Patrick Roberts is a business broker and attorney at HedgeStone Business Advisors, a full-service firm specializing in real estate, businesses, mergers, and acquisitions. In this episode, Patrick shares his strategies for investing in car washes, an undervalued asset class that delivers high returns for minimum operational involvement.
Patrick Roberts | Real Estate Background
- Business broker and attorney at HedgeStone Business Advisors
- Portfolio:
- Five car washes
- One commercial office building
- Two commercial condos
- Three single-family homes
- Based in: Raleigh, NC
- Say hi to him at:
- Best Ever Book: Buddha’s Little Instruction Book by Jack Kornfield
- Greatest Lesson: If you are running a business remotely, vet employees that you trust to run things appropriately, and put a system in place to track your money remotely.
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TRANSCRIPT
Slocomb Reed: Best Ever listeners, welcome to the best real estate investing advice ever show. I'm Slocomb Reed, and today I'm here with Patrick Roberts. Patrick is joining us from Raleigh, North Carolina. He's a business broker and attorney at Hedgestone Business Advisors, a full-service firm specializing in real estate businesses, mergers and acquisitions. He runs carwashes fully absentee, he's been able to triple revenue with up to 40% or 50% margins. In his portfolio, there are five of those car washes, a commercial office building, two commercial condos and three single-family homes. Patrick, can you tell us a little bit more about your background and what you're currently focused on?
Patrick Roberts: Sure. And thanks for having me. I have been working in real estate, residential, commercial etc. for almost 20 years. I started off in residential, moved over to multifamily, then over to commercial, owned a mobile home park, and really got into the carwash space when I really wasn't satisfied with the returns I was getting from all the other real estate that I owned.
In North Carolina the returns are solid, even now with cap rates doing crazy things along with interest rates... But I've found that carwashes are actually the most lucrative in terms of real estate investing, at least for my almost 20-year career. I've tried everything, just about, but I've found that that's where I can really make a good return, even now with all the competition that's out there.
Slocomb Reed: Great. Let's talk about that, Patrick, and your transition into car washes, and what I said in the bio about your margins. I'm gonna ask the question the way that I want to ask it, and we're just gonna see how things go. Everyone listening right now - we have a fairly sophisticated audience, Patrick; we all recognize there's a big difference between owning investment real estate and operating a business that involves or requires real estate. The first thing I'm hearing, Patrick, is that you have found a great business model involving real estate that still requires operation. It's not like this is triple net carwashes, this is carwashes that you own or operate, that you have found a way to operate remotely. Is that fair?
Patrick Roberts: That's absolutely fair. The thing about the type of wash that I invest in - it's very low maintenance, very few employees, almost zero... So it's a great way to minimize overhead, a great way to maximize return. But the system I've developed allows me to sit at my computer, track performance... I'll get on security cameras every once in a while... But frankly, I own five carwashes, but I only visit maybe once every couple of months. It's just not necessary. I have a good team in place, so it's easy to operate. And it's frankly something that anybody can do, it's just an under the radar type of asset opportunity.
Slocomb Reed: Tell us about those margins, 40% to 50%. I'm making the assumption... Is that a revenue to expense ratio?
Patrick Roberts: That's right. There are only a handful of costs associated... And let me say, when I say car washes, I'm specifically dealing with self-serve car washes. And those are distinct from full-service, where the wash is both the interior and the exterior, or Express, which is only the exterior, and is focused on getting you in and out as quickly as possible, hence the name. Self-serve car washes are where the customer goes and does the work themselves, they use the wands to wash their vehicles in the bays, use the vacuums to clean up their cars. Or they might go through an automatic wash and drive their car through; it's not pulled through on a sort of track. And because the customer is doing most of the heavylifting, your margins are going to be higher, because your costs are really just utilities, supplies... And you can have one person, or maybe a couple of part-time people managing a few locations, and have sort of economies of scale, without too much hassle. It's easy to supervise when it's just a handful of people, especially if they have the skill set to do the repair work and the maintenance work without your involvement.
Slocomb Reed: That makes a lot of sense, Patrick, and I'd love to make this a conversation about carwashes, how you got into it, how you operate it, how to identify other opportunities, and what you're doing to the valuation of your business and the underlying real estate through the automation that you've created. But first, let me ask - you have some single-family rentals and some other commercial properties in your portfolio... I want to talk about your current focus. So the next five properties you buy, do you think they're all going to be carwashes, or are you gonna buy something else?
