May 21, 2022
Looking to invest in a new lucrative opportunity?
Whitney Elkins-Hutten is here to talk about how car washes can be a low-maintenance, high-yield investment. She discusses the different types of car washes, their potential profits, and how to scale this type of asset. This is a niche investment that is worth considering for those with a real estate background and an interest in commercial properties.
Whitney is the Director of Investor Education at Passiveinvesting.com. She is a real estate maven who, after purchasing her first rental in 2002, and hitting a home run, then nearly losing it all on her second deal, took control and figured out how to invest in real estate the right way. She realized that success must leave clues. So, she studied and replicated the very personal finance and wealth creation strategies the wealthy use to create financial freedom. Today, Whitney is a partner in $700M+ of real estate —including over 5000+ residential units (MF, MHP, SFR, and assisted living) and more than 1400+ self-storage units across 7 states—and experience flipping over $3.0M in residential real estate.
[00:01 - 04:16] Buying the Business and the Real Estate
[04:17 - 15:19] Getting into the Car Wash Business
[15:20 - 18:13] Creating Value for the Business and the Customers
[18:12 - 19:15] Closing Segment
“If you just buy the business and you don't have the real estate, you're not controlling the actual full potential of asset.” - Whitney Elkins-Hutten
“This is really a space that's ripe for disruption. If you think about it, the carwash space, you know, it's estimated to be I think the number is like $27.8 billion of revenue a year and it's growing just shy of 4% annually.” - Whitney Elkins-Hutten
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Want to read the full show notes of the episode? Check it out below:
Whitney Elkins-Hutten 00:00
It's worthwhile to note that there's other groups that are starting to kind of come up with carwashes. And what makes this really unique, what we're doing here at passiveinvesting.com, is that we're actually buying the business and the underlying real estate. And I think an investor has to be really careful about that. Because if you just buy the business and you don't have real estate, you're not controlling the actual full potential of the asset.
Welcome to the How to Scale Commercial Real Estate Show. Whether you are an active or passive investor, we'll teach you how to scale your real estate investing business into something big.
Sam Wilson 00:34
Whitney Elkins-Hutten is the Director of Investor Education at passiveinvesting.com and Partner at $700 million in real estate including over 5000 residential units, and more than 1400, and it cut off there for some reason that truncated your bio here, Whitney, I'm butchering it. 1400 what? Self-storage units. Fantastic. And you know what we're gonna talk about none of those things today, you've come on the show before, I don't know what maybe four, six months ago, I don't have the episode right in front of me, which was a great time just chatting about really your experience in real estate up until that point in time. So if you want to look back in the show, you can find Whitney's previous interview. But the thing we're going to talk about today, and really highlight and focus on is a really nuanced and niche investment you guys have taken on. Can you tell us about it, Whitney?
Whitney Elkins-Hutten 01:17
Well, yeah, I guess I actually, now you've pointed out to me, I need to update my bio, because now we've started partnering on carwashes. And so right, who would have thunk it? We're so proud to bring on this investment class for investors, a lot of people you know, don't think of car washes as their first, you know, piece of real estate they might invest in. The unique thing about car washes is that you can actually invest in the business and the real estate at the same time and achieve a nice yield, especially in this like cap rate compressed environment.
Sam Wilson 01:48
Tell me the nuances of the car wash. Is there, I mean, when I think of a car wash, I think of the ones where you like you know, you get in, you put it in neutral. And that drags you through and you come out the other side. And then I think of the ones where you know, they have the big signs like don't wash all the mud off your ATVs here in our carwash where you pull in and spray it off with a little wand and you put your quarters in the slot. Which one are you buying? Are you buying both? Give us the breakdown.
Whitney Elkins-Hutten 02:12
Yeah, so there's really three different types of car washes, and you've hit on two. So the coin-operated carwash or the self serve-type of car washes. Number one, I think a lot of us might have grown up with that, where you pull a car into a bay, stick of quarters and you've got the brush and you know, pumps up, then you've got your water one, you know, your child is like chasing around the bay trying to get you wet, right, then you've got full-service carwashes think of these more of the type of single bay, maybe double bass that are attached to like a gas station, or something like that. Again, not very scalable model, but they definitely can be a little, you know, some moneymakers, we're actually investing in what we call a car express carwash. So these are the, think of the ones like you were talking about the long bay, where you have the long tunnel. And you know, you pull up your car, somebody grabs it from you, they like backing it out, and then they flip it around the back, they loaded in the bay. We're not even doing that. I mean, this is all self-serve. And you know, you can, you know, back in my car, and then you can put it in the bay, and it's driven by how long that tunnel is, and how quickly can you move the cars through and still do a great job for the customer. Right? You can whip a car through an express tunnel. But if you're not doing a great job of getting that car clean, guess what? Customers not coming back. So there's a fine balance here. You know, really the express tunnel carwash is or, you know, have the, you know the most potential for profit, because there's really a lot of low maintenance to them, and very low payroll burden on these types of assets. And there's even the opportunity to take some of these other type of car washes, the self-serve carwash and the full-service car washes, and convert them into more of an express carwash. But, you know, it's worthwhile to note that there's other groups that are starting to kind of come up with carwashes. And what makes us really unique, what we're doing here at passiveinvesting.com is that we're actually buying the business and the underlying real estate. And I think an investor has to be really careful about that. Because if you just buy the business and you don't have the real estate, you're not controlling the actual full potential of asset.
