Real Estate - anyone with Hotel investing experience?

[NJDoc]

I am blessed that I am exposed to potential real estate deals almost monthly. My experience, as alluded to in my prior posts, is almost universally in multi family, a little office and large syndicates. I have been approached to consider a de novo hotel project, details lacking at the moment. I know the lead investor and he is quite savvy, but my gut instinct is one of concern. Anyone have any experience or insight on hotel investing? Sorry, I do not have project details to share at the moment, but I am really just asking for input as to the consideration of this particular class of commercial real estate. Thanks in advance.

[Kamban]

Hotels have mainly 3 classes -

1. the large Ritz and JM Marriott that are held by large real estate groups or even chain owner. Total cost $50-100M

2. Then there are the middle order like Hampton Inn, Courtyard, Fairfield Inn etc - they are mid tier from the Marriott, Hilton and Choice Hotel groups. These are the ones that are dominated by one particular community - the Patels from Gujarat, India. Cost $15-25M

3. Finally the no name 10-30 room small motels run by mom / pop who live there and do all the work themselves. They hope by hard work that they  make it to the 2nd tier. Again, many Patels are in this group. Cost $750K -3M.

The first is tough to break into and even if you do, you are a small cog in the wheel. Not worth getting in the 3rd group. The 2nd group is where the sweet spot is. The Marriotts and Hiltons offer a franchise only to people with proven track record.

You either buy an existing hotel at a premium but with income flow, an under performing hotel that you hope to turn around or build a new one where your money is tied up for a couple of years with no return, but has the lowest development cost.

The lead Patel who manages gets a group of his friends and each take a 5-20% share. The usual loan is for $10-15M, sometimes up to $25M for a property like Hilton Garden Inn. you need to put anywhere from 20-33% down, depending on the bank lending you the money. So your 10% share requires you to pay $250K on a 25% down of a $10M loan. The manager gets some money for the initial work (100K or so), managing fees per year and 20%  profit at the end if there is one. During the years you own the property you get distributions based on your ownership percentage. Some properties do very well and some don't. The returns are usually around 10%.

Some Patels keep 20% to themselves for free and offer the remaining 80% for the full price. One needs to trust the lead person.

Sorry, if this is not what your hotel property deal is then this information is useless in your decision making.

 

 

[WealthyDoc]

I had a practice partner who co-invested in a new Microtel.  I'm not sure how it ended up financially but I know he complained about it a lot (the economy tanked and occupancy dropped, unreliable workers would quit in the middle of a shift with no warning, hiring/firing headaches, a meth lab was set up in one of the rooms, etc.).  Based on this, my advice:  Do your due diligence and invest only with someone with a lot of experience.  Limit your liability and debt and prepare for all of the obstacles.

[DMFA]

I saw erictait posting about hotels before here - maybe he might be amenable to share some experience with you.

Not a stalker, I swear, I just remember things good :-)

[NJDoc]

Thank you all -

I forgot about the Patel Family domination in this industry. All in all , I think I may stick to what I know, multifamily.

 

 

[Kamban]

Quote

NJDoc wrote:

I forgot about the Patel Family domination in this industry. All in all , I think I may stick to what I know, multifamily.

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I would recommend that you get more details and then making an informed decision. I find single family homes a pain to manage and the overall returns are not as great as hotel properties.

One good thing is that profits can be used not only for renovations but also as a part down payment for buying another hotel. So one could start out with one or two hotels and multiply it to 5-6 over the years.

[Kamban]

WealthyDoc wrote:

I had a practice partner who co-invested in a new Microtel. I’m not sure how it ended up financially but I know he complained about it a lot (the economy tanked and occupancy dropped, unreliable workers would quit in the middle of a shift with no warning, hiring/firing headaches, a meth lab was set up in one of the rooms, etc.).

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The mistake was buying / building a new Microtel. It is a rung or two lower than a Hilton or Marriott property and the ADR ( Average daily room rate) is significantly lower than Hilton / Marriott. So he paid a good chunk for new properties but did not get the returns. Places like Days Inn, Microtel, Red Roof Inn, Village Inn can become roach motels easily and I am not surprised a meth lab was set up there.

The only ones I would invest as new properties are Hilton / Marriott and IHG ( parent of Holiday Inn and Holiday Inn express). Places like Comfort Inn and Country Inn and suites are best bought used when the prices are a bit low. When a franchise is coming off the flag ( say the Fairfield Inn is going off franchise because it is > 20 year old and you try and get a lower rung franchise to covert it to, like Days Inn)  it is best to sell to a 3rd tier owner and use the proceeds to build another Fairfield Inn whose average daily room rates will be higher.

