Return on Investment and Investor Proposal for Small Hotel
Investor · Austin TX · Member since 2021 · 49 posts · 26 votes
Return on Investment and Investor Proposal for Small Hotel
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Kim Lisa TaylorPro Member
Attorney · Saint Augustine, FL · Member since 2016 · 242 posts · 234 votes@Gino Barbaro Thanks for the mention. I agree with @Don Konipol, if the overall cash on cash return for this project is only 10%, it's not a viable deal. Investors generally want annualized returns from a combination of cash flow and equity on sale of mid-to high teens; and if they perceive this as a risky investment, they may be seeking even higher returns. And in that case, how do you get paid?
You didn't mention getting debt for a portion of the purchase price. This is generally necessary in any commercial real estate deal as a lender is your least expensive investor - meaning their interest rates are significantly less than what your private investors want. If you finance a portion of the purchase at a lower rate, it gives you "leverage" that helps boost the returns you can offer investors (and have something left over for yourself), as you won't need to raise as much capital from them. If you're not able to keep at least 25% of the profits within a couple of years of acquisition - you'll likely be doing a whole lot of work for investors with little upside and a lot of risk for you.
Additionally, as Gino said, when you are raising capital from passive investors who are relying on you to generate their profits, you are selling securities and must follow securities laws; i.e., you need to learn how to "syndicate" real estate. There are specific securities laws pertaining to the financial qualifications of investors, what you need to know about investors before you even ask them to invest, and whether you can advertise an offering to people you don't already know. You will also need to learn how to create the corporate structure for deals with investors, and how distribution waterfalls and management fees work. Check out Jake and Gino's training program, or see if you can find something on hotel syndication. You may also want to get some training or read some books on how to raise capital legally for real estate. I'm happy to talk to you privately if you want to send me a direct message.
7 Replies
- Investor · Member since 2022 · 22 posts · 4 votes1y
Hey Leslie, sounds really interesting. Congratulations on your plans! I’ve scaled that from Single family to multifamily to now true Hotel so I can help Point in the right direction as far as validating your underwriting. I actually live in Austin myself so could make sense to meet up in person if you want to do that. From what you’ve shared so far it’s gonna be difficult for anyone to give you a sense about deal quality, and the value proposition to investors, but I’d be happy to engage.
- Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes1y
@Leslie Beia, while I don't believe I have the same experiences as Matt direct to hotel ownership, I do have a lot of experience working with investor capital, how to underwrite deals to show what the investors can expect in return and what you get.
That being said, at a high level, I could invest in a private note fund, and earn 10% annually. I am not sure what kind of appreciation a boutique hotel can create, as hotels are very much operating businesses and the real estate itself holds minimal value outside of the business operations.
That being said, the process of raising investor capital is very much a chicken and egg game. You should be trying to get introductions with some of your cousin's network to hear what types of returns they would expect out of this type of deal, if they are interested at all.
And, if you anticipate any bank financing, are you sure you can get it? In my limited experience: hospitality, especially small, unbranded, inexperienced hospitality is the hardest financing to obtain?
The two big ones I would be asking:
What is the actual market demand for a small, non-branded hotel in the area this building lies?
What experience do you have in the hospitality business that would get me comfortable investing in your operational skills?
Beyond that, it would be defending all your assumptions with market data. Who is your primary customer, what is your RevPAR, what financing terms are you looking at, who is running the daily operations, are you looking to get under a major flag, i.e. Hilton has the Tapestry Collection of boutique hotels that utilize their systems, including loyalty programs. If you are not getting on a major flag, how do you plan on marketing your hotel and actually getting guests?
- 1yGino BarbaroPro MemberRental Property Investor · St Augustine, FL · Member since 2014 · 2k+ posts · 1k+ votes
I would have a conversation with a securities attorney. Our community uses
@Kim Lisa Taylor. You are creating a syndication, where you are providing all the work, while your investors are passive. Look up the Howey Test for a definition of investment contracts.
