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The Next Great Investment Opportunity?

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Some of you may know that I am just about to sell my restaurant business and concentrate on my growing family. So why would I even contemplate jumping out of the frying pan and into the fire when 52 pubs are closing a week at the moment?

Well I have just seen a nice little pub advertised FREEHOLD for £195,000. It is being flogged off by Punch Taverns who are over leveraged to the max and need to shrink their estate and pay off some debt.

THe history I can gather from the agent as follows is:

Punch paid £360k for it and rented it out for £36k to a sucker who went bust. Someone else took it on and has basically handed back thekeys, thoough I think they are still in there and trading on a month by month basis. It has been a basic boozer, and is failing as that, but if it has the potential as a food led operation, then it might be worth the punt.

I am not advocating that everyone on HPC becomes a publican right now. My plan would be to put in a decent kitchen, get it up and running as a foody pub (which Is my background). Sell the business on a new lease in 6-12 months time, and sit back and enjoy the rental income.

The purchaser of the lease would be delighted with a free of tie lease (no need to buy from the brewery at over inflated prices) and I would not ask a massive rent, so that they could prosper, make a profit and pay me a fair rent. SIMPLES!

THe sums on the back of a fag packet:

Purchase price: £195,000

Refurb: £60,000

Total: £255,000

Sale of new business, good will etc: £60K

Annual rent on free of tie lease:£20-25K

Fees and legals: £10k

So outlay after sale of business pays for refurb is £205k.

Annual rent is £20-25K

Yield over 10%.

Potential for capital increase in the future has to be good. (Barring financial armageddon). If the tenant goes bust I go back in and do it again and then sell it on again.

I admit I have not yet viewed the property, but so far I am struggling to find a downside.......Apart from the fact that I have yet to tell the wife! :lol:

Now over to you wolves to tear my hair brained scheme apart!

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Any garden space for smokers ? Pubs who have a decent garden/ patio type place partly covered with space for winter heaters could do well in the future

Much competition about ?

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Garden yes, but parking no. That is one of the downsides, but it is in a town...not centre. Poor location as a boozer, but better as a food led pub. People will travel further for a meal than a pint.

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Garden yes, but parking no. That is one of the downsides, but it is in a town...not centre. Poor location as a boozer, but better as a food led pub. People will travel further for a meal than a pint.

That seems to be the fly in your ointment. Location is very important for all boozers. Even ones that concentrate on food. The bev is usually the key in this country.

Apart from that sounds like a plan. Especially as you know what you are doing. Can only help.

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Don't forget CGT on sale of goodwill. 18% of whatever you get for it less personal allowance. So another 11k costs. Split ownership with your wife so she gets her 9,200 annual CGT allowance too.

And be warned. If you try this trick too often then HMRC will say that you are trading pubs, and will go back and rework all your pub disposals on this basis - so that you pay 40% tax on it.

Don't forget VAT on the purchase price either. Reclaimable of course as you will be registered no doubt, but don't get it wrong.

Otherwise, cool! Think you should up the rent a bit, or make it a function of their profits. After all you WANT your tenant to go under... Seriously though, if TWO people will take it on at 36k on a tied basis (I know little about the licensed trade save for the fact that buying beer and vodka from your brewery is very expensive) then to ask half that on a free-of-tie basis seems very cheap.

Finally, IMO the place where this sort of a scheme wastes a load of money is on the refurb. Get on eBay buying up surplus restaurant furniture and pay £10 not £150 a chair. Same for pots pans, ovens etc. When you sell it on in 6 months time all the fittings will be second hand anyway by then. (I do not have experience in the retail business, merely a parsimonious approach to all business activity. Shops look nice for the first 10 minutes after first opening; after that they quickly look "lived in" and the expensive fittings no better than the cheaper would have been.)

Edited by Telometer

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Garden yes, but parking no. That is one of the downsides, but it is in a town...not centre. Poor location as a boozer, but better as a food led pub. People will travel further for a meal than a pint.

I don't think I have ever in my life walked to a pub for food, except when staying over where on my own for work.

I think most people drive to a meal, at least round my way.

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We've got a grotty town center pub that is the absolute perfect location. It bangs out cheapo lunches at £2.99 and doesn't rip you off for soft drinks. The place is always busy.

Just 300 yards down the road, but therefore at the edge of the shopping zone, is a very similar pub. Dead as a doornail and all because, unlike the other one, it's not next to a cashpoint and a bookies.

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I'm no expert but if you want to just be an owner, I'd have thought buying a holiday let or two would be a better bet.

....and you can use it yourself from time to time too.