[CAPFUNDR]

Hotels are fundamentally different than apartments or office. They are an operating business, and they are very cyclical. If you own an apartment building, your occupancy is relatively stable, and your expenses are maybe 40% of your revenue. For a hotel, expenses can be 80% of revenue and your occupancy and room rate resets every night. What this means is that a relatively small dip in occupancy or room rates can have a huge impact on your bottom line. I would be very cautious about hotels right now. They have seen a big runup in values because there was no new construction coming out of the 2008 crash. There is now a lot of new supply coming on-stream, at least in the major markets. This will put downward pressure on occupancy and room rates, which can have a magnified effect on value.

Of course, this is a general statement and real estate is a local business, so it all depends on the specifics.

By way of background, I am the CEO of CAPFUNDR, a manager of online real estate funds. Previously I was Chief Investment Officer of a public REIT and ran other institutional real estate investment businesses.

https://www.capfundr.com/

[Craigy]

Came here to say pretty much what Capfundr said above.

A hotel is not "real estate" but a business with dozens/hundreds of employees.  It's as much a "real estate" investment as a burger king if you owned the land underneath and also ran the restaurant.

If that sounds palatable and you've done the research, then go for it.

[Kamban]

Craigy wrote:

A hotel is not “real estate” but a business with dozens/hundreds of employees. It’s as much a “real estate” investment as a burger king if you owned the land underneath and also ran the restaurant.

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I agree with this partly. Both are businesses but the underlying land, building and fixtures are worth more as a percentage of a value of the hotel business than a Burger king business. In a hotel all you offer is a place to stay, relax and sleep and infrastructure plays a major role in this. In a Burger king you offer a product and the physical structure could be small yet you can do an enormous volume of business out of it.

Buying or owing a single hotel is like holding a single stock. It can turn out the home run stock like Facebook or Apple or be a dud and sink like Enron or Kodak. So many mid-tier hotel business owners spread their risk by owing 5-10% share in multiple hotels, like a mutual fund of hotels. These hotels are in different markets across different states. So even if one area does poorly, the others do well and the average return stays the same, unless there is a serious downturn in economy. Mine are spread across 4 states.

 

[VagabondMD]

I have no interest in investing in hotels, but I appreciate the crash course on it by Kamba!

[NJDoc]

Thank you all - excellent info.

Since , I started looking into this, I have heard of a second group looking to do a hotel, also led by a fellow Doc.  I have had good luck with multi family and am going to stick with what I know.

 

[Allonblack]

Funny the one Patel family I know owns a hotel. Never knew it was a thing. Sounds like one of those businesses you are born into. They may not appreciate outsiders. Not sure how much that matters in hotels. I've never heard of someone interviewing for a job in the diamond industry for example.

[Kamban]

Allonblack wrote:

Funny the one Patel family I know owns a hotel. Never knew it was a thing. Sounds like one of those businesses you are born into. They may not appreciate outsiders. Not sure how much that matters in hotels.

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The Patel I know came in 1988 and studied to be  pharmacist ( he is actually a licensed one) but his godfather owned a hotel in deep south and he worked part time with him. He realized that this could be a better line of future income than being a pharmacist working for a chain and he became a manager and minority owner of a no-name 20 room motel. He lived and worked there for a couple of years, bought out the majority owner and when it was time to let it go, he sold it to another Patel and rolled the profits in a "1031 exchange" into a bigger motel.

He then started with lower end franchise - a Day's inn, that he still owns to this day for sentimental reasons. These properties gave him the track record to approach Hilton and get one of their franchises.

Since those cost more he approached a group of family friends (friends and investors of his godfather), each of whom took a 5-10% stake, and he had about 25% stake, to run the business. With the profits and additional experience he could build more Hilton franchise hotels.

Once you hit a certain size in the market you are the head honcho there and Hilton will not offer a newcomer a franchise there without offering it to you first, and you declining it. Sometimes you accept the new hotel even if the hotel returns are not great but just to protect your other Hilton properties in that area.

The reason it is a closed group is that all share the same mentality of taking a set amount of shares, making quick decisions, getting regular distributions and also saving money for required upgrades, agreeing on timing of sale and rolling money onto a bigger property using 1031 exchange etc. Many deals are agreed initially by a verbal agreement / handshake and giving your word means more than pages of signed agreements. Anyone with 10% stake has to be a guarantor for the whole amount and not just his portion, according to the bank requirements and this can put off some outside investors.

Yes this is quite a different culture than what one is used to in other real estate purchases but it is what it is, and what makes that community so successful in the motel business. By sticking with them for a long time you can grow quite wealthy.

 

[Wiscoblue]

The most passive real estate to own for a physician is farmland. I have bought farmland at the outskirts of our city close to the freeway and "in the path of progress". Rent out the farmland for corn or soybean and that pays my property taxes. The land appreciates without taxable "dividends". Some of my land has appreciated from 10k an acre to more than 100k an acre. Gas stations, Fast food restaurants and hotels will seek you out and make unsolicited offers to buy your land. Location is important.