Hotel investing

19 Replies

Anyone with hotel experience give some investing advice? I want to get into hotel investing but it's very capital intensive. I'm wondering what size of a hotel (ex: 1-2Mil size or 3-5mil or 5-10mil) would you need to search for in order to be able to hire either a property management company or hire a consultant to run the property? Also, how much LTV would I need to raise in order to get proper financing?

Welcome to BP! You've come to the right place to find people in all different niches. Here's a list of forum posts on "hotels". Threads on Hotels You might also check the Podcasts and see if any are on hotels. 

Just about any niche in real estate is on BP someplace. Just start searchng, find people in that niche and message or @mention them. Goodluck.

I formerly did feasibility studies & valued (appraised) hotels all over the US.  The hotel business is very difficult.  The real estate aspect is only one component - fundamental to the value of the hotel is the operating business.  You must also think about managing the hotel, sales & marketing food & beverage / restaurant operations, labor/employment relations, etc.).  Also, timing is very important.

Owning the hotel must not be as financially astute compared to running the hotel business because Marriott Hotel chain is basically a service of running hotels and not owning them.

It is very common in the hotel industry to split off (i) the real estate from (ii) the management/operating business.  Marriott did this decades ago.  The real estate business is capital intensive & has a certain return profile.  The management business is asset-light and operates almost as an annuity business because of long-term management services contracts.  Very different business models, and as such, are valued differently.

Shoot me an a PM. I currently have hotels and thats my primary business.

It can be difficult to make money in hotels under the 5MM price point, I know that sounds like an arbitrary number however it's more or less true depending on area etc.  Older economy hotels tend to trade at a multiple of revenue (say 3X) where midscale + branded assets trade based on cap rate.  Older economy properties are generally owner operated and run very lean (based on necessity).  You would be buying yourself a job rather than investing in an asset.  You can have older economy properties (under 5MM) professionally managed however the numbers don't generally pencil out (main reason why they trade based on a multiple of revenue).  Now many great hotel investors and operators started out running their first hotel however thats probably not the course I would take.  A 100 room Hampton Inn in the Midwest that trades at 80k/key/9 cap and is professionally managed runs much more like an investment than a 100 room Baymont Inn that trades at 25k/key/revenue of 833k.  

Hotels are very capital intensive and are very operator driven.  Understanding how to work with the brands and the PIP (property improvement plan) process are extremely important to underwriting hotels.  Beyond that understanding the operational side, ADR, & RevPar are essential even when not managing the property yourself.  Understanding PIP costs goes beyond normal construction knowledge, it's important to develop a team you can trust within the industry.  Because a PIP that costs 5k/key vs. 12k/key might not be very evident from someone looking in from the outside.  

The lender and brand will require experience when buying or building a hotel asset. Depending on the brand they will require a hotel management group that is licensed to manage the specific brand. If you are acting as the sponsor they will also require strong financials, specific real estate experience, or both. Weak financials (even if you can raise the capital) and no experience will make it difficult to obtain a loan. SBA 504 loans are easier to obtain for investors starting out however they are full recourse. CMBS is very active in the space right and offers great rates/terms on non-recourse debt. You will likely be looking at 70% LTV with CMBS, however they will wrap in PIP costs. Most lenders will wrap in PIP costs as it's very common to hotel transactions.

I will also note that you are entering the space towards the upper end of the cycle. Most industry experts believe we have another strong 3 years however it's unclear what the future holds beyond this (on-going real estate debate I know). There's a lot of capital in the market right now and hotels are becoming somewhat of the hot real estate class (think multi-family 2-3 years ago). The issue with hotels which is different from other CRE asset classes like Office, Multi-family, etc, is additional supply can instantly affect your bottom line. If a new property opens up across the street from your hotel you will instantly feel the rate/occupancy effect unless the market can absorb the supply. With office/multi-family it takes years for additional supply to affect stable properties. Now there's a flip side to that, you can capture rate increases instantly as demand pushes where other asset classes can not. The hotel industry is performing extremely well right now, RevPar is up and it's from rate not occupancy, which means more dollars fall to the bottom line. However something has to give with so much supply coming on board over the next 12-24 months. The market can probably absorb the supply over that period however I'm more worried about 36 months down the road.

I've mentioned this in other posts however if you have a strong interest in the hotel space you need to either change your career path or actively become involved in the community (networking, industry events, news, etc).  Hotels are not really something you can dabble in, the industry has a very small circle of players, and these people are generally solely focused on the industry.  Many investors have been burned by the industry, it takes time to learn the operations, revenue management, construction, asset management, etc.  And although there is a lot of money to be made in the industry there is also a lot of money to be lost.  

We are a national hotel contractor specializing in major branded hotel renovations.  We also invest in multi-families and have been trying to enter the hotel investment side for about two years.  I've been very careful with entering the space, even though I'm somewhat well networked in the community and am able to control one piece of the transaction (construction).  I think 2015 will be our year to enter however I'm extremely focused on mitigating risks for my team and our investors.  It's an interesting time in the cycle but that doesn't mean opportunities don't exist. 

Also I would definitely reach out to @Jimmy Klein as an experienced resource in the community. There are a handful of industry conferences throughout the year, it would be worthwhile to attend several if you are interested in the space. Also you might want to think about doing a JV deal with an experienced developer or investing passively in a deal to understand the financials/process. Good luck!

@Chris Winterhalter

Well said Chris. The hotel industry is segmented as Chris mentioned. Your $1-$2 million properties are typically exterior properties, most are independent, others have a lower economy brand under a flag such as Econo Lodge or Motel 6. Then as you move up, your playing in Choice Hotels, Hilton, Marriott, and IHG. These start from limited service hotels with no food and beverage components outside of your complementary breakfast. 

