Why cash on cash return for hotels are so high?

Question

Hi, Fellow investors

I am relatively new to commercial REs and currently looking at motel/hotels. One thing I noticed is that compared to multi families or residential SFHs, the cash on cash return for motels/hotels are relatively high (can easily reach >10% in many deals). The only reason that I could think of is that it is more active than other types of commercial REs, but are there something else that I am missing?

Also, when doing due diligence on purchasing a motel/hotel, what are key points (or additional points that are not common in the due diligence for MF and SFH) that the buyer needs to pay attention to?

Any inputs will be greatly appreciated!

Lee

Jim K. · Answer

As others have said, hotels are an active business with a real estate component. Their occupancy, room rates, returns, etc. are heavily correlated to the economy. Other assets are typically less correlated given that lease terms are longer and fixed.

Dan Wallace · Answer

Hotels/motels are much more complex and require a strong understanding of hotel operations. If the terms, ADR, RevPar, are foreign to you, get a partner that understands hotel operations and has a strong track record.

I look at hotel financing transactions all the time and they are especially difficult now to secure and the primary reason for historical loan failures are inadequate management/experience.

Joel Owens · Answer

You have to know what type of hotel it is.

Is it vacation hotel for a tourist area? Flagged hotel with new property? Old hotel people that rent rooms by the week and live there?

You have to know who the clientele are there in how it is ran and the costs to keep it up.

Most hotel owners look at REVPAR and occupancy rates. In tourist areas REVPAR is up as corona virus is waning and almost everyone wants to take a vacation or travel. If it's hotel not in tourist areas then having an older hotel with people that live there can have high expenses to maintain and hard to push rental rates up on people with fixed incomes.

High end hotel those with money in tourist area can put down 500 to 1,000 a night whereas budget motel that live there might can only pay 250 a week etc.

Tim Delaney · Answer

@Leon Lee a hotel or motel is an active business with a lot more risk than residential real estate. So you should expect a higher return if the financials are accurate and you run it successfully. They also have way more expenses so be sure you are planning for those accordingly in your projections.

Joe Splitrock · Answer

@Leon Lee it is more active and there is more volatility/risk since a motel/hotel is used only for travelers. A motel/hotel is an active business with employees. I would not compare it to SFH or MFH. The good news is you should be able to review operating statements that are far more accurate than a SFH or small MFH information.

Be aware you have many more expenses like payroll, cleaning, common areas, parking lot, advertising, pool, breakfast area, etc. Motels/hotels have taken a hit through COVID with people choosing short term rentals. Hotels have struggled to reopen to full capacity, as finding employees and getting customers back has been difficult.

Why cash on cash return for hotels are so high?

Why cash on cash return for hotels are so high?

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