Experienced Hotel Investor

14 Replies

Hi BiggerPockets community!!

I joined a few months ago, but I just recently started listening to the podcast and finding how helpful this forum can be. I’m excited to engage with everyone to find areas to add value. My experience is primarily in hotel acquisitions, asset management, and dispositions, but I've also been a multifamily broker.

Please feel free to reach out on anything that you think I could be helpful.

John

What timing!  I'm not on the site often, but just came to see if they had any articles about investing in hotels.  Looks like you just posted this an hour ago.  

I started with small multifamly properties, and am growing into larger complexes - my largest now is 24 units, and I'm planning on selling and upgrading again next Spring.  I started out managing everything myself, but now I go through professional management companies.  I've had good ones and bad ones, and am getting some experience in telling the two apart.

A long-term dream has been to invest some of my money in a rural hotel in Scotland.  The goals would be to set some space aside for my occasional private use and make whatever money I could from the rest of the property.  There are a lot of beautiful old homes out there that have been converted to hotels and B&Bs, and I'd like to own one.  When I'm old and grey, hopefully I can afford to kick everyone out, and just enjoy it.

But....can I safely hand over a hotel to outside management, the same way I can hand over an apartment complex?  It'll take a lot more active management, and I'll be overseas - is that even a service that's offered?  Is it still roughly 10% of gross receipts?  Or would I need to directly hire staff as permanent employees?

That timing is amazing!!

First of all, I highly recommend that anyone investing in hotels for the first time make the investment as an LP, in a joint venture, or use a quality third party manager. Hotels are more operating businesses than real estate, so it’s best to learn from a skilled operator before jumping in head first.

Small inns and B&Bs are an entirely different business model than my experience. However, the basic principle is the same - heads in beds. A good manager is able to balance sales and marketing with operations to optimize profitability. After all, you’re dealing with nightly leases here.

As you know from moving your multifamily business from owner managed to third party managed, scale is critical to making the switch. There are certain fixes costs associated with hiring a third party that are the same with a 10 room in as a 50 room hotel. You can probably get around that with a partner that will act as an innkeeper, who lives on site and is incentivized with profit sharing.

Sorry for the rambling answer. Your idea sounds awesome, but it’s probably best to try it out stateside before going overseas.

@John Wijtenburg

Hi John, my experience is within multifamily (apt buildings) and motels (smaller 30 unit). I have been approached to purchase a 150 unit quality inn & suites. Their revenue stream is strong however a third party is managing it now and the expenses are making it a bad deal. I have a chance to acquire it for a fair deal however the NOI is negligent given their expenses.

Currently, I am generally a "passive" investor so I am not looking to manage employees etc. My apt buildings are managed by a PM and motels are managed by husband/wife couples.

Any key questions or things I should be paying attention to? All and any advice is much appreciated. 

@Nik S.

I've been struggling with an answer, as there are many factors to consider. Quality Inn & Suites is a good midscale brand, but your success is very dependent on location and building. I'll just run through a list of where I'd look first:

  • Occupancy and ADR penetration vs. comp set - is there room to improve revenue?
  • Interior or exterior corridor?
  • Deferred maintenance - do you expect a brand-mandated property improvement plan (PIP)?
  • Age of the building
  • Competitive new supply - Quality Inn tends to be on the lower end of the market so you'll probably benefit from a rising tide, but older properties are severely impacted by new economy scale or midscale supply enters the market
  • NOI margin should be >30% - if it's not, your RevPAR is too low or operations are unnecessarily fat
  • It may be of benefit to align with a third-party operator that has some "skin-in-the-game," where you step into a joint venture limited partner role with major decision rights

This is a very high-level list that doesn't account for location, seasonality, and other factors that may have a material impact on performance. Please feel free to message me to go through details. I'm happy to sign an NDA to help you out.

Hey John, 

Just stopped this thread now.  

So here's my situation that I'd love some of your high-level thoughts on...

I've got an acquiantance who I'm helping to raise some money for his properties, who has done really well buying short-term renting residential properties... think Airbnb model.  They charge 25% management fees on the properties, because they manage them as well.  

Now they want to get into the hotel business, because it's much more scalable than buying and renovating $500k properties over and over.  

But here's my reservations:

A. They want to charge a 20% management fee for operations and marketing/sales management of the hotels.  In my research 3.5% is the average management fee, and 8% is spent on marketing/sales... and I assume within that 8% is ad buys. (I'm not sure yet whether they would foot the ad buy bills or charge them to the hotel).  So that's 11% on average.  Would you ever pay a management company 20% for a hotel?? What would they need to be doing to earn that?

B.  Just because they have successfully purchased, renovated, refurnished and rented residential properties, what gives them the capabilities of running a hotel?  They feel that those skill sets are the same... but I think having full-time cleaning, full-time front desk, perhaps loyalty programs, renting out space to a restaurant/bar operator, seems like it could be similar but not a 1-for-1 similarity to the experience of running a short-term rental property.  What do you think? Would operations risk be a concern of yours?  I proposed to them taking on an  operating partner or consultant, but they were reluctant to do so.

C. They have made a killing being the anti-hotel.  Catering to large group travel in luxurious 3-6 bedroom homes.  Unless they want to create a hotel that's more like 3-5 bedroom luxury suites to cater to the same clientele... what advantage are they creating?  They want to be in hotels to have less regulation risk and better exit multiples... but hotels aren't a new proposition, and they haven't done them before... so if they aren't bringing a new approach to hotels... what's the sell right?

D. What kind of returns can an LP get on a well-run hotel of say 50 rooms, in a hot tourist market?  Are we talking 10-12% levered IRRs, or closer to 20%?

