Investing in Hotel Real Estate

The way that we got into the hotel industry was kind of two-fold. I talked about the fact that we keep everything local to Phoenix. For us, our network of people are here. The referrals that we have for the best attorneys, CPAs, folks that know different niche areas within industry are all within the Phoenix metro area. We were actually introduced to someone who's been in hotels for 20 years by one of our brokers about two years prior to buying our first hotel. We were starting to explore that as an alternative niche already. Then about two years later, we received an unsolicited offer for one of our apartment complexes, which we finally ended up taking. Then we were under 1031 Exchange, and we could not find multifamily that met our criteria, that provided the returns that we expect, the CAP rates, etc. Not in the Phoenix Metro area. That is when we pivoted into hotels. I think part of the reason that we have the confidence to do that is we did have basically a hotel mentor. Someone that was able to find off-market property. Someone who’s able to say, “Hey, here’s the value,” and we went along and then bring the resources and recommendations again in market for us to be confident and successful with that hotel.

To start with, the same thing that holds true in any real estate niche location becomes still your number one priority. It's interesting, because when you're buying a hotel, and I'm talking about hotels that are what's called a flag hotel, franchised hotels, limited service, catering to business travelers. That's really the space that we’re in. You are 100% looking first for location. Then you will observe the flag itself, the brand. But we are not buying because it's a specific brand. We’re buying because there’s economic centers. There's development going in. There's a lot of reasons to be in that particular space. That is really the same as multifamily, where you're looking at location first. Some of the things that are different is that hotels, depending on your market, have seasonality. So you do not have a consistent steady occupancy rate that you would see, for example, in multifamily once you've been able to get the property to the level that you expected. So you will definitely see seasonality in Arizona. Our off-season is during the summer. So those are challenging months. It's similar to — if you were to talk to someone who owns long-term rentals versus someone who owns short-term rentals. They have seasonality as well, but the profitability can be much higher on the short-term rentals and similar to hotels. The profitability on a per unit, and I’m going to say that in hotel industry, it’s called key. So a room, how many keys do you have versus units or different rooms itself. You actually use keys. So on the per key basis, the profitability is higher than apartment complexes, but you do have variables that you wouldn't see necessarily in the multifamily space. You also have more levers in a hotel. So it is more of a business than it is real estate, but you do buy for real estate first. Then you're looking at the business components. 

Listen to full episode: https://lifebridgecapital.com/2019/09/ws338-investing-in-hotel-real-estate-with-nichole-stohler/

Some other things are similar. You may have property management for your multifamily. In our case, we have a general manager, and there's levels of companies that will provide operations management, accounting, those kinds of things specific to the hotel industry. You would also have – maybe you are buying some supplies in your multifamily like cleaning for your pool and those types of things. We have the same thing. Only our supplies are on a much higher basis. The cleaning is happening every single day. The pool needs – that's happening all of the time. So those pieces are different. There is generally a free breakfast. So there's all these incremental business component pieces that you can start to take a look at to say, “Okay, can I negotiate better contracts? Can I leverage volume discounts?” So you can start to look at that, because you're part of a franchise or you have other hotels. The other piece that you can do is just monetizing the hotel itself. What can you do, for example, with the spaces? Like our breakfast area is only used for breakfast, and then it sits there the rest of the day. So that could be used as a conference space for small groups. How can you be adding snacks and mini-bars and things to – there's a lot of different ways to monetize the hotel, negotiating corporate contracts, selling digital space on your Wi-Fi splash page. So what I love is that there are so many of these, and it's almost like the sky is the limit in the things that you can do within that specific hotel space.

Listen to full episode: https://lifebridgecapital.com/2019/09/ws338-investing-in-hotel-real-estate-with-nichole-stohler/