157. The Power of Passive Income: How He Built a $75K/Month Vending Empire

0:00Passive income. It's the entrepreneurial mantra we've heard time and time again. But for the vast majority of us with limited resources, is this dream attainable or just pure fantasy? Today's guest is here to reveal the shocking truth. Not only is passive income obtainable for anyone and everyone, but unlocking it requires far less than you think. And he's here to show you exactly how it's done. This is Ryan Atkinson and you're listening to the Outfit Podcast, where we uncover the secrets of building and running successful businesses. Today, I am ecstatic for this episode. We are here with Michael Hoffman, the entrepreneur and wealth expert who went from making $2 an hour as a college strength training coach to starting a vending machine business that generates over$75 ,000 a month in passive income.

0:42He's helped thousands unlock financial freedom, and he's here to do the same for you. Michael, thank you so much for being here. I am so, so excited for this episode. Ryan, fired up to be here and excited to dive into some of this. Yes. And let's give the audience a little bit of background on who you are. Can you share us that background of who you are and how you transitioned from being a college coach to pursuing passive income? And was that a hard transition to make? Yeah. So, you know, a background for me was I started as a classic farm boy in Iowa that had two parents that were entrepreneur spirit and I had a lemonade stand growing up.

1:14And so I had that kind of entrepreneur component. And then I went to college and really got down this path of human performance and coaching. So I got into that with collegiate football and athletics. And I kind of had an aha moment when I was coaching back in the Midwest when, especially in the fall, there's no days off and you're playing on Saturdays, you're back in the office on Sundays. And it just starts to wear down and you start to think about like, what are other ways to make money that don't require my time? And that's when I kind of went down this path of looking at passive income streams to really build some wealth without requiring as much time as my day job at the time.

1:53So you went down this path of passive income. What were some of those first passive income ideas that you had way back when? Yeah. So when I was a young coach, I didn't know a whole lot, but I did. One of my mentors in the coaching business actually got me on to trying to find these long-term rentals in the Midwest that you buy for$70K and you rent out for$1 ,000 and you're well over the 1 % rule. So no matter what mortgage rates are or anything, you're going to come out ahead. And so I literally took my emergency fund that I had built up from coaching and bought my first rental. And it became kind of addicting.

2:28I was making $400 or$500 off of tenants. And I hired a management company that I literally said, if it's not more than$500, fix it and don't even tell me about it because I want it to be as passive as possible and parlayed that into a second property and then 1031 that into a short-term rental and just went down the path from there. Interesting. And you said the emergency fund aspect. I want to ask, how much did you take out of an emergency fund to fund that first part of real estate? Yeah. So the first rental was$70 ,000. So 20 % down was$14K. So it was when you're making, I think at the time I was making$1 ,200 a month as a coach.

3:07So it's not like I could just make up for it in a couple months. Yeah. Were you scared to put all that money down? Because you're making$1 ,200 a month and that's not a whole lot of money here that we're playing with. I mean, were you scared? Absolutely. And that's the entrepreneurial DNA is like you run towards or makes you uncomfortable. And looking back on it, I was probably scared as heck. And it was one of the best decisions of my life. Absolutely. It's kind of like the army. We run towards the sound of chaos, as we like to say. Exactly. And I want to ask then, so you're in real estate, you're doing some long-term rentals, 70K house, doing all this stuff.

3:44How did that kind of lead you to explore like vending machines of all things? It seems like two very different things there. So how did you fall upon vending machines? Yeah, I think a lot of it, Ryan, was I couldn't keep coming up with the down payments for more rentals. And you're kind of capped out at what the market rates are for rent and what you have locked in through. There's not a lot of growth potential there with that asset you already got. So for me, I transitioned from coaching to working for a tech startup that required a lot of travel. And I'd be in these airports and I would see these old school vending machines that, one, I knew people were making 10x off of me because that bottle of water that I bought, I knew was 10 cents at Costco and I'm paying four bucks for it.

