I need some input. My broker sent me an opportunity to buy a 90 room, full service hotel in a rural area, and the price seems low- the owner wants $475K. The biggest problem for me is: how do you comp a closed hotel? If it was up and operating, I' m sure the purchase price would be much higher. I am fighting the urge to just go ahead and pull the trigger right away based on the price, and would sure appreciate any advice from you guys. Thanks.
Are you just looking to flip it? Or are you planning on turning into a business? Either way, Id check to see just how much business/tourist traffic that area gets if its really a rural area.
If you are a real estate investor that usually means you are a landlord or you flip properties. Running a hotel is a business that happens to require a building but is completely different than being a real estate investor. You will have employees, large amount of consumables, maintenance, etc.
Why is it vacant? How long has it been vacant? I wouldn't even know how to start.
Are you going to finance the deal? Will the banks offer financing on a closed property? Or are you paying all cash?
If bank will finance, you have to consider that your mortgage will be due regardless of the property being closed or running.
My family owns (4) smaller motels. I looked into buying a closed hotel for a great deal but turned the other way due to the initial capital investment. I never even pursed talking to a bank before hand.
Looking forward to hear how you tenatively plan to structure your deal etc...
We need to find out if the hotel has extreme deferred maintenance? roofs? rooms need renovated? taxes? water damage?
Last time the hotel was in service?
Look up the hotel VIA Trip Advisor or google reviews to see what guests wrote about it. It can tell a lot about the place.
If the hotel had a "previous stigma" attached to it due to crime and/or bugs (variety of causes), then you will have to "re-brand" the hotel... Start fresh...
How rural of an area and what are the drivers in the area? Was it previously branded or independent? Are you going to keep it a hotel? Is a hotel the highest and best use for the area? How many stories? Interior or exterior corridors? Elevator? Do you have experience in hotels?
I have a hotel construction company and I can tell you that purchasing a vacant hotel (depending on the area & municipality) generally requires a sizable capital injection because of several reasons:
- As with any vacant commercial building you will need to bring up the building to code if a renovation is being completed. This can require a large investment in fire/life/safety, mechanical systems, elevators and ADA compliance.
- No established hotel with recognition...it always takes time to ramp up a new brand in a new location.
- You could be dealing with massive mold issues if the walls have vinyl wall covering (like most hotels).
As far as value it really depends on the type of building, deciding what is the best brand for the location and building type, and construction/redevelopment costs. Hotels generally trade based on cap rate however smaller hotels/motels generally trade on a multiple of revenue. Determining the value can be difficult however you would need to work with an experienced management and construction company. You may want to get a feasibility study performed or pay a consultant to help you with brand choice. The STR report can paint you a pretty accurate picture of what the market is doing. However if it's a small market with very few comparable properties then that can be difficult. Full service hotels in rural areas are very difficult because of the overhead it takes to run a full service hotel (depending on the drivers). Select service hotels are generally preferred. A three story Hampton Inn with an elevator is much easier to run than a two story full service Days Inn with a restaurant. Make sure to answer this question...what are the drivers in the area?
I know the reality shows aren't really real, but watch "Hotel Impossible"
Thanks, everyone, for all the input. Here's more information:
Benjamin- I'm not really sure what I would do with this place! Hotels are just not in my wheelhouse. I specialize in assisted-living facilities, and was considering that as a possibility.
Bill- It's been vacant since January, allegedly because of a medical emergency-type issue.
Nik- It would have to be all cash, as all the banks I have spoken to say no way!
Chris- There are only 5K people in the entire county! From all outward appearances, the demographics would not seem to support something this big. On the other hand, some big hotel outfit did the market research and thought enough of this area's tourist reputation to build a 90 room hotel- at least, that's what I tell myself! ( And there's another 70 room hotel right down the street!) This was a branded hotel, a 2 story elevator building with interior corridors. There have been over $200K in improvements in the past year. They updated the plumbing, heating, electrical, and fire alarm systems. There are new flat panel tv's, new electronic door locks, a new ansul system in the restaurant kitchen, 2 new handicap- accessible restrooms in the lobby area, new water saving toilets and smoke detectors, and new wi-fi capabilities throughout the hotel. The indoor pool was repaired as well. As far as highest and best use, well, that's the $64,000.00 question. As I mentioned before, I specialize in assisted-living facilities, but I have never had one that large, and I have no clue how I'd fill it in an area that is so rural!
Tim- You are so right about those real estate "reality" shows! I'm still looking for "Hotel Impossible"- can't wait to check that out!
Again, thanks everyone for your input, and I'll keep you posted when I decide what to do!
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