Passive Investing in Carwash Real Estate

But Not the Car Wash Business?

investing-carwash-real-estate-car-wash-land


Introduction to Car Wash Real Estate

If you’re an investor currently thinking of buying car wash real estate as a source of passive income, this piece is specifically written to do a deep dive on exactly this. Whether you are soon to be coming into capital for which you would like to utilize a 1031 exchange for, or whether it’s just been too long that you’ve had idle capital earning abysmal rates in money markets or savings accounts, this article will address exactly what you should be aware of, weary of, and can look forward to in the way of investing in and owning car wash real estate.

Note that if you are a car wash operator, soon to be operator, developer, or other and you are more in search of a content exploring site selection and new car wash builds and costs, you’ll have to stay tuned for our soon to launch series that will be covering exactly that. If you’re a car wash owner and operator thinking of selling the land and real estate but keeping your car wash business, we have a piece that specifically covers this as well. This piece here is specifically written to comprehensively cover all sides of passive car wash real estate investing and ownership.

Reasons to Invest in Car Wash Real Estate

The primary reasons for which one should be interested in buying car wash real estate are the same reasons for which an individual, group, or investment fund should consider buying any portion, entirety, or exposure to any alternative asset class. Primary and fitting motivations for being interested in owning carwash land or real estate include:

  • Diversification and Uncorrelated Returns
  • Deployment of Significant Capital
  • Attractive Risk-Return Profile
  • Passive Nature


Diversification and Uncorrelated Returns

Besides being an overused and misunderstood “buzz word”, diversification is quite important and essential depending on your capital deployment goals. Indeed, car wash real estate investing does provide a significant diversification element to a pre-existing portfolio’s exposure profile. While car washes are most certainly overly communicated as being “recession proof” (for which they are most certainly not), they are correctly categorized and accurately described as being a very defensive business model that feels largely muted impact from the surrounding local and macro global economic state. This lies in the fact that the service that car washes provide, being that of washing cars of course, although debatably “luxury” by loose definitions (although rightfully argued as an incorrect definition to certain consumers and especially certain consumers in certain and specific demographics and geographical regions), are still a low ticket item or service regardless of semantics.

It is for this reason that car washes feel a largely muted impact during times of economic strife or dismay. Unlike true high-ticket price luxury goods, such as jewelry, homes, or cars, each carrying with them a forbiddingly onerous price tag, car washing is a luxury good with a small enough ticket price to be quite palpable and tangibly visible. Whereas large ticket purchases tend to be synchronous or laggards to an economic recovery or period of growth, smaller ticket items with tangibly and visible results / deliverables (such as car washes), tend to be synchronous to leading indicators.

Regardless of economic timing relativity, car washes as a whole experience far more muted impacts and changes in relation to the overall economic health of the country in comparison to most other small businesses.

Deployment of Capital

Our most frequently conveyed point that is met with immediate disappointment over here at car wash advisory is with institutional, high net worth, and family offices, that contact us looking to deploy significant +$20MM sums immediately in the car wash space. While flattering for the industry, and inarguably long overdue in many ways, it is unfortunately (to some) quite an unfulfillable ask. See, whereas car wash owners who do car washing correctly are making quite a living themselves, it’s a rarity that for expanded growth a capital partner needs to be brought on. Although far from never, and this most certainly does indeed happen in many circumstances, the car wash industry as a whole is simply too fragmented, too volatile in the way of long-standing operators, and quite frankly too profitable when done properly, in order to have an abundance of readily actionable and fairly priced institutional investor opportunities. That’s not to say they’re aren’t any, and we do have a handful of private and closed larger scale (+$20MM) buyout processes occurring (so if you are an investor or institutional fund looking for deals of this magnitude please do contact us), but in summary – these opportunities are far less plentiful than one may think when initially looking into the car wash industry.

Enough about the car wash operations and businesses, we’re here to discuss the real estate aspect and this right here is exactly where the real estate aspect shines and differentiates itself from that of the Operating Company side of things. Unlike car wash businesses, car wash real estate does indeed provide a far larger and more immediately achievable investment opportunity for larger scale investors. This is simply due to a more natural fitting of motivations. With car washes most certainly being true specialty businesses in all senses of the word, many operators successful enough to be in a true state of growth are utilizing sale-and-leaseback transactions with their carwashes in order to utilize a form of off-balance sheet financing to fuel said future growth. In short, the demand of those looking to spin off real estate is at the current moment larger and more easily scalable from a capital deployment standpoint than the number of high value operators looking to sell both business plus car wash business together.

