Boutique Hotel Opportunity

13 Replies

I recently met with a CPA and he recommended I invest in a hotel for tax purposes. Longer story there, but I've since found a discounted hotel that seems to be a good opportunity. What resources, or people, have folks used to a) evaluate opportunity/risk b) conduct due diligence c) operate (turn around) a hotel, and make a value add opportunity into a winner. I'd even be willing to pay for a consultant. 

Any input would be appreciated.

@Peter Faulkner I am currently looking for a hotel opportunity as well, so I can’t speak to evaluating from experience, but at a basic level I would be looking at 2019 total revenue and expenses compared to the years prior, total number of rooms in the area, what local regulations are regarding Airbnb (so you know about future potential competition), hospitality tax rates in the locality and surrounding localities.

From a business perspective I’d be looking for expenses I can cut with better efficiency. And new ways of marketing that could increase revenue.

Would also like to hear how you found the opportunity.

I would see if I could get in touch with Mike Sjogren, The Airbnb Guy on Instagram. He recently took down a boutique hotel on the coast in Massachusetts. He might have some insight for you.

Thanks, @Myka Artis and @Neil Henderson .

@Tim Delaney - I found the opportunity listed on a brokers website that specializes in hotels. I called the broker just to see if I could get a peak at the financials and learn how hotels are underwritten. At the time, it was under contract. Over the weekend it fell out of contract and the broker contacted me. 

I'm very comfortable evaluating SFR and small (and medium sized) multi, but hotels are another game. That said, this may be a "deal". It's "value add" at the least. I say that because it's not currently in operation. The seller is offering it for 1/3 of what they paid for it when they bought it 3 years ago. They lost money in 2019. I don't know what it did in 2020. It's 22 rooms on 160 acres of land and you can buy it for less than what you'd pay for a starter apartment in NYC.

My largest concern (outside of not knowing anything about hotel operations) is that it is VERY active - has a restaurant, would need employees, would need active marketing, high touch customer service etc. It's not passive AT ALL, which is why (I think) the IRS views these opportunities as "active income".

The way I started in SFR and multi was by looking at deals so you gotta start somewhere!

PF

Running any business, including residential real estate, has challenges. But a hotel (and self storage) is definitely a different animal than buying homes/apartment buildings and renting them out. Lots more to think about especially with managing the staff. Interesting that your CPA thinks that is a better option for you than trying to have you or your spouse qualify as a Real Estate Professional for tax purposes.

I am looking at a small hotel deal right now that I don't love because the restaurant revenue surpasses the hotel portion. I don't really want to be in the restaurant business as staffing is particularly challenging here at the moment for restaurants. Not sure where your hotel is, but be sure to look at potential minimum wage increases and how that could impact you as well.

The value add opportunity of your deal sounds great, but why didn't the previous owners make money? Was it profitable before they bought it and they just managed poorly? Personally, I'm looking to buy an operating hotel that has room to bring in more efficient business operations so that I can learn about hotels - if I had to basically reopen and start from scratch that would make me a little more hesitant even with my business operations experience.

Originally posted by @Tim Delaney :

Running any business, including residential real estate, has challenges. But a hotel (and self storage) is definitely a different animal than buying homes/apartment buildings and renting them out. Lots more to think about especially with managing the staff. Interesting that your CPA thinks that is a better option for you than trying to have you or your spouse qualify as a Real Estate Professional for tax purposes.

I am looking at a small hotel deal right now that I don't love because the restaurant revenue surpasses the hotel portion. I don't really want to be in the restaurant business as staffing is particularly challenging here at the moment for restaurants. Not sure where your hotel is, but be sure to look at potential minimum wage increases and how that could impact you as well.

The value add opportunity of your deal sounds great, but why didn't the previous owners make money? Was it profitable before they bought it and they just managed poorly? Personally, I'm looking to buy an operating hotel that has room to bring in more efficient business operations so that I can learn about hotels - if I had to basically reopen and start from scratch that would make me a little more hesitant even with my business operations experience.

All of the above man. This is all top of mind for me. And I'm not saying I am moving forward, just that I am learning. 

Regarding my CPA, there's absolutely no way I can qualify for REP status - single guy, predominantly W2, etc. For me, it would be an audit waiting to happen. But, the effect (with investing in a hotel) would be similar. Ultimately, I'd like to do a cost seg on an AirBnB or Hotel to offset my active income. 

 

Originally posted by @Tim Delaney :

@Peter Faulkner ok, now I understand the tax strategy - but it is a big undertaking for the potential savings.

If you want another set of eyes on the deal I’d be happy to take a look, just shoot me a message.

My understanding is that, given the right deal, my down payment could be recouped in two years (maybe even year one) through tax savings with this strategy. Would work with an AirBnB too. 

 

@Peter Faulkner

Well first of all congratulations you're ahead of 99% of the population!!

This is a no-brainer and you probably know about this already but make sure you get your engineering based cost seg study, You'll get an exact number on your ROI both roughly up to about 40% back now instead of 39 years...

Message me for info I'll be happy to help!!

@Peter Faulkner I meant a large undertaking from the point that it is an active investment as you mentioned. Which means if not managed properly it could also cost you your entire investment. I guess that would still get you the tax incentive, but it wouldn’t be the way you want it.

I'm just saying it's beneficial to get the study and employ it. Many times you can use it for other tax savings including disposition property abatement etc.

if it's not- you don't go through with it.

The benefit analysis is free and the cost of the study is a right off.

In the case of a hotel investment, is this akin to running a business or is it a passive investment (unless actively managed) like home real estate? Unless there's special tax exemptions or active management of the property, if I'm not mistaken with W2 income, there would be passive loss limits that negate the advantage of the offset to active income, if one makes too high of W2 income.