599: Vending Machines: The Path to Your First Passive Profits

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1:15What's up? What's up? Nick Loper here. Welcome to the Side Hustle Show, part of the Entrepreneur Podcast Network. If you're looking for legit ways to make extra money in your spare time, you are in the right place. And those robots I was talking about, well, it's not sci-fi. They're called vending machines. They've been at least 15 of them over the last few years, generating thousands of dollars a month. And he helps other people do the same to get their first taste of that elusive passive time leveraged income from MrPassive.com. Mike Hoffman, welcome to the Side Hustle Show. Thanks, Nick. Excited to be here and excited to chat today.

1:50Me too. Stick around in this one. We're covering the location and logistics piece of the vending business, how to get started without a ton of upfront costs, and just general best practices in building out a modern vending route on the side that can pay you every month. So Mike, take me back to the beginning here. You're working 60 hour weeks, bringing home 1200 bucks a month. That sounds borderline, like probably below minimum wage. You realize something's got to change here. What's going on there? We were working in collegiate athletics and then we talk about financial freedom and making kind of money without your time.

2:24Something had to change because burnout was definitely fast approaching. When I was a young coach, I think I was 23 at the time, I got my first cash flowing rental, like your classic student rental, 70K, rent it for a thousand bucks. And that thing started making me$350 a month of profits. And then I just started parlaying that real estate cash flow into something that led me into vending machines years later. Okay. Starting with the real estate game, and I'm impressed that you're able to save enough down payment on that salary to make the investment property purchase. So why not continue down the real estate path or looking at a vending machine as a micro piece of real estate?

3:04Where's the transition come? With rentals, I was tired of the 20 % to 25 % down payment that these banks would require me to do. It just didn't make sense after a while of constantly having to try to find 20 % to 25 % to put down. So at some point, I needed to find an income stream that required minimal capital, which obviously vending requires very minimal capital compared to real estate. And then the second thing is real estate isn't necessarily passive. There's definitely things you can do to make it passive with the right property managers and stuff. But if a vending machine goes empty, you're not getting calls like you would when a pipe breaks in the bathroom of your rental.

3:42And that's kind of why I made the transition to more vending and things of that nature that I could make more passive and less urgent. Yeah, it's an interesting comparison to draw. Like, hey, I was cash flowing 350 bucks a month, but it required this huge down payment. Plus it's got all this liability, plus it's got all this maintenance. And yeah, you got to stock the vending machine. But I imagine one machine in a right location could probably make you 350 bucks a month, like for a much lower upfront cost, just like lower headache involved. Absolutely. I have vending machines that do more than my rentals, whether that's my long-term rentals or my short-term Airbnbs.

4:15Food and water are necessities. And that's why Warren Buffett said his first vending machines when he was a teenager were the best investment he ever made. And he actually has regrets selling his vending route when he was young and trying to get a quick buck. But you're spot on with that. And then the risk is way lower. Like if a vending machine runs out or there's a malfunction, it's not the equivalent of your toilet breaking. Yeah, that's helpful. Helpful to put it in perspective. So what happens next? So if you're coaching me and I say like, okay, I'm interested. What's my first move? I start looking for apartment buildings, office buildings.

4:51I don't even know where to start looking to find a placement. The first step is like, think of those places you drive by, think of the gym you go to, think of that office building where your bank tellers in the first floor, they got doctor's offices in the second, lawyers in the third, blah, blah, blah. Like anywhere with a lot of foot traffic and just go start having a conversation. The great thing post COVID is there's no free refreshments in the lobby anymore. So these robots that you talked about, these vending machines are in a high demand. They want the latest modern machines. They don't want the old school, very cumbersome looking ones you see at the airport that are just getting replaced with nicer luxury amenities.

5:33Yeah. What was it for you? So I like this idea of like pre-selling it first, like before you stock your garage full of machines and snacks, go find a place to put it. What did that conversation look like for you? Yeah, well, I think the first conversation, which is really interesting, is my background is in human performance and living longer and being healthier. And so I actually went to a couple apartments where there were a lot of athletes that lived at. And I asked the manager, like, hey, do you guys have vending machines? Do you have healthy options? Because I was genuinely worried about the recovery for these athletes with the right nutrition.

