Any experience in underwriting an inn/motel? Tips to share?

Question

Hi, y'all. We're in the process of finding our next STR property in Vermont, and we stumbled on a motel/Inn for sale that's walking distance from our existing duplex STR in the area.

We feel this property has a ton of potential, and my underwriting has so far come back really strong. With that said, I'm curious as to whether or not I am missing something that I don't know to be looking for.

A few notes:

1. The property has 10 rooms (w/ 5 exterior entry like a motel and 5x interior entry like an inn). Plus a 2BR/1.5BA owners suite and a 25-seat bar/restaurant space. Our plan would be to keep 4 units as single rooms, but split them up into 2x with 1 Queen and a small kitchen (aka studios) and 2x with 2 full beds and no kitchen (aka rooms). We'd pair each "studio" with an interior door connecting it to a "room" to have the ability to rent them together as suites. We'd turn the owner's suite from a 2BR/1.5BA into a 3BR/1.5BA and then pair up the remaining 6x rooms into 3 suites.

2. We plan (at least to start) to run this as a bunch of Airbnb units with remote key-code access and self-check in and 3rd party cleaning and maintenance as we use with our existing Airbnb.

3. There is a 15% VT lodging/sales tax, but I am calculating that this fee will be added to my room-rate after the fact, so it's neither income or an expense; it's a wash

4. My underwriting shows this doing better than breakeven without any revenue from the bar area, which apparently used to generate more revenue for the past owners than the rooms.

So, with that out of the way, any tips, advice or pitfalls to lookout for when underwriting a property like this?

Thanks in advance!

-Brian

Sean Bramble · Answer

@Brian Kantor sounds like you know your stuff - solid underwriting. One thing that might be worth cross-referencing is any other motels in the area. Can't necessarily pull Airbnb data for this, but you could look at their calendars and rates online. If there are none, could be worth finding another market similar to yours to see at least how renovated motels are performing vs standard 1 br Airbnbs. Either way, this project sounds insanely interesting and I wish you the best of luck! Keep us posted on your progress

Sean Bramble · Answer

@Brian Kantor just curious - how are you estimating revenue/ occupancy? Are you using other hotels/ motels as comps, or looking at Airbnbs in that area?

Sean Bramble · Answer

Also cheering you on! Please keep us updated! 👏🏻

Gerald Pitts · Answer

No advice, but following along, and cheering you on haha.  An inn is one of my goals as well.

Brian Kantor · Answer

Really appreciate the kind words, @Sean Bramble. And we'll actually be in Santa Fe later this year, but with a group and already booked an Airbnb. I really like their vibe, though, and would definitely consider on a future trip.

@Nikki Yankowski 100%. First, it's worth noting that this motel is in a vacation destination and not a city or thoroughfare, so less of a place for illicit rendezvous than if in a different area. With that said, we would totally rebrand. "Motel" would be be in the name or anywhere. We'd position as "Modern Boutique Lodging", lean more into the suites than the rooms, and position as more of a destination than just a place to sleep with on-premise activities and a build-out of the bar/restaurant. Over time, if we're able to build A-Frame tiny homes on the property, we think that would add to it as well.

More to come. We just went through a second time with our contractor and hope to make an offer next week.

Sean Bramble · Answer

Oh yeah, forgot to mention- This won't be super comparable to what I assume you would do in the Northeast, but here is a link to a great converted motel my gf and I stay at whenever we drive through Santa Fe https://elreycourt.com/?gclid=...

Brian Kantor · Answer

@Sean Bramble, to estimate revenue when I underwrote my existing duplex, I went on Airbnb in my area and did a deep dive on listings to find comparable properties and what they were charging. You have to play around with the dates to get a sense of discounts for longer stays and also seasonally changing rates. I then looked at the reviews for the properties that had a ton of them. I was less interested in what the reviews said, but more concerned with WHEN they were posted. This helped to show what months of the year I could expect renters (in addition to the obvious ski season).

I also ran a report on AirDNA which allows you one analysis for free without signing up to get another perspective on occupancy. They estimated that I could expect occupancy 50% of the year..

Finally, I connected with a friend who has an Airbnb in the area about what occupancy she was seeing, and she told me that she was seeing closer to full occupancy (90%+).

Combining all of that together, I figured that I'd see 50% occupancy on average at the low end for a traditional Airbnb that had at least 1 BR, kitchen and living room, but with upside as high as 90%.

For this motel, we would do a combo of rooms and suites. We are estimating the suites that would have a full kitchen and living area as equivalent to a standard Airbnb at 50% average occupancy and the standard rooms at closer to 30% occupancy. I further supported these assumptions by figuring that at worst, the standard rooms would see 2x nights per week (Friday + Saturday) with once a month getting a 3-night stay. 2 nights/week x 4 weeks per month. = 8 nights + 1 = 9 nights / 30 days = 30% occupancy.

Based on my knowledge of the area, I got a little more granular on the above, digging into the seasonality of travel there (with Christmas Week through end of March being super-packed and longer stays, April being totally dead and the rest of the year being somewhere between). I also know that aesthetically, the comps are mostly in terrible shape with dated properties still doing a decent business. There are 3x modern comps in the area that are charging on average 2.5x the dated rooms and as high as 5x. Long story short, the above numbers checked out and actually seem to be conservative.

Michael Baum · Answer

Well, @Brian Kantor, the one thing to really look at is the bar/food area. That will require proper licensing and permits and a team to run it.

Also, this will require commercial financing or SBA loan. I am sure you have thought of all that already.

What about zoning? How is parking?

Nikki Yankowski · Answer

Are you doing anything special to change its image? My concern would be this motel will attract some of the cliche negative 'activities' associated with motels and it could effect your values.

Brian Kantor · Answer

Really appreciate all of the positive vibes from the community!

@Michael Baum, the bar/food area seats 25 legally inside and then has outdoor space as well. I looked into the licensing permits, and they don't appear to be onerous. Short term, we may rent the space out to a local restaurant who wants an outpost location, so we can monetize the space without the effort. Again, we're better than breakeven without this space, so even a little rental income here is nice. That said, we ultimately want to take the space over and do our own thing. We have a good sense of what could work there and there are not enough restaurants/bars to service the community and travelers, so good upside.

It is zoned properly from what we know so far (been an inn for 60 years), but would definitely want to confirm that before the purchase.

Parking currently is decent. The parking lot is gravel (as are most in the area) and maybe holds 12 cars, but the property lot is 7 acres, so room to expand it if needed.

We'll see. There is another interested party, but no offers in. Our contractor is friendly with the owners and we are going back a second time with him the weekend after next.

In the meantime, working on a formal business plan as that's a requirement of the commercial lender.

Will keep everyone posted.

Any experience in underwriting an inn/motel? Tips to share?

Any experience in underwriting an inn/motel? Tips to share?

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