How Much Capital Do You Need to Start a Laundry Business?
While typically yielding great returns, the laundry business notoriously requires a lot of capital to get started. Expensive equipment and the promise of a high return on investment drive up the price of acquiring a laundry business. This can make purchasing a laundromat feel out of reach for many people. I am often asked by consulting clients how much capital they need to have to start a laundry business. I’ll break down what I see as the minimum capital requirements you need to start a laundry business in the table below.
Capital Required to Start a Laundry Business
The minimum capital required to start a laundry business when using leverage is $50,000. When purchasing a laundry business leveraged, plan for a minimum of $200,000. When building a new laundry business, a minimum of $250,000 will be required.
Of course, these numbers vary widely depending on the size of the laundromat, the location of the laundromat, the condition of the existing laundromat, and the local laws and ordinances for construction of a new laundromat. Let’s take a closer look at how much capital it takes to buy an existing laundromat leveraged and unleveraged, and how much capital it requires to build a laundromat in a new location.
If these numbers look overwhelming or insurmountable to you, read this post all the way through. There are some caveats to these minimum numbers. They are not hard and fast numbers, although in most scenarios I’ve seen them to be true.
Capital Required to Buy a Laundromat Leveraged
Buying a business leveraged means utilizing a loan or other people’s money (OPM) to purchase the business. There are benefits to using leverage to acquire a laundry business. The first benefit is that you need less of your own capital to make a purchase. Or, stated another way, you can buy more business for the amount of money that you have. This is why you only need a minimum of $50,000 to purchase a laundromat when using leverage, or a loan.
The reason I say you need $50,000 to purchase a laundromat using leverage is that you should plan on the true minimum cost of a laundromat being $200,000. This leaves you with a $50,000 down payment with a 75% loan.
There are other benefits to using leverage, like, for instance, seeing a higher cash-on-cash return. Cash-on-cash return is the ratio of profits vs. money invested. Although your monthly cash flow decreases when you use leverage because you have to make your loan payment each month, you have less of your own money invested, as well. When done properly, this leads to a higher return on investment (ROI).
Let’s go back to needing less money to purchase more business. There are reasons that some investors use leverage, even if they have enough cash to purchase a laundromat outright. I already mentioned the higher ROI potential by using leverage. To expound on that, by using leverage investors have the ability to acquire more assets, invest in improvements to the business, or just to have more money to spend personally. It is attractive to investors who adhere to this philosophy of investing to let a business pay for itself.
Often investors who use leverage to purchase a business find more security when using a loan since the risk of owning the business is shared between them and their lending partners. If the business fails, the owner isn’t the only one motivated to get it performing again. It can also limit the risk by limiting the amount that can be lost by the owner.
Capital Required to Buy a Laundromat Unleveraged
Buying a laundry business unleveraged means that you use your own money to purchase the entirety of the business. In this scenario, no loans are taken out to help acquire the coin laundry and OPM is not used. When buying a laundromat unleveraged, you need to plan on having access to a minimum of $200,000 of liquid funds. This sets a very high bar for most people. This, in fact, is the main reason that most people don’t get into the laundry business. It has a very high bar for entry into the industry.
When buying a laundry business unleveraged, many of the benefits we discussed above about buying a laundromat leveraged do not apply. Returns can be lower (although still relatively high) and initial cash output 4-5 times higher.
There are, however, some great perks to buying a laundry business unleveraged. First, you can often command a lower price by offering cash. A cash offer gives the seller confidence that you mean business (no pun intended) and can close the deal. It also gives the seller a clean break from the business.
Another perk is that since you aren’t paying monthly loan payments, your absolute cash flow is higher from the start. That cash flow can be applied to fund your lifestyle, reinvest in the business, acquire other investments, or whatever else you want to spend it on.
Ironically, as opposed to many investors who use leverage to buy a business, investors who tend to adhere to the no debt philosophy find more security when foregoing a loan and using all cash. They take comfort in the equity cushion they have. Leverage works both ways. When it’s positive, it can accelerate your wealth. When it’s negative leverage, well, if you were around in 2008 then you saw what that can look like. They also take comfort in the higher cash flow each month. Unexpected expenses are more easily covered when higher cash flows are coming in.
Capital to Build a New Laundromat
Costs of building a new laundry business can vary widely. It is impossible to give an accurate quote. I know owners who have built laundromats for $250,000 and I know owners who have spent well over $1 million building a laundromat.
Here are some factors to consider.
- Location. Location will determine much of your costs. If you live in Los Angeles, like me, or another high cost of living area, construction costs are almost prohibitive for most people. Often, most of your other expenses will be inflated, as well.
- Size. The larger the laundromat you’re constructing, the more expensive it will be to build out.
- Equipment. The amount and sizes of washers, dryers, boilers, change machines, vending machines, etc. has a lot to do with the size of your laundry business, but also the brand of equipment you will use.
- Finishes. The construction finishes you use will also dictate the build out costs. Marble floor, expensive (and possibly a terrible idea?). Laminate folding tables, cheap.
- Permits, codes, and laws. If you’re thinking about building a new laundromat, it’s worth taking a trip down to the city to ask about what permits need to be pulled, codes need to be adhered to, and laws need to be followed. It can cost a literal fortune just to connect pipes to the city pipes in some cities, and peanuts in others. It’s better to know those costs going in.
What About Laundromats Listed for Sale Under $200,000?
You’ve probably seen laundromat listed for sale for under $200,000 online and think that I’m full of it. That’s exactly what I would have thought if someone told me that before I bought my first laundromat. But, I bought one of those laundromats listed for sale under $200,000 personally. Here’s my experience.
I bought my first laundromat for $50,000 cash. WELL under that $200,000 mark. However, I had to replace almost all of the washers and dryers in that store almost immediately.
That was a quick way to spend another $120,000. Luckily, that laundromat is relatively small because machines are not cheap. All of a sudden I was up to $170,000 invested.
But, when I looked around my laundromat, I saw these shiny new machines and they made the rest of the store look dingy and constantly dirty no matter how hard I scrubbed. This led to needing new flooring, new paint inside, new folding tables, and resurfacing the bulkheads. I think you can see how this began adding up really quickly.
I can confidently say that I eclipsed that $200,000 invested. You should plan on it, too. If you get lucky and snag one for cheaper, count your blessings. But I wouldn’t count on it. Plan for the probable and you’ll be much better prepared and much more likely to succeed in the laundry business.
Overcoming the Financial Barrier
If you want to find financial freedom through laundromat ownership but are overwhelmed by the daunting amount of money it takes to buy a laundry business, don’t give up hope. There is more than one way to buy a laundromat. For an overview, you can check out the 8+1 Proven Ways to Finance a Laundromat.
There’s more to buying a laundromat than just having the money. Don’t be led astray like I was when I bought my first laundromat. It literally cost me tens of thousands of dollars. You don’t have to make those same mistakes. I’ve put together everything you need to know about how to buy a laundromat in my new book. It comes out May 2020! I put my hard earned experience as a multi-store laundromat owner, laundromat broker, and laundromat educator into this book to ensure that you can find financial freedom through laundromat ownership.
Sign up to be on the email list to get your copy as soon as it comes out!