I’m going to be breaking down my first and worst investment and how I ended up making money on it, and getting a free storage facility, even after closing the business for 2 years.
As you may know, I started looking for deals seven years ago, the market was very hot, I was only looking at deals on websites like Crexi and Loopnet because I didn’t know any brokers, nor did I know that I could send letters to property owners. It took me a year to find something that made sense in that market. I was looking for self storage opportunities that I could add value either by increasing rents, decreasing costs, or building more (if the facility came with some land). And because the cap rates were so compressed during that time, none of the deals that I analyzed made sense. And after over a year looking for deals, I found one, at a cap rate that was higher than other facilities. Why was it higher than other facilities? Because it came with three self serve car washes, and car wash cap rates are higher than self storage cap rates. I thought, what could be hard about learning and managing a brand new asset class that I know nothing about? I don’t know anybody in the industry, I don’t know one person that owns a car wash, I didn’t go to any conference, I didn’t bother asking anyone about car washes, I didn’t even bother to ask a consultant for help, and get their feedback, such as: what is the worst that can happen, what is the hardest thing about the business, who are the vendors, who could help me in case I need help, should I partner up with someone that has managed car washes before? I thought, it can’t be hard, it’s just a numbers game!
The opportunity was in Texas, and I ended up buying it a year after I found it. As soon as I found the property, I reached out to the broker and started getting some documents, and then suddenly the seller had some family issues and stopped all communications. I followed up regularly for another entire year, at least once or twice a month. When the owner started chatting with us again, Covid hit! And that is when I was able to negotiate a lower price. I said, Covid hit, we don’t know where the market is going, things can be catastrophic, I need this lower price in order for this deal to work. We ended up getting a better purchase price, around 30-35% below their original sales price.
Saying “how hard could it be to manage a brand new asset class” was mistake #1.
On a side note, I have recently had a car wash broker on the podcast and we chatted about how car washes can be a great investment, and I do believe that. They’re great for the right investor, for someone that wants to focus on and have car washes as an asset class. As someone reminded me recently, pick your hard, car washes are just not my hard! It’s the last asset class I would choose, but it doesn’t mean that it’s a bad investment. I just didn’t bother learning about it. They can provide incredible returns for people that know how to manage them.
The car washes I purchased were at the time only accepting coins, one value add I thought I was going to implement to not only increase income, but also decrease theft and potential employee issues, was to move it to credit/debit only. I spent a good amount of money converting these car washes to credit card only, only to find out that there are some cities in this country that not everyone has a credit or debit card, or it’s not widely used. We went back to accepting coins, as well as cards. And that ended up being one of the biggest problems, because we had multiple and constant break ins, and employee theft. The break ins are not only expensive in terms of income loss, the damage that was made was very expensive to fix.
In any way, we still managed to make great income during the first year of ownership, and then another curveball…the trusted and reliable employee I inherited had a personal problem and ended up going to jail. That is when things started to go downhill. I lost my best employee and after that it was incredibly hard to find great people that were trustworthy and reliable in that town. We went through at least 5 employees and things were breaking and not being fixed. And in car washes when things break, they need to be fixed right away, otherwise the problems grow exponentially. The employees were not fixing the things in a timely manner and things got out of control. I spent a lot of time trying to solve that problem.
Three years after purchasing these properties I decided that it’s not worth my time to try to fix it, and that I’d put the car washes up for sale, and close them completely. Not knowing when I was going to be able to sell them. I decided to take the hit on the mortgage payments until I sold them because my time was not worth the time that I was spending trying to solve that problem. The mortgage payments were cheaper than my time. The car washes stayed closed for two full years. Last year I managed to sell one of them, and this year I sold the remaining two, two years after completely closing them.
By the grace of God and Jesus Christ, not only did I end up not losing any money on that deal, I actually made money, and got a “free” self storage property. I got 100% of my downpayment back, I paid the full car wash loan, made money, and got a storage facility in the end. The facility still has a loan in it but I did get 100% of my downpayment back on all properties.
Top lessons learned from this experience:
- Don’t ever get into an asset class that you know nothing about without first going to industry specific events, building relationships, asking questions, and getting an advisor to help you analyze and purchase your first deal.
- Buying portfolios can be a great thing, you get multiple properties at a discounted rate, and after you buy them, you split them up and sell a few at market price, while keeping the others.
- This is not really related to car washes, but I have heard that the first offer you get is typically the highest offer you will get, and it turned out to be true in this case. When I decided to sell them while they were still open, we got an offer that was higher than the one that we ended up taking, but I turned it down because at that time the properties were not distressed and our sales price was based on actual NOI. However, it confirmed this theory that the first offer that you get is typically the highest offer you will get.
- Work with a broker that exclusively sells that specific asset class, and follow up with them on a regular basis to make sure you and your properties are on top of their mind. I’m a believer in showing up and following up because people easily forget about you, whether you are selling or buying a property, you need to keep people accountable. This is not to say that the broker wasn’t working on them, but it was to keep reminding her that I was really interested in selling them. My follow ups were about once a month/once every other month.
- There’s a known saying in real estate that “You make money when you buy”. And because I got these properties at a great price, and even though the deal was a complete failure, that is another reason why this worked out. Proving another real estate theory to be true.
I hope that you can learn from my lessons learned, so that you don’t have to make the same mistakes that I made. To better investments!