Sam Wilson 04:16
Yeah, and that was going to be one of my next questions for you on this. But before we get to really the nuance of splitting of the business and the land that goes with it, let's talk a little bit about branding. And is there a national chain that you guys are branding under? Are you starting your own brand? Is there, what's the word I'm looking for, like a franchise that you guys are working through? What is that?
Whitney Elkins-Hutten 04:39
You know, this is really a space that's ripe for disruption. If you think about it, the carwash space, you know, it's estimated to be I think, you know, the number is like $27.8 billion of revenue a year and it's growing just shy of 4% annually, and a large majority of that growth is actually occurring in the express car wash business. Now, if you depending on where you live you might have seen like brands like Zippos, or Mister Car Wash, but majority of these types of car washes are still owned by mom and pop operators. And why is that? Well, if you think about it, the large players, institutional players aren't getting into the space, because they can't make it passive. There's not a management company that can take on this type of asset. So what we're doing that's very unique is that we're actually solving that problem by building our own vertical management company within the business. So what that's going to allow us to do is actually, you know, create tons of operational efficiencies for the business as well as for investors but be able to scale the business to about 100 to 150 locations, and then wrap this all up together for a nice exit.
Sam Wilson 05:47
That is cool. I like that. And then would you guys retain the management company, when you and then just do third party means that part of the plan?
Whitney Elkins-Hutten 05:56
Anything is possible at this point in time. So we are, you know, we're definitely in the build phase, the growth phase of this portfolio. So you know, really focused on operationalize, how many operational efficiencies, can we create, you know, on the labor front, just even like thinking about the chemical front? How do we standardize training across all the locations? How do we standardize the service across all the locations? And, you know, once we kind of have that nailed down, then we'll be able to really fully assess what we do the management company.
Sam Wilson 06:29
Yeah, no, that's really interesting. How are you finding opportunity in this space?
Whitney Elkins-Hutten 06:33
Well, that has led to our acquisitions team. But again, remember, a majority of these locations are actually mom and pop locations. So they've might have bought into like a small franchise or tried to, you know, take over a property on their own, you know, they struggled, you know, a lot of times what we're finding is these locations that we're buying, they're struggling with the actual optimization of the business. One, they're trying to run the business themselves, and never hired themselves out of the business. They actually did bring on a team, they don't have standardization and training. And then even if they achieve that, they're relying on their distributors to help them optimize the actual tunnel, and the chemicals within the tunnel. Now, what's wrong with relying on a vendor to do that? The vendor, you got a conflict of interest going on there. So you know, again, when we're building out this management company, we're really trying to, we're still gonna work very, very closely with our vendors, to you know, work on pricing and optimization, but we actually, as a management company, get to control end and end product of that tunnel.
Sam Wilson 07:36
That makes a heck of a lot of sense. Let's talk then about your finding your see your funding opportunity. Presently run already mom and pop owned car washes. Have you guys, are you considering building ground up?
Whitney Elkins-Hutten 07:50
Again, you know, right now, there's still just enough opportunity in the acquisition space for us to build a large part of the portfolio scale it up very quickly in this arena, we've already brought on nine this year. So yeah, it's there. They're there, right. They're already built-in primo locations. So without having to take on that build risk
Sam Wilson 08:10
that valuing needs, Is this, I mean, obviously a bunch of that operating income, but there's got to be a way to underwrite and say, hey, it's here, we can do X, Y, and Z to make it worth that. How do you do that?
