Investing in Self Service Car Washes

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TRAFFIC COUNTS ... are important, but must be weighed with care. Beyond the count of the traffic, there's the speed of traffic to consider as well as the type. Couple the traffic count with visibility and easy accessibility. I know of a 12-bay wash that went bankrupt largely because it was difficult to see from the main street which by all measures had a good traffic count. It was less than 300 yards from the street, but it was at a lower level and there were other commercial buildings between it and the main artery. The bank got the wash back and found no other carwash owner wanted it ... even at half the price it cost to build it! Data on traffic counts can usually be obtained from city traffic or street departments.

Judgments about visibility need to be made on an individual basis. I look for traffic counts no less than 2,500 to 3,000 vehicles per bay, per day. The ideal count would be about 5,000 per bay ... provided the traffic moves no more than 35 mph. Small Town Ways And Big Town Bays Before evaluating these numbers (in terms of what one can pay for carwash ground) let me offer a disclaimer of sorts.

Nearly all veteran owners know of carwashes in small towns which are very successful ... without population densities or traffic counts which would meet my standards. I know that. You know that. And it is possible to cite examples where a very successful carwash operation takes place despite seemingly poor demographics and questionable location. All site selections involve trade offs.

For example, my traffic numbers are not applicable to rural areas for obvious reasons. We all know most rural cars have to be washed and you can more easily dominate and "own" a rural market. On the flip side of that, small town markets tend to be far, far less forgiving and able to absorb new direct competition. My efforts are to generalize and to set fairly flexible bench marks from which one can form a reasonable basis for site evaluation.

No set of numbers can substitute for good judgment. And good demographics rarely compensate for bad management. Still, I believe my approach is reasonable-to-safe for site evaluation in most cities. Now back to the point about land costs for a proposed location.

Here I'm assuming: 1. Large enough customer base to support more bays in addition to existing competition. 2. Reasonable traffic count and visibility. 3. Knowledge of the PPM (Price Per Minute) in the area and the average number MPD (Minutes Per Day) a wash bay can be expected to operate each day. heroes how I calculate what I'd pay for such land. That is, how I'd determine if the site has the financial feasibility to support a self serve carwash. Bear in mind that many sites which have all the necessary demographics will be too expensive for carwash land. Simply multiply the MPD each bay is expected to operate each day times the PPM charged for wash services to determine the daily gross revenue per bay.

Take that number times 365 and you have the projected annual revenues for each bay. Multiply that by the number of proposed bays, and then add 20% for vac and vending income. Here's an example from my area among the Plains States - the Price Per Minute averages I find in Kansas City. The survey tells us bays in the Plains average about 115 minutes per day of operation. Typical PPM here is 33¢. And 33¢ times 115 minutes indicates each bay will gross about $38 a day. Multiply that times 365 days and the per bay annual income will be almost $14,000 - total annual wash bay income of $84,000. Then add another 20% for gross vacuum and vend income - national surveys and personal experience show me a range of 15% to 25% for vac/vend revenue. The gross annual revenues all add up to about $101,000.

And that's the maximum price I'd pay for most land - no more than one year's gross revenue. Beware! An eager buyer can easily convince himself to pay more by arguing that he'll charge more per minute and operate more minutes per day than the other washes in the area. The more of that sort of reasoning - optimistic speculation! - that goes on the less realistic the situation is. But that's easy to do because of the multiplier effect of the numbers. For example, all I have to do is convince myself that I'll be able to operate 150 minutes each day (instead of 115) and that I'll be able to charge 38¢ a minute (instead of 33¢). Now the numbers are telling me I can pay almost $21,000 a bay. Then add an optimistic 25% for vac/vend income (instead of 20%) and the figure goes to $26,250 per bay.

The feasible price for a 6-bay site just jumped from a maximum of about $100,000 to a cool $155,000 plus. That's a 50% increase over what I consider a safe projection. Be skeptical of income promises from salesmen who do this sort of quick shuffle and massaging of the numbers. it's clear that there are many locations where the best use of the ground is simply not self service carwashing. No one would consider putting one on a typical downtown office building site ... the ground is just too expensive. that's why there are none in Tokyo. What I'm afraid happens is that often someone sees a site that seems ideal for a carwash.