Edited by blankster

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I admit I have not yet viewed the property, but so far I am struggling to find a downside.......Apart from the fact that I have yet to tell the wife! :lol:

Now over to you wolves to tear my hair brained scheme apart!

Do you know what kind of turnover and margins that pub generated before? I know nothing about the pub business but I guess it would be difficult to estimate it's potential without that information wouldn't it?

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Not my trade, obviously, but realistically I think you're going to be looking at 5% yield from an incoming tenant.

I have a feeling pubs, like High Sts, may not prosper for a very long time.

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For a rental of £25K I would expect the pub to be turning over at least £250K net of vat. This should give a gross profit of about £125K. Banks are only willing to lend to experienced people with a good deposit. This is a small business, which will need a hands on approach, and best run by an owner occupier.

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Don't forget CGT on sale of goodwill. 18% of whatever you get for it less personal allowance. So another 11k costs. Split ownership with your wife so she gets her 9,200 annual CGT allowance too.

And be warned. If you try this trick too often then HMRC will say that you are trading pubs, and will go back and rework all your pub disposals on this basis - so that you pay 40% tax on it.

Otherwise, cool! Think you should up the rent a bit, or make it a function of their profits. After all you WANT your tenant to go under... Seriously though, if TWO people will take it on at 36k on a tied basis (I know little about the licensed trade save for the fact that buying beer and vodka from your brewery is very expensive) then to ask half that on a free-of-tie basis seems very cheap.

Finally, IMO the place where this sort of a scheme wastes a load of money is on the refurb. Get on eBay buying up surplus restaurant furniture and pay £10 not £150 a chair. Same for pots pans, ovens etc. When you sell it on in 6 months time all the fittings will be second hand anyway by then. (I do not have experience in the retail business, merely a parsimonious approach to all business activity.)

Our Ltd company would buy....we are carrying foward a loss on the sale of goodwill on our current leashold business...the leasehold market is not as bouyant as it was pre 2007 (not surprisingly).

Re the refurb, with the number of pubs closing, we should be able to pick up all the kitchen kit etc at auctions for peanuts.

It has a 3 bed flat on the top floor and 3 possible letting rooms on the 1st floor....I'm surprised that it is as cheap as it is given its development potential if change of use was likely to be granted.

Yes we could get more rent, but I'd rather have a good professional and happy tenant making a decent profit for himsel...something Punch and the others seemed to forget!

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I don't think I have ever in my life walked to a pub for food, except when staying over where on my own for work.

I think most people drive to a meal, at least round my way.

Ther is plenty of parking locally (I think...will see if / when we view) just no big pub car park.

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Keep an eye on food prices - well I assume you're normally good on the purchasing game as you've got experience in this field. It's just a bit worrying hearing the rumours that are going around regarding food price inflation.

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For a rental of £25K I would expect the pub to be turning over at least £250K net of vat. This should give a gross profit of about £125K. Banks are only willing to lend to experienced people with a good deposit. This is a small business, which will need a hands on approach, and best run by an owner occupier.

That is my rule of thumb too when looking at pub / restaurant businesses. Rent should be around 10% of T/O net of VAT. In the last couple of years most pubs on the market that T/O around £300k+ are at an annual rent of £50+k. (as the Pubco paid in excess of half a million of Bank of Scotland's money to purchase it in a booming market that they and the cheap borrowing fuelled.)

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Our Ltd company would buy....we are carrying foward a loss on the sale of goodwill on our current leashold business...the leasehold market is not as bouyant as it was pre 2007 (not surprisingly).

Re the refurb, with the number of pubs closing, we should be able to pick up all the kitchen kit etc at auctions for peanuts.

It has a 3 bed flat on the top floor and 3 possible letting rooms on the 1st floor....I'm surprised that it is as cheap as it is given its development potential if change of use was likely to be granted.

Yes we could get more rent, but I'd rather have a good professional and happy tenant making a decent profit for himsel...something Punch and the others seemed to forget!

Totally agree about Punch, but like with this one, the rates are a killer.

http://www.punchpubs.co.uk/Punch/Punch+Pub...play+by+county/

It is boarded up with steel shutters now and is covered in pigeon shit. Oh and it is listed and a building of historical importance, but nobody at the council seems to give a damn.

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Keep an eye on food prices - well I assume you're normally good on the purchasing game as you've got experience in this field. It's just a bit worrying hearing the rumours that are going around regarding food price inflation.

I might call it the HPC Arms and serve beans in upturned recycled tin foil hats!

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Our Ltd company would buy....we are carrying foward a loss on the sale of goodwill on our current leasehold business...the leasehold market is not as bouyant as it was pre 2007 (not surprisingly).

