Today's episode is all about investing
in restaurants and bars.
At some point, we've all thought about owning a restaurant
and bar.
We don't watch Bar Rescue and said to ourselves,
"I can do that.
I can do that way better."
We're no different.
I don't really know too much about the restaurant and bar
business, so it's a little bit out of my area of expertise.
If you've ever had a burning desire
to work twice as hard as you ever worked in your life
for a near certain chance of losing all of your money,
today's episode is for you.
Today we explore why owning a restaurant-bar
can be the worst investment ever, and a few examples where
it worked out.
I'm in one of those now.
Welcome to my bar.
This is the Inwood Tavern.
We at Dumb Money own and actively operate
two of the most successful bars and restaurants in Dallas,
and we know how difficult this industry can be.
So Chris and Lin bought Chelsea Corner together,
and Lin and I bought Inwood Tavern together.
So some quick stats according to the National Restaurant
Association a few years ago.
About 60,000 restaurants open every year, and 50,000 of them
close.
So what makes the places we bought different and complete
anomalies?
We'll tell you.
Chris, Lynn, and Dave are going to take me to school,
so I can learn about restaurants and bars.
We'll share with you what we've learned through our experience,
and how we're thinking about assessing this new restaurant
investment opportunity.
We don't often talk about actual numbers,
because we're usually investing in other people's businesses.
But in this case, we own the business.
So we're going to share with you the real numbers,
so stick around for that.
And if that weren't enough, we're
also going to tell you about a new restaurant-bar
that we're considering investing in.
[? We'll also ?] [? be ?] making a passive investment
in a corporate-owned restaurant-bar concept that was
started right here in Dallas, called The Rustic.
Now would be a perfect time to hit that Like button, subscribe
if you haven't already.
We're Dumb Money.
We're all about sharing our real lives and real investments
with you here on YouTube.
So we bought Inwood Tavern in 2014.
It's been open since 1964.
It's the oldest continuously-operating bar
in all of Dallas, and we bought it just
in time for the 50th anniversary party.
It's a neighborhood bar, it's been a favorite of ours
since college.
When we were running a software company,
this was the place that we would go for happy hours after work,
or when we went to lunch and never came back,
this is where we usually ended up.
One of the first improvements we made to this place
was fixing the bathrooms.
It was literally probably the main reason
that people didn't like coming to Inwood Tavern.
It's been five years, but I think
they still look pretty nice.
Trust me, there are not many dive bars
that have commissioned art from well-known local artists.
In fact, this artist designed the whole bathroom for us.
Across the hall, the world's smallest men's restroom.
But again, well-designed, always clean,
and got my name and this one.
Wouldn't be a dive bar without a pool table,
and while we don't serve food we do have chips and beef jerky,
and free popcorn anytime you want it.
This whole side of Inwood Tavern didn't exist when the bar first
opened.
The walls on both sides were originally painted sheet rock.
The previous owner put up fake brick, it was like a linoleum.
We liked the idea, so we recreated it with real brick.
We have DJs on the weekend, we have karaoke on Tuesdays.
We had to rebuild the stage, and it's great
having a general manager who also
knows how to do construction, because he
rebuilt the stage for us.
So yes, originally this was a parking lot with a chain link
fence around it.
Added plants, added nice lights.
After the bathrooms, the second big project we did
was replacing every single television.
We now have four TVs on the patio, four in the main bar,
four in the back bar.
Want to be famous?
Come to Inwood Tavern, take a picture,
#inwoodtavern, and you'll get on screens.
Heated in the winter, cooled in the summer,
because Texas weather is completely unpredictable.
It's literally my second favorite patio to hang out on.
I do have to give it to Chelsea Corner,
their new patio is amazing.
This is my restaurant, Chelsea Corner.
I own it with my buddy, Lin.
We both worked here 25 years ago, me as a bar-back,
him as a waiter.
It's a great example.
Special events is like--
it's a lifesaver for us.
Without special events, we're underwater.
It's a huge part of what we do.
We run special events, probably 10 or 12 a week.
And our kitchen, I think Chef Dario is here.
Is Chef still here?
Oh, sorry.
Come on in and say hi.
Without him, we literally don't have a restaurant.
It took us two years to find him,
and he is literally the savior of the entire operation.
And that little delicate balance of having a good kitchen team
led by a great head chef is--
without him, I would probably sell the entire operation
tomorrow.
He's that important.
