Whether youre buying, selling, building or holding real estate, the question is whether you have the right site in the best location and if it fits the economic axiom of highest and best use. If youre leasing, the question has a twist: Does the site fairly represent value and meet your financial needs?
Highest and best use is a short way of saying revenue will support the value of the land and improvements while also meeting investment requirements. Think of it as a teeter-totter: On one end of the board is your land and improvement costs; on the other is net revenue. If the investment is too great or the profit too small, youre out of balance.
Most investors look for a return on investment in the range of 10 percent to 20 percent. The variation is a degree of risk. The majority of businesses have fairly predictable revenue streams. If you know your expenses and can control and manage them, you can accurately predict what your income will be. Taking normal fluctuations into account, you can arrive at net profit and back into an acceptable investment amount. If income meets or exceeds your criteria, youre on the right track. If it falls short, you may have chosen the wrong project.
In the car-wash business, the three main wash types (self-serve, tunnel and in-bay automatic) have relatively predictable revenue, due to an abundance of public information on site characteristics and profit. With the assistance of a qualified car-wash representative, you should be able to match a possible site to its revenue potential.
Finding the Right Property
Between deciding to become a real estate mogul and actually turning into one, a lot of decisions must be made. First, you must establish your investment criteria. Consider the following:
- How much do you want to invest?
- What is your required return on capital?
- What types of business are acceptable to you?
- How active do you want to be in the venture?
- How are you going to finance the investment?
- Will the business require staff?
- What is your exit strategy?
Once youve answered these questions, you need to find the right property. Most people seek the advice of a trained real estate professional. Keep in mind you need one who is qualified to deal in commercial properties with specialized business needs.
As the requirements for each car wash are unique, your choice of property will depend on the type you choose. If you plan to build a self-serve, youll need roughly half an acre of land. This can typically be located on a B-grade site that ranges from $3 to $7 per square foot. If you want to build an automatic wash, however, youll need to spend more. Its not unusual for A-grade properties to sell in the range of $15 to $35 per square foot.
There are several other factors to consider. Competition in the area, demographics, and traffic speed, type and quantity all play a role in the decision-making process. The fundamental demographic criterion is the number of roof tops in an area. For example, youll need approximately 1,500 people within a 3-mile radius to support each wand bay at a self-serve site. For a more sophisticated wash like an automatic, pay close attention to traffic count. Check industry estimates for the percentage of customers you should expect to capture from drive-bys, and this will help you approximate annual business.
Once youve narrowed your choice to a few promising sites, youll begin the process of economic planning. You must answer these key questions: What is the sites true usable space? What infrastructure improvements are necessary? Is the property in a growing market? What will you have to spend to conform to the wishes of the city? Are all utilities present? Is the site properly zoned and permitted?
After gathering this data, plug it into your financial model. If the return meets your goal, great! If the investment is unbalanced (think back to our teeter-totter), its time to revise the model or look for a new site. Its critical to be honest in your evaluation and ultra-conservative in your revenue estimate. Understanding your costs down to a gnats eyebrow is mandatory.
Car washing, like so many other businesses, has its own real estate quirks, rules of thumb and known performance data. Consider adding a car-wash professional to your team to help guide you through the maze and make the best investment. Happy hunting, and good washing.
Fred Grauer is president of Grauer Associates and vice president, investor services, for Mark VII Equipment LLC, a car-wash equipment manufacturer in Arvada, Colo. He has made a lifelong career of designing, selling, building and operating car washes. He can be reached at [email protected].