1. Possibly see if you can attribute some acquisition value to goodwill.

2. Depending on your losses - capital? trading? how many? Acquire the pub in the company, then set up a jv with you, your wife, company to create the goodwill to benefit from the annual CGT exemption. Capital gains are best held by individual (18% + annual exemption rather than 28% - on the grounds that a large gain pushes you into higher rate corporation tax and indexation is worth nothing), income by a company. No point wasting your losses.

Canny structuring idea that's probably not worth it for a potential gain this small is for an offshore company to acquire the property - probably in Netherlands. Gain on sale is tax free (potentially SDLT free for purchaser if Netherlands Co holds Netherlands Co holds property); gain then dividended up to UK company is tax free too. Nice fees for your professional advisers...

3. 60k including buying at second hand peanuts prices?

4. Not sure why anybody would pay you yield equating to 10%.

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Totally agree about Punch, but like with this one, the rates are a killer.

http://www.punchpubs.co.uk/Punch/Punch+Pub...play+by+county/

It is boarded up with steel shutters now and is covered in pigeon shit. Oh and it is listed and a building of historical importance, but nobody at the council seems to give a damn.

Rates can be a killer I agree. Rateable value of the property in question is under £9k, so annual rates around £4k.

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Well the last time I worked in hospitality was for an upstart Ozzie chef called John Torrode back in 1991 washing up in a field kitchen, who I suspect bribed environmental health to stay away...

FWIW our local Harvester is always busy - near High Wycombe and M40 junction, semi rural, loads of parking and doing early bird deals (£5.99 before 6.30pm).

I have eaten there, being a tight sod who dislikes eating out in overpriced Marlow and have to say the steak and chips with a bottle of Vino Tinto was excellent VFM.

Beware this atmos of bargains and biz opps - it's a phoney recession right now - wait 12 months and buy one at auction.

Best of luck.

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For a rental of £25K I would expect the pub to be turning over at least £250K net of vat. This should give a gross profit of about £125K. Banks are only willing to lend to experienced people with a good deposit. This is a small business, which will need a hands on approach, and best run by an owner occupier.

Need to know what t/o it's doing now but I bet it's nearer £100k than £250k.

Not sure the RV will stay at £9k long if Punch had a lease documented at £36k.

I don't think there's shirt losing potential at the figures involved but not convinced there's massive upside. Quite a few people will probably have run the slide rule over it and decided against.

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1. Possibly see if you can attribute some acquisition value to goodwill.

2. Depending on your losses - capital? trading? how many? Acquire the pub in the company, then set up a jv with you, your wife, company to create the goodwill to benefit from the annual CGT exemption. Capital gains are best held by individual (18% + annual exemption rather than 28% - on the grounds that a large gain pushes you into higher rate corporation tax and indexation is worth nothing), income by a company. No point wasting your losses.

Canny structuring idea that's probably not worth it for a potential gain this small is for an offshore company to acquire the property - probably in Netherlands. Gain on sale is tax free (potentially SDLT free for purchaser if Netherlands Co holds Netherlands Co holds property); gain then dividended up to UK company is tax free too. Nice fees for your professional advisers...

3. 60k including buying at second hand peanuts prices?

4. Not sure why anybody would pay you yield equating to 10%.

1. Yes if possible.

2. I would certainly take advice re the CGT, as I know little. Thanks for your input.

3. Having not viewed the property yet I have no idea about refurb costs. If we wanted to do the letting rooms + kitchen + public areas we could probably spend more than £60k. We might be able to spend a lot less to just get the business up and running. All I have seen is limited sales particulars so far.

4. Punch wanted yield of 10% on their £360,000 investment...hence original rent of £36k which seems to have killed the 2 previous tenants.

I would like to achieve a rent of £20k+, which would equate to 10%. Given the bonus to a prospective tenant of the free of tie lease, I see no reason why a rent of £20k should not be achievable. The reason for the whole post / thread is that a freehold pub could be a solid investment as the big pubcos are desperate to sell.

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I might call it the HPC Arms and serve beans in upturned recycled tin foil hats!

Be careful. If the crash fails Krusty and Phil will take turns driving past while the other one pulls a brown eye out the window. You know how much a practical joker that Phil is! (After Krusty told us).

so your plan is ,that if successful,you will become a LL,sit back and let someone else do the graft.cool!

you want to read some of the CRE threads before you take the plunge.Food led pubs are going one way over the next few years,it happens to be the same way as the drinkers pubs,so they won't be lonely.

What's a CRE thread? Why do you reckon food pubs are going down hill in the next few years? Just because of the recession?

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