Does anyone have any experience with Hotels?
Yes. What are your questions. This is the hardest asset class to understand and manage in the RE world.
@Julia Allred What kind of info. are you looking for? There's a ton of knowledge as this is a niche within a niche. If your provide clarity, I'm sure we can help.
Oh this is fantastic, thank you for responding @Jimmy Klein and @Omar Khan. To start with I need to know what to look for when analyzing the property that will tell me any red flags. We have been looking at several and some appear to have up to 60% Cash on Cash returns with debt service on the property, is this realistic or an anomaly? @Jimmy Klein why is this asset the hardest to manage and understand? Also what kind of inspections should be done during due diligence? I know I will have way more questions, but these are my primary ones for now. Thank you again and in advance.
Red flags could be anything from deferred maintenance, new hotel supply, competing brands, closure of demand generators (corporate and leisure). 60% CoC can be achieved but depends on the deal. I highly doubt the downtown Marriott in Los Angeles will ever see those returns, but the no name 25 room motel in the middle of nowhere in Wyoming is very likely to achieve that. Its a matter of self involvement, the more involved you are, the higher the return. I have done three deals where we achieved more than 40% CoC in year 1...but its a matter of being involved consistently and marketing timing. They were smaller value-add deals.
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Hi Julia. I too am interested in investing in motels/hotels. I think it is important to do you your homework about the industry and then establish a business model. That will inform your search. Unlike long term leasing, hotels are more susceptible to cycles. For example in Phoenix from now until about May hotels are at near capacity while during the summer they have much lower occupancy. In Maine the summers are great but many properties close during the winter months.
Extended stay properties tend to have more consistently higher occupancies than daily stay, but are not able to charge as much.
Also are you aiming for a property in a tourist location or looking at business travelers in a major metro area? What level of service? There is everything from ultra luxury full service like the Plaza in New York all the way down to the limited service "bottom of the brand" Knights Inn or the mom and pops that are run by live-in owners.
If you purchase a branded or "flagged" property, you will need to comply with the franchise agreement. Most of them nickel and dime you to death. The also have what are known as property improvement plans (PIPs) where they inspect and then tell you what changes they want made to the property within a certain time frame. These could be minor items or a complete $1,000,000 overhaul. I understand there is not much room for negotiation. And if you try to leave the flag or if they kick you out, then there are liquidated damages which may cost $100,000 or more.
I am not trying to put you off, but just wanted to share what I have learned. You can set yourself up to succeed if you understand the traps and downsides and position yourself to avoid those.
My family used to own one in Lubbock, TX. It was a really tough investment to keep it going. The worst problem was finding quality employees. It had it's fun moments, but it was a really competitive market so there was only so far it could go.
The obvious major risk to hotels right now is AirBnB and the similar companies. Hotel owners are freaking out, and rightfully so.
I respectfully disagree with you on Airbnb. While it has taken some share, I can assure you hotel owners are certainly not "freaking out". Hotel RevPar is at the highest level seen, there is still pent up demand for hotels and loyalty members for brands is on the rise. The only area where hotels haves been hit due to Airbnb is in large urban markets where younger people are looking for an experience rather than a clean, simple hotel. Based on current trends, there is more than enough room for both markets. I think Airbnb will always be more of a niche, while hotels will still control the bulk of the share. The reason is that not everyone is okay with sleeping on someones couch or air mattress.
@Jimmy Klein All good on disagreeing with me. I think you bring up some good points. Market probably is key. I am in a large urban market so that's where my experience with it is. I will say that yes, the hotel owners in LA are "freaking out" because apparently they've thrown such a fit about AirBnb that LA County is trying to pass a law now that restricts homeowners to how many nights they can rent out their houses or rooms (or couches or air mattresses) in a single year and only if they meet certain conditions. From everything I've heard, this has come out of the hotel owners who have lost so much business around LA because of AirBnB. I've never really heard of someone doing AirBnB just for the experience (unless it's a specific experience-based type of rental like a yurt or a treehouse or something), but that's neither here nor there. There is certainly a difference between age groups though as far as which generations typically go for which type of accommodations...yes.
But like I said, I think you bring up good points and it's all the more that someone looking into hotels should investigate in regards to the area they are thinking of investing in. And, AirBnB is only one of many reasons a hotel may not always get good occupancy....there's a multitude of market factors that will determine that. So everything has to be looked into.
Originally posted by @Julia Allred :
Does anyone have any experience with Hotels?
Have you ever managed a hotel?
If not I would suggest taking the Cornell online hotel management course and working in a hotel for at least a few months
Flips and apt rentals are child’s play compared to hotel ownership and management IMO
@Michael Plante thank you for that input. Have you done much with hotels yourself? What position in a hotel do you think would be the most beneficial to get started and get the feel of how everything is done?
I've done a few hospitality deals in the past, from small non-flags to new construction flags in large markets. Most successful were family-run enterprises with hands-on management. Best categories for cash return were lower tier flags and older exterior corridor non-flags. These of course were the toughest to manage and finance. Best client I had lived at the hotel full time for 25 years, until his kids talked him into buying a house.
Julia, I've purchased more hotels than you would believe, all different types. I would caution you that if you are looking at something with a 60% CoC yield, odds are you are not factoring in all the operating expenses in your pro-forma. Doing a bottoms up budget is difficult and so I would recommend amassing a "library" of hotel P&Ls you can use for comparison purposes.
@Jimmy Klein Sounds like you know quite a bit about the hotel business. Tbh your first comment came off really aggressive, but I see why! You really know your stuff. What do you look for in regards to good investments in this unique niche market. Perhaps a better discussion over email or DM?
Thanks for this great thread and awesome input everyone. Get better every day 💪🏻
@Richard Agee Thank you for that input! What would you say is a more realistic CoC when looking at hotels, also the property I was looking at had an owner that was in personal distress, so was selling at a lower rate than I think would be normal for what the property was bringing in. To be honest my biggest concern with that property was where the contracts for the extended stay guests was coming from, because, it seemed to be in an out of the way area that didn't really have much in the way of tourist attractions.
Yes my comments came off aggressive, but they are true. I have seen too many good people burnt and lose their entire savings in the industry. I have also seen many do well built incredible net worth as well. I don't sugarcoat it with this asset type. Shoot me a DM and I'd be happy to help in any way.
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