The Problems are the Path: Car Washes for the Income Investor

Interest rates continue to rise; along with, mortgage rates.  Retired investors take on unhistoric risks by shifting their portfolio's weighting to equities.  Sellers of real estate continue to hold off as the mortgage rates are above the average rate of an existing mortgage of around 4%.  Banks continue to see warnings of an equity crisis.  Nicolet Bank of Wisconsin sold bonds classified as "Held to Maturity" and took a $ 9 million loss.  Large commercial office buildings face a interest rate adjustment that will force giving keys to lenders.  All the time home prices in the affordable areas of Silicon Valley take a jump of 5%.  The stock market has a major rally led by High Tech Stocks.  Venture Capital money stays hidden from new ventures as the window to Initial Public Offerings remains closed.  "Sell in May and Go Away" did not work for the stock market.  At least so far.

The real estate market is not confusing.  Residential buyers are sick of renting and will buy with the savings from the Pandemic; irrespective of price.   That certainly makes sense.  To those buyers who must stay close to the area and report into work, it is sensible.  To those buyers who have children in local schools it is sensible. 

Luxury homes move, but at a lower pace and not at over lists.  Luxury Homes see more in inventory with less new construction homes as compared to the affordable homes of the $1-2 million range.  The $1-2 million range homes are usually fix and flip homes of 60 year old homes with new interiors and landscaping.

So where are the opportunities?  Income real estate in recession proof sectors.

"Use Your Common Sense",  my Father once told me as a young boy.  For those who have cash savings looking for investments that are not volatile and provide a steady cash flow there are numerous opportunities that are protected from recession and stock market volatility.  Storage Centers, Rental Real Estate, Car Washes, just to name a few.

Rental real estate has some issues in Silicon Valley.  "San Mateo County Board of Supervisors Working Draft of July 10, 2023, An Ordinance Adopting a New Chapter of San Mateo County Ordinance Code to Provide Tenant Protection."  The abuses of Landlords and Property Managers have become so severe that  San Mateo County is looking at Tenant Protection.  Once this passes, other countries will follow.  This takes residential real estate out of the "sure thing" category.  A potential pay day for attorneys.

I have have experience in Car Washes.  This sector, I find, is a great opportunity being driven by rising interest rates and adjustable mortgages that secure those properties.  As I review the Profit and Loss Statement of numerous car washes across the continental United States, I find many owners took advantage of low interest rates to pull money out of their properties.  They are now being faced with increased rates on their adjustable loans as the FED drove up rates 5% in the past year.  This created a loss of income as the mortgage interest rates rose faster than the ability of income from car washes to absorb.  

Generally, car wash investments are a solid option for many investors.  From a fundamental level, they offer low construction costs, short construction timelines; in which, investors can capture cash flow faster and with a lower dollar investment.

The car wash industry globally is growing; $29.3 billion in 2021 with North America accounting for more than 72% of the revenue.  US drivers regularly use professional car washes.  This is based on convenience and car maintenance.  COVID-19 encouraged further growth.  No Touch car washes have earned "Essential Business" designation in a number of markets.  Rideshare services like Uber and Lyft now require professional cleaning of vehicles boosting demand. 

5 ELEMENTS OF AN IDEAL CAR WASH LOCATION:

1. Accessibility: Easily accessible

2.  High Traffic:  High traffic area is a must for flow equals usage.

3.  Few Nearby Competitors:  This is essential as the death of older washes are caused by the emergence of newly constructed car washes with new equipment and better rates.

4. Diverse Climate:  This is a big surprise as cold and snow actually drive washes and create stronger markets.  The old fashion individuals washing their cars will stop during snow and freezing weather; while salt on roads force cars into car washes to maintain the finish of the car.  Desert conditions of blowing dust is another reason washes are in demand...think Arizona, Palm Springs, Southern California.

5. Rideshare Volume: Self explanatory as more sharing more dirt more maintenance.

CAR WASH INVESTMENT TYPES:

1. Full Service, most labor intensive; expensive to operate.

2. In-Bay Automatic, low operating costs; popular option for operators.

3. Express exterior, maximum wash volume; low labor costs

4.  Self-Service, little to no labor costs; may not be profitable year round

5.  Flex-Serve, higher labor costs than fully automatic systems

The most advantageous investment opportunity in Car Washes is the Lender.  The Small Business Association brings the US Government as the guarantor of the loan.  The SBA has set standards for a loan based on Cash Flow.  Based upon past averages, a $2,200,000 purchase price of a car wash with a SBA loan of $2,000,000 leaves the investor with $80,000 after debt service, 40% margin.  The loan is based upon cash flow and not an appraised value of the property as we have here with residential rental properties.

More on the SBA in my next newsletter.

Interested in viewing opportunities in Car Washes email: gary@mckaeproperties.com

As before, call or write for any question you may have and think of me of your "in the know real estate agent".