Usually It's a high traffic count that gets the attention of a would be carwash operator. They see 20,000 or more vehicles a day driving by a vacant, available site with little direct competition. It seems "perfect". They hear the price and automatically conclude that a carwash will work on the site. What I'm saying is, look at the numbers very carefully. there's definitely a top limit as to what should be paid for single use carwash sites. I know of a recent case that makes my point. A 4-bay unit I used to own was sold not too long ago. This unit had the highest per bay income of any carwash I had ever owned at the time I sold it ... about 7 years ago. Despite the great carwash revenue, the new owner sold it and it was torn down to use the ground for more profitable purposes. The new owners paid about $18 a square foot for the property - an out-of-sight price for carwash land in this area. there's no way the income from a self serve carwash there could generate a reasonable return on such a heavy investment in the land.

The following table shows what I consider to be reasonable costs per square foot of carwash land ... under particular conditions. To use the table find the Price Per Minute in the left column - that's the PPM at which you can expect to operate given the existing competition. Next find the average number of Minutes Per Day each bay can be expected to operate ... in the row across the top. In the box to the right of the PPM and below the number of MPD operation each day will be found what I believe to be a reasonable approximation of the maximum cost per square foot for carwash land. For example, if 30¢ a minute is the going rate for self serves in a particular area and bays in that area can be expected to operate 100 minutes a day then the table indicates reasonable land cost might be in the range of $6.25 a square foot. Caution ... This table should not be used to "prove" that if land were purchased at $4 a square foot then the carwash is guaranteed to be a rip roaring success. Rather, the table suggests that IF all the other factors (like population, visibility, type of customer base, etceteras) are in order then and only then are these reasonable costs. Moreover, good judgment has to be used about the amount of land.

In general terms, self serve carwashes can be comfortably built on sites providing about 2,000 square feet of overall land for each bay. A bit depends on stack up requirements and on whether a drying area is to be provided. Sites with less than 1,500 square feet of land per bay are going to be very tight. Sites with over 2,500 square feet of over all land per bay are ample to generous. One must remember that while extra land is always nice, it costs money and is going to have to be paid for by the carwash revenues. It is possible to buy too much land - more than what is needed or can be comfortably purchased with wash income. What the table is intended to provide is bench mark, reasonable costs per square foot for carwash land under varying competitive conditions.

A fair reading of that data would be that it suggests to anyone considering paying $16 a square foot for carwash land that heed better have solid evidence that the market will bear a PPM cost in the range of 50¢ a minute. And that carwashes in that area are operating an average of 150 Minutes Per Day. Then, if all the other conditions are in concert (population, traffic, etceteras) the price is reasonable ground cost ... provided one buys no more land than is genuinely needed for the facility. Safety Or Sorry

The final cautionary note has to do with "dirt" costs which are well below what the table suggests. In major urban areas there's a fair chance that a piece of ground could at least squeak by the demographic conditions, be priced well below the per square foot guidelines, and yet be dubious as a self serve site. here's why: Sad though it may be to report, there are areas in many major cities where few people are willing to get out of their cars for any reason. The traffic count may be good, the land cheap, the demographics adequate, and the competition sparse. Safety (or often perceived safety), however, can be a major consideration. The perception of not being safe renders such areas questionable for business purposes ... especially for self service carwashes.

Unlike banks, there's not going to be armed guards around to make people feel more safe. The question to be asked about such land is whether the dirt costs are so much below other areas that the cheapness of the ground is an adequate trade off for what a potential owner will have to do to attract customers under these conditions. I'm not prepared to try and answer that question beyond stating that I'm not suggesting that self serve carwashes are doomed in urban cores. I know That's not true. I own a very profitable one. At the same time,

I know this locality well enough to state that there are certain sectors within the urban core in which I would not build a self serve if I were given the ground! It's neither stiff competition nor poor demographics which causes me to make that statement. Rather, it is that instinctive inner voice telling me It's too risky ... for me. At the present time and crime conditions, there are a few areas which I stay out of. That attitude certainly does not apply to all of the urban core, but I believe most people who are longtime residents of major cities probably understand what I'm saying. And no doubt they, with me, yearn for the day when these areas will once again become - in fact and in perception - reasonably safe places to do business.

Fudge Factor SSCWN: You apparently intend these land costs guidelines as maximums. Just how hard and fast are they? Is there any set of conditions under which you'd pay more than $8 a square foot for land in your area ... how about $10 per foot? Is there an absolute limit? P.C.: No ... They're not absolute, never to be violated maximums. Given the right circumstances I would go over them. By the right circumstances I mean some convincing evidence that either the cycle price can be set higher than the average price. Or convincing evidence to believe that the bays will operate well over 115 minutes a day ... or both. I can cite an example here in Kansas City - a 4-bay carwash, 3 enclosed bays and one open bay.

