How To Analyze A Carwash

[Antonio Wade]

BiggerPockets,

I am new to investing on commercial properties. I came across a self serve car wash for sale. If anyone could provide insight on how to evaluate or analyze the property that would be very helpful. Thanks. 

[Barry Ruby]

Hi Antonio,

In buying a car wash (self service or otherwise) you are buying a business along with the real estate. Analyzing an entity with cashflow requires valuing the income stream to determine its net operating income (NOI). NOI is determined by defining the current gross income generated by the car wash and deducting all operating expenses involved in generating the gross income. The value of the car wash is determined by capitalizing the NOI.

Capitalizing the NOI is accomplished by dividing it by a capitalization rate (Cap Rate). The Cap Rate is determined by market conditions and the return you would like to see in exchange for the purchase price you pay to own the NOI generated by the operation.

In effect, the Cap Rate is equal to the yield (cash on cash return) you think is fair for you to earn on the investment. For instance, a $100,000 NOI capped at 8% = a $1,250,000 value for the car wash.

If you are serious about acquiring the car wash, you should also drill into what the value of the property itself is. You should also run numbers that reflect the performance of the deal on a leveraged basis, that is with a loan on it. 

Placing a loan on the deal reduces the $1,250,000 an all cash deal required by 75% to $312,500 cash equity you would need. A $937,500 loan would absorb $68,108 of the $100,000 cashflow and leave $31,892 in net cashflow which earns a cash on cash yield of 10.2% (NOI/Equity).

So a leveraged deal earns an annual return of 10.2% vs the same deal on an all cash deal @ 8.0% 

Hope this helps