, and should, use this template with every business opportunity you consider going forward. This template will help you quickly eliminate bad business ideas like my coffee shop. It will also help you stay focused on the BEST business opportunities. You can register for the webinar at: https://www.renegademillionaireblog.com/webinar
NOTE: Please understand I’m not suggesting you use insider information to trade investments. I’m simply suggesting that you only invest when you have a reasonable idea of the outcome before making the actual investment. A simple example might be…
Buying a rental property for $100,000 in an area where the average monthly rent is $1,500. This average monthly rental rate can be figured out by studying other comparable rental properties. By performing this research, you know your profit on the investment BEFORE you buy the $100,000 property.