What is the current fascination with carwashing, a business that isn’t glamorous or high-tech, but is capital intensive and requires a lot of effort to be successful? I think it’s the perception of ease: The industry seems easy to get into, easy to finance, easy to build and pretty simple to operate. But as with most perceptions, this one includes a real disconnect between what is real and what isn’t. Car-washing is a very tough business, not suited for the faint of heart.
The physical real estate is one of the primary considerations when locating and choosing which type of car wash in which to invest, and it is particularly important in terms of total financial impact. Yes, carwashing is a “vehicle” of choice to pay for the real estate investment itself, but don’t lose sight of the long-term objective: improving your asset base and net worth, the keys to which are real estate appreciation and sale of the business.
So what is the role of real estate, and how do you know your investment matches and fulfills its “highest and best use”? This old real estate adage insists that whatever you place on a site should return enough revenue, when capitalized, to support the value of the investment. The question is, how do you know when the revenue stream is correct?
Measuring Car-Wash Value
Each type of car wash has a relatively predictable revenue stream and expenses. You can therefore roughly determine if a particular site and facility type will be the highest and best use. Following is an example.
Let’s say you found an ideal site candidate for a car wash. You’ve determined a self-serve (wand or coin-operated self-wash) best fits your lifestyle and business model—minimal labor, all cash, nominal customer involvement, and you can keep your existing job until such time the investment takes priority. The site meets generally accepted rules of thumb (good ingress and egress, as well as demographics), and you know the community can support an additional six car-wash bays. You meet with the realtor and find out the site it is a permitted use and the planning board will support the business.
So far, you’re doing great. You gather your information and put together a rough but telling set of numbers:
- Your land cost for half an acre at $10 per square foot is $220,000.
- Your estimated equipment cost for six bays at $30,000 a piece is $180,000.
- The cost for your estimated building and other site improvements is $200,000.
- Your total investment is approximately $600,000.
What about revenue? You’ve discovered, through your research, that average car-wash revenue for your area is about $1,800 per bay per month, or $129,600 annually. You have also learned that a conservative number for variable expenses (heat, electricity, sewer, water, supplies and labor) is around 30 percent, or $38,880. Now you’re down to $90,720.
After talking with your banker, you find out you need 20 percent down ($120,000) for the project, and it will be financed over 15 years. At a 7 percent interest rate, your annual loan payment is roughly $51,772, leaving you a net $38,948 to cover fixed expenses (debt insurance, real estate taxes, accounting, legal and advertising). Assuming your insurance costs about $10,000 and real estate taxes are about $12,000, you’re left with $17,000 in profit. Considering you invested $120,000 in cash, the return is 14 percent.
|Annual income (six bays @ $1,800/month)||$129,600|
|Subtract variable expenses @ 30%||-$38,880|
|Net before debt and fixed expenses||$90,720|
|Subtract debt ($600,000 - 20% down = $480,000)|
|Balance for fixed expenses||$38,948|
|Subtract estimated costs for insurance and real estate taxes||-$22,000|
|Estimated return on cash||14%|
That’s not bad, but if you were looking for a minimum of 20 percent, you’ve missed the mark. What’s more important, if you were to capitalize revenue at 20 percent before fixed expenses and debt, it would only support an investment of $453,600, not the $600,000 it cost to develop the site.
In the example, it is obvious one or several of the numbers are off. The most apparent are land and revenue. To make the project more profitable, you either have to reduce the land cost, find a different site or change the revenue opportunity. The other thing you have to take into consideration is your exit plan, which is of major importance. You want to be sure the revenue stream will support your asking price with a reasonable amount for good will at time of sale.
Consider what would happen if the land cost were only $5 per square foot instead of $10. Your new loan payment would be $42,280 a year. With all other expenses staying the same, your new return on cash (with a reduction in real estate taxes and insurance to $16,000) is 33 percent. If you use the same capitalization formula as above, the cap rate is 18.5 percent, pretty close to a target of 20 percent.
The bottom line is you must match your real estate site and improvements with your revenue stream. Over or under invest, and you fail to recover your investment or get the correct value for your business. The key is working with knowledgeable vendors and being realistic in your expectations. You want to be happy, and your bankers want to know you’re building an asset that will bring a realistic return for you and is well-covered for them. Remember, real estate is King and, therefore, the focus of real wealth creation.
Fred Grauer is the vice president, distributor network, for MarkVII Equipment LLC, a car-wash equipment manufacturer in Arvada, Colo. He has made a life-long career of designing, selling, building and operating car washes. He can be reached at firstname.lastname@example.org.