There's literally no competition for miles around. This particular unit falls far, far short of state-of-the-art condition. On top of that, it has poor access and limited visibility. And yet I know (after considerable personal observation over time) that it operates well over the average 115 minutes per bay per day. It's clear to me the neighborhood could easily support another carwash. The area has demonstrated its enthusiasm for self serve washing by keeping those old bays stacked. The area has middle to upper middle class residents - people with discretionary income as well as a real appreciation for a new state-of-the-art facility.

Now I would not pay any price for carwash land in that area. But I would go well over $8 a square foot. Moreover I know a number of other knowledgeable carwash operators who would do the same. Someone will get it done eventually. There are compelling reasons to do so. At the top of the list is a lack of competition. And, importantly, little chance of future competition due to there being almost no vacant land and severely restrictive zoning regulations. Add to that ideal demographics, lots of apartments, the decrepit nature of the existing competition and you have a situation that justifies paying above the carwash norm for the land. I'll cite another example.

I paid over my own guidelines for my 1990 purchase. The compelling reason in that case was that it was an older, high population density neighborhood with very little vacant ground ... and virtually none large enough to accommodate an 8-bay carwash. The site I discovered was the exception - vacant, large enough for 8 bays, and it was properly zoned. New businesses coming to this area are now doing so by buying out older businesses, tearing them down, and building the new ones where the older ones used to be.

If carwash competition is going to come to this area They're going to have to do that. Their land costs are going to be astronomical when the costs of the existing business and demolition are included. Watch out for those old buildings ... especially those with asbestos. Construction costs could very well end up being double ... even triple! ... the cost of building on vacant land. In addition - no potential future competitor will "Smell blood in the water if he comes nosing around my market. I operate a state of the art facility that's kept clean, neat, and operational. So competitors will not be attracted to this market because they see unmet customer needs.

So competition would have - at best An up hill battle. That's not to say no competition will ever come. Such a venture would be very high risk ... truly a foolish investment. But you know what they say about "a fool and his money". So, yes, I will exceed my guidelines for buying land ... when special, desirable circumstances tip the odds in my favor. As in the example I gave, the decision was based on the assessment that future competition was not very likely. That traffic count and population demographics indicated bays working well over 115 minutes per day.

And it was all reinforced by the site being vacant (no demolition costs) and having favorable zoning in place. After 5 years of operation there, I know I made the right choice in paying over $9 per foot. My annual revenues at that location are excellent ...well in excess of the land costs. A Profitable Business ...Or A "Piggy bank"?

I can't leave the topic of ground alone without one final comment. People have all sorts of reasons for wanting to be in business ... for wanting to own a self-service carwash. To some folks the financial reward is only one factor ... perhaps even a relatively small and uncertain one. I've often heard people say they would gladly continue to work at their regular job and manage the carwash for nothing ... if it would simply pay for itself in any reasonable length of time.

Their plan being to eventually sell the carwash and use the proceeds to retire on. It seems to me such people think about carwashes as if they were like "Big piggy bank" - an easy way to force themselves to stash and save some money. Such people seem to have no idea what it takes to run a carwash. And if they build one that manages to just pay for itself, then their motivation is not typical. It may suit their own particular needs, but the fact that it does not more directly compensate them for their investment, management time, and efforts simply proves to me that it was not financially feasible ... not by my standards.

I've also seen carwashes built which seem to reflect the owner's personal priority to satisfy his own ego needs rather than meet reasonable standards of financial feasibility. If that's the way a person wants to spend his money that's his choice. But such carwashes aren't really built for profit, and anytime a business is started for other reasons its success is nearly impossible to evaluate.

To Lease Or Not To Lease SSCWN: we've all heard those stories about those characters with too much money and ego ... but too little brains and investment sense. And, yes, some of those guys build carwashes. But the vast majority of operators, however, are very practical and down to earth - they do want a reasonable return on their investment ... in light of the risks involved. Many operators get into carwashing by leasing the site. How risky is leased land? Does leasing jeopardize profit?

P.C.: I prefer to own the land rather than lease it. The obvious risk in leased land is that at the end of the lease (if it can't be renewed) the land owner becomes the owner of the carwash building ... though not the removable equipment under most cases. There are at least 3 sets of conditions under which a potential carwash owner should consider leased land. Incidentally, of the 8 washes I have owned 3 have been on leased land. Here are the reasons to consider a land lease. Of course all of these assume that the land being leased would be a good carwash site:

Reason#1: The potential carwash owner lacks the capital and credit to buy the land AND do the carwash. Most of us rented houses or apartments until we could afford to buy a house.

Reason #2: The terms and conditions of the land lease are quite favorable to the leasee. it's possible that it's actually cheaper to rent than to buy. This doesn't happen often, but I'll tell of such a case in a minute.

