Real Estate Investing vs Laundromats for Cash Flow
My previous Bigger Pockets blog post, You Shouldn’t Buy Real Estate for Cash Flow!, got a lot of attention on Bigger Pockets. It rapidly became the month’s top member blog post. In it I argued that for the majority of investors, at least in the beginning, the cash flow from real estate functions more like insurance against a market drop than a wealth-building tool.
I make the argument that there are other sources of cash flow that are far superior and don’t require too much more time and effort than real estate. This idea resonated with me and, judging by the comments and messages I received and the traffic to my website from Bigger Pockets, it seemed to resonate with many of you, too.
In this post, I come bearing even more great news! You can acquire one of these cash flow machines for little to no money down! Being savvy real estate investors and Bigger Pockets aficionados, we’re familiar with many of the creative financing ideas to acquire a real estate asset. Many of those same strategies work for other cash flowing assets, as well! I would argue that many of them work even more so with some of these other assets than with real estate. But, with the asset class I focus on, there’s an even more powerful method of acquiring cash flow for nothing down! I’ll show you 3 ways to get a free laundromat!
I am going to focus this post mostly on the laundromat asset class. It’s what I invest in for cash flow. As I emphasized in my last post, I am a real estate investor at heart and do invest in real estate, as well. However, when presented with the 25-35% cash-on-cash returns of laundromats verses the typical 6-12% cash-on-cash returns I could find in real estate, I shifted my strategy and you should consider it, too. If you haven’t yet, go read why You Shouldn’t Buy Real Estate for Cash Flow! before you finish this one.
Getting a Free Laundromat
The holy grail of investing is the legendary “Infinite Returns”! Infinite returns can be achieved when you acquire a cash flowing asset for no money out of your pocket, or if you acquire an asset, increase it’s value, and refinance your money back out of the deal. This can be achieved in real estate investing, but real estate doesn’t have a monopoly on this strategy. Other asset classes pave roads to the holy grail, as well. Here are three ways that you can do it with laundromats!
Lame! Seller financing? We hear about this all the time on Bigger Pockets. What’s so revolutionary about this? Well, nothing really. It’s the same concept you’ve probably learned about from one of @BrandonTurner’s webinars or in a Bigger Pockets podcast, book, or blog post.
So why bring it up here? I bring it up here for a very important reason. In the laundromat industry, unlike in real estate, seller financing is very common. In fact, some brokers and even websites that list laundromats for sale allow you to filter by deals that offer seller financing. While it might take some convincing to get a seller to finance a real estate deal, a laundromat seller might actually prefer to offer seller financing.
Why Sellers Finance Laundromats
The reasons for that are similar to why a real estate seller would want to offer seller financing. Taxes and investment returns. Instead of taking a huge tax hit on a lump sum capital gain when selling a laundromat, owners often prefer to spread that gain over 5, 10, or even more years to reduce their tax burden. Win for them, win for you!
Also, they can often lend that money to you, secured by an asset they already understand, at a stable rate that yields a predictable income for them. Again, win for them, win for you!
Another reason seller financing can be attractive to laundromat sellers is that the financing process can be a huge pain. If the seller hasn’t kept great records or is not very organized (both common with small business owners), getting bank financing could be an even bigger pain for them than it is for you.
So I mention seller financing as a way to acquire a cash flowing asset like a laundromat because these unique characteristics of laundromats make seller financing much easier to attain than it usually is with real estate. This means you have the opportunity to get a free laundromat through seller financing.
Of course, not all sellers are willing to finance all of the purchase price. But, some are. And even if they aren’t willing to finance the whole thing, their financing means you have less money to come up with to acquire a cash flow machine!
Partnering/Joint Ventures (JV)
Seriously? Again? I’ve heard this all over Bigger Pockets already with real estate! Ok, I grant that. But here me out on these two points before you go find another blog to read. 1. The next way to acquire a laundromat for free is unique to laundromats, so stay tuned for that. And, 2. There is a unique nuance to partnering on a laundromat acquisition that makes it easier to do than it is to do with real estate.
We all know and have heard that partnering to acquire real estate can be a great way to get in the game. We know the golden triangle of a real estate deal: time, knowledge, and money. Here’s the thing about real estate: time usually makes you transactional money (like wholesaling or bird dogging), knowledge is easy to come by (thanks Bigger Pockets!) and real estate is mostly simple, and money is what you probably don’t have if you’re looking for a partner.
The Unique Potential of Partnerships in Laundromats
With laundromats, however, there are real opportunities to offer time and knowledge to add real value to the business. Although laundromats are very simple businesses and do not require a lot of time, they do require some time and are still a bit more complex than real estate. In addition, real knowledge about the laundromat industry is difficult to come by right now, unless you know where to look. Luckily for you, you know where to look! Laundromat Resource has a ton of free information and resources if you’re interested in being the time and knowledge partner in a laundromat business.
Also, I speak with lot’s of coaching clients who are looking for cash flow and are scared of the time commitment of a laundromat, despite it being very small (almost always less than 10 hours per week, and usually 2-5 hours). High paid professionals with demanding jobs don’t want to commit to another 5 hours of responsibility, despite the lure of 25-35% cash on cash returns. That’s where you come in!
If you are an investor looking to get into the laundromat business but would prefer it to be more passive, sign up to be on the mailing list for my investment fund, Diligence Capital Investments. We partner with investors to purchase laundromats and commercial real estate. We do all the work, you reap the benefits!
