Why should anyone invest in car washes? What are the pros and cons? What are some ways to add value in car washes? Whitney Elkins-Hutten, Director of Investor Education at passiveinvesting.com shares her knowledge.
Tell us a little bit about you.
I started off as an accidental landlord in 2002 when I brought a house with a significant other. When the relationship fell apart, I stuffed it full of roommates and did a rehab on the house. Fast forward 11 months later, I made 52 grand on the property. My husband and I now have scaled up to over 30 single family rentals, made a few million in live in flips, as well as fixing and flipping on properties. We started off in the multifamily space and have been expanding ever since.
Why should someone get into the carwash asset class?
You have a few different types of carwash asset classes, starting with coin operated carwashes. They are not always coin operated, some may also be credit card operated as well. These types of carwashes are where you drive into a single bay and there are brushes and hoses available for you to wash the car.
Then there are car washes attached to gas stations or the like, they have a single bay, but are more automated. There are also smaller versions of those, in between a single bay and the larger express tunnels.
We invest in express tunnels. Express tunnels have tunnels that are 40, 60, 80 or 100 feet long. We take on this type of tunnel and layer on a heavy marketing strategy to them, and convert them into a subscription model. Now you have MMR type income and we will add on extra streams of income into the subscription as well, for example: additional types of polishing or back end packages. Pet washes are another thing that you can add on, where else can you go to get your car and the dog cleaned?
Those are the types of car washes that we are looking to invest in, because it is a very stabilized business. We have watched the business expand rapidly over the past 10 to 15 years. Similar to self storage, there’s no consolidation in this business right now. From a practical standpoint, it’s ripe for optimization and consolidation, which is what we’re trying to do. We are acquiring 150 to 200 units over the next two years to really solve that third party management piece, so that we can either IPO our brand, or exit to a REIT.
What are some of the pros and cons of the type of car washes that you have invested in so far?
A pro would be that we are looking to buy properties from Mom and Pop owners that are already stabilized and performing, ideally they already may have several properties under management. However, because they are the operator, they haven’t figured out how to scale themselves out of the business. That scaling problem is what we are looking to solve.
That is also the next pro, because we are looking to build one of the only third party management companies for carwashes. We take advantage of not only operational expenses, sharing full time employees between different properties and keeping our labor expenses low, but we can also keep our chemicals and supply expenses low because we can buy in bulk.
We also have a great Training Management Program. Anyone that has run a business knows that one of the hardest things to scale is your people, with this, we can actually achieve that type of scaling. Then, the ability to layer on a strong brand and duplicate that model over several other properties is of benefit.
As for cons, this is a different type of investment. Investors that get into the space can be starry-eyed, they may look at the returns and think that this is easy money. They may think they can make passively 10 to 15% cash on cash, 20 to 30% IRR on this type of investment, but it does come with its different types of risks. It has seasonality type risks, and competition between competitors. There is also intra competition, which is between the assets you already currently own. You have to be partnered with an operator that knows what they are doing as far as being able to acquire the right facilities that have the right metrics and layer on a strong marketing brand.
When buying a carwash, you can’t just pick a piece of land and build a carwash, it doesn’t just work anywhere, you have to have eyeballs on the property. More importantly, you have to have the traffic count coming by, similar to self storage, you need the traffic count coming by, but cars also need to be able to turn in the correct direction and lead them in the correct direction. Whenever you get the traffic on the property, you now need to be able to manage the traffic on the property and get a correct flow to be able to service your customers because at the end of the day, it’s your customers that’s going to drive your business.
If someone were to start wanting to invest and operate their first carwash, what are some things that they should be thinking about? And what are some ways that they can add value when they complete the purchase?Your value proposition is going to start at the beginning if you’re not looking to do this passively and run as an operator on your own.
Make sure you are in a great metropolitan service area that has the demographics to be able to support a carwash. It doesn’t have to be in a high end luxury area to support a carwash, you just need to have a great population count, solid income in that area and it has to be growing. Jobs need to be coming into the area, a lot like the criteria for multifamily and self storage. Many of those similar metrics come into play once you have purchased and closed on the property. Start this due diligence while you’re under contract, take a look at the trailing 12 months. What is the current operator doing well? What are they not doing? You should be able to determine your value add during that due diligence period, not after.
What we are seeing, especially picking up from mom and pop owners, is that their employee count is very high. Their employees are not trained, there is no strong branding on the property, they haven’t moved to a subscription model or their subscription model hasn’t added an immense amount of value to the customer, partly because the owners are afraid of subscriptions. They wonder what will happen if a customer comes in and washes their car every single day? Statistically, the average person that’s on a subscription model comes in 1.8 times a month. The chemicals, water and electricity costs that you are spending during the carwash is around 80 cents a wash. You also have labor costs and other things that come into play, but you are still at a very healthy profit margin. When you take into account all your overhead, look at what the current operator is doing and what they’re not doing.
Look for ways to increase your income, look for ways to decrease your expenses. Can you renegotiate vendor contracts to bring down some of your chemicals that you purchase? Can you optimize the tunnel speeds so you are not spending as much in water and electricity? Can you add an express lane to the property to add an additional tier to your subscription model and move those people that pay a higher tier through faster? I’m a dog owner, why wouldn’t anybody spend $200 to put in a metal tub and a hose on their property to wash their pet? Anything to keep me from washing my dog inside my bathtub, I’ll do it!
You might give away some things for free, for example: vacuuming to create a value add for the customer. The customer may take that into account when looking at two different competitors. How can you increase income, decrease expenses and add additional streams of income?
With regards to employees and management, what are some tips that you can share?
Put on that CEO hat and think of it strategically, not just from having one site. This is something that I help coach people with – buying just a single family property as a hobby versus thinking of it as a business owner and a strategy.
Training and educating your employees is very important, setting expectations up front from the very beginning. This not only sets you up for success as a business owner, but it sets the employee up for success to do the work that you need done. It’s not just a one time thing, training is an ongoing commitment, you are constantly seeking improvement.
Touch base with employees every quarter, how can you improve their training and efficiency? Listen to them? They are the boots on the ground, they will have good feedback too.
How can you share if you have multiple locations? How can you now start sharing management across the locations? This type of business doesn’t require a full time management on premise. Who can you hire initially that has the potential to become that manager and groom them over time? Those are some things to consider when it comes to employees.
Take into account the seasonality of your business. During winter, some areas you may not need to be open as long, cut your overhead as much as you can and maintain employee satisfaction at the same time. If you come at it with a service mindset, if you’re a business owner, you have two customers, your customer that’s coming in the door and paying all the bills, and then you have your employees. You want a rock solid business where employees are taking care of your customers.
Is there anything else with regards to car washes that you think is really important for our audience to know?A lot of people are questioning going into this recessionary environment inflation, what is going to happen to carwashes? The same with self storage, what happens if nobody needs to have a storage unit? Nobody needs to wash their car, what’s going to happen to this industry? Statistically, the data from 2008, 2009, 2010 and 2011, even 2020 shows the opposite that one would expect would happen. Once the behavior of washing the car is established, people rarely get rid of it. People also don’t sell their cars when we hit in an inflationary environment, or a recessionary environment. You have to take better care of your current car in a recessionary environment. Once that behavior is established, people will actually utilize the carwash more. It’s not a huge expense to a household’s budget, and if you need that to take better care of your car and extend the life, you might look elsewhere to actually trim $300-$1,000 out of your budget.
It sounds like car washes are also recession resistant. Is that fair to say?
Yes, that is what the data leads us to believe.