Tell me about hotels

[Jon Holdman]

Tell me about investing in a small(-ish) hotel.  I'm talking something in the $1-3 million range, 25-60 rooms.  I realize this is as much a business as a real estate investment.  Is this something that requires constant attention or can you hire a manager to deal with day to day operations and then oversee the business?  I've stayed in a few where it was pretty clear the owner and family where living right there.  That's not what I have in mind.  (OK, maybe a possibility on some Caribbean island, but that has a whole additional set of issues.)  How much staff does it take to run one?  

What is financing like for these?  I'm assuming commercial terms, like 30% down, 20 year amortization and a 5 year balloon.  In another thread on commercial financing, I saw that commercial loans are limited to your net worth.  Is that the case for this?  Are such loans available?

What does it take to get branded?  Can you compete with the big chains as an independent?  Or is it better to consider properties that are already branded?  Branded ones do see to be offered at lower cap rates than non-branded ones.

What are expenses? Looking at Choice Hotels financials, their operating income appears to be 26-28% of revenue over the last five years. OTOH, IHG (Holiday Inn, etc, etc) in Americas reports 62-64% of revenue as operating income over the last three years. Worldwide, they report 35-41%. That's a big difference. Does that reflect the difference in low end hotels vs. high end, business hotels? La Quinta reports 8-18% for the last five years, though they show a large "impairment loss" in the last three years. That appears to be associated with pending sale of some hotels and reflects a decline in the value of these properties. Taking that out, their NOI appears to be 14-18% of revenue.

Is this a viable long term business or does AirBNB, VRBO, etc eventually kill hotels.

What's a good resource for learning about hotel investments?

[Jay Patel]

I found this thread pretty entertaining. 

First of all, let me say that even though I am a Patel, I haven't directly owned or operated a hotel/motel but I am very familiar with others that do/have.

In my opinion, the Patel difference comes in play with the management of these lower level "C" type properties. They all start in these smaller motels (like the one OP is referencing) and self manage the hell out of them. They are a one man show for the most part. They work the front desks (all shifts), do rooms, laundry & general maintenance. They run it efficiently making decisions on the fly with variable rates etc. to get the rooms filled. They "milk" everything they can out of these things, sometimes neglecting cap ex, repairs borderline code enforcement issues etc. They live on site in a couple of rooms that have been converted into an apartment of sorts.

Many started this way and used their cash cows to scale into larger Hotel brands which can support being professionally run. Many of them now own multiple properties with the managers OP mentioned but it all started with that first one run the way I described above. Many of them were able to achieve this success in one generation and had this drive because many of them were first generation immigrants to the US. 

The issue with trying to professionally manage this kind of "C" property is that this is what you will be competing with. If you are willing to manage it the way I mentioned above, you can, your last name doesn't have to be Patel. But the minute you try to put a bunch of employees and managers into such a place, you wont be able to compete. One way some of these Patel's have managed to escape this self management trap to scale the way they did was to replace them selves with a "manager" (often another Patel lol) who was willing to run it the same way for a share.