Exempt Market Products, Real Estate, or Subway Franchise? A Case Study

Franchise, Condos, Apartment Buildings, or Exempt Market Products: Which Would you Choose?

Recently I had an extremely interesting conversation with an accredited investor living in Toronto. This gentleman owns a technology consulting business, is extremely intelligent and astute, and has achieved a level of success that affords freedom and choices. I love conversations with individuals who have carved their own path and taken the risk of starting a business. We can always learn something from true entrepreneurs.

I asked him how he ended up becoming an investor in exempt market products. He responded that, as he already has significant portfolio representation in the public stock markets, he also has a sizable portion of his portfolio in cash. His investigation led to a number of questions regarding investment options:

Should I start buying condos in Toronto, and develop a real estate portfolio, and follow the crowd?

Perhaps an apartment building in a suburban area?

Should I invest in a franchise such as Subway?

Are there additional investment products that can allow my capital to work harder than the 1.5% it is receiving in the bank?

Getting yourself informed is one of the keys to avoiding costly investing mistakes. He decided to roll up his sleeves and carefully investigate these options.

Option #1: Downtown Toronto Condos

After examining the real estate market in Toronto, he came to the conclusion that there are too many uncertainties associated with buying a condo for investment purposes. The market has shot up so much that it becomes difficult to overlay proper fundamentals on condos, and this leads to higher risk, and becomes speculative.

Purchasing downtown condos for investment purposes would most likely be suitable for someone who is already an expert in that market, and has a developed network of inside contacts, so as to be presented with and take advantage of the most ideal opportunities.

Option #2: Become an Apartment Landlord

He also investigated the opportunities available in apartment building ownership. The best buildings for investment purposes seemed to be in lower income suburban areas. Some of the buildings he looked at required immediate maintenance, which is an upfront cost to be factored in. Also, when examining “cap rates”, the asking prices of many buildings provided low annual income, under 6%. There are also monthly maintenance costs, and he could either perform these tasks himself, or pay someone to take care of them. After crunching the numbers, the conclusion was that net of costs, annual income generated would not be much greater than keeping his money in the bank.

I know many individuals who have created a fortune by purchasing apartment buildings. While this can be a viable strategy, the greatest opportunities seem to be acquired by those who have some sort of specialized expertise, knowledge, or contacts. By the time a building is presented as an investment opportunity to a novice, it very likely has been examined and passed up by the pros.

Option #3: Subway or Similar Franchise

The third option involved purchasing a franchise such as Subway. The great advantage to investing in an established franchise is that you are not starting from scratch. You are in business with a partner who knows the ropes inside and out, and the operation is essentially turn-key. After thorough investigation, this investor came to appreciate some important realities associated with buying his first franchise:

He would have to dedicate an enormous amount of time and energy, to run the franchise, and ensure everything ran smoothly
He would be on the hook for a lot of money (inventory, lease) if things didn’t pan out as expected
All things considered, he was still anticipating a franchise investment to earn approx. 15% annual return on invested capital. Pretty decent, and after all the heavy lifting of his first one was completed, the next should be easier, and so on. He saw the definite potential in the opportunity, but ultimately put it on the back-burner, as time commitments again prevent him from acquiring another full time job.

Being familiar with a number of successful franchise owners, every one of them has told me that the first few years are 80+ hour weeks of blood, sweat, and determination. Then the payoff comes. If this suits you, a franchise can be an excellent way to create wealth and independence.

Option #4: Purchase a Diversified Portfolio of Private Exempt Market Products

Prior to making his final decision, this astute investor asked a LOT of questions, regarding all exempt market products considered:

Who is the manager?
What is their background and track record?
What is the structure and specific terms of the investment?
Who gets paid first, me or management?
Why is this area a good opportunity?
Is management able to uncover value by purchasing assets at a discount?
Explain all of the risks to me
How long is my money locked in for?
What are all the fees and commissions?
After weighing all of the above options, this particular investor decided to develop a well-diversified portfolio of exempt market products. He now has representation in the following:

Private Apartments

Private Equity

Farmland

Conventional Energy Assets

Lending Strategies

Solar Energy Assets

By using the same amount of money that would be invested in the other options, this investor is currently diversified across 6 unique asset classes, reducing overall risk in comparison. He is also a passive landlord, collecting a monthly rent cheque with no hassle on the apartments. As there are professional managers making all the day to day decisions, his time commitment is almost zero, and he is free to dedicate energies to his consulting business.

While investing in exempt market products may not be for everyone, for this particular investor, it is an ideal fit. This gentleman already has a public stock portfolio to diversify his private holdings. And he is also holding onto some cash, in case circumstances change, or he decides to buy a building or franchise. By keeping some investments public, some private, and holding some cash, this investor is in an ideal situation to set himself up for future investment success. He has created an institutional-style portfolio that is far beyond the plain-vanilla stocks and bonds that most people purchase.