Latest / Franchise Conversations with Fexingo: Buying, Running, and Scaling Franchise Businesses / Why Franchisees Should Own Their Real Estate
Transcript
- Lucas: When you look at franchisee failure rates, the usual suspects are undercapitalization, bad location, weak operations. But there's a less obvious factor that separates the franchisees who build serious wealth from the ones who just earn a living, and it has nothing to do with how well they run the fry station. Luna: Let me guess — it's whether they own the building? Lucas: Exactly. Real estate ownership in franchising is one of those strategies that seems obvious in hindsight but most franchisees never even consider. According to a 2025 FRANdata study, fewer than 15 percent of single-unit franchisees own the real estate under their business. For multi-unit operators, that number climbs to about 35 percent. Luna: So the people who own multiple locations are more than twice as likely to own the dirt. That tracks — they've got more capital, more experience. Lucas: Right. But here's the thing — you don't need to be a ten-unit operator to make this work. Let's run a hypothetical. Say you're opening a mid-range fast casual franchise. Total investment is about $800,000 — that's $400,000 in build-out and equipment, $150,000 in franchise fees and working capital, and the rest is soft costs. Luna: And typically you'd lease the space. So maybe you're paying $12,000 a month in rent on a fifteen-year lease. Lucas: Right. Now imagine instead of leasing, you buy the building. Same location, same build-out costs. But now you've got a $400,000 mortgage on a $600,000 property — you put $200,000 down. Your monthly payment is roughly $3,500 at current rates. That's $8,500 less per month in occupancy cost. Luna: That's over $100,000 a year in extra cash flow. But you also tied up an extra $200,000 in down payment. What's the return on that? Lucas: That's the key question. Let's say the business itself generates $150,000 in pre-tax profit before occupancy costs. Under the lease scenario, after $144,000 in rent, you're left with $6,000. That's a 0.75 percent return on your $800,000 total investment — basically nothing. Luna: Yikes. So the rent eats almost everything. Lucas: Now under the ownership scenario, your mortgage is $42,000 a year. So pre-tax profit jumps to $108,000. Your total cash invested is $1 million — $800,000 in the business plus $200,000 down payment. That's a 10.8 percent cash-on-cash return. But you're also building equity in the property, which is probably appreciating at 3 to 4 percent annually. Luna: So you get the business cash flow plus real estate appreciation. That's a double dip. Lucas: And when you sell the business ten years later, you sell the real estate separately. The franchise might sell for one times revenue — maybe $1.2 million. The building could be worth $800,000 by then. That's $2 million total versus maybe $600,000 if you were just a tenant. Luna: But there's a big hurdle — capital. Most first-time franchisees are scraping together $300,000 to $500,000. Adding another $200,000 for a down payment is a stretch. Are there ways to structure it so you don't need all that cash upfront? Lucas: Absolutely. One structure that's gaining traction is the lease-option. You negotiate a lease with an option to buy the property after three to five years. The landlord gets a premium rent — maybe 10 percent above market — but a portion of that rent goes toward your future down payment. By year five, you've effectively funded the down payment through rent. Luna: That's clever. The franchisor is usually not involved in the real estate side, right? They just want you to open the store. Lucas: Some are actually encouraging it. Take Taco Bell — they've been piloting a program where they offer sale-leasebacks to qualified franchisees. You buy the building from them — they built it — and then lease it back to you for 20 years. You get the tax benefits and appreciation, they get capital to open more corporate stores. Luna: So the franchisor essentially becomes your banker. They're trading a long-term asset for immediate cash. Lucas: Right. McDonald's has done this for decades, but mostly with large institutional investors. Now smaller franchisees are getting access to similar structures through third-party lenders who specialize in franchise real estate. There's a company called FranFund that's doing lease to own programs specifically for franchisees. Luna: What about the downside? If you own the building, you're on the hook for maintenance, property taxes, insurance — all the landlord headaches. Lucas: That's the trade-off. But here's the numbers — maintenance on a well-built fast casual restaurant runs about 1 to 2 percent of property value annually. On a $600,000 building, that's $6,000 to $12,000 a year. Property taxes vary by market, but call it $10,000. Insurance maybe $5,000. Total landlord costs: maybe $27,000 a year. Luna: Compare that to $144,000 in rent. You're still way ahead. Lucas: That's the arithmetic. And the risk is actually lower than most franchisees think because the building is a necessary asset — you have to occupy it anyway. The real risk is location. If the area declines, you're stuck with a building you can't sell. But if you're a tenant, you're stuck with a lease you can't get out of. Luna: If these conversations have moved your work forward in any small way — maybe you're seriously researching a franchise purchase or thinking about real estate strategy — it's worth knowing that listener support is what keeps this show ad-free and independent. You can find us at buy me a coffee dot com slash fexingo. Lucas: Yeah, and we really mean it — that kind of support lets us spend time digging into topics like this rather than chasing sponsors. It makes a difference. Luna: Alright, back to owning the dirt. What about exit strategy? If you own the building and want to sell the franchise, you have two assets to sell. Is that harder or easier? Lucas: Easier, actually, if you package them right. You can sell the business to a new franchisee and lease them the building — that gives you ongoing income. Or you sell both together as a turnkey operation. Multi-unit buyers especially love owning real estate because it lowers their total occupancy cost and gives them an asset to borrow against for future growth. Luna: Borrowing against the building — that's another angle. If you own the real estate, you can do a cash-out refinance after a few years and use that capital to open a second unit. Lucas: Exactly. That's how many multi-unit franchisees scale. They buy the first building with a combination of equity and debt. After three years, the property has appreciated and they've paid down some principal. They refinance, pull out $150,000, and use that as the down payment on the second location. The first building's equity funds the second store. Luna: So it's a flywheel. But you need the initial capital to get on the treadmill. Lucas: That's the barrier. For someone with $500,000 to invest, you have to decide: do I put it all in one owned location, or do I lease two locations for $300,000 each? The lease strategy gets you more units faster, but the ownership strategy builds more long-term wealth. Luna: I've seen data that suggests franchisees who own their real estate have a 40 percent lower failure rate over 10 years. Is that because they're more committed, or because the economics are better? Lucas: Both. A 2024 study from the Franchise Business Review found that franchisees who own their real estate had an average net worth of $2.3 million versus $850,000 for tenants. Some of that is selection bias — wealthier people buy buildings. But when you control for years in business and unit count, owners still outperform by about 20 percent on return on investment. Luna: What about franchisors who prohibit real estate ownership? I've heard of some that require all locations to be leased from their preferred landlord. Lucas: That's becoming less common. Most franchisors today are neutral or even positive about it. They recognize that financially stronger franchisees make better operators. A few still restrict it because they want control over the site if the franchisee fails. But those are mostly older, more rigid brands. Luna: So if someone's listening and thinking about buying a franchise, what's the first step to exploring whether real estate ownership makes sense? Lucas: Talk to a commercial real estate broker who specializes in franchise properties. They can show you what buildings in your target area sell for and what rents are. Then run the numbers with your franchise consultant. The formula is simple: if the building costs less than 10 times annual rent, buying usually beats leasing over a 10-year horizon. Luna: That's a good rule of thumb. And if the building costs 15 times rent, you're probably better off leasing. Lucas: Exactly. And don't forget to factor in the tax benefits — depreciation on the building can shelter a lot of the business income. A good CPA can show you how that changes the math. Luna: So the takeaway: owning the real estate isn't for everyone, but if you have the capital and a decent market, it can transform a modest franchise into a wealth-building machine. Lucas: That's the long game. A franchise without real estate is just a job you bought. A franchise with real estate is a business that builds generational wealth.