How to Invest in Hotels and Leave a Legacy - want to learn more?

19 Replies

I love apartment investing. I've acquired over $100 MILLION worth of apartment buildings.

Me and my partner Nate - have a SIX FIGURE monthly 'passive' income.

BUT, I realized that my 'passive' income is NOT totally passive. 

I still need to manage my property managers. They look to me and my partner for some of the decision-making. I have to continually look over their shoulders to be sure things don't fall apart.

So I began to wonder what will happen when I die...will my children handle my buildings and truly benefit from it?

or will they be like some of the owners I bought buildings from...

Daddy died and the kids don't want the building...they can't handle it...they hate it...so they lost the buildings their pops worked his entire life for (and sold them at a big discount).

Is that really the legacy I want to leave behind? 

Can that really be called a legacy in the first place?

Hmmm...

and then I realized that the ultra wealthy and those who have truly left a legacy to their kids, grandkids and even down through the generations...

they leave behind INSTITUTIONAL GRADE ASSETS which are truly PROFESSIONALLY managed resulting in TRULY PASSIVE INCOME...

and one of the real estate types that fit the above description is HOTEL...

So I went to work and dug deep into hotels. 

I worked my butt off to buy my first hotel. It was not easy to break into hotels. I had the capital, the networth, the credit and still those things were not enough. I made mistakes and some of them were costly!

But I figured it out. And the results are amazing!

My first hotel produces MORE tax-free cashflow than my best apartment building. 

Think about the significance of this.

I started investing in apartments in 1999 - starting with a 2-unit. It took me 20 years to have "made it" in the apartment investing world. And yet, my FIRST hotel beats my best apartment building!

Below is an example...

Of course NOI/unit is not the only measure since a key consideration is the price you need to pay for the asset. But if you know how to buy hotels right, since they produce more money per key or per room or per unit vs. apartment buildings, then, you will make more money with hotels.

Don't get me wrong...I still buy apartment buildings today but they have to be really GREAT deals (so that even if my kids sell them at a discount, they will still make money from them).

And talking about leaving a legacy, hotels are truly professionally managed. My hotel management and operational teams are college grads and professionally trained for many years. 

In fact, with hotels, I don't do anything. My management team doesn't call me for any decisions. All I do is monitor the bank account and the income statement. I call and visit them from time to time but to be honest, I only do it to feel like I am working :)

So, who wants to learn more about hotels?

Who wants to leave a LASTING, TRUE LEGACY to their kids, grandkids and even down to their great grandkids?

Who wants truly passive...and MASSIVE income?

Answer this post and also ask any questions or concerns that come to mind.

I know one concern is the effect of a RECESSION on hotels. I will answer that but first I want to know if enough people are interested in this topic.

So who wants to go first?

Guess I am first second (nuts)... I am very interested in Hotels Mike. But to be honest I really am focussed on building my first bridge with syndications (we've discussed this before). But I do see Hotels in my future after I have solidified a foundation with multi-fams. 

Here's a question... how will you adapt to new technology where the dynamics will change the game, for example... AirBnB?

Thanks Mike, and looking fwd to this ride.

Originally posted by @John Lenhart :

I have always had an interest in this asset class

 John, what made you interested in hotels?

I am also based in Cincinnati. Which part of town do you buy properties in? What do you currently specialize in?

Originally posted by @Gaspare U. :

Guess I am first second (nuts)... I am very interested in Hotels Mike. But to be honest I really am focussed on building my first bridge with syndications (we've discussed this before). But I do see Hotels in my future after I have solidified a foundation with multi-fams. 

Here's a question... how will you adapt to new technology where the dynamics will change the game, for example... AirBnB?

Thanks Mike, and looking fwd to this ride.

 Gaspare, thanks for chiming in man.

That's a great question.

AirBnB and other STR marketing and leasing platforms have an effect on hotel room rate. In some respects they are competing with hotels. More specifically, STRs are getting a lot of their revenue from vacationeers, specially family. I mean it's better for a 4-person family to do AirBnB instead of paying for 2 hotel rooms specially if they stay for a long weekend.

The hotels I focus on buying are those that cater to the business traveler and those attending business conventions. Those will always have a market and unlikely that AirBnB will cannibalize that.