So thank you, Chef Dario.
You're welcome.
I appreciate it.
The reason why so many restaurants and bars go out
of business is high fixed costs.
We have 65 employees here, and these napkins,
along with our bar towels and our kitchen uniforms,
cost us $3,000 a month to get cleaned, delivered, and folded.
Less than two months ago, we paid $4,000
to have eight vinyl booths completely recovered,
and one of them is already ripping again.
We pay $2,000 a month to have an auditor come in weekly,
and weigh every bottle of alcohol
and count every can of beer to help us monitor theft.
And like every other bar in the world,
we still have rampant theft issues.
It never ends.
These guard rails, our insurance company made us install them.
They charge us $80,000 a year for liability insurance.
$80,000 a year.
Meet our $10,000 ice machine.
We have two of them.
They cost us about $5,000 a year to maintain and get repaired.
I love our real wood floors.
What I don't like is the $5,000 a year
we spend having them refinished.
Golden [? Tee, ?] ATM fees, and pool.
An outside vendor maintains this for us,
but also keeps most of the money we make from it.
That empty spot on the wall?
That used to be a really cool fish sculpture
that a customer broke.
We spend about $14,000 a year fixing things
that customers break.
2.5 million dollars.
That's how much money we have to make every year just
to break even.
This is why most restaurant and bars go out
of business, and why you should think twice
before investing in one.
This is the back office at Inwood Tavern.
I promised you we'd show you some real numbers.
I'm going to show you exactly how much money we make here,
and why a bar may not be the best investment.
Everyone wants to be in the bar business,
and it makes sense, because it's a high margin business.
You sell a product that--
let's say a beer costs $1.
You sell it for five, there's lots of money
to go around, right?
Let's dive in, look at the actual numbers.
I looked at the last six months and came up
with a monthly average for both our sales and expenses.
So if we start with sales, about $156,000.
Cost of goods, $34,000.
And our gross profit, about $122,000 on an average month.
And if you're thinking about opening a bar,
obviously, you know you have expenses.
There are some obvious ones like rent, utilities, licenses.
About $1,600 of legal expenses every month.
Another $1,600 of cleaning, 3,000 of insurance.
Can't forget the tax man.
Almost $20,000 in taxes.
All of that adds up to about $37,000 a month in expenses.
36,620, to be exact.
And if that was it, we'd have a net profit of $85,000,
but that's never it.
There's always more expenses.
Payroll, equipment rental, repair, security, pest control,
DJs, bands, karaoke every Tuesday, bar supplies,
marketing and other expenses.
Oh, and let's not forget, $4,000 of credit card processing fees.
That's almost $42,000 of additional expenses
you may not have thought about when
you were budgeting how much it would cost to open your bar.
All of these add up to 41,715.
So we're able to do $156,000 in sales,
we have our cost of goods, expenses, and more expenses.
Instead of $122,000 in gross profit,
or even $85,000 in net profit, we're now
looking at just over $43,000.
At an anomaly bar that has no cost of food,
we don't have a kitchen, small staff.
It's a fairly simple operation.
But what happens if we have a slower than normal month?
Last month, for example, April.
April showers cost a lot of people not to go to bars.
Instead of our typical $156,000 in sales,
rain caused us to be about 20% lower,
which takes this healthy net profit way down.
And that's a lot of work for $14,000 of profit.
Imagine a bar that didn't have this level of consistent sales.
The scary truth about investing in restaurant and bars
is you do start over at zero every month.
You have to find a loyal following.
It's kind of like YouTube.
You have to find a loyal following,
you have to have them coming back every month.
A slight drop in sales could be a disaster
for any bar and restaurant.
Which is why we say the bar business could be the worst
investment ever.
I've got to clean all this up.
This took way longer than expected.
We have money to make.
Well, we said we would never ever, ever do this,
but here we are, contemplating investing--
not even in our own restaurant-bar,
but in someone else's restaurant-bar.
Why are we doing this again?
I think it's a typical story, right?
Everybody you know--
I don't say everybody, but a good chunk of people you know,
all say they'd love to own a bar.
Everyone who's sitting around in college
is like, yeah, I'm going to own this place someday.
There's this idyllic view--
and I've always tried to figure out what that is in people.
But for some reason it's, if you own a bar,
you're the most popular guy, you're
throwing a party every day.
Who doesn't want to be the center of all that?
