Okay, so you’ve had your health club open for a few years and you’re doing all right. You have a few hundred members, you’re paying the bills, and as the owner you’re bringing home about $20,000 annually. You advertise your fitness center regularly, you make the extra effort to get some free publicity for the gym, and you’ve even experimented with a referral strategy or two.
You keep investing in the business, pouring profit into health club marketing and maybe some new fitness equipment. You do this because you know that even the best business opportunity isn’t successful overnight. It takes work. It takes sacrifice. It takes patience.
You enjoy the work. You really do! You’re a woman who basically gets paid to exercise in your women’s circuit training gym. You get the benefits of circuit training because you exercise all the time. Every member is your friend, and you’re more popular than you’ve been since high school. You work in the health and fitness industry, and you feel like Wonder Woman most days of the week! Your gym job is to help women achieve their personal fitness goals. That’s a rewarding career, and you love it!
But there’s still that thought, lurking somewhere in the back of your mind, that owning a health club business should be more profitable…..
Sure, you’ve already paid the loan on the exercise equipment. You have all the office equipment you need, too. You’ve even invested in some extra sports equipment for your women’s health club. But what about that take-home check? Will it always be that small?
Before we go any further with this discussion, let’s make it perfectly clear that we are NOT attorneys or accountants. The purpose of this article is to give you food for thought, NOT to offer you legal or financial advice. Even if we were qualified to give you professional guidance, we still don’t know your individual situation and without that knowledge we couldn’t make the appropriate recommendations regarding your personal situation. So, although we’re here to offer you what we think is reasonable counsel, you are advised to seek advice from your own attorney and accountant before making any decisions.
That being said, we’re here to tell you that owning a gym franchise such as a Curves health club is not a direct ticket to wealth. Yes, you probably have the best commercial gym equipment in your area, and you can probably sell gym memberships like nobody’s business! But that doesn’t guarantee financial success, does it?
To turn your fitness job into a money-making machine, you need to stop thinking like the owner of a small fitness franchise and start thinking like the owner of a business.
There are a ton of books out there on how to turn a small business opportunity into a success, but unfortunately most of those publications are just hype. They talk about the latest business buzzwords, trying to get you excited about ‘total quality control’ or ‘fire them up management’. That kind of information is good if you’re studying for a college exam, but honestly it’s quite worthless if you’re in the real world. In the real world, business success really boils down to only two things: minimizing expenses while maximizing profits. That’s it. Similar to the ‘buy low, sell high’ advice that we’ve all heard about the stock market, the best business advice you’ll ever hear is to keep expenses low and keep profits high.
But how do you do that? Sure, that sounds great, but how do you actually DO it? What you need right now is a real, honest, down-to-earth strategy that you can use to crank more dollars out of your fitness facility.
Well here it is…..buy your own building. Yes, buy a building in which you can operate your circuit training health club. Don’t think it’s a good idea? Don’t think it’s possible? Read on…..
What did you pay in rent this month? What’s the lease for your fitness club each month? Is it $500? $1,500? $5,000? How much did you pay the landlord last year? Was it $10,000? $30,000? More?
Wouldn’t it be nice to have some of that money back?
The fact of the matter is, once you’ve purchased and paid for your gym equipment, the number one expense your fitness center will face is the monthly rent. While lease rates vary widely around the country, in most areas commercial space is going for anywhere from $14 to $22 per square foot! At $22 per square foot, a relatively small 1,500 square foot space will cost you $33,000 annually. Keep in mind that this doesn’t include Common Area Maintenance (CAM) fees or utilities!
Why not buy a building for your health club? Depending on the area in which you live, the monthly mortgage payment could be less than what you’re paying in rent! You’ll have fewer dollars going out in monthly lease payments, and the rent you do pay goes to…..you!
Buying a commercial building may be more affordable than you think. If you’re currently paying $1,000 in monthly rent, then you can probably afford a $120,000 building. At 8% interest on a 20-year commercial loan, your payments on $120,000 would be $1,003.73 per month.
If the monthly lease on your hydraulic circuit training franchise is $2,000 then you can probably afford a $240,000 building, which at 8% interest on a 20-year note will give you $2,007.46 monthly payments.
Perhaps you’re paying $5,000 in rent each month. That’s a lot of money, but it’s certainly not unusual in some parts of the country. If you’re paying this much, then you should be able to afford a $590,000 building. Your monthly payments will be $4,935 assuming 8% interest on a 20-year loan. (Source on all financial calculations: bankrate.com)
Of course, there are many other variables that come into play when you’re considering a commercial real estate purchase. Some of the cautions you need to be aware of include:
1. You’ll need to come up with a 20% down payment and be able to show a stable credit history.
2. You’ll want to carefully consider the location of the building. After all, it won’t do you any good at all to purchase a building if it’s so far off the beaten path that it kills your business!
