Is the next portfolio step for vacation rental investors boutique hotels?

[AJ Wong]

Five years into creating, decorating, managing, buying and selling vacation rentals has taught me that the window of opportunity and potential for the asset class is tightening, closing and generally diminishing with time. 

That is not to say in certain regions of the Oregon Coast, the country and the world there is not still vacation rental ownership opportunity, but over the next decade, compared to the previous decade, clearly the margins are on the decline. 

The main restriction has been the implementation of rules and regulations on the density or saturation of vacation rentals in popular tourist areas. Places like Austin, for example, are well documented for being over saturated with AirBnB's, but who wants to visit Texas anyway? (No offense.) 

Towns on the Oregon Coast are small. Very small. Like a thousand people or two small in some cases. They rightly, do not want out of towners from California (and beyond) buying up their homes and converting them to nightly rentals. This is understandable, but also tourism is the life blood of these isolated areas. There's a balance, and some of the areas are getting it 'right,' most are making it un-investable, but if you're dedicated to an outcome you'll find the path to prosperity. 

For the high level and experienced investor the next phase of nightly accommodations could be the boutique motel or hotel. Commercial zoning is essentially the difference between accommodating nightly tenants and being subject to the rules of the territory. 

The vast majority of the hotels or motels on the Oregon Coast are 'mom & pop' run establishments. There are very few name brand or national brand hotel chains. Those that are here are smaller, not luxury and generally booked to high capacity. Franchises have their benefits, but the demand for nightly accommodations is so strong on the coast that any well run or well managed hotel has the capacity to produce and increase revenue. 

In comparison to the California or Washington coast's many of these boutique hotels and motels have been operated by the same owners in the same way, with the same infrastructure and amenities as they always have. There are many examples of smaller; 7-12 unit hotels that have revitalized the properties and business and generated spectacular results. 

It is fair to say that owning a vacation rental is not the same as operating a successful hotel or motel business. It is an absolute full time commitment and comes with a lot more risk and liability. The majority of owner/operators are either personally on site or personally involved to a high degree, it is a 24/7/365 responsibility, times however many people the property can accommodate. 

However, for those that have mastered the hospitality business, the next graduation in their portfolio might be to consider a smaller, higher density nightly accommodation business. 

 The barrier to entry (at least in Oregon) is lower than investors might think. There are bundles of boomers looking to pass off their assets and might consider an owner carry and plenty of local credit unions and banks that are seeking to accommodate a strong cash flowing business with consistent deposits. For strong borrowers as little 15-25% down could be accessible. 

There are definitely more factors and considerations to take into account in regards to owning and managing hotels or motels, primarily revolved around property and business management. 

Physically managing people and property is exhausting and the more guests one needs to accommodate the more pressure to perform. Similar to managing a restaurant it is an involved and riskier business, certainly a more, if not the most demanding property class in terms of active attention and energy required to sustain. 

Often, the individuals or companies that figure it out are able to replicate or duplicate their successes. Proven restauranteurs and hoteliers are excellent at systems and management. Their businesses work because they refined operations. 

Operating a full time hospitality business takes experience, resources and a team. Those that have managed, to manage a highly functioning and well rated short term vacation rental business might consider a new goal or objective to their portfolio. 

I think the future of the Oregon Coast has at least one true luxury hotel option. Most likely on the northern coast or near Bandon within the next decade. 

Anyone have experience selling, operating or managing a boutique hotel in the US or beyond? 

[Andrew Steffens]

Well said. I think it depends on the person. Me personally am more interested in turning smaller multifamilies into STR's. A bit similar to a boutique hotel but there will be no front desk etc.

[Michael Baum]

I think it would be fun but I no longer have the ability to be as involved as running a small hotel.

We came close to buying a 24 room BnB in New Hampshire a long time ago. Had a restaurant and a small bar. Very cool place but decided to stay put rather than roll the dice.

No longer in the cards for us.

[John Underwood]

I still over all prefer finding deals on LTR'S fixing them up getting a great tenant and collecting mailbox money. Much more passive.

