16 Mar It always comes back to laundromats!

Back in our post titled “A look into Laundromats” we discussed our first look into a couple different deals and foreshadowed a fast forward to 2020 where we are looking at them again.  We continue to be eyes wide open toward opportunities in a few different categories as I’ve mentioned in some other posts.  The opportunity to build passive income through Real Estate, Semi-Passive through Laundromats and the Franchise Opportunity or other business purchase.  In my laundromat hunt I ended up finding a pretty unique situation that we are mid-evaluation on right now, this deal will require a partner and my brother in law seems aligned with the big picture goal and we’ll see if it works out.  As my wife loves to say “it always comes back to laundromats”.  Why? Potential cash flow and return compared to cash flow and return on real estate can be more powerful while also requiring more work.  Pair this all with the ability to buy an existing laundry with existing customers and equipment to learn from, then we can begin to plan bigger and potentially open a new build out location or multi location.  We want to start small and learn, first.

While looking for laundromats for sale I stumbled across a commercial building for sale with a laundromat inside of it and both are owned by the same group.  The building make up is approximately 6,000sq feet of mixed use space which contains the Laundry, a 3 bed 1 bath apartment, a 2 bed 1 bath apartment and finally a tenant renting out space for a Pilates studio.  The purchase price was $675,000 which buys you the building itself and the laundromat.  When I first saw the posting I was anticipating seeing two sets of P&L Documents from the seller, one set for the Laundry and one set for the real estate, what I received was one P&L Containing both.  I haven’t spoken to my CPA yet to understand what strategy might be there, but these are clearly two different businesses and should be able to run independently of each other and maintain their own individual value even though they can be bought as one.  This whole deal is unique as it stands simply because it falls in a few categories:  Small commercial under $1M, Commercial Landlording, Residential Landlording, and owning/operating a coin laundry.  It seems to me this property might not be incredibly to any buyer looking for something under $1M, nor may the dual landlording appeal to someone looking to have bought a laundry.  With that, I think we are a bit of a potential unicorn buyer for a unicorn transaction such as this one as I love all categories as long as they stand on their own.

I asked if the seller would provide split P&L documents but am being told I can uncover this information during due diligence after providing a letter of intent which is a non-binding commitment that demonstrates we are serious potential buyers.  Instead of providing a letter of intent, I took their P&L Document and saved 3 copies of it and labeled them as follows; The original, The Laundry, The Real Estate.  I then began looking at the original and re-aligning income to the real estate or the laundry, whichever seemed appropriate.  I did the same with the Cost of Goods Sold lines, and expenses categories.  I sorted out cell by cell to the best of my ability on items that seemed very straight forward and was leftover with some expenses that I really didn’t know where they belonged.  In those situations, I looked at what they were and just made an educated guess splitting the cost between the two with a percentage that I thought was appropriate.  For example the water bill was massive, there was no hiding the mass majority of it belonged to the Laundry and a small percentage leftover was split to the building.

I ended up finding that each entity may stand on its own as it sits, the real estate is a pretty straight forward calculation of Capitalization Rate up against its Net Operating Income.  The Laundry however, I need to pay a coach to help me understand, and will do so once I finalize some potential financing we are working on in order to make this happen.  The Laundry has dated equipment but we don’t know the age to figure in how much of the cash flow will we need to set aside to replace some or all equipment.  There are factors that weigh on the laundromats value such as turns per day, competitors nearby, and density of apartments or population nearby.  In this specific case there is not a lot of apartment complexes nearby but this building is smack in the middle of a working-class neighborhood of homes on top of homes, very small yards and densely populated.  While this could be and may be a really solid starting point to get into a laundromat and commercial space, I’m just not sure yet and have some work to be done.

An additional concern that weighs on my gut is the thought of being a landlord for residential in the Minneapolis City Limits has always been something I swore I’d never do.  This isn’t because of crime, demographics or the rioting that took place in recent weeks, but because of the laws so heavily favor the tenant.  The City Council has proposed and not passed some pretty ugly ordinances in favor of tenants that likely foreshadow what will become reality at some point in the near future.  While there are a number of items they’ve proposed that are troubling I’ll give one example that stood out, criminal record.  The City has proposed that a landlord cannot take into consideration criminal record that is 3 years back or older in their past, this is crazy.  I understand people have earned second chances, but 3 years is ridiculous and a landlord shouldn’t be held to a standard that by comparison is 4 years shorter than what an employer may take into consideration when wanting to rescind a job offer.  That is an unattractive direction that the City appears to be headed and while that may not become the case tomorrow or even in 2020, it could be in the next 3-5 years and I plan on buy and hold investing in most of my deals.

As I weigh out the metrics of this specific deal I have a few things to consider, a conversation with the broker and seller in the near future, and then a decision that will either move us further in to due diligence or a chance to back away and continue the hunt.  When coming at this from the gut check method I oddly feel better about the laundry itself than I do about the building and the laundry.  There may be a chance that I can help the seller out by buying the laundry itself after securing a new long term lease, and allow them to relist the building itself at a lower purchase price and removing an obstacle of sale since many investors may have low or no interest in owning the laundry.  Of course right as we are close to a point of being ready to move forward another laundry we had looked at recently has just taken a significant drop in price and is very appetizing as it appears on the surface.  We already have the P&L but had reviewed it based on a purchase price that was significantly higher.  I’m writing this on the 4^th of July, so I’ve emailed the broker for more information to start a deeper discussion but am stuck waiting for Monday to come (who looks forward to Monday’s?).  We’re ready to pounce on something, I truly hope one of these two is what we prey upon and use as our next leg toward FI.