3. Depending on the age of the building, it may be expensive to ‘bring it up to code’ or make the necessary changes so that it passes city inspection (fire, structure, safety, etc.).
4. Depending on the building you choose, renovation costs may be higher than expected.
5. If the building is far from your existing location, you may lose some members when you move.
6. When you’re the owner of the building, there is no landlord to call when something goes wrong.
7. Depending on where you live, you may pay substantially more in property taxes.
8. You will need to purchase another insurance policy to cover the building.
While there are some drawbacks to purchasing a commercial building for your circuit training health club, the advantages far outweigh them:
1. You’ll no longer see 100% of your rent money go to someone else. Sure, you’ll lose a portion to interest charges but each and every month you’ll be paying down that loan principle.
2. If you’re patient and a bit lucky, your new location can be even better than your old one! Look for buildings on main roads, preferably with a traffic count higher than 25,000 per day.
3. Yes, renovating a new building will cost you some money but when all is said and done the newly remodeled building belongs to YOU. Any improvements you make to the building just add to your investment by raising the market value.
4. You will have full control over what you do in your building. Have you wanted to put in showers, for example, only to be told ‘no’ by the landlord? When you own the building, you have the freedom to do what you want, when you want, why you want.
5. When you own a commercial building, and you’re organized as a legal entity, you may be able to save a substantial amount of money on your taxes by depreciating the value of the property. The savings can be thousands of dollars annually! Consult with your personal CPA or tax advisor.
6. Eventually (usually 20 years when dealing with commercial loans) you’ll pay off the mortgage and own the property. At that point you start to look at some SERIOUS cash flow! Once you own the building, your expenses drop dramatically. You can either take the old mortgage payment and add it to your monthly paycheck, or you can simply reinvest it in another property.
7. Retirement! When you finally decide to complete that last circuit training workout and retire, you’ll have an asset that you can use for retirement income. Perhaps you’ll sell the building and the business together and invest the proceeds. Or maybe you’ll just sell the business and collect rent from the new owners as they lease your building. The bottom line is that you’ll have options.
If you’re considering moving your circuit training health club into a building that you’ve purchased, then there is one more item of concern that must be addressed. It has to do with risk and potential lawsuits. Again, it’s important to note that you need to stop thinking like the owner of a small fitness franchise and start thinking like the owner of a business. Once you purchase a commercial building, you’re really becoming involved in two separate and distinct businesses: fitness center ownership/operation and real estate investing.
What this means is that you should organize each business separately. Hopefully you’ve already set up your gym as a legal entity (S-Corporation, C-Corporation, LLC, LP, etc.) and you’re NOT operating as a sole proprietorship. Running any business, particularly a health club, as a sole proprietorship is simply a bad idea. The best way to buy a commercial building is via another, completely different, legal entity.
For example, if you already own ‘Jane’s Health Club’ Inc. and that entity owns your gym, then you need to create another legal entity that will purchase the building. Do NOT purchase the building under ‘Jane’s Health Club’. Why not? Because the building will be your main asset, and the gym is your main risk. It’s a smart move to separate your assets from your risks.
Keeping assets and liabilities segregated protects the assets.
Let’s pretend, just for the sake of argument, that someone has an accident in your health club and is paralyzed. That would be a horrible accident, and we certainly hope it never happens! But just for this example, let’s pretend that this person decided to file a lawsuit against your gym for $10,000,000. Let’s pretend that they won.
If your gym owns the building, then guess what – your building will be auctioned off by the court and the proceeds will be given to the plaintiff (the injured member who won the lawsuit). If, however, your building is owned by a completely different entity then the building probably cannot be sold to pay the plaintiff. Because the asset is owned by a different company, it is not considered an asset of the company that lost the lawsuit. Because your commercial building is not an asset of the company that lost the lawsuit (your gym), it cannot be part of the settlement.
This is a fairly complex area of the law, and you should consult with your own legal representative about your own personal situation. For now, it’s sufficient to say that your goal should be to have two distinct legal entities. One should own your fitness center, and the other should own your commercial building. Your gym then pays rent to the landlord (remember, that’s you!).
It’s up to you which legal entities you will choose to host ownership of your gym and real estate. Each type of entity has different advantages and disadvantages. For example, an LLC is strictly a ‘flow-through’ entity for IRS purposes, while a Corporation is not. Without knowing your own personal situation, it is impossible to offer advice regarding which entity you should choose. Your legal counsel and CPA will be able to help you make these decisions.