Patrick Roberts: No, I've actually found another nice niche in the commercial real estate space. I'm in Raleigh, North Carolina, as you mentioned, which is a fairly sophisticated tech hub... Lots of new development, Apple's bringing a second headquarters here, Google has a presence here now, and I think Facebook as well in Durham... What I've actually found is that you can buy vacant commercial office space, which is still readily available here, especially the new construction, and lease it up, and really increase value there as well. I like to focus on the medical tenants, smaller medical offices, smaller doctor's offices, psychiatrists, psychologists, maybe individual practitioners... I did a deal recently where I was able to get about 60% on my return on investment in an 18-month span.
So there's a lot of opportunity there. I would say the next five purchases, maybe two will be carwashes, and the remainder will be office buildings, medical office in all likelihood. I'm not in the multifamily space right this minute. I think cap rates are just ridiculously low... And that's how I got into car washes in the first place, once cap rates started declining, and it just wasn't attractive for me... So I ended up moving over into car washes, and now the commercial office space I think is attractive as well.
Slocomb Reed: From a business plan perspective, Patrick, what is it that's attracting you to office space, and medical office space, specifically?
Patrick Roberts: I started looking around for what was essential, okay? And we know that work from home movement is not going anywhere; a lot of workers are pushing back at even coming back to an office. So around the country, you're seeing many older office buildings essentially become obsolete. That may be true as a general matter, but you can't deliver medical services from a distance. You can perhaps deliver a few things, but the majority of medical services need to be delivered in person. X-rays need to be taken in person. So I don't see the medical opportunities going anywhere. I think they're going to be solid for a long time. Doctors tend to stay, or even dentists, or any medical professional, tends to stay in their location for a very long time, unless they themselves are buying their own space. So I think the real estate play there is great. They're typically signing triple net leases, they take care of everything, and it's a great opportunity for a very, very niche area of the office market.
Slocomb Reed: How is it that you're finding these properties, these sellers or these opportunities, whether they're carwashes, or office space?
Patrick Roberts: I've got a fairly extensive network of brokers, just contacts in general that know that I'm looking. I'm an attorney, I've been practicing law for 21 years, so I know a lot of estate planning attorneys, family law attorneys - when divorces come, properties are available. People go to court, they fight over it, the judge says "Hey, you have to split it, you have to sell it." I'll get calls from that standpoint. It's not always the off market deals, but I do have a lot of people who will call me and say "Hey, I have something coming up. Are you interested?" and I'll usually get a crack at it before it hits the market.
Slocomb Reed: Outside of spending the next 20 years building a professional network that touches real estate, Patrick, what advice do you have for our listeners for getting in front of deals like the ones you end up acquiring?
Patrick Roberts: The biggest thing, I think, is to really make yourself available on social media. I think you really have to let people know what you're looking for. And don't be afraid to say "I'm in the multifamily space" or "I'm in the carwash space" and let people know what types of deals are attractive to you. And it certainly doesn't hurt to maybe offer a referral fee if you're getting started. But building the relationships with people by letting them know what you are looking for; if you don't ask, you don't receive. So the best thing to do is to give people a good sense of what types of deals you're attracted to, your ability to close, and maybe your track record. Put your information out there so people know "This person has done some deals before, and they're capable of getting deals done."
Slocomb Reed: Nice. It seems to me like there's some divergence in the deals that you're looking to do in that triple net lease commercial real estate. It's great that you found a way to operate carwashes remotely, but that's still a business that you're operating in the real estate, which is a very different game than triple net commercial. What is it that you're looking for in these properties? Are there particular underwriting metrics that you're interested in? Or do you always drive these properties personally, and get in there, fine tooth comb, before you write an offer? What's the most important to you in your deal analysis?
Patrick Roberts: For me, it's cap rate. I rule properties in or out based on cap rate. For a self-serve carwash, I really wouldn't sniff anything below 10% cap.
Slocomb Reed: And is that on current operation, based on when you're buying it?
Patrick Roberts: Correct.
Slocomb Reed: So let's stick with that. We'll come back to triple net later. The cap rate on a carwash, which again, is really a business being operated on real estate - that's going to be highly dependent upon the current owner's operation of the business. I would imagine, especially with the success that you've had, that your goal is going to be to increase revenue and hopefully reduce expenses. I would imagine, Patrick, that the going in cap rate doesn't really matter all that much to your execution of your business plan. Where am I wrong here?
