Return on Investment and Investor Proposal for Small Hotel

[Leslie Beia]

Hi! I'm scaling into a commercial property and starting a boutique hotel. Currently, I'm looking at $2.5M all-in for building purchase, renovations, and business start up. My financial models are showing a roughly $250k net profit, so a 10% annualized return. I have a cousin who funds RE deals and he has a whole network of money people, so I am putting together a business plan to submit along with my financials and an investment proposal.

I am coming from single family residential, and have only ever worked with hard money for short-term loans, and also some smaller amounts of private money. I'm trying to wrap my head around working with investment capital long term, and there's also the potential for some seller financing from the building owners, and my cousin is on the board of a bank which could also come into play. This is a lot to consider! I'm curious what would be some different ways I could look at structuring the deal, and is the 10% return going to be attractive to people who invest in deals like this? Thanks!

[Kim Lisa Taylor]

@Gino Barbaro Thanks for the mention. I agree with @Don Konipol, if the overall cash on cash return for this project is only 10%, it's not a viable deal. Investors generally want annualized returns from a combination of cash flow and equity on sale of mid-to high teens; and if they perceive this as a risky investment, they may be seeking even higher returns. And in that case, how do you get paid? 

You didn't mention getting debt for a portion of the purchase price. This is generally necessary in any commercial real estate deal as a lender is your least expensive investor - meaning their interest rates are significantly less than what your private investors want. If you finance a portion of the purchase at a lower rate, it gives you "leverage" that helps boost the returns you can offer investors (and have something left over for yourself), as you won't need to raise as much capital from them. If you're not able to keep at least 25% of the profits within a couple of years of acquisition - you'll likely be doing a whole lot of work for investors with little upside and a lot of risk for you. 

Additionally, as Gino said, when you are raising capital from passive investors who are relying on you to generate their profits, you are selling securities and must follow securities laws; i.e., you need to learn how to "syndicate" real estate. There are specific securities laws pertaining to the financial qualifications of investors, what you need to know about investors before you even ask them to invest, and whether you can advertise an offering to people you don't already know. You will also need to learn how to create the corporate structure for deals with investors, and how distribution waterfalls and management fees work. Check out Jake and Gino's training program, or see if you can find something on hotel syndication. You may also want to get some training or read some books on how to raise capital legally for real estate.  I'm happy to talk to you privately if you want to send me a direct message.