4:29And then two, there was no one selling me that it was a machine. So that person's time that was running that machine was literally limited. So I was just fascinated by that whole concept. And I just kind of went down this rabbit hole of vending. And that's when I really learned actually Warren Buffett's first investment as a teenager when he was 17 was a pinball machine route and that he had built. And at the end of the day, it's all unintended retail. I think that it's really interesting. You're thinking about it in a very entrepreneurial way, honestly, where it's like, well, I know it's going to cost them 10 cents to this water bottle.

5:04They're going to charge me$4. They don't have anyone selling it. So I think that speaks to your entrepreneurial mindset of starting to figure this out even when you're not in the industry yet. Yeah. And then you think about the friction. Think about you go to the grocery store and you don't want to have to wait in line to check out. You naturally just go over to the self checkout kiosk. And that's where like the future of all of this is going. Now you go like I literally just landed in Denver last week. I went up to this micro market in the terminal, didn't talk to a person, grabbed all my items.

5:33There's AI cameras above me, checked out, got my stuff and walked out without waiting in line, without the whole nine yards of dealing with a customer service rep that was mad and hated their life for any of those kind of friction points. I'm also someone that will go to self-checkout if I can, just because I just want to do it. I get to bag all everything, get myself there. But what timeframe was this? Because this isn't before people are really thinking about self-checkout. This is 2014, 2015? Yeah, it was right before COVID. So it was more around like 2018 time. So yeah, it was probably six, seven years ago, kind of exploring this a little bit.

6:07Let's go to that time then. So it's around this timeframe, you're starting to realize, okay, this vending machine thing might have some traction behind it. How did you start to take that first step to actually investing in vending machines? Yeah, so it's a really good question. It was a classic thinking about how would you make money with a vending machine? It all starts with foot traffic. And so I actually, living in a college town, I went to a college dorm right next to campus. And I walked in and was like, hey, you guys have vending machines? Do your residents have to walk across the highway at 10 p.m.

6:44and deal with kind of things that happen at night trouble wise? Or do you actually provide this amenity to your residents? And they were like, no, we don't have this. We'd be interested in what you have to offer. Send us a proposal. And this is pretty Chad GPT. Yeah. So it was just door knocking, literally. and I googled vending machines online and there was only one company that wasn't from Alibaba or China and it was a company out of Iowa and it was amazing I was like oh my gosh they have no money down your first payment isn't due for 90 days after the machine's delivered so you have 90 days of sales and they had a ton of YouTube videos on how to how to get the machine through a doorway how to set the prices like how to turn it on I was like all right and then being from Iowa like you.

7:30I was like, I trust these guys. So right away, I got the first machine and self-taught myself. That's really interesting. I love that they had the blueprint essentially of this is exactly how to do it and how to price your products. I am curious. So finding your first vending machine, it sounds like, so you're able to put it in the dorm. What was that timeframe? You sent the proposal. What did you include in this proposal? You're not trashy if you'd seen it. What did you include in that proposal? And what was the timeframe from actually getting set up just so people have this in the back of their mind as they're listening?

7:58Yeah. So I think the first thing with regards to kind of that starting your business is you got to find the right locations that has foot traffic. So that was the first thing with this apartment complex. And then, you know, a typical machine takes 48 weeks for delivery. And so you kind of use that timeline to your advantage with getting the proposal signed. And then in this case, this proposal, I didn't want any revenue share. In fact, they asked if I would donate a percentage to a nonprofit so they could put a sign up next to the machine. And so the portion of your proceeds would go to X nonprofit.

8:30So I was like, absolutely, I'll totally do that. And that was 2%. So it was very minimal. And yeah, it was just kind of growing from there. You know, the classic commercial real estate type expansion where they have three other properties they manage in town and you do a good job with the first one. And we were fortunate to get the others right after that. I love that. What were some of those upfront costs? Because I really want to speak to the audience here that they want to be entrepreneurs. They want to get in this business as well. What type of money should they be thinking about, about setting aside to actually get this business started?

9:01Yeah. So if you think of vending and the minimal capital relative to real estate, most machine manufacturers are in, whether that's micromarkets, the more frontier forward machine type setups or the old school machines, most all manufacturers are similar to car dealerships. So they'll do like, Ryan, do you want to do pay in cash or do you want to finance? And then you say, oh, maybe I want to finance and save some capital. So 95 % of companies will do no money down or, you know, at max 10 % down on a, let's say a 6k machine, you're looking at 600 bucks. Or if you're like me in that first example, I use that at no money down.

