Is the next portfolio step for vacation rental investors boutique hotels?

[AJ Wong]

Five years into creating, decorating, managing, buying and selling vacation rentals has taught me that the window of opportunity and potential for the asset class is tightening, closing and generally diminishing with time. 

That is not to say in certain regions of the Oregon Coast, the country and the world there is not still vacation rental ownership opportunity, but over the next decade, compared to the previous decade, clearly the margins are on the decline. 

The main restriction has been the implementation of rules and regulations on the density or saturation of vacation rentals in popular tourist areas. Places like Austin, for example, are well documented for being over saturated with AirBnB's, but who wants to visit Texas anyway? (No offense.) 

Towns on the Oregon Coast are small. Very small. Like a thousand people or two small in some cases. They rightly, do not want out of towners from California (and beyond) buying up their homes and converting them to nightly rentals. This is understandable, but also tourism is the life blood of these isolated areas. There's a balance, and some of the areas are getting it 'right,' most are making it un-investable, but if you're dedicated to an outcome you'll find the path to prosperity. 

For the high level and experienced investor the next phase of nightly accommodations could be the boutique motel or hotel. Commercial zoning is essentially the difference between accommodating nightly tenants and being subject to the rules of the territory. 

The vast majority of the hotels or motels on the Oregon Coast are 'mom & pop' run establishments. There are very few name brand or national brand hotel chains. Those that are here are smaller, not luxury and generally booked to high capacity. Franchises have their benefits, but the demand for nightly accommodations is so strong on the coast that any well run or well managed hotel has the capacity to produce and increase revenue. 

In comparison to the California or Washington coast's many of these boutique hotels and motels have been operated by the same owners in the same way, with the same infrastructure and amenities as they always have. There are many examples of smaller; 7-12 unit hotels that have revitalized the properties and business and generated spectacular results. 

It is fair to say that owning a vacation rental is not the same as operating a successful hotel or motel business. It is an absolute full time commitment and comes with a lot more risk and liability. The majority of owner/operators are either personally on site or personally involved to a high degree, it is a 24/7/365 responsibility, times however many people the property can accommodate. 

However, for those that have mastered the hospitality business, the next graduation in their portfolio might be to consider a smaller, higher density nightly accommodation business. 

 The barrier to entry (at least in Oregon) is lower than investors might think. There are bundles of boomers looking to pass off their assets and might consider an owner carry and plenty of local credit unions and banks that are seeking to accommodate a strong cash flowing business with consistent deposits. For strong borrowers as little 15-25% down could be accessible. 

There are definitely more factors and considerations to take into account in regards to owning and managing hotels or motels, primarily revolved around property and business management. 

Physically managing people and property is exhausting and the more guests one needs to accommodate the more pressure to perform. Similar to managing a restaurant it is an involved and riskier business, certainly a more, if not the most demanding property class in terms of active attention and energy required to sustain. 

Often, the individuals or companies that figure it out are able to replicate or duplicate their successes. Proven restauranteurs and hoteliers are excellent at systems and management. Their businesses work because they refined operations. 

Operating a full time hospitality business takes experience, resources and a team. Those that have managed, to manage a highly functioning and well rated short term vacation rental business might consider a new goal or objective to their portfolio. 

I think the future of the Oregon Coast has at least one true luxury hotel option. Most likely on the northern coast or near Bandon within the next decade. 

Anyone have experience selling, operating or managing a boutique hotel in the US or beyond?