Whitney Elkins-Hutten 08:22
Right, yeah, so typically, what we're doing with a multifamily unit, self-storage, you know, mobile home parks, you're underwriting net operating income. When you have a business you're underwriting EBITDA, Earnings Before Interest Depreciation, Taxes, and Insurance and Amortization. So we are actually, and I'm sorry, you know, amortization not insurance piece that's actually an under a line item in the expenses. So when you take the EBITDA, essentially your profit, your gross profit, you know, we're paying a multiple on top of that and so we're looking for car washes, probably valuing the car wash it like eight maybe 10% EBITDA. But it goes even a little bit deeper than that because we're looking to be in at 51 to 53% of the expected gross income on the property even though we're putting these guys into like, you know, 2,3,7 portfolios, small portfolios together, we have underwriting each property to stand on its own. That really just helps mitigate more risk for the investor, right? Because you know, our intentions is to do a large exit, potentially IPO roll up to REIT you know, those are a couple of different you know, exits there but things just totally you know, business totally tanks and we can't figure it out which just the wealth of knowledge we have in our team, I don't see that happening. Each carwash can stand on its own and a very attractive return number.
Sam Wilson 09:45
Right.I like that. And that is interesting. Let's talk then about this splitting the business and the land or maybe there's, you know, two things going on. There's a real estate play and then there's the business play. When you guys buy these are you holding title to the business and of the land all in one, or is it that the business then leases the real estate back from, I mean, how are you guys doing that? I guess if I can get the words out of my mouth.
Whitney Elkins-Hutten 10:12
That's an amazing question. And I really want to dig in further on that. Because I, you know, on where I'm at with working in with the investor, I don't know that and I haven't been asked that yet. But that's an amazing question. But I can tell you, what I can tell you is that we actually have both within the portfolio. Right? So you know, I would imagine it's all wrapped up into the same LLC.
Sam Wilson 10:34
That's interesting. Yeah. Because I would have thought and again, I know, this is pure conjecture on both of our parts, not like neither of us have the solid answer. Because this is one of the businesses, you know, that I'm involved in is the laundry business. And in that, we've got both the actually, I don't have it right now, we are just on a lease for the one we own, but looking to build, the next few we do, we're going to be new builds, and I go, Gosh, when I do that, I'm gonna split them. One company is going to own the land and lease it back from the company that owns the actual business, because then someday, if I want to sell off the business, I may still retain rights to the land and just be a landlord, I wouldn't have that option. I didn't know how you guys were doing that. So and then, of course, then you have to profitable companies and they have their own split on the whole deal to a different equation altogether. But then I guess the last question for you, your underwriting these is up to take a stand on their own, but it sounds like you're also taking them down inside of a fund. Is that right?
Whitney Elkins-Hutten 11:23
We're doing mini portfolios, you know, as we can group acquisitions together, you know, our first acquisition pool was two units or next acquisition pool was seven units. So we're looking to group those together. And it operates like a fund in a few different ways in that you get diversification, multiple assets with one investment. So if you're investing in, say, you know, $200,000, it's split over two assets or seven assets, you know, so there's that. The cool thing, rather than doing this fund is that it's not blind. So you actually get to see the assets at the beginning, rather than sometimes when you a lot of times when you invest in fund, if you're coming in early. You're not able to see the actual assets that are being required, you're having to invest on a hypothesis that the operator is making, you know, we choose not to do that with this type of acquisition. And lastly, you know, because of that, because the investor can actually see the assets, you know, inquire about individual metrics on each asset, if they choose to, there's more of an immediacy to invest. I know for me, this is getting down to investor behavior. I know for me, like when I'm investing my own dollars, I might be really excited by that investor bonus at the beginning for a blind fund. But you know, I'm very conservative, and I want to all let the fun acquire like a few assets before I actually go into invest. That's just me.
Sam Wilson 12:41
Love it. Yeah, that's sage and hard-earned advice coming right there. Tell me about pricing. Like, what's a typical range of a cost per express tunnel carwash? Is it like 5 million bucks? Is it 10 million is at one, I have no idea. Where are you finding the range of pricing is for these?
Whitney Elkins-Hutten 13:00
It depends on the location. So you know, the land, since we're acquiring the land, the land is also can be a large factor in the pricing. So you've got the actual, you know, again, what we talked about eight to 10x gross. And then we also have like the price in the land. So our first acquisition, you know, that one is since close, you know, that one was an $8 million acquisition. So that two of them, yep. Yeah. As we grow the NOI, just think about that, you know, we're looking to optimize the NOI on that property and, you know, exit at a 10x EBITDA. Know, when we go for an IPO. So there's just a, you know, a nice ability to create some exponential growth for investors.
Sam Wilson 13:40
Yeah, absolutely. When you look at businesses like this, they typically have a higher cash on cash, return, maybe than, say, a multifamily project or even a self-storage, for that matter. I mean, what and again, I know, you probably can't say exactly what it is on the air, but like, what's, what's an expected range? You guys are looking at, you would say, hey, if it falls in this range, it looks good for us.
