Would like a few opinions on this property..... - Posted by Doug O

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Posted by Doug O on February 14, 2007 at 10:20:18:

Ray, thanks for the breakdown - very helpful…

Although I do have a few details to add plus one question about the laundromat…

Details - from the tax returns, the laundromat shows $127,000 gross for 2005, $120,000 gross for 2004 (2006 hasn’t been finished yet). With total expenses (water + electric/gas) for 2005 $33,000.
So, excluding maintenance, the net for the business was $94,000 …
Also, the maintenance for the apartments would be lower than 40% - I’d be managing the property myself, and judging by first walkthrough, there doesn’t appear to be any deferred maintenance or major needs on the apartments…
My question is with regards to the laundromat (since I’ve never owned/operated one, and you have) - there wouldn’t be much maintenance as it exists, there is a woman who runs a wash & fold out of the laundromat and takes care of the place in return she gets free use of a small room in there for her business (great idea, if you ask me). The big question is the machine maintenance - there are 90 machines, total (2/3 washers, 1/3 dryers), and they are a bit old as commercial machines go - avg of 12-14 years old… I’m in the process of talking with some service companies, but do you have any idea what general maintenance runs on this type of business?

This just seems to be a decent opportunity, and I didn’t want to completely pass it by, or insult the seller (even though there will be other deals out there) with a ridiculously low bid.

Unfortunately, I don’t know that there is much more potential with the property - it is full lot coverage currently… And obviously I’m trying to protect my interests here, and don’t want to get screwed on the buy (since we all know that’s where the money is made)…

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Would like a few opinions on this property… - Posted by Doug O

Posted by Doug O on February 12, 2007 at 13:26:46:

Ok, so I found a property that seems moderately appealing to me (it’s not easy to find this in NJ, where cap rates are historically low, unless you invest in the ghetto)… The only question here is about owning a business that I wouldn’t normally have ever thought/cared to own as part of the deal (a laundromat)…

Asking price $1,795,000
8 units, and 1 commercial space (laundromat)
Apartment income: $88,000 / year
laundromat income (gross): $120,000 / year

Total Income (including business): $208,000 / year

Expenses:
Gas/Electric: $14,000 / year (laundromat has high usage)
Water/Sewer: $22,000 / year
Taxes: $14,000 / year
Insurance: (Guestimate) $9,500 / year

Total Expenses: $59,500

Total Gross Profit: $148,500

Ok, I’ll likely be putting $600,000 down on this, and was figuring to get a purchase price of around $1.6, so to try and get the loan value to just under $1 million … Figuring $1 million loan, my monthly payments would be approx $6,800 (7.25%, although I have faith I’ll get it to 7%)… So that leaves me a calculated net of $66,900 annually, or about 11% cap (I’ll be figuring maintenance at about $500 / month for reserve fund, but I like to treat that money as part of my income during assessment)…
Any opinions on this deal? The reason I’m hesitant is more because of the fact that I’ve never owned/operated a laundromat, although as business go, it doesn’t seem too bad to own… Low maintenance, cash business, etc… It’s all set up - the only thing to do is step in an take over… The apartments are all in decent shape - no noticeable deferred maintenance to worry about (although I’ll be doing a more rigorous walkthrough soon enough)… The area is decent, nothing to worry about…
Guess I’m looking for some words of encouragement with regards to owning a laundromat as well as the property. Normally I like to have mixed use properties, and rent out the space. In this case, the commercial space as a rental is less valuable than the income from the business (ie, if I tore out the laundromat, I wouldn’t be able to replace the monthly income from it with a commercial tenant in the space). That’s what makes this a little different - I was trying to figure out if I should value this property as if it were a rental or should I do it with the existing income (since I’d be taking over ownership of the business)??

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Opinions are something we have plenty of! - Posted by ray@lcorn

Posted by ray@lcorn on February 13, 2007 at 20:55:36:

Doug,

I would value the deal based on the component parts rather than as one operation. The laundromat is a business. The apartments are a real estate investment. I wouldn’t capitalize the income at the same rate, because each component requires different treatment.

Assuming 40% expenses, the apartment NOI is about $52,800. ($88,000 - 35,200). They may be valued at an 8% or lower cap (depending on your market conditions). That means they’re valued somewhere between $660,000 and $750,000 (7% cap).

The laundromat can (should) be valued in two ways… one, the value of the business, and second the value of the space it inhabits. As a real estate deal, the second valuation would be based on the market rent one could expect to receive from a third-party tenant who operates the laundromat. Say it’s 3,000 sq. ft. and would rent for $15 per sq. ft. per year. That’s a $45,000 gross, and let’s assume it’s triple net, all expenses paid by the tenant. A market cap rate for that piece of the deal may be between 8% and 9%, again depending on your market, with an estimated value range of $500,000 - $562,000. But the cost approach would be considerably less for the space, say around $100 per sq. ft., allowing for the upfits? That’s $300,000, so split the difference and call it $400,000.

(But both of the above calculations assume that the space is marketable, i.e. separate from the apartment building. If it is contained in the apartments building it’s going to be worth considerably less, no more than the square footage value of the storage space, say $35 psf, or about $105,000.)

The value of the business itself could be calculated as a multiple of gross sales (least accurate) or replacement cost, capitalized adjusted net income (there is no provision for labor, maintenance, licenses, supplies, etc. listed in the expenses you supplied), or liquidation value (keep in mind that used equipment brings about ten cents on the $). Equipment for a new laundromat can be bought (but is usually leased) for $150,000 or so.

Our company has built, owned and operated three laundromats, and I can tell you from experience that the only number that counts is net income. Deduct the $45,000 rent and 60% or so of those expenses quoted above (59,500 * 60% = $35,700) and you’re left with about $39,300, before deducting for any maintenance, supplies or labor. That’s easily $20,000 per year even if you do it yourself or use minimal part timers. So the pre-tax net is about $19,000. Cap that at business rates of about 20%, and the business value is around $95,000.

Add them all up…

Apartments $660,000
Commercial Space $400,000
Laundromat $95,000

Total: $1,155,000

And actually, that may be a little high for a mixed use property that is going to need constant attention. Also remember that laundromats are very simple to open, and therefore very vulnerable to competition.

There may be other value-added factors to the deal though… I’d look for upside value in the property, such as change of use, any expansion possibility (e.g. extra land; higher density; room to add on, etc.). If so, then a deal structure may be devised that allows you to get paid to play.

Just my two cents,

ray

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Response of Prospective Property - Posted by Standing On Gods Promises

Posted by Standing On Gods Promises on February 13, 2007 at 18:49:16:

Hello:

Close on the deal! The numbers work. There is a first time for everything. Get in and take over the laundromat. Hire the professional help you need to maintain the laundromat if need be. It makes more sense to keep the property with the laundromat attached opposed to turning it into another space. Sounds like you will see more income this way.

Bottom line…Go for it! Look at it as on the job training with great wealth benefits!

Remember you are standing on God’s Promises.