Why cash on cash return for hotels are so high?

[Leon Lee]

Hi, Fellow investors

I am relatively new to commercial REs and currently looking at motel/hotels. One thing I noticed is that compared to multi families or residential SFHs, the cash on cash return for motels/hotels are relatively high (can easily reach >10% in many deals). The only reason that I could think of is that it is more active than other types of commercial REs, but are there something else that I am missing?

Also, when doing due diligence on purchasing a motel/hotel, what are key points (or additional points that are not common in the due diligence for MF and SFH) that the buyer needs to pay attention to?

Any inputs will be greatly appreciated!

Lee

[Joe Splitrock]

@Leon Lee it is more active and there is more volatility/risk since a motel/hotel is used only for travelers. A motel/hotel is an active business with employees. I would not compare it to SFH or MFH. The good news is you should be able to review operating statements that are far more accurate than a SFH or small MFH information.

Be aware you have many more expenses like payroll, cleaning, common areas, parking lot, advertising, pool, breakfast area, etc. Motels/hotels have taken a hit through COVID with people choosing short term rentals. Hotels have struggled to reopen to full capacity, as finding employees and getting customers back has been difficult.