I love my vacation rentals but they are definitely more work.

[Chris Watkins]

On the flip side of the same inventory, I've been told that there are some great opportunities in converting some of these tired small hotels/motels into rental units using seller carry and Opportunity Zone financing. Lots of these small coastal towns lack clean rental housing and there could be a mint in converting them the other way as well.  

[Jay Hinrichs]

full circle back to Bed and Breakfast that has proper zoning and licensing..  ??

[Christopher Price]

Great post! 

With regulations tightening and getting impossible to net a solid COC it makes sense. Personally I am focusing my efforts on these mom and pop hotels in those and other select markets.

[Zach Edelman]

Definitely a lot of cool/interesting creative financing tools to employ when it comes to the commercial space, and specifically, boutique hotels. I feel like I am seeing a ton of boutique hotel investors on social media speak about creative financing options they recommend/implemented. 

[AJ Wong]

Quote from @Chris Watkins:

On the flip side of the same inventory, I've been told that there are some great opportunities in converting some of these tired small hotels/motels into rental units using seller carry and Opportunity Zone financing. Lots of these small coastal towns lack clean rental housing and there could be a mint in converting them the other way as well.  

 For sure. A few on the radar now. 

[Jon Martin]

Quote from @Michael Baum:

I think it would be fun but I no longer have the ability to be as involved as running a small hotel.

We came close to buying a 24 room BnB in New Hampshire a long time ago. Had a restaurant and a small bar. Very cool place but decided to stay put rather than roll the dice.

No longer in the cards for us.

Depending on the layout it could be much less work than a traditional hotel/motel and managed in a similar way as an STR, just at a bigger scale. I've stayed in boutique hotels that were minimally staffed with keyless entry. Then you could lease the restaurant out to a local restauranteur.

That said I would still want to sub out the management. 

[Alex Scattareggia]

Really well thought out post.  The overlap between the two sectors means that you could easily translate skills from one to another.  

I don´t own or manage anything that would qualify as a boutique hotel, but we do have two properties with multiple doors located at the same property. What I have noticed is that the property with seven doors is only marginally more work to manage than a SFH rental. The fact that everything is at one address really does cut down on management time and work despite being 700% more doors. I would imagine this scales to a boutique hotel as well.

Good luck!

[Patrick McCann]

Quote from @Michael Baum:

I think it would be fun but I no longer have the ability to be as involved as running a small hotel.

We came close to buying a 24 room BnB in New Hampshire a long time ago. Had a restaurant and a small bar. Very cool place but decided to stay put rather than roll the dice.

No longer in the cards for us.

 Where in New Hampshire?

[AJ Wong]

Quote from @Zach Edelman:

Definitely a lot of cool/interesting creative financing tools to employ when it comes to the commercial space, and specifically, boutique hotels. I feel like I am seeing a ton of boutique hotel investors on social media speak about creative financing options they recommend/implemented. 

Hi Zach, I have an off market 13 unit boutique coastal hotel that would be a GEM of a COC return with anything less than 25% down? Send me an overview of commercial options..Also a new restaurant in Bandon listed, no RE but anything for business financing?

[AJ Wong]

Quote from @Alex Scattareggia:

Really well thought out post.  The overlap between the two sectors means that you could easily translate skills from one to another.  

I don´t own or manage anything that would qualify as a boutique hotel, but we do have two properties with multiple doors located at the same property. What I have noticed is that the property with seven doors is only marginally more work to manage than a SFH rental. The fact that everything is at one address really does cut down on management time and work despite being 700% more doors. I would imagine this scales to a boutique hotel as well.

Good luck!

 Thank you for the kind words, and certainly greater responsibility but there is absolutely a lot of overlap. Hospitality is a people business, the concentration of management is optimal and eliminates the zoning or permitting restrictions. Also there is a lot of opportunity for updating the units or efficiency to 2023. Keyless entries, outsourcing linens..The challenge is often favorable financing or terms. 