6:07And they were like, no, Mike, we need vending machines. Can you provide them? And keep in mind, Nick, this is pre-COVID. I didn't even know where to look on Google for vending machines. So I was like, yeah, absolutely. I can do that. So then I just kind of self-figured it out from there. Yeah. The confidence to say, totally, I could totally do that. Got to go figure that out. Okay. So trying to find kind of like high density populated, either office buildings or residential buildings that don't have something in place already. And the question that comes to mind for me is like, well, why isn't the building owner or the property manager?

6:40Like, how is nobody else doing this? Like, why aren't they interested in doing it? Why did they say, yeah, can you do that for us? The biggest answer to that is it's not a high enough on the priority of their to do list. A perfect example of that is I'm talking to Marriott Corporate right now out of the Northeast about doing a potentially large rollout with all of their courtyards across the U.S. and Canada. and they already have these little micro markets in their hotels, but they're tired of the human error element of relying on their staff to restock them, relying on their staff to do room charges because people have to wait at the front desk.

7:18So again, that human error piece to this, where when you come with a proposal, it's like, oh, I can outsource this. I don't even have to worry about it. Cause at the end of the day, if you have an empty vending machine or an empty micro market, there's nothing worse than not having it than having it and it's empty because now your residents or your tenants expect, Hey, I want to go buy and get my energy drink before work today. Well, when it hasn't been stocked for three weeks, guess what I'm going to do? I'm going to go to the property manager and complain. Okay. Your argument is that it's not core to their business in the case of the hotels.

7:50And so they're just like, who cares about selling a$3 and 50 cent thing where we're charging$300 a night for the room. Like it's a distraction. If somebody else could take it off our hands, that would be a welcome conversation. I mean, a perfect example of this is there's a national vending brand that when we started to become a national thing with vendingpreneurs in the community that I got exposed to and we were taking a lot of their business. And I was like, I wonder why these locations you mentioned with the high foot traffic, why they're not happy with these guys. Well, these guys got into food catering too.

8:20So they were doing vending and food catering. So think of a senior citizen center. If I'm a vending company coming in and I'm also providing all of the Pepsi or soda kegs for the cafeteria, all the food for the cafeteria, do you think I'm really focused on the vending machine down in the hallway that just needs to top off with snacks that might do$1 ,500 a month where this cafeteria is going to blow through$1 ,500 a product a day? Okay, okay. So you get your first yes from this apartment building, this athlete or student apartment building. And then you start looking around, well, how am I going to get a machine?

8:54Walk me through what happens after that. I literally Google vending machines. You kind of got two routes here. You go down the used path, look on places like Marketplace and Craigslist and even local refurbish type places like appliance type places. And then you got these new places. And the best analogy I would use is a new vending machine manufacturer is very similar to a car dealership. So I called them up. They're like, all right, Mike, the machine you want, it's going to be about$5 ,500. Do you want to pay for it up front or do you want to finance it with zero money down? And I was like, okay, tell me about your financing options.

9:28Like, oh, we can do it over 60 months. You can use profits to pay them off early. And every single one now I financed with zero money down. and I typically have them paid off in the first year just with profits. Okay. And that's like the real estate mindset of leveraging other people's capital versus coming up with a hundred percent down payment. Yeah. And this is back to the, like, when I bought that a hundred grand house, I had to put 20 % down and that just wasn't sustainable every single rental. So this is where with vending, I just bought 18 grand worth of vending machines, I think in October, and I didn't put a dollar down.

10:03And the benefit there is you got something brand new because I'm on Facebook Marketplace. Of course, like, well, shoot, what's available? Dear me. Yeah. From the$500 to$1 ,000 range, it looks like for some drink machines. Okay, a little bit more than that for like the combo machines or the snack machines. I don't know how old they are. I don't know if they have card readers. But there's options if you want to minimize the upfront sticker price of these things, too. There's definitely options. I got my first machine used and then it broke after six months. And I was like, I never want to do that again.

10:34I don't want to be a machine mechanic. None of that stuff. I just want this thing running. Are they like relatively reliable? To what extent do you have to know the fixing game? Or do you have a go-to vending machine fixer person that you can call? Like if something does break? Yeah, that's why. So ever since that first one, I got off Craigslist broke. I've only bought new ever since. And so they're under warranty. So if anything were to ever, I mean, you got to keep in mind, these things have been around for decades. So they're built to last. I mean, we're talking 20 years plus. So they constantly are built to be robust and to be used.

