Want to Earn Less Than a McDonald’s Cashier? Buy a Laundromat
Buy a laundromat, they said. It’ll be profitable, they said.
Laundromats are frequent favorites when people talk about passive income opportunities. Coin-operated machines require very little maintenance and doing laundry is a necessity. On the surface, it seems like it’s a low-risk way to generate cash without having to take any excessive risks. But when you look closer, it’s a lot more work and a lot less reward than promoters would have you believe.
On the whole, owning a laundromat seems like a raw deal. I definitely wouldn’t want to try owning one. In the worst case, your hourly wage could be as low as $10.40 per hour. In the best case, you might be able to reach $125 per hour. That sounds great, but in that scenario, your maximum yearly earnings would only be 3,000. Buyers beware!
Don’t Believe the Propaganda
If you search Google for phrases like “should I buy a laundry” or “what percent of laundromats fail?” you’ll likely get results like this:
You could be forgiven for coming away from reading those results with the impression that laundromats almost never fail. But the last time I checked, laundromats are businesses. The 95% number doesn’t jive at all with the data compiled by the small business administration. They have hundreds of thousands of data points about business failure. Here’s what the SBA found about the success rate of small businesses in the US in general [source]:
The number of laundromats has also declined by more than 20% between 2005 and 2017 [source].
This got me thinking about the whole idea of buying and operating a laundromat. Is it a good idea? A terrible idea? Buckle up for a deep dive in laundromat-land.
No Laundromats to Buy in Austin, TX?
You could certainly start a laundromat without buying an existing business. As with most things in life, doing it completely by yourself has more risk and more upside potential. But to get a sense of the opportunity size quickly, I opted to think through purchasing an existing business.
There are plenty of places to buy existing businesses. Loopnet, Businessesforsale, and Bizquest all have listings for laundromats. I opted for BizBuySell for my search, which appears to be part of the Loopnet product family.
The first thing I noticed is that there were only 2 listings in all of Austin, TX. They were pretty sketchy. No photos, minimal detail about the cash flow, and exorbitant asking prices. At first, I thought that maybe this was due to gentrification causing laundromats to close. You can imagine why this might be the case. As wealthy home buyers move into an area, they build homes that have washers and dryers built in. But even in NYC, there doesn’t seem to be any correlation between rising household incomes and laundromat density [source]. But then I checked the metro area populations and realized that Dallas and Houston are just a lot more populous [source]:
The Dallas metro area has 3.4x the population of Austin and Houston isn’t far behind at 3.2x. Where there are people, there are laundromats, so that’s where I started looking.
Buying a Laundromat in Dallas
There were quite a few existing laundromats to choose from in Dallas, TX. I chose one that looked compelling in Dallas county that was listed for sale at $150,000. It had been around since 2001, and came with $225,000 in machines and equipment:
The business had no employees, 2,900 SQ of retail space (leased), and the seller accepted financing. Not too bad.
To make things simple, let’s assume that you buy the business at the asking price with an all-cash offer. Further down, I think through what financing might look like, but the idea of buying it up front makes things simple for the first pass.
Here’s what we know about the business from the listing:
Key Business Metrics of the Dallas Laundromat
|(Implied) Yearly Costs||$138,000|
A $30,000 yearly return on a $150,000 investment represents a 20% ROI. That’s not bad, but we haven’t factored in any time required to run the property or employee wages.
Managing the Laundromat Yourself
The laundromat I picked out appears to have been run by the owner. That means that they would have to do all the necessary maintenance themselves. Estimates for the weekly time commitment to run a laundromat range between 3-20 [source, source, source, source]. The median seems to be around 12 hours/week, so I’ll use that to estimate the time commitment.
12 hours spent per week is 624 hours per year. No vacations for you! At least not at first.
That works out to an hourly rate of $30,000 / 624 = $48 dollars per hour which isn’t bad. If you worked a regular 40-hour week at that hourly wage, you would have a top 20% salary in the US [source].
Of course, this assumes you can actually do the work conveniently. In this example, I live in Austin and the laundromat is in Dallas. That’s not exactly a convenient commute. So we’ll have to look into hiring some help.
Hiring an Employee
It’s hard to find data about the average wages paid to laundromat employees. One of the more realistic I found suggested that $27,000 per year was industry average [source]. That seems roughly correct. If you have that employee work 20-30 hrs per week, that’s ~$20/hr. Fast food chains are now paying ~$15 per hr, so that’s probably about as low as you can go and not have constant problems with employee turnover, property damage, theft, etc.
But your employee cuts deep into your profit. When you take the $27,000 for employee wages out of your cash flow, you are left with only $3,000 of yearly profit. If you only have to spent 2 hours per month managing your employee, that means your hourly wage is $125 per hour. Pretty good, but your total yearly earnings are capped at $3,000.
The Opportunity Cost of Money
In the example where you buy the laundromat outright, you are forgoing other investment opportunities. You’re using $150,000 to buy the property instead of, say, investing that money in an index fund. Index funds have historically returned more than 7% per year, but let’s be conservative and assume you can only earn 5%.