On the other hand, AirBnB is now also advertising hotel rooms. It is becoming a marketing platform for the industry. So it's what I call "CO-OPETITION" - combination of cooperation and competition.

AirBnB and other STRs are good for the hotel industry. It forces hotel owners and the flags to up their game and it drives the bad operators out of business creating buying opportunities for people like me ;)

Originally posted by @Michael Ealy :
Originally posted by @John Lenhart:

I have always had an interest in this asset class

 John, what made you interested in hotels?

I am also based in Cincinnati. Which part of town do you buy properties in? What do you currently specialize in?

Mike - my office is in blue ash but we have approx 200 apartment units split between east side and west side along with a self storage portfolio in the area with 5 storage centers. 

 

Originally posted by @Michael Ealy :
Originally posted by @Gaspare U.:

Guess I am first second (nuts)... I am very interested in Hotels Mike. But to be honest I really am focussed on building my first bridge with syndications (we've discussed this before). But I do see Hotels in my future after I have solidified a foundation with multi-fams. 

Here's a question... how will you adapt to new technology where the dynamics will change the game, for example... AirBnB?

Thanks Mike, and looking fwd to this ride.

 Gaspare, thanks for chiming in man.

That's a great question.

AirBnB and other STR marketing and leasing platforms have an effect on hotel room rate. In some respects they are competing with hotels. More specifically, STRs are getting a lot of their revenue from vacationeers, specially family. I mean it's better for a 4-person family to do AirBnB instead of paying for 2 hotel rooms specially if they stay for a long weekend.

The hotels I focus on buying are those that cater to the business traveler and those attending business conventions. Those will always have a market and unlikely that AirBnB will cannibalize that.

On the other hand, AirBnB is now also advertising hotel rooms. It is becoming a marketing platform for the industry. So it's what I call "CO-OPETITION" - combination of cooperation and competition.

AirBnB and other STRs are good for the hotel industry. It forces hotel owners and the flags to up their game and it drives the bad operators out of business creating buying opportunities for people like me ;)



 I have always been curious about this asset class as well. Im looking to start with a quadplex but the goal is 2 - 5 hotels and 3+ B class apartment communities. My goal has and always well be 4 green houses, 1 red hotel :)

What are some of the biggest challenges you have had with your hotel investments? What are some pitfalls you think less sophisticated investors should be aware of?

I enjoyed staying at your hotel! Thanks for the discount :]

I've always been under the impression that apartments are more recession proof than hotels and that hotels will always see a dip in occupancy during recessions. Is this true? How do you mitigate this? 

How much control do brands like Marriot and Hilton have over how you operate?

Originally posted by @Sherif Lyons :


 I have always been curious about this asset class as well. Im looking to start with a quadplex but the goal is 2 - 5 hotels and 3+ B class apartment communities. My goal has and always well be 4 green houses, 1 red hotel :)

What are some of the biggest challenges you have had with your hotel investments? What are some pitfalls you think less sophisticated investors should be aware of?

 One of the main challenges is just BREAKING into the industry.

The barrier to entry is very high. Even if you have the money, the credit, real estate experience and networth, lenders can still deny you and refuse to give you financing. You need an experienced partner-operator and fortunately for me, I found a partner with $1.5 BILLION worth of hotels.

Another challenge is finding good deals. Good deals are few and far between - even fewer than apartment buildings. BUT, due to my track record, I got my deal flow established.

Originally posted by @Michael Ealy :
Originally posted by @Sherif Lyons:

 I have always been curious about this asset class as well. Im looking to start with a quadplex but the goal is 2 - 5 hotels and 3+ B class apartment communities. My goal has and always well be 4 green houses, 1 red hotel :)

What are some of the biggest challenges you have had with your hotel investments? What are some pitfalls you think less sophisticated investors should be aware of?

 One of the main challenges is just BREAKING into the industry.

The barrier to entry is very high. Even if you have the money, the credit, real estate experience and networth, lenders can still deny you and refuse to give you financing. You need an experienced partner-operator and fortunately for me, I found a partner with $1.5 BILLION worth of hotels.

Another challenge is finding good deals. Good deals are few and far between - even fewer than apartment buildings. BUT, due to my track record, I got my deal flow established.