9:40And then they had a financing plan of 60 months. So my monthly payment was$117. and it wasn't my first month's payment wasn't due until 90 days after the machine was delivered. So I had done 90 days of sales before my first$117 payment. And then as far as like stocking that machine, usually budget for around$500. And then they'll also put a credit card reader on the machine for you and wrap that into the financing costs of the machine. So you're looking at, let's just be conservative. the product to put in the machine the first time is 500 bucks and then maybe a hundred dollars for other ancillary things like insurance whatever else do you think of you need to get started that is really interesting and are you paying a fee to these locations that you're actually placing i'm sure like varies but i know the apartments one they didn't pay anything but do some have like where you need to pay a fee to actually have your vending machine there some do but most don't that's kind of a common like oh you need to so we actually have the other side of that, we have two businesses that will pay us because they don't want their workers to go to the 7-Eleven or we work for a roofing company that literally will pay us every month for 50 % of all the products sold in our micro market.

10:57And what we do is we set the prices half off. So if it's like a, let's say a$2 water, we set it to a dollar. And then every water we sell for a dollar, we invoice the company. So at the end of the month, we do a thousand dollars in sales. We invoice the company for the other$1 ,000, but he wants his employees to get cheaper products. And he literally calculated all the costs of time going to the store, gas using the work trucks to go to the store, all the store prices to justify putting this into his budget. So you think of like, oh, you're going to rent this space. But I think we, I don't even know how many locations we're up to now, but we probably pay a revenue share for one fourth of them, 25%.

11:42That is a super interesting business model. I really, really like this. And I love how low those upfront costs are. You're basically looking at the$500, that$100 or so. I want to go back a little bit here. Identifying high traffic locations, what are some try and true high traffic locations that are easier to get and find than others? Yeah. So there's kind of two trains of thought there. And both of them revolve around one thing, and that's a full parking lot. So you think of one train of thought for high foot traffic is going to be high employees. So anywhere that has a lot of employees that has a full parking lot is kind of where you can target.

12:20And then the other side of it is anywhere with literally high unit count. So whether that's apartment complexes, whether that's condos, what have you, anything that's going to have high unit count. And at the end of the day, you're just trying to quantify foot traffic. And when you think of unit count, don't just think of an apartment complex. Think of that medical building where you go see a doctor and you walk in and there's the CPA office on the first floor and the dentist on the second floor. And that parking lot is always jam-packed and everyone has to follow through that lobby. That kind of place is where you want to be.

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13:32Yes,$58 ,000 a month. If you're ready to learn, then the Uphlip Academy has the tools to help you succeed. Click the link in the description below and gain free access today. Everyone, I will see you in the Uphlip Academy. One question that comes to mind for me is let's just use the high unit. Some of them already might have a vending machine. So are they only having one vending machine or only using one supplier for their units, whatever, or there's room for two suppliers, two vending machines in one location. Yeah, it depends on how niche you want to go. There might already be the old school machines in there.

14:04And now the baby boomer generation is in there and they have the old school Coke and Pepsi machines. So you might come in and pitch them on these new micro market concepts with salads and subs and factor meals and crumble cookies in your kind of smart machine. So So you can displace those people. But then you also got the other side of where you're at in Austin. You know, Farmer's Fridge has a really big footprint. That's a very niche vending machine that you see in like the Austin Airport. But, you know, you're dealing with literally only salads and shelf lives in seven days. So you better sell a lot of them or you're going to have a lot of spoilage.

14:41That is super interesting. Yeah. When you said the Farmer's Fridge, I was thinking of that exact location in the Austin Airport that you were mentioning right there. I want to ask then from that. So you talked about two different products there, your Coca-Cola's that you're selling and your farmer's fridge, two very different markets that you're selling to. Are you primarily focused on one more than the other? Or how are you deciding which products go where? Yeah, it's all about what the clientele is, you know, and that's where understanding, again, putting yourself in their shoes. So if we're going into a YMCA or a gym, you might do healthy only protein shakes, you might do like protein chips and protein bars, but you're not going to put Snickers and Twix's in there or Diet Cokes, it's going to be a lot of like Celsius, Alani and then protein shakes, muscle milk, etc.