Hopefully by now you’ve made the decision to at least start looking around for commercial buildings to purchase. It doesn’t cost you anything to think about it! Look for buildings within your price range that have great visibility. Don’t rule anything out, because remember that even a run-down building can be remodeled. You might even consider buying an old house that’s now zoned commercial. Many towns have these older homes on what used to be a sleepy side-street and is now a busy thoroughfare. Somewhere along the way that entire section of town was zoned commercial, but the house is still there because it was ‘grandfathered’ in when the new zoning laws were passed. These older homes can be remodeled and made to look like a commercial building with less effort than you’d think.
Okay, so here’s one more profit-boosting idea for you. Consider buying a building that has more space than you need. That’s right…..more space than you need. Section off that space into rooms and rent them out! This tactic has several advantages, the primary one being that it will help you make the mortgage payments each month. An added bonus is that your members will have more amenities available to them, which is good for your business.
As an example, consider this scenario. Jane purchased a hydraulic circuit training fitness franchise a few years ago and was paying about $5,000 per month in rent. At that price, she was in a great area of town and had a few hundred members. Finances were tight due to the high lease, but she worked hard and built up a membership base. Before the end of Jane’s first lease term, she sought out and found a building she could buy. It had more room than she needed (about 3,000 square feet) but the location was AWESOME.
The building Jane found was listed at $275,000 and it needed about $100,000 in repairs/remodel to bring it up to code and make it look like a women’s health club. Jane created a new legal entity, let’s say an LLC, and through that LLC she purchased the building.
When securing the loan for the building, Jane was able to prove that she had a long-term lease commitment from a reputable tenant (her own gym!). Because the gym had a strong membership base and a good credit history, Jane was able to use a commitment to lease from her own gym to secure the loan for the building. Wisely, Jane had set up her gym and real estate LLC as two distinct entities.
Jane started the remodel, always aware that the new building had to be finished when the lease term at her existing health club location was over. She worked hard, put in long hours, and at times almost lost her sanity due to the stress of running a business and remodeling a building at the same time.
Eventually, Jane moved her health club business out of the old leased location and into the new one. The new building had a lot more space and more eye-appeal. Since the landlord (Jane herself) didn’t mind, Jane had even installed showers and lockers – something that was prohibited under her old lease agreement.
The health club franchise Jane owns still has to pay rent. It pays that rent to Jane’s LLC, which in turn pays the mortgage on the building. The landlord (Jane’s LLC) has set the rent at $3,000 per month, which covers the mortgage and the remodel loans.
Being a savvy real estate investor, Jane knows that twice each year she will need to pay property taxes and property insurance. As the landlord, how will she come up with this extra money? She doesn’t want to raise the rent on her primary tenant (remember, that’s herself). Instead, Jane rents out the three rooms that she had put into the building! She rents one to a massage therapist, another to a woman who does permanent makeup, and the last room Jane rents to someone doing bodywraps. Now the real estate LLC, which is owned by Jane, is collecting $3,000 per month rent from the fitness center (also Jane) and an additional $200 per month from each of the ‘room tenants’. Through her real estate LLC, Jane saves the extra $600 per month she has coming in to pay property taxes and insurance.
The members at Jane’s gym love the new location! They’re so glad that Jane now offers massage therapy, bodywraps and permanent makeup! They keep commenting on how no other women’s circuit training gym in town offers that much in one location! Memberships skyrocket, and member retention improves. Jane smiles….all the way to the bank.
Although Jane’s story is just an example, it is possible. It can happen. It can happen to YOU.
So, are you ready to earn some REAL money with your health club?
The author (www.cuecd.com) makes no representation or warranties regarding the outcome or the use to which this information is put and is not assuming any liability for any claims, losses, or damages arising out of the use of this document. Additionally, www.cuecd.com strongly recommends that you retain the services of an attorney and accountant to assist you in all business decisions.
This document is designed to educate and provide general information regarding the subject matter covered. However, laws and practices often vary from city to city and from state to state and are subject to change. Because each factual situation is different, specific advice should be tailored to the particular circumstances. For this reason, you are encouraged to consult with your own advisor(s) regarding your own specific situation.
The author (www.cuecd.com) does not assume any responsibility for any errors or omissions. The author (www.cuecd.com) furthermore specifically disclaims any liability resulting from the use or application of the information contained in this document, and the information is not intended to serve as legal advice related to individual situations.
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