11:09So if I ever have an issue, because mine are under warranty, I just FaceTime them when I'm at the machine. They do their little troubleshooting thing. If there's any issues, they just overnight me apart. And like I said, I don't want to be the mechanic. Yeah, that becomes a little bit less passive at that point. Exactly. So walk me through the math here. So new machine, 5 ,500. You're financing that over a period of several years. What's typical payment? Typical payment is right now with interest rates around 170 bucks a month. Your first payment isn't due until 90 days after it's installed on site.

11:42So you're going to do 90 days of revenue before your first$170 payments due. And then it's$170 a month typically. And that's just based on today's rate. So let's just say eight to 9%. I don't know. I have one. Sure. Sure. Yeah. Four years ago that my payments are$112. So So they're definitely a little variable there. And then, yeah, you can just use profits to pay those off. Of those machines I just used as an example that are$170 a month, I mean, we had one in January that just did over$1 ,500. Okay,$15 in revenue minus your cost of product. Aim for a 3X markup, like stuff in vending machines.

12:21It's not cheap. Exactly. You pay for the convenience. Yep, yep. So typically we'll be around 35%, 40%. So let's just shoot high on expenses. let's say 40 % of 1500 bucks. So what's that? 650,$700 in cost of goods. Okay. So we'll call it 800 in profit on that$1 ,500 a month. Yep. Okay. Yeah. Minus your 170 in payment and you're still in the black pretty healthily and you pay it off faster if you don't like paying interest and you can parlay that into the next machine, next location. Okay. So you're starting to try to see how this can work out and you have so far minimized your overhead. Anything else that would go into that?

13:00Like, do you have to like pay electricity or like you have to pay a percentage to the plate, like to rent this little like six square foot place in their building or something? I hire someone to stock the machine. So if anyone needs to like place an ad on Craigslist, you can place a job ad like under gigs. So it doesn't matter if they stock in the morning or night because they're a night owl. It doesn't matter. They just need to do it, let's say once a week. And that's about 20 bucks an hour. So let's just say$30 a week, even though it takes a half hour to stock a machine. So let's just say 20 bucks for easy math.

13:32So we got 20 bucks an hour, that's 80 bucks. So you got$700 in COGS,$170 machine payment. And then if you don't want to stock yourself and you want to make it truly passive, you're going to spend another 80 to$100 for someone to stock that machine. Gotcha. Yeah. And then lather, rinse, repeat as many times as you can or as many locations as you can find. More with Mike in just a moment, including the minimum occupancy thresholds you want to look for when scouting for locations and where he gets the actual products for the vending machines right after this. As a business owner, you worked hard to make that phone ring, but missing a business call, it's like watching money fly right out the window.

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16:58I mean, we've added cold brew machines now. We've added micro markets, which look like unintended self-checkout 7-Elevens on site. So that's kind of a parlay thing there. We're now, instead of just the candy bar, the soda, and the vending machine, now you can start adding things like toilet paper. You can add things like phone chargers. You can add things like subs and salads. And now our average transaction value just went from$2 to$3 to$12 to$15. Well, with each of those, and now you got to worry about like food spoilage and turnover and stuff where it's like, yeah, it's less of an issue with a candy bar or bottled water or something.

17:35Because I've seen these at the airports where it's like several racks of different products and then there's no checkout person, just like self-honor system, like self-checkout. There's enough people walking by to prevent theft or security cameras. Do you find that inventory shrinkage is an issue here? Nowadays with some of these cameras, so all those will have cameras that you were at. But these cameras now will alert you if you grab an item and like there's AI and machine learning cameras now that if you don't grab that item and go over to the kiosk, it'll actually shout out something out of the camera to you, like almost like a horn of like, hey, you didn't pay for your item.

18:10And now you're sitting in the terminal of the airport and everyone's staring at you shoplifting. So there's all kinds of things. And then the other side is like a lot of these where it's going now is like that cooler you grab that Dr. Pepper out of, it's going to have cameras built inside of the cooler. So if you take out five Dr. Peppers, you don't even have to scan it anymore. It'll just because there's a lock to get open the cooler. So when Nick comes by that cooler, he has to put his credit card to unlock the door. And then if he takes five Dr. Peppers, he doesn't have to scan on that lock, he can just grab them.

