Hotels

2 Replies

Hi I'm Nicholas West.  I have been learning commercial real estate and know much about multifamily/student housing deals. I am currently going to college and will be a junior next year. I have been working with Jeff Greenberg and currently working on closing on a large Ohio student housing deal I found. 

I have noticed that multifamily in the midwest US is ranging from the 9 to 10 cap range. I have also noticed that hotels in Houston easily are 14 to 15 caps. I would like to talk to someone who has experience owning and operating hotels. I would like to know what to look for in the hotel arena. I would also like to know how to underwrite hotels. I would also  like to add hotels to my portfolio in the long run due to their cashflow over multifamily. 

I realize that the difference before multifamily and hotels are many. Multifamily is recession resistant and more stable than hotels. This difference is reflected in the cap rate. 

Thanks for all the help. 

First question, are you speaking of owning a hotel and leasing to an operator or owning and operating it? That cap rate is not only an indication or risk but also management of the business, a different industry in hospitality. Are you speaking of a flag hotel or an independent operation, returns will be different. I don't assess valuations for a hotel/motel/resort under real estate as much as a business operation, the bricks are secondary. 

Maintenance will be greater with a hospitality operation than a similar size MF, laundry facilities, kitchen, is there a bar operation? Higher traffic count (hopefully) passing through the doors means more maintenance. A hotel is not really comparable to MF housing units as an investment, it is an alternative investment. So is running a car dealership, it has real estate involved, but it can't be compared to other types of businesses or real estate just because the dealer owns the property. Apples and oranges. Keep your studies up, good luck :)

        

I personally have partnership interests in hotels in Houston. I have no idea where you are getting 14-15% cap rate for hotels in Houston, unless they are really low end independent properties located in bad areas.

You may be confusing cap rates in the shale gas areas. The hotel cap rates in these areas tend to be 15% and its understandable why. When the oil/gas runs out, the hotels will lose a bunch of room demand.

Underwriting hotels is based on a mix of ADR and occupancy, also known as RevPar. You want to have a STAR report, which essentially outlines how the competition is doing in that specific market. Then you need to budget out your expenses, everything from breakfast costs to salaries. You eventually get your NOI and pay your purchase price based on the cap rate you feel is sufficient. However, in the hotel industry, given that NOI is highly dependent on cost management, many use GRM, which is the gross revenue multiple to determine the price they want to pay. This is more of a back of the envelope calculation, but is actually more common than the cap rate method, which can be skewed due to expenses. For example, a hotel doing $1 million in revenue might be worth 3x GRM to someone. Thus someone offers $3 million for it.

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