[Michael Baum]

Quote from @Patrick McCann:

Quote from @Michael Baum:

I think it would be fun but I no longer have the ability to be as involved as running a small hotel.

We came close to buying a 24 room BnB in New Hampshire a long time ago. Had a restaurant and a small bar. Very cool place but decided to stay put rather than roll the dice.

No longer in the cards for us.

 Where in New Hampshire?

North Conway baby!

It's the Cranmore Inn. https://www.cranmoreinn.com/

[Patrick McCann]

Quote from @Michael Baum:

Quote from @Patrick McCann:

Quote from @Michael Baum:

I think it would be fun but I no longer have the ability to be as involved as running a small hotel.

We came close to buying a 24 room BnB in New Hampshire a long time ago. Had a restaurant and a small bar. Very cool place but decided to stay put rather than roll the dice.

No longer in the cards for us.

 Where in New Hampshire?

North Conway baby!

It's the Cranmore Inn. https://www.cranmoreinn.com/

 My grandparents owned the kanc motor inn in Lincoln till I was about 6, really wish they hadn’t sold it or that my dad or uncles would’ve had any interest in real estate and buying it. 

Anyways, far out goal for me but I’d really like to get a property at some point whether it be one with many bedrooms or multi unit probably in the Bethel, Maine area that would provide a more affordable place for people like myself to stay that are passionate about skiing/boarding/mountain biking to stay that work regular jobs where either they have to work a ton of over time to afford a weekend away at the mountain and have no time to actually do it, or have the time but not the money. There’s still properties in the sunday river area that aren’t all that expensive just not in the immediate area of the mountain

[Michael Baum]

Quote from @Patrick McCann:

Quote from @Michael Baum:

Quote from @Patrick McCann:

Quote from @Michael Baum:

I think it would be fun but I no longer have the ability to be as involved as running a small hotel.

We came close to buying a 24 room BnB in New Hampshire a long time ago. Had a restaurant and a small bar. Very cool place but decided to stay put rather than roll the dice.

No longer in the cards for us.

 Where in New Hampshire?

North Conway baby!

It's the Cranmore Inn. https://www.cranmoreinn.com/

 My grandparents owned the kanc motor inn in Lincoln till I was about 6, really wish they hadn’t sold it or that my dad or uncles would’ve had any interest in real estate and buying it. 

Anyways, far out goal for me but I’d really like to get a property at some point whether it be one with many bedrooms or multi unit probably in the Bethel, Maine area that would provide a more affordable place for people like myself to stay that are passionate about skiing/boarding/mountain biking to stay that work regular jobs where either they have to work a ton of over time to afford a weekend away at the mountain and have no time to actually do it, or have the time but not the money. There’s still properties in the sunday river area that aren’t all that expensive just not in the immediate area of the mountain

If you are interested in keeping tabs on the area, you can hit up Earle Wason - https://hospitalityrealestate.com/

They cover the northeast with listings for all sorts of hospitality places, motels etc.

[Christopher Price]

Quote from @Jon Martin:

Quote from @Michael Baum:

I think it would be fun but I no longer have the ability to be as involved as running a small hotel.

We came close to buying a 24 room BnB in New Hampshire a long time ago. Had a restaurant and a small bar. Very cool place but decided to stay put rather than roll the dice.

No longer in the cards for us.

Depending on the layout it could be much less work than a traditional hotel/motel and managed in a similar way as an STR, just at a bigger scale. I've stayed in boutique hotels that were minimally staffed with keyless entry. Then you could lease the restaurant out to a local restauranteur.

That said I would still want to sub out the management. 

You are correct Jon. These hotels can be run just like STR's which is why they are so appealing. Ive seen some actually removing the restaurant all together and creating a community space/social gathering space. Some have added a game room as well as couches and common areas which is a great option.

I plan to keep the management in house with our STR property management company. Some things I realize are not in my wheelhouse any more so I respect your decision. I stopped flipping properties in the past and focus on what I am good at and sub out for the rest.