Patrick Roberts: You're not necessarily wrong, but the thing that drives performance at a self-serve carwash is really the quality and age and nature of the equipment that's offered. So if you can see from the onset at the time of acquisition that the current, maybe older equipment is still able to generate a significant amount of income, you can really get a good sense of how much you can increase revenue when you implement new changes.
I typically look for older washers; if you will, you can even call them fixer-uppers. They need a lot of work visually, they need curb appeal, but they also need equipment updates, because a lot of times you'll drive by some of these older washers and they've been in business for 30 years, and the equipment's been in business about that long. But they have a loyal following. So I look for that. If a business has been running for 15, 20, 30 years, I know that there is an underlying customer base. If you make improvements, improve the curb appeal, you're going to get new customers; you're not going to lose the old ones, you're going to add on top of what's already there.
So it's somewhat dependent on the operation, but to be honest with you, quality equipment or well-maintained equipment will draw people in, will get you the word of mouth advertising. You don't need to do that. So as long as the equipment is well maintained and operational, and delivering the quality wash, everything will take care of itself. So it's not really that dependent on the operator to the extent that there's some unique skill there. It's really more a function of having the right equipment, making sure you're delivering the quality that the customer expects. And from there, everything takes care of itself.
Slocomb Reed: Patrick, just now in the conversation about the operation of the business and what actually drives revenue you didn't mention marketing at all. And the only time you ever said advertising was for word of mouth advertising. Again, we're talking about self-serve car washes. It sounds like you're saying "If you build it, they will come." Is that really the marketing strategy, is improve curb appeal, improve the amenities and let people talk about it on Facebook?
Patrick Roberts: I don't know where they talk about it, but in the communities where self-serves thrive word of mouth will take care of itself. I've never advertised and done a single PPC campaign. I put out a feather flag once in a while, but for the most part, when you take a washer that's known to be rundown, that the community knows is there but it's seen better days, give it a brand new paint job, put brand new equipment in, spruce up every detail - the change machine is updated, the lighting is updated... When all of that happens -- I love ice vending; that's a different conversation, but I love ice vending, so I always put ice vending machines on my washes when the space is available. You do all those things, you're going to draw the community. People tend to take pride in these types of washes if they've been using them for a while. I have folks in some of my washes that were customers back when they were teenagers, and now they're my age. They'll come to the wash and say "Man, we really appreciate what you've done for this wash. My kids use it, I use it, my wife uses it..." I wouldn't say "If you build it, they will come", but if you renovate it, they will come. That's really more the phrase.
Break: [00:15:39.29]
Slocomb Reed: Last question and then I want to transition this conversation... Keep it on the carwashes though, this is really interesting stuff. I'm not going to be mincing words here, Patrick... I'm imagining that because the real estate and the mechanicals especially of a carwash like this and the equipment is fairly specialized, that it would be pretty easy for specialized contractors to effectively hold you hostage until you pay premium rates for their services. Do you run into issues when your equipment runs into issues, getting it serviced or getting new stuff installed? Or is it all fairly readily available and it doesn't require much specialization in order to install and operate?
Patrick Roberts: That's a great question. To be honest, the carwash communities, especially the self-serve community, is fairly small. In any given state, any location, any county, there are a couple of people that will know exactly what to do. But I've never had the problem of being held hostage, or someone gouging me price-wise. Because the thing about this community is that it's very congenial, very supportive, and small. So when I met my current contractor, it was through a referral from someone within the carwash communities. It was actually the guy that did my security systems. He does all the car washes and pretty much all the car washes in North Carolina, and he said "You should talk to this guy. He owns washers, he knows how to run them."
And every time I've met someone new, it's been because of introductions within the community. Once people know that you're serious about the business, you do quality work, you work with quality washes, you're trying to really deliver a quality product and keep the reputation of the carwash community high, the door's open, and everyone knows someone who can get things done, so the introductions are made. I've never had that problem. But it's a great question. I would think, for someone looking in from the outside saying "I've never owned one, but I don't want to be taken advantage of", it hasn't happened to me. I practice law. I don't know how to fix a thing. I'm not kidding, I can't fix anything. In fact, you're gonna laugh at this, but I've actually never used any of the wash equipment at any of my car washes. I've never used it. I know conceptually how to use it, but I've never used it, ever. So that should tell you something. I do not know how to operate these things from a practical standpoint. I can figure it out, but really, you want people who are specialists. And within the community, everyone kind of learns who to trust, and once you get a referral, you can rely on that referral and that's good enough.
