Purchasing a hotel business when the property is rented?

Question

I apologize if this is in the wrong section - I thought there used to be a hotel investing section.

I've seen a lot of discussion of sub leasing rentals for AirBNB purposes lately.

I was recently poking around a business opportunity for a small hotel (21 rooms) that rents its space in a large commercial unit.

Essentially, a large portion of the commercial space is rented to an indie hotel operator - I guess just like any business that rents from a commercial owner. The hotel business is for sale, and buyer would assume the lease agreement.

I'm sure it's been done before, but what would be some things to consider if purchasing a hotel business that doesn't own the land it operates on?

I can't decide if this is a fantastic formula or a faulty one, but it's something I would like to explore a little deeper. I always just assumed a hotel purchase would include the land/building it operates on.

The commercial plaza it is in is also for sale, though isn't something of interest to me, but wondering how that would play into the investment.

Just looking for some thoughts from those who have experience in hotel investing. I've always wanted to get into vacation rental or hotel investing, and this is just something I haven't come across, though I am sure it's not new.

Paul Sandhu · Answer

@Jami Kloet There is a reason the 21 room hotel is up for sale or lease. Someone is probably not making money, or the money they are making is not worth the time or effort that they put into it. There could be some competition that you don't know about that is cutting into their revenue.

I started with 1 STR in this town, now I'm up to 23 with 82 beds. There were 2 cheap motels in this town back when I had just 1 STR. All 3 of us rented to the same clientele, refinery contractors. My business has grown, one motel changed hands and the new owner isn't very happy. The other motel shut its doors 2 years ago. I might have 20-40 people stay with me an average week. The motel that is open might have 5 (and he has the monopoly on cheap motels).

You'd be better off purchasing a SFR and turning it into a STR. There is a reason the hotel lobby is fighting against the STR industry, it's because the STR industry is taking money out of the hotel industry. Why invest in a hotel? You have control over all the variables. Just do your research first.

Jami Kloet · Answer

@Michael Nelson thank you for that feedback! It's really helpful, I didn't even get as far as rental laws and insurance, so I will look into that. Yes, it would appear the business would be purchased and the space would be rented. It's very early stages, but I am going to dig a little deeper.

@Jaysen Medhurst that makes sense - thank you. I always assumed the smaller operations would be owned outright, but so many businesses rent their spaces, I don't know why I didn't consider it an option.

I've wanted to enter the vacation rental or hotel market for a while, and this particular business is located in a popular tourist destination nearby. I figured if I were going to enter the market, this is a good region for me to test the water.

Jaysen Medhurst · Answer

@Jami Kloet, I'm not an expert here, but my understanding is that in fact most hotels do not own the building. An investor (or group) own the property and then has an agreement with Marriot, Hilton, whomever to run it. The property owner gets rent and/or a portion of the hotel revenue, often in a tiered structure. I.e. 5% of 1st $1MM, 4% of $1-5MM of revenue, etc.

Michael Nelson · Answer

@Jami Kloet I’m not sure if this is the “right” forum but it’s close enough for me! I’ve dealt with both short term rentals and hotels (franchise, corporate, leased, owned) The challenge is that you have no control of the building. Similar to renting the quality is left up to the property owner. You should also look into rental laws and make sure this doesn’t cross any lines. (Some laws say property has to be rented from the property owner) as well as how this would work with insurance. Before making your final decision just make sure you do your homework. Also, would you be buying the business and renting the space?

Purchasing a hotel business when the property is rented?

Purchasing a hotel business when the property is rented?

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