Attractive Risk-Return Profile

Car washes most certainly should, and do, carry a slight premium in the way of real estate capitalization rates than that of other less operator dependent services businesses. This immediately creates a point of relative attractiveness for passive real estate investors and differentiates the car wash industry from other potentially passive investment alternatives. However, though somewhat heightened in the way of risk, obscurity, lower asset residual value, and cap rates in accordance with the aforementioned metrics, still comes a largely stable, solid, and attractive risk profile for those looking for mid-to-high single digit passive real estate investment returns (this is of course on an unlevered basis). Adding leverage to the mix as a passive real estate investor in the car wash space will of course amplify returns, but no differently than any other industry.

Passive Nature

For anyone currently outside of the car wash industry peering in, please go try to find a current car wash owner-operator who will look you in the eye and tell you that the car wash business itself can be owned and run passively. You will find exactly zero successful car wash owner-operators to will tell you this. The reason is – owning, operating, managing, and running a car wash is hard work – and a lot of hard work. Go figure that the car wash industry is not all that dissimilar to any and every other industry in the way that it’s not quite as easy as it may seem from the outside.

Whereas the business and operations side of a car wash are far way from lending themselves towards a passive ownership model, the real estate is indeed a different story. Owning the land of a car wash as a passive owner while leasing it to the current (or a new) operator does indeed provide the very elusive and all-desirable “passive” income that is perennially in such very high demand.

Pros and Cons of Investing in Car Wash Real Estate

As always, it’s never a one-sided equation. There are both pros and cons to owning the land of a car wash as a passive investor and without owning the car wash business itself.

Pros of Owning Car Wash Land

The major pros of passively owning carwash real estate include:

  • True passive income
  • Premium return (in comparison to other alternative investment opportunities)

Cons of Owning Car Wash Land

The major cons of owning car wash real estate may outweigh the pros in quantity, but please don’t mistake quantity for being a representation of magnitude. The major cons of passively owning car wash land include:

  • Specialty industry with illiquid secondary market in liquidation scenario
  • Single tenant (and specialized tenant risk)
  • More difficult learning curve for correct, accurate, and appropriate pre-purchase diligence
  • High and largely uncontrollable competition risk


When Does It Make Sense to Buy Car Wash Real Estate?

Before Buying Car Wash Real Estate

Investing in car wash real estate should be treated with the same level of diligence, care, and consideration as making any other semi-illiquid alternative investment into such an asset class. The one singular divisor that could be called to as differentiating this from other alternative investments is to the level of which the operator is key.

A largely commoditized industry with a great site is less beholden to the success of a specific operator in place. The reason for this is two-fold. The first reason is that replacement operators and business owners are more plentiful and the second is that the businesses variance of success is typically less tied to the operator and business owner themselves.

A McDonalds in a prime A+ location will certainly see some level of variance from a good, great, or bad business owner and operator. However, there is a far deeper and larger pool and populous of ready to action individuals who would gladly step in and assume the businesses ownership and the lease. This is largely since the fast food industry has far more documentation, comfortability, and somewhat intertwined attractiveness than the car wash business does to the general public. For this reason, passively investing in say fast-food real estate is immediately, by-and-large, far more liquid of an investment than car wash real estate. Secondarily, the absolute amount of variance to be had between a good and a great McDonalds owner, although surely impactful and significant, is nowhere near the extent of the variance of profitability and financial success for which the difference of a good versus great car wash owner and operator will have on a car wash business. This too is somewhat co-mingled in cause with the more niche status and footprint of this industry coupled with more lacking transparency and formal documentation, although this is most certainly increasing in more recent times. But the fact still stands that when you buy car was real estate – you are, whether fully consciously knowledgeable and willing to admit such or not – fully beholden to the success, ability, and commitment of the car wash business owner and operator and this is even further heightened in both magnitude and importance by the relatively increased illiquidity of this space, industry, and asset class in comparison to rivaling alternatives.

When Does it makes Sense?

Investing in carwash real estate and land as an alternative asset class makes sense when the specific opportunity at hand meets and fits your needs and goals. Different operators and different holding companies which house some car wash operators introduce a certain level of ambiguity of precise asset claims, but regardless of the complications, it comes down the specific deal, land, real estate, car wash, and operator in front of the investor. If mid-to-high single digit returns are attractive to you, fit the bill, and you can become comfortable and knowledgeable of the car wash operator and their operations (along with your true tangible seniority and collateralization), then investing in car wash real estate very well may be a perfect fit for you.

