Experience anyone opening up a retail business In a commercial property they own outright?
My family owns a commercial property in Vancouver worth about 4.1 million. It has been debt free for 20 years. It’s currently only making 108K net for rents. Soon to maybe go up to 125.

Seeing as how much the building is worth the income it’s producing is not that much. We have 2 retail units 1 building. Each side is 1000 sq ft. I’m thinking of maybe opening up a franchise in here and using the buildings equity to build it out. With no over head of rent profit margins should be higher then a franchisee who has to lease. Or other option is to just leverage and buy more real estate 

Any thoughts?
[{"id": "ixn30yd", "text": "Good way to convert income to passive, not sure about tax laws in Canada though.", "replies": [], "depth": 1}, {"id": "ixn4b14", "text": "&gt;With no over head of rent profit margins should be higher then a franchisee who has to lease.\n\nyou're just shuffling your own money around, this isnt an overall profit advantage.  in almost all cases, starting a business just because you happen to own a building is a bad idea unless you are an expert in that field.", "replies": [], "depth": 1}, {"id": "ixnjukg", "text": "Why is the cap rate so low? 2.6% . . .", "replies": [{"id": "ixnkah4", "text": "Only 2100 sq ft", "replies": [{"id": "ixoaol8", "text": "That\u2019s not how any of this works.", "replies": [], "depth": 3}, {"id": "ixoer40", "text": "Noi/value just so you know is how he got that 2.1%", "replies": [], "depth": 3}], "depth": 2}, {"id": "ixo0lkk", "text": "cap rates for buildings like this arent super meaningful in Vancouver.  with few exceptions, any 2000sf freestanding retail is going to be valued off of its redevelopment potential into resi / mixed use.", "replies": [], "depth": 2}], "depth": 1}, {"id": "ixo5nns", "text": "Your numbers said - time to sell, unless the property is drastically improved and increased rent return. \nWhat makes this property be worth 4+M and have such a low return? Condition? Location? Outdated use?", "replies": [{"id": "ixo9rtu", "text": "Location. On a main artery road in Vancouver", "replies": [{"id": "ixockb5", "text": "Start the conversation with the family if it better to self  or upgrade the building for a A rated tenant maybe a brand name or national franchise\u2026 \nIs the building obsolete to produce at least 8% to 10% ? Time to demolished? Enough parking space?\nMaybe you can find a good CRE broker that can do a study of best uses?", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "ixojzt3", "text": "I think this is going to be what more and more landlords do and it\u2019s not going to make sense to people coming to these discussions from outside the perspective of a family owned property. More and more retail startups want to own there own property. \n\nYour base thinking here is right, you can generate more income with less risk or overhead from anyone who signed a lease with you. Those other businesses/tenants will generate more income off the space than you do leasing it. Where it gets shaky is eating into equity on the loan plus franchise licenses. Tapping into the equity works but not if you have overhead for the business. You killed your own advantage On one hand, you can only make so much on the square footage, so sure if your business only has to earn $30k gross to put you in better shape, it\u2019s a no brained to do that. If you pull from the equity, you then pay monthly to the bank and have risk.  You\u2019re using a franchise thinking a formula for income is assured, and that can be true, but then you\u2019re in a different business. Why not just take a smaller loan to open your own high margin business?  \n\nAlternatively, solicit a franchise who will pay premium rents, and just be satisfied. \n\nRent rolls are only one factor in value. Low rents decrease value but I think some people are caught up in REIT mentality and if your property is valued higher than your rents would suggest, that\u2019s not indication you should be justifying that value and need higher rent rolls. These guys read you wanting to make more off the building and suggest change of use. Your question is about maximizing the opportunity you have. Open a business, if it doesn\u2019t earn you as much as rent did, sell the business. You know this is a good proposition for you, the thing holding you back is that you\u2019re no longer a landlord then.  Once the operation consumes your time, will you still be happy grossing double your current rent and consider that a win? I wouldn\u2019t chase a franchise based on big dreams of profits. They are feast or famine.", "replies": [], "depth": 1}, {"id": "ixoow3j", "text": "Thoughts: think \u201chighest and best\u201d. The only way that land is worth that much is developable value. So either a) sell the land and invest elsewhere where you can receive a higher yield, or b) partner up with a developer to turn that into a condo project, and you share the profits (which you then invest somewhere with a higher yield). \n\nAs an example of reallocating to a higher yield environment, your $4m could be a down payment on an $8m, NNN property yielding at 6% - meaning NOI of $480k/yr. Mortgage payments for $4m on a 25yr amort. at 5.5% are $300k/yr. That means you would have after debt-service cash flow of $180k - an increase of $75k/yr to what you have right now. \n\nThat\u2019s sounds like an awful lot less work than becoming a franchise restaurant owner (which - if you\u2019re determined to do so - you could still choose to do, as a completely separate decision from the real estate). Remember, what\u2019s your own \u201chighest and best\u201d use of your time? \n\nSide note, anecdotally, most franchise businesses are just you buying yourself a job for a few years unless you are exceptional at people management and have extremely high volume sales right from the start. The business simply can\u2019t afford to hire managers without reducing profit to zero.", "replies": [{"id": "ixot5kq", "text": "5.5% still a thing??", "replies": [{"id": "ixou67x", "text": "In Canada it is. I just locked at 5.4% on a commercial property yesterday, and will be locking on another next week at GoC bonds plus 210 that\u2019s looking like it will be 5.3%. These are $10m+ loan size, but it\u2019s def still available", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "ixp1ejp", "text": "Go ahead. You are able to show lease and manage good cash flow. Repeat until fully leased with multiple businesses on multiple units. Sell property at a higher value. Buy another..", "replies": [], "depth": 1}, {"id": "ixp2d37", "text": "How are you coming to a 4.1M valuation? Commercial RE tends to be valued based on cashflow, and if this is netting 125k, you\u2019d be hard pressed to find a buyer at 4.1M. Most probably wouldn\u2019t touch it until you\u2019re in the 2.5M range\u2026\n\n\nWhat\u2019s great about CRE is that you can force the appreciation. Sure, start a business and run it out of there. If the business nets you 300k, sell the property with the business charging 150k rent. That\u2019s ~3M for the property alone. Depending on the business, you\u2019re probably looking at 2-3x multiple. You could sell the business for 600k charging 150k rent and sell the property for 3M. That would be a good deal\n\n\nNot financial advice, just some napkin maths based on exposure to this kind of stuff", "replies": [], "depth": 1}, {"id": "ixpaiby", "text": "How\u2019d you come up with the valuation of $4.1mm?", "replies": [], "depth": 1}, {"id": "iy05elk", "text": "We call this opco propco\n\nYou can Google YouTube videos on it called operating company and property company. I do not suggest taking equity from your real estate asset for your operation company unless your operation company plans on paying your real estate asset back. \n\nKeep them totally separate. Pay the appropriate rent per square foot for your rental space or your real estate will lose value or not appreciate as quickly as the rest of the market. \n\nThis way you\u2019re shuffling your own money around this way so your ass it performs to its full extent and your business if a franchise should operate to franchise standards which will outline what your rent payment should be.", "replies": [], "depth": 1}]