Slocomb Reed: Alright, you have me convinced. Patrick, I'm based in Cincinnati Ohio, so not Raleigh... Give me and our Best Ever listeners a playbook. Please make the assumption that we are sophisticated enough to understand commercial real estate when it comes to analyzing a deal to find NOI, to find cap rate... Actually, hold on; one more question - how borrowable are your car washes?
Patrick Roberts: Four of the five, I've put down 5% and leveraged 95%. This was before the SBA changed their rules recently, so that's actually easier now. Car washes are fully SBA, 7A and 504 fundable, including the self-serves. But you can get traditional commercial financing from your local community banks. It's a little harder, because you sometimes have to educate the banker on the benefits of funding a carwash. They are considered to be real estate, but they're also considered, as you mentioned, to be going concerns and operating businesses... So there's a twofold aspect to it. But the banks consider them to be owner-operated businesses. They're not investment property. So they actually get a little slightly more favorable treatment if you find a bank that has familiarity with the carwash space and has funded deals before. They consider them owner-operated, so there's that bias towards more reliability in the mind of an underwriter. The guy or gal in the back who really makes your deal either happen or not happen, they tend to be a little bit more favorable.
Slocomb Reed: One more question, and then I want you to tell me all your secrets... You said you have a targeted day one cap rate. What is that, and at what cap are you looking to operate after you have all of your own equipment and systems in place?
Patrick Roberts: As a rule of thumb, I'm looking at 12%.
Slocomb Reed: Day one.
Patrick Roberts: Day one. I'll go as low as 10. And to be honest, every once in a while, I've had maybe one or two deals where you couldn't figure out cap rate if you tried, because the seller is so old school that I get handwritten logbooks with deposit information, and the deposit information in the bank is not the deposit information in the logbook, so it's "Okay, we'v got to figure some things out." But the deals just make so much sense. I'm looking for more than just cap rate. But initially, my starting point is "Let me see what the cap rate is." If that's available, I'll work with that. If not, then I'll look at other factors, traffic count being probably the most important. Age of the wash being equally important. The type of equipment - that requires an on-site inspection, but the type of equipment and the age of that equipment, that's important. Whether they have credit card readers or not. Hugely important. If you do nothing else to a self-serve carwash but add a credit card reader, you can add 15% to 20% to the top line, guaranteed, the minute you put that in there. So it's really -- there are a number of factors that I weigh, but my initial rule of thumb, my initial screening criteria starts with cap rate and goes from there.
Slocomb Reed: Ideally 12, sometimes you'll reach to 10, and see the possibilities in an underwritable deal from that sense. What kind of cap rate are you looking to get to?
Patrick Roberts: My goal is not even to get to cap rate on the backend, when I acquire them. I'm looking to cash on cash. So I'm typically 30% cash on cash minimum, normally. Some deals I've actually gotten all my money back in about nine months. So it really depends on -- I would say, I would expect the minimum 15% when I'm done making my revisions, but that's even low, because typically I'm tripling or doubling the monthly revenue... So we're kind of off the charts at that point when it comes to the cap rate, your cash on cash. It's not even a measure that I really consider. My first criteria is "How fast am I getting all of my down payments, my appraisal costs?" All of my closing costs - how fast am I going to get my closing costs back? That's my real measure. And if I can feel comfortable that it's 18 to 24 months at the door before I made the acquisition, I'm making the purchase.
Slocomb Reed: Last question here, and then we really do need to transition. The five car washes that you have acquired, 10 to 12 cap - what was the average purchase price?
Patrick Roberts: Varied... Just shy of about a million to somewhere in the high six, low seven, somewhere in that range.
Slocomb Reed: For the average.
Patrick Roberts: Yes.
Slocomb Reed: Got it. So you are putting out let's call it 700k for 70% to 80% plus in NOI per year. What kind of downpayment has been required with the lending you've gotten?
Patrick Roberts: There's a special program through the Treasury Department that I've been using. 5%, typically. The only one I deviated - I did some sort of seller financing; the seller gave me 80%, so I didn't have to go through a bank, and I put down 20% on that one. But normally, I'm just gonna put down 5%. So on a $700,000 acquisition, $35,000 plus the closing costs, another 10 grand. So 45k.