And deeper than that, when you're in a bar
you spend so much money that you think they're
making all this money off you.
You just you just assume that bars and restaurants are
super profitable.
OK, well, you're that guy that's always
coming from a making money perspective, which is true.
But I think a lot of people idealize owning a bar,
and they look at it as something that it's really not,
which it's a business.
Worst investment ever.
Well, I disagree.
It's been proven.
Most of the time, owning a bar restaurant--
Can we go ahead say most startups--
No, no.
Way worse than restaurants.
That's not true.
There's more startups out there than bars being opened.
Even successful restaurant-bars in general
make virtually no money.
Barely enough money to pay them out.
Fair.
Alcohol is relatively-- well, it doesn't go bad.
It doesn't have a shelf life, and it generally
makes a lot more percentage in revenue.
I can serve you a vodka soda and charge you $10.
How do you get a complaint on that, right?
I serve you a cheeseburger for $10.
18 Yelp reviews come in.
It's unbelievable.
And by the way, it took five people since 8:00 AM
to work in the damn kitchen just to get the crap prepared
to make that $10 burger.
But still, constant expenses, constant--
it's always work, too.
When you put a lot of money in, so like, redoing bathrooms,
putting up TVs and stuff like that,
and if you don't, you're going to have to redo that
in like, what, five, six years?
Oh, it's a constant.
I think one of the biggest things people don't understand
when they invest in a is they see
that initial investment, right?
And then they can barely live off the profits,
and they're distributing those profits,
and they don't realize that they're not putting anything
back into the building.
These are emotional investments for most people.
Emotional investments are always the worst to make.
So the biggest advice that I ever
give to anybody before they think
about a restaurant or a bar is simple.
Are you absolutely doing it to make money
and treating it as a business?
And unless you can answer that question honestly,
then you have no business.
Because there's way too many ways to fail in this business
by being the popular guy, and try and open
the cool restaurant.
Can we agree on something?
A restaurant or bar is only a viable investment
if it is meaningfully differentiated in some way,
whether you have the best chef in the city,
or the best location, or the best history, right?
Or what we're about to get into now, which
is The Rustic, this investment opportunity, which
is the most unique live music venue [? slash ?]
restaurant-bar.
And in this case, is replicable.
I think that's the only thing that's interesting to me.
It's not just the one location.
That has only been achieved by one other entity, which
is House of Blues, that recently sold for over $300 million.
So we're about to go meet with them at their Dallas location
to talk about opening two additional locations.
Hey guys, we have 15 minutes to get there.
So let's go.
How did you come up with The Rustic as an idea?
When we created The Rustic, the idea
was born from my partner's bachelor party
out in the Texas Hill Country.
We were at a ranch, we were grilling
steaks over an open flame, and we
thought, let's bottle that up and try
and find a location in an urban center
so that we can have that experience
in a densely-populated urban center.
So that's how the idea was born.
If you ask anyone, investing in a restaurant, bar,
terrible idea.
Most of them fail in the first year,
and those that don't fail in the first year
fail in the second year.
Point blank, it's not about you have a good recipe.
That's not what the restaurant business is.
People romanticize--
It's a business.
A restaurant is a smaller business.
Exactly.
So tell me about this investment opportunity.
So this deal that we're talking about right now,
it's going to take us from three units to five units.
It's going to build unit number four and five.
This is the tipping point for us.
This is where we go from a regional brand
to a national brand very quickly.
I'm the only one who was willing to sit down.
It looks like everyone's got a beer or a sandwich.
Should we go get a beer?
I think we should go join in.
Let's go do it.
I don't know that I've actually eaten here
at The Rustic, which is probably maybe a bad decision
before committing.
This sandwich just closed the whole deal for me.
Deal sealed, done.
I'm done with just this--
the hot chicken and cheese sandwich.
Guys, this sandwich just sealed the whole deal for me
right here.
Just sealed the deal.
We are going to soon be proud investors of the next Rustic.
The very next two locations.
That's right.
And probably the next 10 after that.
Let's go.
Just for starter, it's a concert hall, restaurant, bar.
That's the differentiation here.
This is exciting.
Awesome.
Our third restaurant-bar.
Our third concept.
And just to prove that the other two places
that we have actually have customers,
we're going to take you there at night.
Because they're completely empty during the day,
but just wait till you see.
If you enjoyed today's episode, please throw us a thumbs up,
consider subscribing, and as always,
share those comments with us.