Sounds like a really good deal. Good luck
Gino
- 1yDon KonipolBusiness MemberInvestor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votesI’ll cut to the bottom line. This deal is NOT viable. For the level of risk involved investors want 20% annual return. Your GROSS return is 10%, before your ‘PROMOTE” for putting the deal together.
Quote from @Leslie Beia:
Hi! I'm scaling into a commercial property and starting a boutique hotel. Currently, I'm looking at $2.5M all-in for building purchase, renovations, and business start up. My financial models are showing a roughly $250k net profit, so a 10% annualized return. I have a cousin who funds RE deals and he has a whole network of money people, so I am putting together a business plan to submit along with my financials and an investment proposal.
I am coming from single family residential, and have only ever worked with hard money for short-term loans, and also some smaller amounts of private money. I'm trying to wrap my head around working with investment capital long term, and there's also the potential for some seller financing from the building owners, and my cousin is on the board of a bank which could also come into play. This is a lot to consider! I'm curious what would be some different ways I could look at structuring the deal, and is the 10% return going to be attractive to people who invest in deals like this? Thanks!
So, let’s evaluate. Here are the things you’ve done positive. You’ve done a thorough and realistic analysis. This puts you above 95% of the universe of people wanting to syndicate deals.
You’ve recognized you need outside help raising capital. Now you’re ahead of 98%
Do NOT give up on your idea. We reject 98% of the deals we see; that’s just the way the real property prices are today. But, as tou sharpen your analytical skills, and quantify the parameters of your search, you’ll be able to better target a doable deal. Continue your positive thinking and you will find the right deal, get it financed, and then suffer all the fear, anxiety, and sleepless nights we have all gone through LOL. Seriously, you are on the “right” track, and already ahead of most investors. Best of luck. - 1yKim Lisa TaylorPro MemberAttorney · Saint Augustine, FL · Member since 2016 · 242 posts · 234 votes
@Gino Barbaro Thanks for the mention. I agree with @Don Konipol, if the overall cash on cash return for this project is only 10%, it's not a viable deal. Investors generally want annualized returns from a combination of cash flow and equity on sale of mid-to high teens; and if they perceive this as a risky investment, they may be seeking even higher returns. And in that case, how do you get paid?
You didn't mention getting debt for a portion of the purchase price. This is generally necessary in any commercial real estate deal as a lender is your least expensive investor - meaning their interest rates are significantly less than what your private investors want. If you finance a portion of the purchase at a lower rate, it gives you "leverage" that helps boost the returns you can offer investors (and have something left over for yourself), as you won't need to raise as much capital from them. If you're not able to keep at least 25% of the profits within a couple of years of acquisition - you'll likely be doing a whole lot of work for investors with little upside and a lot of risk for you.
Additionally, as Gino said, when you are raising capital from passive investors who are relying on you to generate their profits, you are selling securities and must follow securities laws; i.e., you need to learn how to "syndicate" real estate. There are specific securities laws pertaining to the financial qualifications of investors, what you need to know about investors before you even ask them to invest, and whether you can advertise an offering to people you don't already know. You will also need to learn how to create the corporate structure for deals with investors, and how distribution waterfalls and management fees work. Check out Jake and Gino's training program, or see if you can find something on hotel syndication. You may also want to get some training or read some books on how to raise capital legally for real estate. I'm happy to talk to you privately if you want to send me a direct message.
- 1yDon KonipolBusiness MemberInvestor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
@Kim Lisa Taylor is being modest when she says “read some books on how to raise capital legally for real estate”. What she failed to mention is that SHE wrote the book!
“Kim Lisa Taylor is a nationally recognized real estate securities attorney, speaker and author of the No. 1 Amazon best selling book “How to Legally Raise Private Money" and her newest publication, "How to Raise Capital for Real Estate Legally."
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