 I can imagine. i was casually looking through loopnet and saw some lower end hotels for sale. Looking at the extensive damage and just thinking about all the renovation and repairs that would be needed was giving me headaches. That said nothing of value is easily obtained and the goal is 4 green houses to 1 red hotel.

Originally posted by @Pratik P. :

I enjoyed staying at your hotel! Thanks for the discount :]

I've always been under the impression that apartments are more recession proof than hotels and that hotels will always see a dip in occupancy during recessions. Is this true? How do you mitigate this? 

How much control do brands like Marriot and Hilton have over how you operate?

Hi Pratik,

You're very welcome.

With regard to recession - YES, a hotel's financial performance becomes lower during recessionary periods. During economic contraction, businesses cut down travel and hotel room revenue goes down as well.

However, recessions usually last 12-18 months and after that, hotel room sales goes up considerably.

During the last Great Recession, the hotels that didn't go down as badly as the rest spent good money on marketing. One of the few who survived the Great Recession is my operating-partner. They've been doing it past 35 years and they survived several recessions.

Also, I buy conservatively to the point that I can operate my hotel with low occupancy and still make money.

So bottomline, you need to buy the hotel right and you need a good, highly experienced hotel partner to insulate your hotels from recessions.

Originally posted by @Sherif Lyons :


 I have always been curious about this asset class as well. Im looking to start with a quadplex but the goal is 2 - 5 hotels and 3+ B class apartment communities. My goal has and always well be 4 green houses, 1 red hotel :)

What are some of the biggest challenges you have had with your hotel investments? What are some pitfalls you think less sophisticated investors should be aware of?

 One of the main challenges is just BREAKING into the industry.

The barrier to entry is very high. Even if you have the money, the credit, real estate experience and networth, lenders can still deny you and refuse to give you financing. You need an experienced partner-operator and fortunately for me, I found a partner with $1.5 BILLION worth of hotels.

Another challenge is finding good deals. Good deals are few and far between - even fewer than apartment buildings. BUT, due to my track record, I got my deal flow established.

 I can imagine. i was casually looking through loopnet and saw some lower end hotels for sale. Looking at the extensive damage and just thinking about all the renovation and repairs that would be needed was giving me headaches. That said nothing of value is easily obtained and the goal is 4 green houses to 1 red hotel.

 Don't go into hotels or projects that have TOO MUCH VALUE ADD.

Life is too short to work too hard. And heavy value-adds like those are really risky.

I met a guy who has a $1B portfolio and he started with hotels doing this for only 10 years. I started with small apartments (2 units) and worked hard for 20 years and I've done a lot less than this guy.

I wrote about it here on BP:

https://www.biggerpockets.com/forums/517/topics/780535-i-thought-i-had-it-made-until-this-guy-humbled-me

@Michael Ealy thanks for posting. I like most transitioned from SFR to MFR and have been able to build a portfolio of over 500 doors in MF. I'm currently spreading out to Mobile home parks and have been looking at hotels for years not but never able to pull the trigger. I had one in contract that was around 100 keys in a town where I had a MFR presence. I had a great SBA loan lined up at 10% down and it was a smoking deal on paper but what spooked me the most was the franchise dictated repairs. They were coming in every 2-4 years and dictating major lobby renovations, furniture upgrades etc to the tune of $400k plus. This made me very uncomfortable underwriting 5-10 years out. Second thing was management. I was able to find professional hotel management but these guys are not easy to qualify and they can make or break your investment.

A few questions for you - how are you financing your deals? Do you always use the same management teams? Have you had renovation cycles dictated to you by the franchise and how did that go down? What are some of the main metrics you look for when flagging a deal? Do you invest in primary, secondary or tertiary markets and what size hotel makes the most sense?

Originally posted by @Serge S. :

@Michael Ealy thanks for posting. I like most transitioned from SFR to MFR and have been able to build a portfolio of over 500 doors in MF. I'm currently spreading out to Mobile home parks and have been looking at hotels for years not but never able to pull the trigger. I had one in contract that was around 100 keys in a town where I had a MFR presence. I had a great SBA loan lined up at 10% down and it was a smoking deal on paper but what spooked me the most was the franchise dictated repairs. They were coming in every 2-4 years and dictating major lobby renovations, furniture upgrades etc to the tune of $400k plus. This made me very uncomfortable underwriting 5-10 years out. Second thing was management. I was able to find professional hotel management but these guys are not easy to qualify and they can make or break your investment.

