Financial Data
Updated 19 Sep 2019


The value of owning property if you have your own business

Did you know that McDonald’s, is one of the largest commercial real estate owners in the world? The food chain’s property asset value is far higher than its food retail revenue.


26 March 2018  Share  0 comments  Print


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Real estate titan may not be your first guess when considering McDonald’s biggest revenue stream, but the company most famous for its timeless hamburgers is a good example of a business building a solid property portfolio.

ince the 1950’s McDonald’s has consistently maintained that owning its property and leasing it out to franchisees not only protect its assets, but it also benefits the franchise owners.

This is how property has become the main source of income for the world's largest chain of hamburger fast food restaurants:


“In the last two decades real estate values have increased, which means the overall collateral value of the company’s property has increased too. So, when McDonald’s wants to borrow money to make new investments, it can do so at relatively cheap rates.”– Xian Sun, Professor of Corporate Finance at Johns Hopkins University


Property is still the best way to grow wealth

Bizconnect Embedded _Property

Most entrepreneurs don’t realise that property ownership might actually be their best-bet at future wealth. Property experts say this is because:

  • Property is usually viewed in the context of its current usage, and not in terms of its possibilities for use.
  • Entrepreneurs’ main focus is their business idea. They assume that’s how they will be most profitable – property ownership is hardly considered until much later.

According to Jason Lee – property investor and author of 10 Simple Steps to Property Wealth – the McDonald’s story on property acquisition is ideal for any property owner to learn about. Lee himself got into business through purchasing property for another business to operate, from while he used the rent to pay off his bond.  He outlines a few key lessons from McDonald’s:

1.    Don’t limit your investment capabilities

When McDonald’s struggled to get bond approval for a second property while still paying off its first loan, the idea of renting then sub-letting a second property was born. But what was supposed to be a plan to grow its footprint faster, became a valuable asset to the company’s financial success.

Related: Why you can’t buy a commercial property without looking at it first

As McDonald’s became more successful, it needed bigger premises and they sold off the original property for another – and made a tidy sum from the sale.

Consider leasing the space out to a franchisee or business owner whose venture you have a share in, like Lee did, so their rent pays for your property. Ownership of the premises means you can lease the space out even after the business owner has relocated.

2.    Establish how you can afford the property

“The next time you see a good property deal, instead of thinking ‘canI afford this property?’ rather think ‘howcan I afford this property?’” says Lee. “Instead of paying rent and servicing someone else’s bond, you put the rent payments towards you own bond, and towards ownership of the property…building up the value in your business and the property.”

This way, you can afford to own premises without directly paying for the monthly bond repayments yourself. McDonald’s did this by dealing directly with the landlord to rent the premises on the new franchisee’s behalf, subletting the space to the franchisee at a mark-up. The franchisor then used a portion of the rental income to pay the property owner.

Today, the bulk of McDonald’s’ revenue is from these properties, because the corporation ensures its assets are working as passive income.

3. It is easier to make changes on property you own

Renting premises for your business means structural changes could only be made at the landlord’s discretion. Consequently, any renovations made on the business owner’s account, either remain when the landlord sells the property or must be removed at the tenant’s cost when the business relocates.

“If you own your own premises, you are protected against losing out on the value of any improvements that you make and you are also protected against being removed from the property against you will,” says Lee.

Related: Is now the best time to jump into South African commercial real estate?

Owning your locations means you can effect physical changes quicker than the process of requesting permission from a landlord.

4. You have security for the challenging economic times

Rental income has been a beneficial buffer for the franchise as McDonald’s weathers changes in consumer trends and tastes.

While all businesses encounter fluctuations, rental payments don’t have to affect your profitability. When you don’t have a landlord to pay on a monthly basis, having ownership of your premises starts demonstrating its viability.

“It is for this reason that I often say to struggling businesses that own their own premises not to feel discouraged if the business is struggling,” says Lee. “Because as long as it is covering the bond payments every month, it is creating future wealth.”

It’s time to think differently about the relationship between business ownership and property ownership, advises Lee.                                                                                                                                        

KEY TAKEAWAYS

  • Instead of paying rent and servicing someone else’s bond, you put the rent payments towards you own bond.
  • When McDonald’s struggled to get bond approval for a second property while still paying off its first loan, the idea of renting then sub-letting a second property was born.
  • As long as you service your bond payments every month, no matter how tough business can get, you are creating future wealth for yourself.

Resources:

  1. 10 Simple Steps to Property Wealth by Jason Lee
  2. http://www.quickliquidity.com/blog/mcdonalds-secret-sauce-commercial-real-estate.html
  3. https://qz.com/965779/mcdonalds-isnt-really-a-fast-food-chain-its-a-brilliant-30-billion-real-estate-company/
  4. http://fortune.com/2015/11/10/mcdonalds-real-estate/
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