Whitney Elkins-Hutten 14:02
Our first couple of acquisitions, first 8 acquisitions, you know, pulled together, you know, cash on cash, you know, first year might be like, again, we always aren't underwritten very conservatively, you know, because we're, you know, having to optimize the asset, first year might be somewhere between four and a half to 8% cash on cash, as we stabilize all the units together, and then we're ramping up as quickly as we can to 8%, 9%, 10%. We are looking to hit 15% cash on cash by the end of five years.
Sam Wilson 14:32
Got it. Okay. Okay. Cool. That is absolutely. You know, fascinating last question for you on this, leverage. What sort of debts are available for this?
Whitney Elkins-Hutten 14:42
Yeah, so we're using private lending, we're looking very attractive. 60% loan to value are, you know, on the last acquisition that we did, I'm just looking at the number. We did a 4.15% interest rate fixed for five years with a 20 year amortization. So it's very competitive private business funding.
Sam Wilson 15:02
No, that makes all the difference in the world. That's a lot. Those are a lot better terms that I would have thought on the private lending side, so that's absolutely awesome. Whitney, thank you for taking the time to break down the carwash base, why do you guys see opportunity there? And then how you're acquiring assets and then running them. I think it's brilliant. Is there any question I should have asked or any other last piece of information that you'd like to share?
Whitney Elkins-Hutten 15:23
Well, I think you know, one thing you know, as an investor, when you're looking to invest in a project like this, that definitely has a value add component, what is the value add that you can create on a carwash? So, you know, we've talked about, you know, the actual tunnel, and a lot of everything occurs within that tunnel, and you know, can you optimize the chemicals in the tunnel, some of the chemicals on a carwash are extremely expensive, but mom and pop operators might actually put that chemical on the car, every single time that comes through, we can actually optimize for that based on the membership and only apply it like one every four times that the car comes through. So we have a lot of optimization with the chemicals in the tunnel, we have an optimization with the payroll, it can be run with, you know, maybe four to six full-time employees, you know, annually to very low overhead and cost that way. And there's just a wealth of things that we can do, you know, with the vacuum housings, you know, perks that we can add subscription packages to the property or to the business. And so, you know, I know one thing that investors ask me, and they're like, What happens if somebody comes every single day to wash their car, you're like, Okay, if the subscription package the low switching costs $35 a month, that average carwash, a person, washing a car uses 80 cents of water and chemicals on the car, we've got a nice healthy margin there. So they would literally have to wash their car, probably twice a day for the full month, we started losing money on that subscription agreement.
Sam Wilson 16:51
And that's a lot of commitment for somebody to wash their car twice. Now, I'll be honest, I used to live in Indianapolis and on snow days. Man, I love my carwash subscription, because you get all that black, gray, brown, muddy saltwater. Man, I go through four or five times in a day, because I'm on the road all day long. But of course, that was only you know, three or four days of the year. So they still got their money for me.
Whitney Elkins-Hutten 17:15
Well, and you brought you tapped on a really kind of a great point here. And that is, you know, we're talking a very interesting time in our economy. Right. So you know, a lot of people, a lot of investors are going what happens in a recession? How recession resilient are these assets? And so we've talked about the optimization, we've talked about the subscription packages, but you know, investors asked me and they're like, well, wouldn't somebody just cancel their subscription? First of all, you know, science or statistics, or a tell us when somebody actually establishes the behavior of washing their car, they don't break it, right. And especially at $35 a month, that's a pretty low-hanging fruit compared to other expenses. I love it. But when you have a recession environment, right, and last point here, is people actually take better care of their cars because they don't have to repair the car, right? Just like what you're talking about. We live in Colorado, you've got that mag chloride like I don't want to have to like deal with the pain here in a couple of years. I'm gonna spend a couple of bucks and wash my car.
Sam Wilson 18:12
You got it. I love it, Whitney. I know we're out of time. Thank you for coming on the show today and breaking this down. It's been tons of fun. If our listeners want to get in touch with you, what is the best way to do that?
Whitney Elkins-Hutten 18:21
Yeah, a couple of places. You can reach out to me directly at passiveinvestingwithwhitney.com. If you just follow the little form on the page and you'll land directly on my calendar. You can also email at firstname.lastname@example.org
Sam Wilson 18:40
@passiveinvesting.com. Got it. We'll make sure we get that corrected and in the show notes properly. Whitney, thank you again for your time was great to reconnect.
Whitney Elkins-Hutten 18:48
Yeah, it's you too. Thanks, Sam.
Sam Wilson 18:49
Hey, thanks for listening to the How to Scale Commercial Real Estate Podcast. If you can do me a favor and subscribe and leave us a review on Apple Podcasts, Spotify, Google Podcasts, whatever platform it is you use to listen, if you can do that for us, that would be a fantastic help to the show. It helps us both attract new listeners as well as rank higher on those directories so appreciate you listening. Thanks so much and hope to catch you on the next episode.