Here’s Why Real Estate Investors Are Turning to ATMs For Diversification

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This article is presented by ATM Investors. Read our editorial guidelines for more information.

If you’re looking to diversify your investment portfolio in 2024, investing in ATMs should definitely be on your radar. 

We all know that economic conditions for real estate investors have gotten tougher in the last few years. Tighter margins, smaller ROIs, and fewer investment opportunities are a reality. Not so in the ATM industry. ATMs are a remarkably resilient, though still often overlooked, source of long-term, steady cash flow, with minimal active involvement, minimal risk, and a ton of opportunities for diversification within the industry. 

Sure, there are some logistical considerations (which we’ll get into), but the modest amount of planning you’ll need to do is absolutely worth the rewards. If you want a number, consider this: A typical ATM will give you a complete return on investment within 12 to 18 months. 

Impressed? Here are five benefits of investing in ATMs. 

1. Cash Is Still Widely Used by Unbanked and Underbanked Small Businesses  

According to data from the Federal Deposit Insurance Corp. (FDIC), as of 2021, 4.5% of U.S. households, or about 5.9 million people, were underbanked or unbanked. That’s a lot of people who rely primarily or completely on cash to run their businesses and everyday lives.

Contrary to popular belief, being underbanked doesn’t necessarily correlate with financial instability or poverty—although it does correlate with lower income levels, especially in Black and Hispanic communities. The dataset shows that of households earning between $30,000 and $50,000, 8% of Black households, 8.4% of Hispanic households, and 1.7% of White households were unbanked. When asked why they weren’t using a bank, most of those people either felt they didn’t make enough money to meet banking balance requirements (21.7%) or they simply didn’t trust banks with their money (13.2%).

Many American households still use nonbank check cashing and nonbank money order services, which are especially important for immigrant communities, where part of someone’s income is sent abroad. In 2021, nonbank money order services are used by 9.7% of the country’s households, a huge number.

There’s also a lot to be said about the enduring preference for cash payments for running small businesses. There’s no getting around the fact that small businesses with tight operating margins struggle with the per-transaction fees they have to pay every time a customer pays electronically.

These aren’t just credit card fees: there are also processing fees charged by banks and processing companies and even terminal fees charged by electronic card terminal providers like Square. The fees can add up to as much as 5% per transaction. That’s the main reason you’ll often see a “$5 minimum to use a card” sign at your local small business.

It’s no wonder that with fees this high, many small businesses will use every opportunity to take more cash payments—or even go cash only. On-site ATMs are invaluable to many of these businesses, making it easy for customers to withdraw cash even if they normally don’t carry any. 

ATMs are so beneficial for increasing small business profit margins that many will make a trade-off between taking the commission for ATM cash withdrawals and having an ATM installed on their premises. Indeed, 90% of the locations that our company, ATM Investors, sign for are willing to forgo their commission from the unit just to increase cash payments in their business.

2. There Are Substantial Tax Benefits 

ATMs are truly a unique investment opportunity: They can be classified as a type of real estate, but they’re also pieces of business equipment. And business equipment is eligible for very generous federal tax breaks. 

First, if you purchase an ATM—or multiple ATMs—you can have the entire cost of the purchase written off for tax purposes in the year of purchase. The cap for this write-off is $1,220,000 for 2024 on total purchases under $3,050,000. You’d still get some tax write-offs on purchases of up to $4,270,000. This is called a Section 179 deduction. 

You also would be able to leverage a 60% first-year depreciation bonus if your total first-year purchase is over the Section 179 cap but under the upper threshold of $3,050,000. Potentially, you can benefit from both in your first year of setting up an ATM investment business, although the Section 179 rule applies first. 

There are other potential tax benefits you can reap since both ATM units and ATM location contracts are deemed depreciable assets for tax purposes. Of course, you should always consult a business tax professional to work out what exactly you will be entitled to.

The tax incentives associated with ATM investing are extremely valuable to any investor with long-term diversification goals. Over time, you are also able to leverage those assets to borrow against the asset value in order to reinvest in the growth of the ATM business or diversify into another asset class.

3. Stable Long-Term Cash Flow

One thing you need to understand is ATM location contracts. Location contracts are the legal agreements between you, the ATM owner, and the business that agrees to have the ATM installed on their premises. 