That means that to be worth your time, any investment has to earn at least $7,500 per year ($150k x .05). You would also want to earn substantially more than $125 per hour. You can earn that $7,500 with almost no work after all.
But can you do better if you finance the purchase?
Financing The Purchase
So how does the math work out if you loan the money to purchase the business? Purchasing businesses requires a small business loan. Those tend to be more expensive than other forms of lending because many businesses fail. Here’s what small business loans cost today [source]:
SBA loan down payment requirements range from 10-30%. Assuming a middle-of-the-road 20%, you’ll need to put $30,000 down and loan the remaining $120,000. You’ll owe approximately $1,670 per month to service the loan if you pay it off in 10 years [source].
A monthly payment of $1,670 x 12 months = $20,040.
The amount of money the laundromat generates doesn’t change unfortunately. After all, your customers don’t care how you financed the place, they’re just cleaning their clothes. So in this scenario, you can’t afford to hire help, you’ll need to do the work yourself. But, of the $30,000 in profit the business generates per year, $20,040 will be spoken for by loan payments. That only leaves you with $9,960 in yearly profit. You’ll still need to put in ~624 hours of labor, but you’ll only be paying yourself the equivalent of $9,960 / 624 = $16 / hr.
In this scenario, the opportunity cost of money is also quite a bit lower, because you only put up $30,000 to get started. At a 5% yearly return, a $30,000 investment only yields $1,500 per year. But again, that’s essentially free money because it requires so little effort.
Risk-Adjusting Future Returns
Index fund returns are about as low-risk as you can get from an asset class. Index funds also have more than 50 years of historical return data that give average investors confidence in future returns.
A laundromat, by contrast, is much more risky. I’m skeptical about the industry claims of 95% success rates. But I do have to admit that laundromats probably do fail less often than other small businesses. Let’s adjust up the BLS probability of success numbers to account for the low-risk nature of laundromats:
The Odds That Your Laundromat Fails
|Time Frame||% Failure (BLS Data)||% Failure (Laundromat Adjustment)|
|Within 1 year||18%||0%|
|After 5 years||50%||20%|
|After 10 years||65%||35%|
With these adjustments in mind, we can figure out the actual per-hour wages you could achieve under various circumstances.
Risk-Adjusted Expected Profit from Owning a Laundromat Over 10 Years
The yearly upside of owning a $150,000 Dallas TX laundromat over 10 years, depending on whether you self-finance, take on a loan, manage it yourself, or hire employees. All financial outcomes are multiplied by 65% to account for the 35% chance of total business failure.
|Self Managed (no employees)||Employees|
|Self-funded (no loan)||$19,500 per year or $31.20 per hour||$1,950 per year or $81.25 per hour|
|Financed (loan)||$6,474 per year or $10.40 per hour||Not possible|
When you account for the risk of failure, the hourly wages and total yearly upsides don’t look so great. If you finance, you strictly can’t afford employees. And if you do the work yourself, your hourly wage is lower than cashiers at McDonalds [source].
If you have $150,000 of liquid funds available, $31.20 per hour probably isn’t very enticing, and $1,950 per year is less than a third of what you could earn by simply investing the money in an index fund.
What About Buying a Laundromat with a Better Cost/Cash Ratio?
I chose the example business at the top of this article because it was fairly affordable in absolute terms. $150,000 to purchase a business is within the realm of possibility for determined savers and hustlers in a way that a $3M chain in Houston is not.
I also chose it because of it’s purchase price to cash flow ratio. A $150,000 purchase price is 5x the yearly revenue. The 5:1 purchase to cash flow ratio was right in the middle of the proverbial pack. You can do better and worse than that of course.
I was able to find laundromats with cost to cash flow ratios as bad as 8.7 (yikes) all the way down to 2.1 (nice). Each business came with its own pros and cons. Some of the high-ratio businesses looked like they might just be mis-managed. Some of the low-ratio businesses looked like they might be considerably more work to maintain.
It seemed as though the sweet spot was in the 3-5 range. But to access those better ratios, you would have to spend more up front. Perhaps businesses that are more expensive to buy outright tend to have higher returns? I can’t prove or disprove that theory, but it’s plausible.
Before we wrap up, I do want to freely admit that you can probably beat my estimates. If you have industry knowledge, existing business connections, or are just unusually savvy, you can probably put my numbers to shame.
For most people, and especially those without any entrepreneurial experience, owning a laundromat looks like a pretty bad bet. You’re either paying yourself a paltry wage to do hard, menial labor, or you’re mis-investing your savings.
If you are a savvy businessperson, you can probably manage your wage to much better returns than I’ve calculated. But if you’re that type of person, you could put your mind to work on much more profitable ventures.
So I have to conclude this one on a pretty harsh downer. Laundromats look like a pretty terrible way to make money. Unless you have 10-15 hours of extra time a week and cannot survive without an additional $6,500 per year, I would look elsewhere for ways to generate additional income.
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