I'd love for them to keep doing what they've been doing or at least build an all-suites hotel that resembles their short-term rental homes... because simply pitching as a first-time hotel operator isn't going to be easy. 

@Anders Jax  

Thank you for your questions. These are good considerations, and I'll try to put it into context as best I can.

You are right to be concerned, as hotel investing is very different than apartments and even Airbnb. The similarities with homesharing apps, like Airbnb, stop at the nightly lease. Beyond that, a hotel is an operating business that has considerably different revenue management, yield management, and demand patterns.

To your questions:

A. Industry standard management fee is 3.0%. Small motels may charge as high as 5.0% and large convention hotels could charge as low as 2.0%. This management fee is for operational oversight, but all property management salaries and expenses are charged directly to the hotel.

The 8.0% you referred to is probably the franchise cost, and it can vary greatly depending on the brand. Many brands have a license fee in the 4-6% range and a separate marketing fee in that range. The license fee is a profit center for the brand, whereas the marketing fee is spent 100% on brand marketing (e.g. TV commercials, e-commerce, etc.). This is usually sufficient for a small rooms-only hotel, but you'll probably start taking on additional promotional costs when you are selling meeting space or food & beverage.

B. I've never operated an Airbnb, so my only reference point is stories from friends. That said, I would always align with an experienced operator for the first hotel investment. Additionally, most lenders would require you to do the same. There is a lot of room for error in operating a hotel with big margins, but there's also a big learning curve. Whatever benefit you give up from taking on a partner will be worth multiples in experience and avoiding disaster.

C. You can invest in an extended stay hotel to capture a similar guest, but they're two very different experiences. The hotel and homesharing market is reaching equilibrium. Demand for homesharing is starting to level off because the hype is dying and travelers have aligned their preferences. Airbnb is a distribution channel just like brand.com, Expedia, or Priceline is for hotels. There is some overlap, but travelers generally choose their lodging depending on their needs and perceived benefits of each lodging option.

D. Returns depend fully on the level of relative risk. On average, hotels trade at higher cap rates than other CRE asset classes because of the increase operational risk. As a result, cash-on-cash returns and IRRs tend to be higher. However, a value-add deal will deliver a different return to LPs than a core plus deal. As an LP, I would look for a solid preferred return in the 7-9% range and target levered IRR of 11-13% for core plus deals. Add 250-400bps to the IRR for value add deals depending on the renovation scope and projected operational enhancement.

I would say, if the Airbnb thing is working, keep doing it and become the expert. If they really want to branch out into hotels, align with a skilled operator to learn the business before trying to go it alone.

Please feel free to PM me with specific questions or to discuss further.

Hi John,

I am new to the forums and considering purchasing a small inn as both a real estate investment and a business opportunity since I would run it myself. I understand that this is only marginally related to your area of interest, but I was hoping you might be able to tell me if there is anything you think I should pay close attention to when I look over the books. I have been assisting the owners in operating the place since January and feel like I have a good handle on the day to day operations, and see some big-picture changes that could improve the occupancy rate, like online booking. I also have a few years of experience in apartment maintenance and have rehabbed a few older buildings, so I think I can keep some of those types of costs low. The owners said they would be willing to carry the note, but I do not yet have any specific numbers. Do you have any suggestions regarding what I should be looking at closely?

As a lifelong hotelier in Las Vegas and Sonoma Wine Country, I agree with @John Wijtenburg 's assessments.  For those of you wondering what type of returns to expect, the only true and correct answer, in my opinion, is it depends.

There are so many factors that play into profitability, market penetration, and a successful operation.  From a 30,000 foot view:  How has you comp set performed over time?  What might influence it in the future?  What new builds or existing hotels changing flags are happening now or in the future?  

Getting more granular, what classification of hotel are you interested in (luxury, upscale, select service, convention, etc)?  Does it fit the market?  How does the competition in your classification in the market look?  Does the local tourism bureau have strong leadership with a good vision?  What management company are you using?  Will your hotel have food and beverage?  This is a huge one.......if you ask 100 hotel developers, I'm betting over 95 will tell you they wish they could operate without food and beverage.....it's a money pit.  And, what about unions?  Are they present in the market?  That's also a big factor.  

As you can see, there are many considerations.  Some can be easily overlooked.  For instance, in some markets with very high cost of living like mine, your ability to staff the hotel becomes a nightmare.  In Napa, I know of a hotel paying for a shuttle bus to bring housekeepers to work and home from cheaper cities a half hour away, since they cannot afford to live in the area they work.  This gets quite expensive as you might imagine.  

Now that I've painted this horror picture, I should mention there is plenty of upside.  Many owners will purchase a struggling property, rebrand it, renovate, stabilize, and either sell or cash out refi.  This of course takes time, effort, and great partners/boots on the ground to nail down, but can be just as or more financially beneficial as multifamily.

Good luck to those considering hospitality.  I live it, love it, and wish I owned it.  

@Davin Peterson  Welcome to the forums.

Sounds like you are in an ideal position. @Justin Hayman gave some good advice, and I'd echo what he said.

In addition, I would spend some time with the current owner to build a good operating pro forma. Three years out should be sufficient, but you can easily extend to five years with a basic growth assumption.

Generally, I would be wary of any seller that isn't willing to share financial data. That said, you've been working at this property and should understand it. Additionally, the owners carrying the note exposes them to some risk. It makes sense for you to be aligned on the future performance of the hotel.

PM me if you'd like some help with an investment pro forma.

@ Justin Hayman thank you for your broad spectrum response, I may take you up on that offer after I have had a chance to look at the books on this particular inn I am interested in, especially since it is near one of the areas you operate in.

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