mini-motel room opportunity in Bakken oil region?

[Katie L.]

Hello

I have some questions about investing in the USA and would like forumites’ opinions. I have been researching the opportunities in the US for some time now. I live in Australia.

My friend and I both found an investment opportunity with a agent (based in Australia) selling mini-motel rooms for a builder/developer (prefabrication modular housing) to house employees in the oil industry in the Bakken oil region in North Dakota, near the town of Williston. These units have been popular with investors in Europe.

The builder is using QB technology (i.e. QB paneling system) to construct the motel. The builder also has a property management company so they will make money from property management. They have sold the first phase of mini-motels near Williston, North Dakota, and they are selling the units at US$47,000. Net rental income is around $18,000 pa (after taking away property management expenses). The property management fee if 45% per annum and this figure also includes maintenance costs.

After, deducting an additional $5 per day for an upkeep and insurance fund, and advertising fees and landlord insurance premiums, I'm guessing that the 2 bedroom unit will yield approximately $14,000 per annum in income (or around $1,166 per month nett). In summary, about a 28-29% pa nett return. Projected rental income is calculated as follows: $100 per night for 365 nights, assuming an occupancy rate of 90%). All owners will contribute $5 per day to the upkeep and insurance fund. In addition to these costs, the investor would have to take out a home warranty program after the first 13 months and landlord insurance.

The property management fee of 45% pa is high because the business is run like a motel - workers moving in and out. The builder was upfront about making money from the management fee; they said their could price the units higher to being with, but decided to offer a lower price point and make money from property management as well. They are looking to sign leases with oil companies for their workers to reside in the mini-motel. There will be 20 rooms in a mini-motel.

The price point of $47,000 applies to units selling in Phase 2 of the development. Phase 1 was sold out very quickly after the project was launched in November 2011 - in this Phase, they priced the rooms at $37,000 each as an incentive for people to buy.

Comparable units of this kind around the vicinity, in the past 18 months have sold for around $85,000 per unit. The developer told me that they could price the room at $85,000, however, they started at a lower price point of $47,000 and will make money from property management instead.

I see this as commercial housing rather than residential housing - am I right? Would the landlord insurance premiums be much higher for motel-type housing than insurance for a typical single family homes in the US cities?

The builder told me that the costs of construction for a prefab single motel room is US$30,000. Do this think this figure is about right? If each unit costs $47,000 to buy and the costs of constructing the room is $30,000, then the investor is $17,000 'behind' to start with? Some people would say though, that the costs of construction does not matter and that its the land value that matters.

The builder said that with QB technology they are able to construct the motel quickly in their factory, whereas it takes a longer time for traditional motels and hotels to be constructed.

Are there any particular risks or pitfalls when it comes to investing in this type of property compared to a typical single family home? There are risks if the price of oil falls. There is a risk of over-supply of units in 5 years' time in the region.

Here is an important question - with low interest rates in the USA of 3-4% pa, why hasn't the builder convinced a bank to lend them $20 million to build a couple of developments at 36% (being a return of 40% minus 4% interest)? This is what I don't understand. Why have the builder chosen, instead, to raise finance by getting the individual investors to own the units?

The builder intends to build eventually around 1000 units throughout the Bakken region, covering Montana, North Dakota and Saskatchewan).

Is this a good investment opportunity?

Thank you for your time. I look forward to your thoughts.

Katie