If you plan to hire a property management company, your most likely going to simply be an investor and just get passive income. Problem with management companies is that in order for them to work, you need them to manager larger properties due to scale. If you put in a management company for a smaller property, its like throwing money away. That's why most smaller hotels are run by owner-operators, some that live on site, and others that own several properties in the vicinity. Even though I live in Florida, I am investing my money with a family run operator who have a very good track record. They are getting 40%+ NOI margins on the properties they run and own. This is because they are so active in their business. My partners and I only stick to limited service as we can avoid food and beverage outlets which are typically cash drains. We run lean expenses as well. If you plan to get into the hotel industry, it is not for the faint of heart. It's better that you put your money with an experienced operator so you can understand the business or maybe invest in some REITs.

Originally posted by @Chris Winterhalter :

I've mentioned this in other posts however if you have a strong interest in the hotel space you need to either change your career path or actively become involved in the community (networking, industry events, news, etc).  Hotels are not really something you can dabble in, the industry has a very small circle of players, and these people are generally solely focused on the industry.  Many investors have been burned by the industry, it takes time to learn the operations, revenue management, construction, asset management, etc.  And although there is a lot of money to be made in the industry there is also a lot of money to be lost.  

 Chris - what would you advise doing? I am a 30 year old RE investor with 2 triplexes but would like to own a hotel someday. I am willing to do a career change if that would help me, but I'm not sure where to start. 

Hi Bok,

@Jimmy Klein said it right, an experienced and hands on operator can make buckets of money in the hotel business and a property manager would only be suitable if you have a property with scale.

I owned a 87 key Best Western for over 10 years and managed it myself through the recession.  To answer your question, I would say you need +100 keys to achieve the economies of scale and feasibility to hire a property management company.  But that obviously depends on the ADR, revenue, etc etc.  A good PM isn't cheap however I want to point out that they may be worthwhile for the simple fact (among many other things) that most reputable PM companies will employ all the hotel staff which takes away a lot of employer risk (employee lawsuits) off the owner's shoulders.  At least this was my experience in a pro-employee (and very litigious) county of Los Angeles.  

@Jimmy Klein

Unless you have some serious cash laying around and have a high net worth for a lender, you'll likely need a capital partner. In order to get a capital partner on board with you, assuming you don't have a strong track record, you'll need to find a smoking deal. A smoking deal will consist of an asset that is severely underperforming but has clear potential (and you can prove it), or is an overlooked hotel that has the opportunity to change brands to a more upscale brand, thus increasing the rate and occupancy and becoming more valuable. In order to evaluate these two things you'll need a very connected and strong management company as they will help evaluate operational potential as well as introduce you to brands to discuss possible conversions. 

My personal recommendation would be to network your butt off, find a smaller hotel investment company and either place your cash with them (if you have enough) and try and be as hands on of an owner as possible, or to go searching for deals and bring them to smaller hotel investment companies and have them cut you into the deal. From there they will put the rest of the pieces together (capital partner, brand, business plan, management company, execution) and you'll learn the entire way through. Once you see how one or two get executed, you're ready to do it on your own.

Jump in head first and start learning. That's what I did and I now own several hotels and I'm in my mid 20s

Hotel/motel networing in the industry: what are the main conventions and networking groups do you recomend?

@Pat Chomyn

The Lodging Conference is great. Its huge. This years its in Arizona. Also each franchise tends to have their own conferences as well, but you would need an existing hotel.

All great questions! There are so many options and variables out there that I would definitely recommend you reach out to a lender for advice and guidance. While they are compensated, of course, by loaning you money, they are a great source of information because they need to provide you with a lot of answers before you or they know what direction to take.

hi Guys i have posted this in another forum but some members where not on it so please allow me  to post it in this forum as well 

, i happen to have some clients willing to sell medium sized hotels in Seychelles islands and also some property ideal for resort development. One big property is near Four seasons resort Seychelles. I like the way they operate, basically they build villas , which they sell to private buyers who in turn gives it to the resort to manage when they are not using it themselves. Tourism is very big industry in my country , we have a few of the big brands like Hilton, Banyan tree , Four seasons etc..

you can find some additiona linfo here

four seasons

you can see their details in the link below, the price of the villas a re pretty high.

i have a few properties posted on this page

and a website i am working on

If anyone is looking for financing on resorts/hotels/etc please reach out to me. 

@ Bok O I agree with @Cameron Lamming.

To start, I would suggest you seek out hotel owners that are seeking investors for their project.

To start, I would suggest you seek out hotel owners that are seeking investors for their project. Currently hotels are being financed via SBA, so you will need to seek a flag hotel in good standing. The lender will want someone that has 3 year industry management experience, good credit, good liquidity. The highest loan to value on hotels is around 75% to 85% LTV. You will need a feasibility study, 3 years projections, a business plan, plan to be a guarantor on the loan if you own 20% or the business to name a few requirements. Visit your local SBDC or Score if you are going forward so that you can get help with the feasibility, projection business plan, etc. The SBDC or Score is a service that you pay for via paying taxes.

Lastly, Nothing is impossible when you know what is required to achieve your goal.

I agree with @Chris Winterhalter.

@Chris Winterhalter , Thank you very much for providing all details. As you involve with Multifamily investment...

  • What is your recommendation for person starting out... they should focus on Multifamily? 
  • MF makes similar return over 5-10 years.

This thread is 1-2 year old, market change big time in last two years... what is good RE investment now?

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