Choosing to Build New or Buy and Retool (Part 1)

CHICAGO — For today’s self-service laundry investors, one of the first — and most critical — decisions is whether to build a store from the ground up or purchase and renovate an existing operation.

Each path comes with its own mix of costs, timelines, risks and rewards. Market conditions, customer perceptions, financing options and operational goals all play a role in determining the right fit.

To examine the factors that can tip the balance and to offer insights to help operators make a confident, informed choice, American Coin-Op sought the input of several distributors and an industry-specific financing company; their responses have been edited for magazine style and length.

Q: What basic factors should be considered before deciding whether to build a new laundry from scratch or to retool and renovate an existing store?

Brandon Hoffman, salesman for Gold Coin Laundry Equipment: When considering both options, I would say the investor first and foremost should understand themselves and be comfortable with who they see in the mirror. If your personality type is one that likes structure and doesn’t adapt to change well, then building a new store from scratch for your first crack in the laundry business may not be the best situation to put yourself into. You will have to have the ability to pivot and change direction with different situations throughout the build-out process, so the point is know yourself first before you decide which direction is best suited for you.

Tommy Murati, director of marketing for Laundrylux Distribution: It really comes down to market and investment. I suggest starting by looking at the location in terms of population density and demographics, competition, and overall demand. Retooling might make sense if the store has a solid reputation and good infrastructure, but if utilities are outdated or the store’s been neglected, costs can add up fast.

Building new gives you full control over layout and utilities, but it’s usually more expensive and takes longer with permits and construction.

Lease terms are also key; whether you’re retooling or constructing, you want a long runway to make your investment worthwhile.

I encourage investors to work with an experienced distributor early. The right partner can provide demographic reports, profit forecasts, and market analysis to support a smart, data-backed decision.

Tony Regan, vice president of sales and marketing for Eastern Funding: While a laundromat relies heavily on location, the decision between building new or retooling an existing store depends on the ROI, or return on investment. What will it cost to build a new laundromat, including construction costs, electrical service, plumbing, along with bringing in utilities (water, sewer, electric, gas) necessary to support it? Do you own the building? If leasing, what are the terms that will allow you to recover your investment? Will the landlord provide any tenant improvement (TI) money? Is this your first laundromat?

Dan Schulte, sales manager for Laundry Solutions Co.: The industry is really hot right now, so we are getting a lot of very well-funded investors looking around. We also have interest from people who have no idea what it costs to retool or build a new laundry. Most of our new investors who are coming in are wanting to own and build and start from scratch. Retool can be tricky, because why is the store being sold? There is value in retools in that you already have the infrastructure for the utilities, but sometimes you’re just “putting lipstick on a pig,” which is not too late to do with a laundry. I look for opportunities with new investors to build new stores.

Andy Wray, sales manager at ACE Commercial Laundry Equipment: Other than the pure location of the laundromat, infrastructure/sunk cost is one of the largest factors when looking at a new location vs. an existing location to retool. It’s the “most expensive thing you don’t see in a laundromat.”

With ground-up builds, there can be a whole range of new-construction items: impact fees; utility establishment or start-up costs (delays in obtaining major utilities); stringent building codes; the “meter could be running” on the lease during construction and any delays cost money; and changes in equipment prices and interest rates while building, plus market shifts.

Whereas an existing laundromat usually has a pulse: slight revenue flow; a customer base; working infrastructure (paid for and ready to use); fewer start-up costs; usually adequate utilities at the location; and paid-in permits/fees/licenses. Once you sign the lease or close escrow, you have the keys; most major retool projects can be done in one-quarter the time it would take to build a ground-up store.

Another thing to consider when looking to build vs. retool is that of leased space (looking at both rate and term) vs. owning the property. This would change the outlook on capital and the decision to move forward, or not, on certain things.

Q: What market conditions typically influence the decision?

Murati: We look at several key market conditions when helping an investor decide. First is demographics. Population density, growth trends and income levels all impact demand. Then there’s the level of local competition; are there already strong operators in the area, or is the market underserved?

We also consider the availability of existing laundromats for sale, which can make retooling more viable, and the commercial real estate landscape, including whether there are suitable spaces for a new store.

Lease terms are critical, too. If you can lock in a long-term lease at a fair rate, that can tip the scale in either direction. And finally, utility infrastructure, especially water and electrical capacity, can be a deciding factor.

An often-overlooked factor is how development-friendly the city is. Permitting timelines, building codes and impact fees can vary widely and have a big impact on the overall cost and speed of a project.

Regan: Competition. Is there a need for a new laundromat, or are there opportunities to take over a “zombiemat,” retool and increase what might already be existing cash flow? Construction costs have increased significantly since the pandemic, so projects that were spec’d out two or three years ago may have changed dramatically.

Schulte: Competition. A shift in demographics. You know, as our population increases in that area or is going down, the laundry demographics have changed drastically. We are not just (serving) the low-income, diversity-type customer. We’re getting affluent housewives who are really liking new stores. They can come in and get six hours of laundry done in an hour and a half, and have a safe place for the kids to run around.

Wray: The land or real estate aspect is the real driver here. Anywhere from owning vs. leasing of property to what your crystal ball says rent will be like in this center in 20 years. If you’re spending hard-earned money to construct a beautiful, modern laundromat and you have the choice to own the dirt or pay rent that’s going to increase annually, the decision seems like a no-brainer to me.

There have been occasions — the Great Recession around 2009 and during the recent pandemic — when there were high vacancy rates and one could sign a really good lease. We saw a number of new builds take place.

Hoffman: Again, you need to know yourself and have realistic expectations and goals before picking a direction you should plan out for yourself. Knowing the available liquid capital you want to use out of your own pocket, and your anticipated return on investment, is key. You can get creative to find a lot of the money required but if you borrow too much and don’t lay out enough, that is an absolute recipe for disaster when trying to achieve and meet long-term goals. Make no mistake: A laundromat is not a get-rich-quick scheme. This is a long-term decision, and everything should be based on the direction and choice you will go with.

In Part 2 on Tuesday: Comparing their start-up costs, and learning which option can get you to operational status and profitability more quickly