18:44And it's going to charge that because of the cameras, we'll use machine vision and calculate that you just took five Dr. Peppers. So we see this all the time with like drunk college students where we have these modern coolers. They'll like think they're 2am having the munchies and getting away with taking 20 things. And we're talking 90 to a hundred dollar transactions. They wake up next week and they find the transaction charge. Yeah, like all those bags of chips they just thought they snagged when they were hammered are now they're paying for it. Okay, so getting a sense of, well, what demographic do I want to target here?

19:21Yeah. Impulse purchases late night. Okay. With the protections in place to prevent the shoplifting. Yeah. Okay. Yeah. I can picture like a senior center down the road from us. There's got to be some nearby apartment buildings. How do I find the decision maker there? What does that like initial conversation look like? What's my opener? It's super easy. I think the first thing is the examples you just rattled off. So senior center and let's say an apartment complex, the thing they all have in common is they have a front desk person that works there. So you can just roll right in there. They're not going to know you from anyone else.

19:54And you can just say, hey, is your general manager or your property manager in today? And if she's like, oh, no, you can always ask for the business card and send an email. But yeah, that's exactly what I did. That first location I landed, I was like, hey, is your manager in? And she happened to be in. She's like, oh my gosh, coming with COVID, we can't put out refreshments, blah, blah, blah. We want to move forward. It's just such a low barrier to entry by just doing that pop in. Your ask was like, tell me about your current vending situation. Like, what's that line? Yeah. Or just like, do you want to provide modern amenities?

20:25And then you just start asking questions about foot traffic to qualify them. So how many people live here or how many units are here? And they'll say, okay, Nick, there's 200 units. And then you're like, okay, well, how many people live in those units? because some might be two or three bedroom. They're like, oh, 400 people, like right away you're sitting on a 1 ,500 to two grand gold mine just with that. Is there a minimum residency or occupancy that you're looking for? Yeah, we like to target 100 units as a minimum or 100 plus employees. Okay, 100 residential units or 100 employees. It's hard to imagine an office building without this in there already, but you're finding like, this building has been here for 25 years, No one has ever asked us about vending before.

21:08You know, that's a great idea. Like, does that happen? All the time. And in fact, what you'd be really surprised about is we're taking over a lot of the market. So current user, let's say that location, they probably already have vending machines that aren't being stocked because the baby boomer generation doesn't use a cell phone. The only way they can track inventory is driving by the property where like on my phone across the country. I can look at all my vending machines, even my micro market in Philadelphia and see what I've done in sales in the last hour. So then I can get ahead of what needs stocked before it actually shows up empty customer facing.

21:47I'm like, okay, we've sold eight out of 10 salads. We have two left. We need to backfill those salads where right now these places we're taking over for, they either have vending machines that are broken. They have vending machines that don't allow credit card usage, well, guess what? 80 % of your sales are going to be with card, not cash anymore. Yeah. So it's not so much that they have never considered vending. It's that their existing provider is not living up to expectations or it could be doing better. Yeah. It's like either that existing provider took on a bigger, let's say the Coke provider of Washington has vending as a side service.

22:26Well, is that Coke provider more worried about topping off the cafeteria with Coke in the school? Or are they more worried about the teacher's lounge vending machine? Did you give any thought to buying a route that already existed as a way to kind of jumpstart this? I can see how that would appeal to people, but I can also see like, well, there's a lot of sweat equity to be had and just like doing the cold calls and making a few placements yourself. Yeah. So I'm always looking for good deals when it comes to buying routes. I have a student that started in my like vendingpreneur community where I helped people get going last January and he went from zero machines to 20 machines.

23:00And about half of those came from buying routes for sale. And the other half came from finding leads, sending cold emails, getting a response kind of on repeat. So I see both sides of it. The hard part you need to be careful of is don't get caught up in how many machines are part of that sale or how many locations they have vending machines in, you want to focus on revenue per machine. Because that's where a really, like, I would rather get one senior center that's doing a thousand bucks a month than five machines at five Jiffy loops doing a thousand bucks total a month. Fewer stops, like fewer places to restock, like less headache to manage.

23:41Higher revenue. Yep. Gotcha. And then if they're like really low revenue, if you're like, oh, the location looks kind of good, but why is the revenue so low? Is it stocked all the time? Does it have a card reader? Like you start to kind of go through, like could this be an undervalued asset versus, like if I was to put in a more modern experience, would it still be$100 a month or would it be$700,$800 a month? Like I could see how you could do some forced appreciation or forced improvement to these locations. Even just little things like adding a credit card reader or instead of 12 ounce sodas, now you're charging bottles of soda.