So although this is not unique to laundromats, nor is it likely novel to you, it is a very powerful and practical way to get into a cash flow machine for no money down. If you bring the knowledge and time and partner with someone with money to invest, you can get a free laundromat and benefit from the Wealth Tripod!
Ok, now for the novel strategy. If you’ve ever seen the videos on YouTube about a course on how to get a laundromat for free, this is what they’re usually talking about. It’s no secret and I’m not that masked magician revealing other magicians’ secrets. It’s well-known in the industry and is click-bait outside the industry.
The basic premise is that you look for laundromats that have closed down. Contact the real estate owner or property manager about opening a new laundromat in the location (where all of the infrastructure already exists!). Negotiate a long-term lease with the landlord, selling them on a bigger and brighter future for their vacant unit. Then, fill the vacant laundromat with new machines using 100% financing from a machine distributor. Violà! A free laundromat!
Of course, it’s a little more complicated than that. You’ll definitely want to know why the previous laundromat closed down. You’ll need a solid plan on how to acquire customers again. A great lease is mandatory in this situation, as well. Some renovations to the space will be required, although you may be able to negotiate some help from the landlord. There are a lot of costs associated with starting any business, and laundromats are no exception.
Is it quite as simple as a free laundromat? No. Is it riskier than buying an existing, performing laundromat? Yes. Is it possible to acquire a laundromat for free using this strategy? Absolutely!
Classic Quote From a Cinematic Legend
Now that you’re excited about picking up a laundromat for free and visualizing swimming in your vault of quarters, a la Scrooge McDuck, it’s time for me to drop a little wisdom from the surprisingly relevant movie, Jurassic Park, with a loose quote!
“We’ve been so preoccupied with whether or not we can, we didn’t stop to think if we should.” -Dr. Ian Malcolm, Jurassic Park.
So, Should You Seek a Free Laundromat?
The short answer is: maybe. Anticlimactic once again. I know. Let me run through some of the pros and cons of acquiring a laundromat for free and then you can decide if it’s a good idea for you or not.
- You get a cash flowing asset for free! Duh!
- You have a shot at achieving the legendary, bordering on mythical, infinite returns!
- You’ll gain a ton of experience and wisdom that should translate to good decisions in future endeavors. But,as Mark Twain said about making good decisions: “Good decisions come from experience. Experience comes from bad decisions.” This leads us to the cons.
- You won’t do it right the first time. You’ll make bad decisions, you’ll gain experience, and eventually you’ll start making good decisions.
- Getting a laundromat for free is much riskier than purchasing a performing laundromat, especially if you don’t have much emergency money to fall back on.
- There are still plenty of costs up front, such as rent and utility deposits, costs to ensure the store is functioning properly and looking neat and clean, insurance costs, and more.
- Your marketing game better be top notch. When you own a laundromat, you are competing directly with other nearby laundromats for business. You will no doubt get customers who live closer to your laundromat than others naturally migrate to yours, but it is tough to break customer habits and establish new ones.
- You have to qualify for the 100% loans on equipment.
- Expenses can quickly outpace income if you don’t ramp up your business quickly.
- If you’re taking over an existing location that closed down, consider that there was a reason it closed down. You better have a solid idea of why it closed down and how you can ensure that doesn’t happen to you.
- More time and effort will be required on your part to get things done for free or cheap.
Who Should Try to Get a Free Laundromat?
So who might be a good candidate to acquire a free laundromat, particularly with our third method? I think there are a couple of categories of people who might fit the bill.
First, if you’re young, have a little bit of money or a job that pays you more than you spend each month, and not a lot to lose, this might be a great way for you to pick up a cash flowing asset! It might take a little hustle and some guidance. I’m glad to help where I can. Schedule a free call with me on my website if you’re interested. But if you can tolerate the risk, I would go for it if the right opportunity presented itself!
Second, if you’re someone who has some cash reserves but just prefers not to use it, or not to use too much of it, this might be a great opportunity for you, as well. Having money in reserves to loan your business if the first few months are slower than expected, an unforeseen problem arises, or initial costs aren’t 100% covered by the loan mitigates the risk of this strategy. It can be a great way to pick up a cash flowing machine for no money down!
If, on the other hand, you’re in a position where you don’t have access to cash reserves or cash flow that exceeds your expenses from a job, finding a closed down laundromat and breathing new life back into for no money down may be too risky. The decision is yours, but I would hate for an unexpected expense to knock you out the game before you really get started.
Never Buy a Laundromat?
Maybe you’ve heard the marketing hype that you should never buy a laundromat. While getting a laundromat for free is technically true, there are still plenty of great reasons why you should consider purchasing a laundromat.
- Time & effort vs money. When you buy a laundromat, you’re often buying the cash flow of that laundromat. This saves you the time and effort it takes to build that business up and let’s you cash flow faster.
- Risk. Taking over a run-down laundromat comes with risk. It’s not making money for a reason and you better have a great plan on how you are going to turn that business around.
- Rapid growth. Buying an existing business may shorten your timelines to profitability and let you scale faster!
What Do You Think?
So, what’s your take on all of this? Are you intrigued by the prospect of acquiring a business that prints cash for free, or does it all sound too abstract, unrealistic, or too much work? Is a free laundromat too good to be true? I’m genuinely curious about your perspective.