Understanding the power of a portfolio loan - Professional Carwashing & Detailing

Understanding the power of a portfolio loan

Finding financing for multiple carwashes.

Carwashing has grown from almost exclusively mom-and-pop operations to a multibillion-dollar industry, and investors are taking notice. Low labor costs, a fragmented market and an efficient track record of cash flow have made it beneficial for investors to consolidate and acquire blocks of carwashes. Investors hoping to own multiple carwashes will need to find the right financing, which can be a challenging process. Fortunately, there are beneficial loans for this type of investor.

Portfolio loans are one of the best ways for investors to save money on their financing costs, provided they are looking to acquire anywhere from five to 30 properties.

A bigger loan value

The reality is that portfolio loans put lenders at ease, making them willing to lend you more money. In my experience, a lender is willing to loan about 65 percent of the total value of a single carwash, meaning that the owners will need the other 35 percent on hand when purchasing their new businesses.

However, blocking multiple carwashes will usually make a lender willing to loan about 75 percent of the total value of the property.

Why does a portfolio loan make a lender willing to put down more money?

From the lender’s perspective, a diversified collection of properties means the lender is dealing with less risk. The possibility of multiple carwashes from a diverse portfolio going AWOL are slim to none, compared to just one carwash.

Diversification is key to obtaining an excellent loan.

A better loan and a better return

A portfolio loan can not only give you a bigger loan for your carwash, but it can also give you a better loan with better financing options. Buying multiple carwashes requires millions of dollars in investments, and higher investments attract more sophisticated lenders. Making yourself available to these lenders can set you up with more attractive interest rates due to the fact that you are investing more money.

A portfolio loan can also set you up for partial or fully non-recourse financing, meaning that the lender would only be entitled to repayment from the profits of your carwash and not from the other assets of the borrower.

Third-party costs are also cheaper with a portfolio loan because the properties can be charged at a block price. These costs add up when you are starting your new carwash business. At the very least, your new business will need to be appraised so the lender can learn the fair and unbiased value of your carwash in the market. You will also need an American Land Title Association Survey (ALTA) conducted to clarify your building’s property lines, the location of property improvements and the location of any easements.

The appraiser and surveyor would be more likely to do a portfolio for all of the properties you are planning to purchase instead of charging you individually for each property. This creates a win-win situation, because you are able to save money on third-party costs while the contractors are going to make more money because they are working on a bigger project with multiple properties.

In my experience, portfolio loans have saved owners about 30 percent on their third-party costs.

A portfolio loan will give you a better return on your equity, because it will give you better leverage to extract some of the equity that is already baked into your carwashes. Once your block of carwashes has started to obtain additional value, you will be able to go back to the lender and extract the old value of the loan out of the new value of the business.

The ideal applicants

A portfolio loan is ideal for carwash owners who want to purchase at least five carwashes. The ideal carwashes that are appealing to a lender are ones that have a proven track record and have been operational for two to four years.

This type of loan is not ideal for first-time carwash owners. Lenders will be looking to approve someone with experience or someone who has partnered with someone experienced. A good lender is looking for five years of experience at a minimum to consider someone for a portfolio loan. Lenders want to see someone who knows what they are doing before they invest millions of dollars into a business.

Below are a few more tips for applying for a portfolio loan.

Know your financial position

Lenders want to know someone has the financial wherewithal to sustain a business and get a return on the investment. The ideal borrower will have six months of reserves for the property and know the cash flow of his or her business.

Have a plan

What is your business plan? Are you going to have a centralized manager? What is your methodology for running multiple businesses successfully? It may seem obvious to have a plan, but it cannot be an afterthought.

Know your properties

You should know the properties you are buying inside and out. Collect at least two years of historical financial information on the properties. Know how long the carwash bay is, how many vacuums are on-site and what the traffic footprint of your properties is. This will help the lender know if the new assets have value and can go a long way in helping obtain a loan.

Know your state/area

It is important to know the market in your state. How many carwashes are in your area? How much traffic does your state get? How many other carwashes are around your new property? A good way to judge the amount of competition in your area is to see how many carwashes are within a three-mile radius.

Also, what are the weather patterns in your state? This is a big deal, because weather patterns in Arizona are different compared to those in the Midwest, and this can affect your carwashes’ traffic.

All of these factors are huge variables in the success of your carwashes.

Find the right broker

Finding the right broker is key to getting the best portfolio loan for your carwash. The right broker has contacts, understands the market and knows where to go to get you the best loan.

Find a broker who is honest, willing to consult the right people and will ask the right and tough questions about your business. Read reviews online and check their Better Business Bureau ratings.

This will help you find a loan that works for you and help you avoid situations that will cause problems down the road.

Dave Kotter is the principal of Integrity Capital LLC, a commercial mortgage company in Scottsdale, Arizona. Integrity Capital has obtained carwash financing for dozens of clients across the nation and is an expert in the industry.

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