Reason #3: The site is strong and the land simply can't be bought. Perhaps the land owner is simply unwilling to sell or the parcel is part of a development which would be extremely difficult and cumbersome to divide - like a portion of a shopping center parking lot where there's shared access or other conditions making a sale unlikely. Many potential owners of carwashes reject the notion of leased land out of hand.

They argue that the risk is always too great that the land owner will wind up with the carwash after years of operation. Maybe, maybe not. It all depends on the terms and conditions. I'm suggesting that despite my preference for land ownership the leasing of land can be a viable, desirable option. By the early 60's, I was a married high school teacher with an expectant wife. I'd always had part time jobs in addition to teaching.

What little money we had managed to save was used for a down payment on a house. I made less than 5 grand a year teaching. It was increasingly obvious to me that my financial life was going to be a constant struggle. At one time I had 3 part-time jobs besides teaching. None paid well. I wanted my wife to devote her full time efforts to raising our growing family rather than trying to be mother and bread winner simultaneously. I know that must sound very old fashioned or even sexist, but remember it was the 60's. And in my shanty Irish Catholic view, motherhood is a full time vocation ... deserving of far more respect and affirmation than it currently receives.

Then I saw my first self service carwash and the fire in the belly was lit. This had to be a better solution to financial struggles than an endless string of part time jobs - clerk at Sears, house painter, ticket taker, tutor, and others. I'd work every vacation period and nights after school just to pay the bills. I quickly learned that someone in my financial position was not a desirable borrower of capital for business start up.

But finally, by taking in two partners (we each put up $1,000) we managed to lease a piece of land and build a carwash. I was at the absolute limit of my capital and credit to build the wash. There was no way for me to consider buying land. I'd been turned down by lenders, by leasing companies, and was only able to lease that land because one of my partners looked financially strong ... on paper. Leased land allowed me to get started in the self service carwash business.

A personal example of the first reason to consider leased land: a lack of funds, collateral, and credit to buy the whole business ... including land.

SSCWN: Beyond getting started on minimum capital, why else would anyone consider building a carwash on leased land?

P.C.: You should realize that many - perhaps most - small businesses are in leased facilities. Almost all shopping center space is leased and often buildings are built on land that has a long term lease. There's nothing inherently wrong with leasing land. It just depends on the terms and conditions of the lease. The lease has to be long enough to justify the cost of the building over the term of the lease. And the rent has to be low enough to allow for a reasonable profit. You better believe I've been offered lease deals I'd never sign. But I recall one which I did sign that turned out better than I could have hoped. It's also a good illustration of "Reason #2" - favorable terms.

It was a case where the land was simply not for sale. The owner was adamant about that- there was no reasonable price at which it could possibly be bought. There was a carwash on the land and I had made an offer for the carwash. The offer was accepted on the condition that a satisfactory lease could be worked out. The land owner was receiving $400 a month rent and the lease had 8 years remaining.

While the rent seemed reasonable the term seemed a bit short, so I asked the land owner for an option to renew the lease when it was up. The owner showed no interest ... until I mentioned paying $800 a month. His eyes lit up and he agreed to two 5-year options to renew at $800 a month. The thought of his rent doubling was too much for him to resist. Inflation...Not All Bad But now think about that - land with a fair market rental of $400 a month now and 8 years later the rent will be $800 a month and remain so for 10 years.

Can you think of any 18 year period in our lifetimes when costs didn't more than double? In real dollars (adjusted for inflation) I'd be paying far less rent at the end of the lease than I was at the beginning. All during the first 8 years (with the rent at $400 a month) as inflation increased my rent payments decreased in actual value. When/if the rent jumped to $800 a month 8 years later that would be an increase in real dollars, but over the next 10 years of the lease the average rent, in real dollars, steadily went down.

I sold that wash long before the end of the lease. it's still operational today and still on leased land. I tried to buy the land at one point, but the property is part of a large parcel. The owners didn't seem very interested in selling and so I didn't push very hard for a sale. Yet the property illustrates a point which I believe is noteworthy. It shows how tricky predicting the future can be.

I had a good lease, but wanted to own. After being 5 years into the lease I'd have paid a premium price for that land. Today that land is not worth much more than it was years ago. The once prosperous strip mall adjacent to the wash has fallen on hard times. There's high vacancy and some marginal tenants. Recently the neighborhood has shown economic decline rather than growth. The point again, is that all property values are not guaranteed to steadily grow. Some are in decline.

Some go up and then go down. It's difficult to predict what the value of a particular property will be 15 or 20 years from now. At the time I negotiated the lease inflation was in double digits ... now it's below 3%!

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