Help with deal analysis - roadside motel

[Crystal Davidson]

So I need help with an analysis on a potential purchase.   The seller is elderly, foreign and is not working with a broker, so a lot of the financial work is not done for me, or he just can't answer my questions.   I have tried to get as much information as I can.

Looking at a roadside motel on a major road in a rural area.   15 miles away is a medium-sized college campus, and it's within 45 minutes of a big NASCAR venue, but other than that it is NOT a tourist destination - just rural area known for hunting, fishing, hiking, etc.   The owner rents the rooms for $40 a night.   He doesn't advertise online (besides having an extremely basic Facebook page) and the place isn't even on TripAdvisor or Google Reviews.  His current occupancy is a measly 16.5% annually (meaning $70k in gross revenue).   Fixed costs are relatively low as it's an owner/manager situation now.  $9,000 annually in repairs, maintenance, taxes and other costs, $29,000 annually in utilities.

He paid $350,000 for the property almost 30 years ago.   His asking price is $225,000 and it's been on the market for a long while so I could probably get him to be creative or even take less.

My strategy would be to rehab the place from a 1 star to at least a 2.5 star motel, market it appropriately, and raise the average daily rate.  3 star hotels in the area have an average 54% occupancy rate (according to a local broker) and an average rate of $78.

I've never bought a hotel/motel before and I want to know if I should ask anything else important that I've missed or if anyone thinks it's a totally terrible idea and I should run away now.   I appreciate your time!

[David Ptak]

Some thoughts... has it had any extended stay guests? Would you offer that? Have you considered a str report for the area? Are all the units rentable currently or will you need to do some rehab? What is your plan for financing or will you pay cash? Insurance may be quite a bit more than what he’s currently paying. You might want to get a quote on that up front so you know what that will look like. I own something that sounds a bit similar. I’d be happy to share more of my experience if you’re interested. Good luck!

[Crystal Davidson]

Yes I would definitely be interested to know more about your experience!  Feel free to PM me.  As far as the units go - the place has a newer roof but no other major capital improvements.   The place was built in the seventies and it shows - I would say the furniture dates to maybe late 80s?   Tube TV's, ugly paisley comforters, etc.   That said, it's in use at the moment (if you consider 5 rooms full to be in use lol)   As each room is only currently bringing in about $200 a month, I think the smart play would be a few "long-term" tenants to boost the rent rolls immediately and take up some of the vacancy.   Again, as it's a rural area - average rents aren't high ($485 a month for an efficiency).   

As opposed to most investors, renovations don't scare me at all.  I'm a licensed contractor and I definitely know what I'm getting into.   If I left some of the deferred maintenance, and focused on new beds and more attractive decor, the costs are relatively minimal.

For financing, I'm looking at a commercial loan - would probably have to put up the 25% down myself (I don't have any friends or family with money lol)

As for management, my adult sons will be taking it over from me soon after acquisition.

[Charlie Price]

@Crystal Davidson I did the same thing with a run down 23 unit Garden Motel. I split a couple larger units to two smaller units. Made storage space into extra units and now have 29, soon to be 30 Studio/Efficiency units. However, mine are in a historic downtown, with about 23,000 population in our county seed city (Okaloosa county) and 40 minutes from the Gulf of Mexico, sugar sand white beaches and warm emerald waters! I gutted and renovated one unit at a time renting them out and using proceeds to renovate the next unit. Mine rent for $800 per month and I rent about 1/2 or 1/3 at weekly rates ranging from $200-$300 depending on the time of year. I stay pretty much 90-100% full. My current rent roll from this project alone is $20-27K with only $100K debt! I self manage and have a couple part timers help me with maintenance and cleaning duties. I hire a part time manager when I travel also. I travel 3-6 months per year around North America in My R V with my family Home schooling our 6 & 8 year old boys along the way.
So your model is absolutely doable. I believe that there is a big opportunity for the old worn out motels around the country. For this type of business model. Good luck and let us know how it goes.

[Charlie Price]

@Account Closed property.  If if the place is in the middle of no where, then it would be tough to make much money on it.  However, I was told many of the same exact things before I purchased my property 5 years or so ago.  Before I purchased the property It was previously a drug infested run down motel that nobody wanted.  I had no experience running an extended stay business.  Many investors passed on this property as the bank foreclosed on it, kicked all the tenants out and let it sit vacant and boarded up for a another year or so.  I could also be completely wrong.  We have no idea of the area Crystal is in.  But if it is just 15 miles from a medium-sized college it may not be too far out in the sticks.  If it is true that there are 3 star hotels in the area charging $78 a night and staying 54% then there is at least some demand there.  And if she can fix the place up with herself and her son's, then she can probably do a lot of the work for not much.  She didn't say exactly how many rooms there are, but it looks like about 28 or so according to her numbers.  If she could even raise the occupancy to 50% at the same rates she could bring in $210K gross, or $17,500 per month.  And if she can make some off the units into efficiency units and rent out to longer term people she could do better then that.  It is probably a long long shot, there are a lot of IF's in my analysis and we don't know enough of the other factors involved.  And if anyone thinks this business is  way too time consuming, they may want to re think that.  I travel the country with my family 3-6 months per year while  doing this.  So it can be done if you have a big enough desire.

[Crystal Robens]

Thanks for the reply!   I work from home with a comfortable salary so my goal is to cover our travel expenses with our investments.   We don’t have any kids younger than college age so we are hoping to do exactly what you are and travel and have a great life from our investments.  I just feel like a distressed property is where the majority of upside will be and we are buying it below market so even if we improve it minimally we can always trade it out for a better performing property in a few years after squeezing out some tax benefits.  Thanks for the advice!