Is buying a pub too risky? BANK ON DAVE replies

I’ve recently inherited some money that could be used for a downpayment on a property. I’ve always been interested in running my own pub but I know it’s really hard to do at the moment.

I have experience in the industry so I know I could do it well but it’s a huge risk and I’m unsure of the best way to approach it. I know I could put the money down for the premises but it’s the startup costs that worry me.

I was toying with the idea of getting a rental property instead, as it would be more passive. But I have no experience and I’m worried about the market.

What should I do?  

Is buying and running a pub a good investment or is a rental property a better bet? Dave Fishwick replies

Dave Fishwick, This Is Money’s business doctor replies: The hospitality industry is having a tough time at the moment. 

Rising energy and stock prices are forcing the licensed trade to raise their prices at a time when the public is tightening their purse strings, having seen their finances put under pressure for similar reasons.

Financial pressures and the increasing use of social media to keep in touch with each other have led many of us to choose drinking at home or with friends and family. 

For years, the number of pubs has been declining as fewer of us spend our time and money in the local tavern. Over 2,500 pubs have closed in the last five years, with 400 gone in 2022 alone.

I think the decline in the local pub is a real shame. They were once the heart of the community in towns and villages up and down the country and still is in many places. 

To maintain strong communities, people need a place where they can all come together. Otherwise, we can become increasingly insular as our communities become increasingly fractured.

If you do go ahead and start your pub, I think you should look to mitigate the risks involved. The one thing you don’t want to do is to lose the money you have inherited along with a great deal of your time. When starting a business, rule number one is: Never Lose Money.

It’s great that you have previous experience in the industry because that will give you a good insight into what’s involved.

Unless you can afford to take over a thriving pub in a busy location, you’ll need to buck the trend and succeed where others have failed.

Perhaps you should try to offer something different and look into what the best-performing pubs and bars do. 

As one example, a village pub here in Lancashire hires a Kashmiri chef on alternate Tuesdays to host a curry night, which is popular and keeps customers coming back on what might otherwise be a quiet night.

There are different ways that you could get into running a pub, and you could buy a lease on a pub or buy it outright if you can afford to.

I like the idea of buying bricks and mortar as you have an appreciating asset, and in time that will become worth more money and give you a tangible asset to borrow against in the future if you want to expand.

Alternatively, you could approach a pub company with a portfolio of pubs to see if running one of theirs could work for you.

A dear friend of mine used to operate a number of pubs owned by a large pub management company. Generally, they had been previously closed or had temporary managers in place, and that company required minimal upfront costs to take on a pub.

However, while this meant low overall start-up costs, you’re often contracted to buy your alcoholic drinks through them at higher than wholesale prices, reducing your profit margin. This is called being barrel tied.

Also, these pubs are likely ones that have struggled to make a decent profit or are problematic to operate. 

It’s worth visiting potential locations on different days and at different times of day and night to get a feel for the area and what you’re signing up for, take lots of notes on what foods and beers are selling best in the busiest pubs, what entertainment they have on, what works and what doesn’t.

This will save you time and money in not making the same mistakes. Don’t try and reinvent the wheel; It goes around brilliantly; just borrow the best ideas, and replicate them yourself.

As well as the initial costs, consider the length of any leases and rental agreements you’ll be signing and remember that they are legally binding.

Before you take the leap, produce a complete business plan with all anticipated costs and projected earnings and build a healthy margin of error.

To start a business which involves fixed overheads, you’ll need a decent cash buffer to see you through the early days in case there are quiet times when you’re trading at a loss. Most businesses have quiet periods from time to time, particularly new start-ups.

Cash flow problems are the biggest killer of new businesses. 

Cash flow is like oxygen –  you don’t think about it until it’s not there, and then that’s all you can think about, so a cash buffer is essential.

Regarding your other idea, a rental property can be an excellent investment.  

I have a commercial property portfolio myself, including factories, shops, and land, which I rent out and it creates a solid and safe return on investment and gives me very few problems.

Although commercial property and house prices can decrease in the short term, they always rise in the long term as inflation erodes the value of your money at a far higher rate than the rates of interest offered by most banks, so it could protect you from inflation and provide you with income from the rent.

>> Check the latest rates using This is Money’s mortgage finder 

The main difference between investing in a house and a pub is, as you said, you’ll have to work in the pub or employ staff, whereas a rental property is more or less a passive investment which provides income without you having to work. 

I would say that the rental property is a safer option.

Other options you could consider might be to use the money to pay off loans or your mortgage on your home (depending on your current interest rate) or you could possibly invest it in a low-cost stock market tracker fund. 

This should see a good return year on year but can be volatile in the short term. We are currently seeing record highs in the stock market in the UK, so you’d have to decide for yourself when is the best time to get into the market.

> >  For some help on getting started read our guide to choosing the best investment platform

I can’t guarantee which choice will be best for you, but I hope I’ve provided some food for thought, and I wish you all the best on whichever path you choose.

Good luck!

This post first appeared on Dailymail.co.uk