Doing Your Small Phoenix Multifamily Laundry
Doing your laundry: a tale of increasing your cash in a small income property.
I spoke with a client looking to sell his two fourplexes in the near future. Part of my due diligence, as an seller representative, in establishing the value of a property I discovered how the owner is loosing quite a bit of cash flow from his property and that loss decreases the property value. This has to do with additional income generated through secondary income of the rental process; laundry room income. In this case there was a laundry lease almost 7 years long, 6 years and 8 months to be exact.
This would not be so bad but the agreement is a loss for the owner. He only receives 25% of the laundry revenue. In most such cases the owner usually gets 50% of the revenue. I looked at his income and the laundry leasing company. It works out that the laundry is generating an average of $260.00 per month in laundry income. The owner should, by prevailing rates get $130.00 but he is only getting $65.00. Over a year this is $780.00 and over the 7 years this is $5,460 of lost income. In this situation the owner purchased the properties with this lease in place many years ago. Remember that the lease comes with the property not the owner so make sure you check this out carefully when making a purchase.
I see three problems. One is the lease is too long and if he does not notify them in time the lease will extend for another period equal to the previous, so another 7 years. If this happened then the current owner would be leaving a lot of money on the table.
The second problem is that he is only receiving 25% of the revenue. In essence he is loosing money because it is the owner paying for the water and electricity to run the laundry room. So its probably a break-even if not a loss.
The third problem is that he has not way our, no choices for 7 years. Since his lease is running out, he needs to make sure he renegotiates a much better lease for a shorter time or better yet he should consider putting in his owner new coin operated washer and dryer. Consider that currently the laundry is pulling in $260.00 per month or $3,120 per year. If they owner in hisown washer and dyer at a cost of $1,400 he would have a return on the investment within a year and after that an income generating asset.
So $3,120 in income and 30% in running expenses or $936 leaves $2,184 in net income. Lets round it to $2,000; $2,000 of net income on a 10% cap rate is $20,000 in value. At the prevailing 7.5 cap rate the added value to the property is $26,667 in additional value to the property. It’s not big money but for an 8 unit property it is size-able . There are some downsides to having your own units, which you may read in the comments section. Each building is different, but in this case it would be worth it. I’ll have a short analysis posted about this topic in the near future based on an actual property.
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Mr. Ciesielski,
A good article, and some good points! However, you neglected to mention that an owner-operator of coin-operated laundry equipment has additional costs and liabilities over just the utility costs that he needs to factor into his profit analysis. Costs such as maintenance and repair of the machines, and collection costs. What about liability insurance and vandalism repair costs that might result from burglary attempts?
However, one great point that your article makes is the importance of having the owner emphasize the monthly commission rate from the leasing partner, and the emphasis on the owner’s actual NET return, after utility costs are deducted. Too many owners have a tendency to ask for up-front cash from laundry lease operators, and that up-front investment often requires a reduced commission rate to the owner. In almost every instance, the owner will receive much higher income over the duration of the lease term by negotiating a higher commission rate rather than taking money up-front. (Your example doesn’t make mention of any front-money paid out, but that could be one of the reasons the commission was less than 50%.)
A third point I would like to make… You mentioned the gross income at this 8-unit property was $260 monthly. That equates to $32.50 spent by each unit on laundry per month. If the vend price at the equipment is set at $1.00 wash and $1.00 to dry, or $2.00 per full-load, then each unit is doing more than 16 loads of laundry monthly, and the equipment is running 130 cycles per machine per month, 4.33 cycles per day. By industry standards, that’s about 35% higher than average. The “wear & tear” on that equipment will create higher than normal service and repair costs. And, with that kind of usage, one might make a case that another pair of machines might be beneficial and provide more convenience to the residents, and might even increase revenue.
In any event, I appreciate your insights, and wish more investors / owners evaluated the laundry revenue opportunity in as much detail as you have suggested!
Kindest regards,
Mike Jordan
Vice President and District Sales Manager
WEB Intelligent Laundry Systems
A Division of Mac-Gray Corporation
@Mike,
I just hinted at it: “There are some downsides to having your own units…”
A more detailed analysis is in the works for a specific property as a case study.
You’re right Mike. There are additional costs to the owner when the units are property owned and in many cases the additional expense and time needed to maintain them is not worth it for the owner. In some cases it is. I have clients doing it both ways and some of my properties have leased equipment and others don’t. In each case is was a conscious decision based on a balance of income and expense/liability.
The upfront money in turn for a lower commission rate is important and I’m glad you mentioned it. It is of benefit to the signing party, maybe; but, there is no benefit to the subsequent owner of the property, especially if the lease is in place for such a long time. In fact, taking “up front money” probably hurts the resale value of the property because net income is reduced.