When Does it Not Make Sense?

Easier to judge than when investing in this sort of asset does make sense is its counterparty; being that of when it does not. The blanket disclaimer and litmus test for objectively and quickly determining when it does not make sense for you to invest in or buy car wash land or real estate is as follows: Do not invest in car wash real estate if you would not invest in the underlying operators equity. Aggressive – yes, this statement can certainly be categorized as such. But it does hold true.

The car wash industry is still far from commoditized and uniform in the way of operating standards, service level, and even more rudimentary aspects in so many other industries such as pricing. This, coupled along with the current surge in car wash demand and interest from a builder, developer, acquiror, operator, and overall institutional investor side of things that is currently being experienced in the car wash industry make it so this more aggressive statement is less aggressive than such would be in other market dynamics.

The single largest risk you run as a car wash real estate investor and owner is having a subpar or uncommitted operator as your tenant. Competition is real and uniformly growing throughout the country. Both the current lending environments and overall economic environments have both increased the relative attractiveness of this industry to outside parties. Knowing such, it is all but prudent to assume that your tenant and car wash business owner and operator will have to be committed and nimble in these unprecedented times.

Unless you are purchasing the land underneath the car wash for significantly under par value, don’t buy the real estate unless you can get comfortable with the car wash owner, operator, and potentially future tenant.

Car Wash Real Estate Financials, Valuation, and Pricing

Prior of the last decade, and arguably five years, the demand for the underlying land of car washes was paltry in comparison to today’s environment and demand. Due to such, overall, car wash real estate pricing is still somewhat finding its footing making long-term historical pricing analysis and confidence-based approaches a bit more limited and uncertain than many other industries.

That said, and despite the recency of its commonplace nature, car wash real estate has quickly found a footing in the way of pricing. Being a potential car wash real estate buyer, your two main points of focus are undoubtably the security of your steady cash flow stream along with any sort of capital appreciation (or the opposite) in the event of a future sale of the land.

In the way of cash flow stream security and reliability, this will unequivocally come down to your trust and security level with the car wash business owner / operator (or the holding or parent company in the way of larger operators such as Mister or Zips), for which in those instances you may or may not have parent level corporate guarantees to lie claim against in the way of collateralization. In short though, cash flow security is solely tied to car wash owner and operator confidence and trust.

The second piece of the equation, being that of the capital appreciation side, is far more difficult to forecast and to measure. That said, in the current market environment, and using both history and current alternative asset class pricing as guideposts, it is indeed far to say that capital appreciation and making the lions share of ones car wash real estate investing profit on the capital appreciation portion is both imprudent and unlikely. This is far from saying that you are certainly overpaying for the real estate, as you may or may not be and that is impossible to gauge without analyzing the financials of the underlying business to understand the true quality of the car washes’ earnings. However, capital appreciation based on cap rate compression (aka enterprise value multiple expansion) should not be counted on nor expected in given current car wash valuation levels and rates being offered in the open market as a result of the recently increased demand.

Car wash real estate cap rates generally fall within the 4.5% - 7.0% range. The majority of the variance surrounding such is well warranted via the existence of corporate level guarantee’s, quality of earnings for which cap rates are based, and pro-forma / utilization of full potential the current wash is operating at. There are many other factors a smart car wash real estate investor should consider and weigh into appropriate pricing including more nuanced factors like membership attribution and impact on earnings quality specifically from such, etc. Please note that this 4.5% - 7.0% range is being presented here only to serve as a guidepost based on empirical data from recent deals that have been performed in the car wash real estate arena. Every situation, piece of land, car wash business, and investment has some nuances and should be diligence appropriately and considerably on a one-of-basis.

Conclusion

If you’re thinking of investing in car wash real estate, you may be ahead of the curve and on the track of discovering and capitalizing on a currently under-the-radar and attractive asset class. Despite the recent demand in this space and niche, car wash real estate investing and asset separation are still in it’s nascency in comparison to most other arguably similar specialty industries. Therefore, investing in car wash real estate provides a premium and attractive return for those who are wiling and can also provide subpar returns for those investors that blindly and imprudently invest in the space.

Have More Questions?

If you are a real estate investor currently considering investing in carwash real estate and want guidance and an expert opinion on the specific investment at hand, please feel free to reach out to us at Car Wash Advisory. Car Wash Advisory is a national car wash real estate brokerage. CWA operates nationwide but only and specifically within the car wash industry. We work with sale-and-leaseback car wash deals and real estate only sales in this industry daily. We are always happy to provide guidance and any assistance and help we can.