ROI of a Car Wash

I've been asked recently what is the ROI on a typical car wash. While the numbers will vary based on location and climate - here's is a brief synopsis of the communities surrounding this industry.

1) Development: Normally takes 1-2 years to find a suitable site, tie it up and deal with the zoning requirements, contractors, engineers/ architects, and local politicians to get the project to the next stage. Typical cash involvement is $25-50,000. Skills, time, and contacts would be of the most importance here.

2) Construction: Normal equity requirements for bank financing would be 25-30% on a commercial building plus additional monies for float capital. On a $1,000,000 development (land, building, equipment, interest losses, etc) this would equate to roughly $300,000 which includes the $25-50,000 already spent to achieve site readiness. Construction can range from 180 days to more than a year depending on labor and local climate.

Several communities of investors will purchase the project at this stage netting out the developer at minimum double what they have already invested into the project. In some cases projects sold at this stage are sold due to cash constraints of the developer and the resulting owner can profit handsomely. ROI at this stage is usually 100% plus.

3) Initial Operation: During the initial operation many communities of investors will venture out to purchase the development for 25-30% more than the development's overall cost. In the case of our $1,000,000 development this would relate to at least a $250,000 gain over the initial cost of the project relating to a 83% gain. Should the construction contract be based on a well-managed construction management basis it is entirely possible to increase this overall gain by as much as 50% should the contractor and the owner discover serious cost savings (in our example $125,000 in savings would relate to the aforementioned 50%).

Many real estate agents specialize in this area as they can typically purchase a property in a soon to be appreciating area for a considerable discount by offering the developer a substantial profit. In areas where land is a highly valued commodity these values can increase considerably more than those posted, but a typical ROI at this stage is usually 75-80% including all real estate fees and charges associated with new business operations.

4) Short Term Operation: After the first year to two years of operation a new development is considered to be complete and valued based on it's cashflow. A typical non-urban Albertan car wash will achieve occupancies of 10-15% in it's first year, 15-20% in it's second year, and 25% plus it's third year - assuming no long term abnormal weather patterns. At 25% occupancy our $1,000,000 car wash would be (theoretically) worth $1,500,000 based on it's $150,000 of annual NOI (Net Operating Income) valuated with a 10% capitalization rate.

After three years of operation the facility will have achieved a moderate amount of debt pay-down as a typical equipment loan is amortized over 5 or 7 years. In a 7 year case, approximately 40% of this cost will be repayed and would be an additional bonus to the developer and investors at time of sale. Assuming no re-financing has taken place over this period, ROI's of greater than 200% are common including all debt paydown, real estate fees, and charges.

5) Long Term Operation: After it's third year of operation a typical car wash costing $1,000,000 to construct achieving 25% or better occupancies should return at least $60,000 per year to it's shareholders assuming no refinancing has taken place nor has there been any expansions of the operation. This equates to a yearly ROI of 20% but at this stage a greater amount of equipment wear and tear is present and as such a greater amount of management is required. Bear in mind that the remainder of the income for the year ($150,000 - $60,000 = $90,000) would be spent in debt repayment.

A typical plan would be to develop and construct such a facility with a five year holding plan. During this time the cash proceeds would be utilised to expand the facility - resulting in a larger facility worth at least $2,500,000. Net debt on this building should be less than 70% resulting in a total ROI of 350% plus.

Here's to tomorrow and all it holds.