There’s a variety of ways these agreements can be structured, but the most beneficial is structuring ATM contracts as lease agreements. Essentially, the template is similar to leasing real estate but with caveats specific to ATMs. You’ll be able to clearly set out who’s responsible for the maintenance and replenishment of the ATM, how the transaction fees are split, and to protect yourself against the loss of revenue that could result from having a competitor also install an ATM on the premises. 

Probably the most beneficial aspect of entering into a lease agreement with a small business is that it will stipulate how long the agreement will hold. ATM contracts have a standard length of five years, which gives you stable, long-term cash flow. At the end of the lease, if everyone is happy, it can be renewed in the same way as any other lease agreement. A typical ATM has a lifespan of 15 years, so if your contract has an auto-renewal clause, you may never need to worry about a well-performing ATM again.

4. ATM Businesses Provide the Ultimate Form of Diversification at Scale

When you invest in real estate, your long-term path to success will require some diversification. If one of your properties stands empty for a period of time, the others will compensate for the temporary dip in cash flow—but only if you diversify in the real sense, meaning your properties are different, situated in different locations, etc.

The same logic applies to running an ATM business—and there are many opportunities for diversification within the ATM industry. As with other types of real estate, ATMs will go through dips in cash flow, even though the risks of this are lower than with traditional real estate investments. Pandemic-era ATM investors learned the hard way that if all your ATMs are located in restaurants, you’re in trouble if the restaurants are forced to close temporarily.

Ideally, invest in a diversified portfolio of ATMs located across a wide range of businesses and public facilities, including airports, convenience stores, and leisure or entertainment centers. Solid ATM portfolios are also diversified by region, which better protects you, the investor, against local economic fluctuations that may affect cash use.

Finally, it’s a good idea to make sure that your ATMs are diversified by business use case. People’s hyperlocal preferences can be difficult to predict in advance.

In some locations, cash-only businesses will give you the greatest cash flow—especially if the location has a high concentration of underbanked communities. In others, businesses that offer a cash discount as an incentive for customers will do better. You won’t know which one will deliver the highest performance unless you’ve tried them all.

Don’t forget the ultimate advantage of an ATM: It’s a movable asset. If all else fails, you can always have the ATM moved to a different location at minimal cost to you. 

5. You Can Leverage OPM to Reduce Risk and Operational Complexity

OPM, or Other People’s Money, is a very good idea to leverage if you’re investing in ATMs. In fact, it is very common in the ATM industry to leverage cash-loading services, also known as third-party vaulters, to service and load the machines with cash.

This is especially important if you own ATMs located all over the country, but even if you only own a few ATMs locally, there are logistical inconveniences to replenishing your ATMs yourself. You would have to keep track of all the transactions that go into your business checking account and how much they’ve depleted the ATM’s cash vault. It is then your responsibility to replenish the vault, thereby “settling” the transactions.

Eventually, to maintain an efficient replenishing schedule, you will need to track longer-term usage (typically over three- and six-month periods). Obviously, the more ATMs you own, the more these operational complexities will grow. And that’s without considering the risks associated with regularly transporting large amounts of cash to an ATM. You would need to think through appropriate security measures. 

For all these reasons, using third-party vaulters is a good idea for most ATM investors. The third-party vaulter uses their own money to manage and settle transactions and replenish the cash. This makes your life easier, allowing you to have zero cash in circulation—and more time to spend on your other investments. 

Final Thoughts

Investing in a diverse portfolio of ATMs can deliver you substantial, tax-efficient cash flow over a relatively short amount of time. For an investor who needs to generate reliable additional cash within a tight time frame, there are few comparably lucrative areas of investment.

As with other forms of long-distance investment, however, ATMs require some logistical and legal know-how, which is why going through an ATM portfolio manager can be beneficial. That’s where we come in. ATM Investors is the best solution for real estate investors looking to diversify their portfolio and increase their cash flow, especially during times like now when the real estate environment is as tough as it is. We help with everything, from assisting in drawing up contracts and replenishing and maintenance of the machines. Once we help you get those factors under control, you can reap the benefits of this unique industry.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.