Slocomb Reed: That's impressive. Okay, we only have a couple of minutes left here, Patrick... Let's just go with this. I want to buy my first car was in Cincinnati, Ohio; and I know our listeners do as well where they are. What are the first three things that I need to do?
Patrick Roberts: Assuming that you have the wash in mind, or you're starting your search from scratch?
Slocomb Reed: I'm starting a search right now.
Patrick Roberts: Okay. Let's start with LoopNet, CoStar and Crexi. Everyone knows those websites. That's the starting point to get a good sense of what's out there. But that's just a baseline to see what the market is offering. I would suggest googling your nearby carwashes and driving the properties and getting the phone numbers, going old school - sending a letter, making a phone call, shooting out an email, and seeing if the property is for sale. I'm looking for properties that look like they've seen better days, and haven't had any love in a long time... Especially if that property has a loyal customer base. So I would go to that property on a Saturday, for a couple of hours, or at least drive by a few times, see how active it is. Then go on a Tuesday at 7pm, see if it's active then. Then go maybe on a Thursday and see what type of activity you see at that point. That'll tell you the level of money they're making, just to give you a good sense.
You want to make sure you can go on to your Department of Transportation website and measure the traffic count. They'll tell you. If you're getting anything above -- a minimum 15,000 is generally my standard, anything North of 30,000 in traffic count going by the location , very good, probably extremely good. And then basically, you want to make sure that the site has a lot of access. Multiple ways to get into and out of the location, so you don't have a bottleneck scenario going on.
Then you wanna check to see if the equipment's working. I mean, that's not a deal-breaker by any stretch, but a busy location with broken equipment tells you you've got a lot of goodwill and a lot of stickiness at that site. And that seems a little counterintuitive, but the truth is if people are coming to use it no matter what, the pricing is good, probably low, and you can raise it. But also there's just a sense of loyalty and community around that particular property, which you can build on.
Slocomb Reed: Excellent. Very helpful, thank you. Are you ready for our Best Ever Lightning Round?
Patrick Roberts: Let's do it.
Slocomb Reed: What is the Best Ever book you've recently read?
Patrick Roberts: Wow. You're gonna laugh, this is not a business book... "Buddha's little instruction book" by Jack Kornfield. I actually have it sitting next to me. Business is stressful, and if you can learn to cope and deal with the stress, you can find success.
Slocomb Reed: Nice. What is your Best Ever way to give back?
Patrick Roberts: I like to take a call or two every once in a while for someone looking to learn and want to pick my brain. I always try to be available if I can, if I can make some time to help someone, especially someone starting out, like who's never done real estate, or never been in business before. I'm always trying to offer some advice if the time permits.
Slocomb Reed: Patrick, specific to the car washes that you currently own, what is the biggest mistake you've made, and the Best Ever lesson that resulted from it?
Patrick Roberts: Well, that one's easy. Since I like to run my car washes remotely, I trusted the wrong people to do the job. And it's a cash business, so you can imagine that did not go well. The big thing is vetting the employees that you have to make sure they have the skills to do the job, and putting a system in place to be able to monitor your money remotely, so that you can trust that when it's time for your deposits, you have all the money you're supposed to have and there's nothing missing.
Slocomb Reed: On that note, what is your Best Ever advice?
Patrick Roberts: Great question. Believe in yourself. I'm originally from Jamaica, and I came here when I was a kid. We were poor in Jamaica, and some of our family that's still there is still poor. But there's so much opportunity; just a matter of believing in yourself and finding what fits, and not being afraid to take a chance. If you fail, at least you get a lesson, but taking the risk and taking action is exactly how you get to the point of success.
Slocomb Reed: Last question, where can people get in touch with you?
Patrick Roberts: You can find me on LinkedIn. I'm kind of available. LinkedIn, PatrickRobertsJD. That's my LinkedIn ID handle. My number, I'm happy to give it - 212 933 96 96, or Patrick.Roberts [at] hedgestone.com. Feel free to email, call, text, send a smoke signal. I'm generally available.
Slocomb Reed: That's great. Patrick, thank you. Best Ever listeners, thank you as well for tuning in. If you've gained value from this episode, please do subscribe to our show, leave us a five star review and share this episode with a friend you know we can add value to through our conversation today. Thank you, and have a Best Ever day.
Patrick Roberts: Thanks, guys. I appreciate it.
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