A few questions for you - how are you financing your deals? Do you always use the same management teams? Have you had renovation cycles dictated to you by the franchise and how did that go down? What are some of the main metrics you look for when flagging a deal? Do you invest in primary, secondary or tertiary markets and what size hotel makes the most sense?

 Serge,

I found that local credit unions provide the best financing - although they already know me and gave me a higher LTV than what you get normally. And yes, the franchise will have a say on the PIP since their brand will be affected. I always want my properties to be better than their competitive set so I actually renovate better than what the franchise requires. Main metrics - I look at the MPI, the ADR and see if they're lagging than their comp set. Any market - there are always opportunities and lastly, 100 keys or more makes the most sense.

Does owning hotels mean you have to have a "sense" for the design of hotels, for presentation, aesthetics, etc? That would be a barrier for me. I like Bach and Handel and all but I am not sure how well I can get into the mindset of the hotelier, picking out expensive tile and chandeliers, etc.

Thanks for the post!

Originally posted by @Ryan Seib :

Does owning hotels mean you have to have a "sense" for the design of hotels, for presentation, aesthetics, etc? That would be a barrier for me. I like Bach and Handel and all but I am not sure how well I can get into the mindset of the hotelier, picking out expensive tile and chandeliers, etc.

Thanks for the post!

 Ryan,

No you don't need to have an "eye for design".

I have some eye for design but that's not my strength and I don't really make those day-to-day decisions. I let my hotel operating partner do that.

What are the best resources to learn the basics of hotel investing in terms of books or podcasts? I want to learn the following things for example: 

1. How many rooms are considered small, medium, and large size hotel respectively when it comes to the flagged hotels?

2. How much is the avg investment for these sizes?

3. What is considered a good deal? Is it based on the cap rate or some other criteria?

4. What is the average cash on cash returns for the investors?

5. What are all the calculations/terms I need to know from an investor's perspective?

I have found a few hotel operations management books and planning to work in a hotel part-time to get an idea of operations, but couldn't find any book on the basics of hotel investing that could answer above listed questions and more. Any recommendations?

P.S: I completed my MBA from the University of Cincinnati and planning to move back to Ohio soon. So, glad to find you guys. 

Originally posted by @Surya Chahar :

What are the best resources to learn the basics of hotel investing in terms of books or podcasts? I want to learn the following things for example: 

1. How many rooms are considered small, medium, and large size hotel respectively when it comes to the flagged hotels?

2. How much is the avg investment for these sizes?

3. What is considered a good deal? Is it based on the cap rate or some other criteria?

4. What is the average cash on cash returns for the investors?

5. What are all the calculations/terms I need to know from an investor's perspective?

I have found a few hotel operations management books and planning to work in a hotel part-time to get an idea of operations, but couldn't find any book on the basics of hotel investing that could answer above listed questions and more. Any recommendations?

P.S: I completed my MBA from the University of Cincinnati and planning to move back to Ohio soon. So, glad to find you guys. 

 Hi Surya,

Too bad you missed the webinar we did on it a few months back but we're doing it again.

To be honest, there are not many books on hotel investing. Maybe I should write one ;)

But to answer your questions, hotels are also evaluated based on cap rate.

NOI/cap rate = value

But how you get to the NOI is a little bit different than with apartments. There are terms that are different with hotels vs. apartments like:

RevPAR

ADR

MPI

From an investors' perspective, like apartments, there are three numbers:

Cash on cash return

IRR (project and investor)

and

Equity Multiple

Hotels - I like 100 keys (that's what they call rooms or units - "keys") or more. Smaller than that and there's not much scale. 

I can tell you what I buy. I buy hotels in the $5M to $15M range.

A good deal for me (not necessarily good for everyone) is at least a 30% project IRR but that's my target for apartments as well. I do value-add and that's how I get such great returns for me and my investors.

@Michael Ealy hope you are managing as best as you can with hotels right now. Any insights you care to share on strategies to stay afloat right now ? Any thoughts about what 6 months from now looks like ? Thanks