Hotel Investment Strategy

8 Replies

BP Family,

I am looking at purchasing a small hotel/motel (40 keys) and I'm wondering has anyone had any success using creative strategies (short-term option, owner financing, etc.) to work a deal? I know the parameters are way different from apartment buildings, but I would love some guidance please.

Thanks,

Jeff

It is part of the Choice Hotels (Econolodge) in Junction, TX. The owner is motivated to sell, however how would I structure a short term option, land contract, etc.?

Attempting? If you have 20% of the money at closing, there are many conventional banks at might do 80% if the debt service coverage is there. You will need 20% at the closing table. This is also assuming you have a decent net worth to provide a guarantee. You could get seller to carry back 10%, but problem here is the location. The location is in a very rural market so unless the deal is very strong, banks won't be interested. Typically these type of properties in Texas command cap rates in the 30% range. I recently look at a Hampton Inn in a similar market in Texas that was going for a 20% cap rate. The debt service coverage on an amortizing basis for a market like this would need to be 2.5x for a bank to get interested. It may be less given that its located off I-10. I know this for a fact as I have dealt with this first hand. This property is also four hours away from your listed residence of Cypress, TX. I have been in the hotel business for 30 years and know for a fact that this is the type of property you will have to live on site for it to run smoothly.  Rule of thumb, you should be paying maximum around 2x that of the last twelve months of revenue based on this location. How much revenue has it done in the last twelve months and what is your purchase price?

Jimmy,

The list price is $1.5M and the gross revenues are right at $654k.  I was looking to offer $1.3M.  However, I do understand that living on property will be needed to run it effectively, which will not be a problem. Thank you for the insight and I definitely will utilize the 2X's revenue strategy for pricing. If the location is excellent and city driven, is there a case that you will go over the 2X's price model?

Jeff

First confirm from Choice if there is a PIP, which is a mandatory renovation. Yes, pricing is based on market as well as brand and various other factors. So for example, an econo lodge in a market like this I would honestly pay 1.5x-2x revenue. For a Holiday Inn Express in downtown Dallas is a different story. A hotel in NYC will go well over 6x. It all depends. 

Do realize that smaller hotels / motels are much less liquid than those that are 90 to 140 rooms.  Sounds like there is some hustle upside, so really get a good feel for if you think it will be worth the time. Unfortunately overhead and labor can be more burdensome with smaller properties.  Good luck!