15:28And then the other side of it is you think of places in downtown Austin that might be a commercial office building that had a Walgreens or CVS and then Walgreens or CVS pulled their retail space out during COVID. and now they have a bunch of office tenants, even at 50 % occupied, they might have 1200 people in that building that were used to getting incidentals from Walgreens or CVS. So they might want a lot of your over-the-counter meds like Tylenol and Advil and all your hangover type stuff and kind of that, like we call them incidentals, you know, makeup wipes. And we have a property that's half Airbnb rentals, half apartment complex, and we have an entire shelf that's incidental.

16:10We have phone chargers, we have condoms, makeup wipes, all the way to smart waters and the cooler. It's really interesting because it really expands vending machines. It's kind of like when people think of like franchising, like fast franchising, they only think of fast food places. And I feel like vending machines maybe sometimes only think of like Coca-Cola, but vending machines go way beyond just your Coca-Cola. Absolutely. I mean, anything you want, people are going to pay for convenience. Yeah, exactly. Let's talk about strategies you have used to secure vending machine placements. Anything specific that you have used to get these placements in apartments or offices?

16:44Yeah. So there's a couple strategies we use. We have full-time cold callers on our team. We have email SDRs on our team. And then we do a ton of pop-ins. So for me, I'm super bullish on face-to-face because usually the competition is lazy and we'll hide behind an email address. And if you put yourself in a property manager's shoes, whether it's literally an office building or an apartment, they're putting out fires all day. So they're not just checking their email. So I love doing just kind of swing buys and just checking in and being kind of the front of their brain and saying hello, dropping off a four packet crumble cookies or something just to try to keep the ball moving down the field a little bit.

17:25So you guys have full-time cold callers, STRs. I absolutely love that. I know you said competition behind the computer, but I still believe cold calling is not dead. Cold emailing is not dead if you do it in the right way. So how is your team sourcing locations or finding people? You don't have to give away all the secrets here, but how are you guys finding people to actually call? We have a couple of data sources we use and we have some criteria around some foot traffic algorithms. I mean, we have, I don't even know how many, probably 900 properties now we found off market. Because where we're going is we want to build the Zillow's estimate for vending revenue.

17:59What's this type of property going to bring? So yeah, we have some data sources that we will pull. And then yeah, we just pick up the phone and start dialing away. Interesting. So are you just saying like, hey, this is Mike. I'm calling if you guys have any vending machines. What's the amount of time that people say yes, no, interested? Yeah. A lot of times you'll find the baby boomer machine that's broken or, oh yeah, we have a Coke machine, but it takes cash only. Or, oh yeah, we're hitched to Pepsi's wagon with the bottling service here and we actually want to add some Coke products like Monster.

18:36So there's kind of objection handling. There's a hundred ways you can go with it. Kind of back to the incidentals example was the one property group we got with that micro market. That micro market did$18 ,000 in August. Wow. We sold 589 smart waters, but we also sold a ton of makeup wipes and paper towels and laundry pods. So for us, we were going in there like, hey, we can actually be a full on market for you. And this property is up in the northwest and a very high visibility city. And they didn't want their residents going across to Whole Foods at 10 p.m. when there's homeless outside. Like, that's just not what they wanted to do.

19:15So for us, it was kind of a simple value prop. Yeah, I want to emphasize that to the audience, 18 ,000 with one mini market. That is insane numbers. Can you talk to us specifically about the margins on that vending machine, the mini markets? With that one, we're about 50 % all-in profits. With that one market, we pretty much normally do around 3x on our COG. So we try to aim for 67 % to 73%. Like the smart waters are a little bit different because, you know, we can get those for a dollar or a little bit less and get away in this market with selling them for four bucks. So those are on the higher end.

19:54And then food is a little bit lower around two to three X. So yeah, we're profiting about 50 % on that one. That is insane. With this one specifically, because I know with your very first one, you had like a full playbook on how to like price everything. Are you still using something similar to that? Or how are you deciding on how to price these products then? Is it based all on margins or following best practices? Yeah. Yeah. So this one we were talking about with the 18 grand in August, we actually priced our smart waters at 350. This ownership group has multiple properties in LA, the Northwest, Chicago, Canada.

