In times like these, I want to park my money in cash flowing tangible assets. Between the insane volatility seen in equity markets between the Greek crisis, JP Morgan and Facebook debacles, I have very little faith that the equity markets can provide me with any sort of size-able returns relative to the risk I would be assuming.

There was a GREAT article in the Economist a few months ago that discussed the shrinking equity risk premia in the United States (one driver of this is the near zero interest rates we have had). Check it out: http://www.economist.com/node/21550273 

So its back to basics, we should do as Buffet does:

If you can tell me what all of the cash in and cash out of a business will be, between now and judgment day, I can tell you, assuming I know the proper interest rate, what it’s worth. It doesn’t make any difference whether you sell yo-yo’s, hula hoops, or computers. Because there would be a stream of cash between now and judgment day, and the cash spends the same, no matter where it comes from. Now my job as an investment analyst, or a business analyst, is to figure out where I may have some knowledge, what that stream of cash will be over a period of time

I have spent some time researching three types of business opportunities:

1. The Laundromat

This one is tried and true. There are people that make absolute empires from owning slews of laundromats (or “mats” as people in biz call them). 

Pros:

-This business can be run entirely absentee. 

-Coin-operating mats have the benefit of being all cash businesses.

-There are ways to expand to find alternate revenue streams (introduce wash and fold service, keep vending machines or ATM machines on the premises, etc.)

-A good laundromat can provide about $100,000 in annual revenues. If you can target a 10% profit margin, that’s $10,000 more a year in your pocket for a relatively easily run business. If you can purchase a laundromat as well as the real estate it is operating in, all the better. 

Cons:

-Most mats that are for sale do not have reliable financials, so its up to you to do your own due diligence. This would involve understanding the demographics of a target location, competitors in the area, and locating sound and observable data which allows you to estimate weekly foot traffic.

-Maintenance costs can creep up. Machines have a tendency to break, but this can be mitigated with a solid service contract.

2. The Storage Facility

The demand for storage units is growing, both for individuals who have just run out of space in their residences as well as for small (growing) businesses.

Pros:

-This is a low overhead business and can be run semi-absentee. The largest expenses here are: 1) the cost of financing and 2) the cost of 1 or 2 employees to manage the space. Profit margins in self-storage range from 12%-15%.

Cons:

-Storage units for sale are difficult to find and you’ll likely have to cold-call storage units that interest you and gauge if the owner is willing to sell.

-There is always the risk your storage facility will be under-occupied, but with enough homework, you can make this a low probability outcome.

3. The Landlord 

The rental market is booming, and the cost of home ownership has never been lower.

Pros: 

-You can enjoy a steady stream of high cash flows if you can locate a multi-family (three or four units) home in areas with high rental demand.  The largest cost to you would be the cost of financing. I have heard of real estate investments with up to 30%-40% profit margins (note I’m not speaking in terms of returns, but rather profit margins [Cost of Ownership / Gross Rental Income].)

-Location. Location. Location. There are depressed areas of New Jersey where property values are significantly below market value. If you have a long-term point of view, you may be able to bet on the possibility that the home will appreciate in value and you can realize a size-able return upon exit.

Cons:

-Management is time consuming. I would highly recommend employing a property manager to manage the space. Of course, this would mean the returns on the investment would be lower.

-Real estate is highly localized, and you’ll need someone you trust in your corner guiding you to homes that are 1) under market, 2) have a high rental demand, and 3) have solid re-sale potential.

-Depending on the condition of the home and the quality of the tenants, there could be high costs to maintain the property. Things break in homes all the time. Just layer in a assumption for monthly capex in your analyses.

-The eviction process is expensive. Tenants’ rights are extremely strong in New Jersey and an eviction process can take up to 6 months and numerous court appearances. Background checks on tenants should help hedge this risk, as would locating tenants that have their housing subsidized (so your rental check would be coming from the city instead of the tenant).