20:28So we negotiated a revenue share for their whole portfolio properties and gave their owners dashboard access to the sales reports. So they had kind of some skin in the game to help market the markets. And so it's funny because we actually got an email within the first two weeks that were like, hey, will you raise your prices? Which usually it's the opposite. It's like we got residents complaining that you're charging too much. So we actually bumped our prices up a little bit, which has only helped our margins, obviously. How are you then refilling these vending machines? Can you talk to us about the logistics that happened there to actually make sure these are fully and properly stocked?

21:06There's kind of two trains of thoughts with this. And I'm kind of on the how do I make this as systemized as possible because I want things to be passive and my time's worth more than stocking Doritos. So I kind of clearly self-taught myself, you can't delegate something unless you know what you're delegating. So I stocked our machines probably for the first six months by myself. And then I posted that under Chrysler's gigs, which was their gig section is brilliant because it's all the door dashes, the Ubers. So in a college town, it's like you can stock these machines if you're an early riser, if you're a night owl, if it's Sunday or Wednesday, I don't care.

21:44It just needs to be done once or twice a week, depending on sales volume. And so I hired someone at$20 an hour and I just put in there, hey, if you do a good job, I'll raise it up to$25 an hour after three months. And then long term, I might give you a 5 % profit share. And that's just worked ever since. So now that person came on full time. We just hired our third person this week for that route. So we just kind of really build the systems and let it kind of run itself. I want to dive into that though. So you have three people that are working on logistics and everything, but you have 900 different locations.

22:19How many markets are you in? And how does that math essentially? I want to dive deeper into that. So I'm talking about our Eugene route here. So our route here is probably 25 locations. Usually one staffer can take on about 15 to 20 if they're really efficient. You know, usually 10 locations a day. If you have good locations, you usually have to go by twice a week. And then you might have a day in the middle of the week, like Wednesday as a floater, just in case something comes up. But yeah, you usually try to scale that. And a lot of people, they'll get one or two locations doing, let's just say,$2 ,000 a month.

22:55And so you got, or even less, let's be conservative, say$1 ,500 a month. So you got two locations doing$3 ,000. They're profiting$1 ,500 minimum. And if they're doing it themselves, they're probably spending three hours a week. I mean, you factor in, that's 12 hours a month. That's a pretty solid return. For sure. What are some other costs that comes with the vending machine business? I feel like we've talked about a few like stock and obviously you have payroll, you're using technology, you have SCRs. What are some other typical costs that you're seeing within the vending machine space? Just so people can understand it may be a smaller upfront cost, but there are costs actually running this.

23:32Absolutely. Yeah. So there's all kinds of things that definitely add up. So you got insurance. So normally machines insurance costs is about 15 to 20 bucks. And then it kind of plateaus at a hundred bucks for your route that's per month what else you got you got like transaction fees so a lot of these micro markets and kind of smart coolers are credit card only so you got the merchant service fees you got the software fees from that machine company because they're trying to like get you for oh we're going to take five percent of revenue because we're providing software updates and the whole like sas model of that so you know you got another 10 % there.

24:10So if you think about a 50 % margin, you got about 30 % for COGS, 10 % for those kind of transaction fees and software fees. And then another 10 % for the ancillary, you might hire a part-time stalker or the insurance fees or what have you. That's super interesting. I didn't even think about the insurance costs, but I mean, that's like a no-brainer. Of course, you guys have to be insured there. I want to pivot to then also asking about how are you finding these vending machines? And what are the benefits of buying a new vending machine versus a used vending machine? Yeah, this is a loaded question.

24:45So we'll just go through what happened with me. So my first location, I was like, oh, I'm going to save a couple thousand dollars. Or no, it was actually my second location. I was like, I'm going to save a couple thousand dollars and buy a machine off Craigslist. So it was a refurbished machine from a manufacturer that gets these old machines and refurbishes them, whatever. And so I kind of trusted them at the time. And sure enough, that machine broke after six months. And I realized real quick, being Mr. Passive, I was like, yeah, no thanks. So ever since then, I've never gotten to use machine again.