Resort Valuation

[Tim Johnson]

Hello BP!

I have a connection to an older couple that are interested in selling their resort in norther Minnesota.  It's been family owned for 60 years. It's beautiful...a dozen fishing cabins in Northern Minnesota on an entire peninsula of a lake surrounded by state forest land.  

The way I've valued multifamily properties is to calculate the Net Operating Income (Gross Income - Expenses) and then divide by desired cap rate.  When I do this for the resort, I'm not getting numbers that approach the properties value.  (I feel like the property is quite valuable, but current revenues are small).  

Are there any other considerations when valuing vacation rentals? Or does anyone have any advice?  I haven't really worked with vacation rentals before.

P.S.  The cabins are too close together to be split up and divided off.

[Roy N.]

@Tim Johnson

There are essentially two ways (and a few variations) to purchase this deal, depending on how the owners are selling it:

As a going concern:  In this instance you are buying the business, so it is the business you evaluate: assets, liabilities, revenues (historical: 3 - 5 years), operating costs (historical: 3-5 years), future financial projections, goodwill, etc.    After all this, you arrive at a value of the business as it presently operates.   When it comes to the actual purchase, you might be able to {gradually} purchase shares of the business (depending on how it is set up and the appetite of the owners) rather than an all out purchase.  You may also have the owners stay on {part-time} for a season or two to help train the new management (you).

Acquire the hard assets:  In this scenario you would only purchase the real property and those hard assets (docks, boats, etc.) that you deem would be beneficial.  The existing business would be wound-down by the current owners.  This would be like purchasing any other real estate.  The owners may agree to carry part of the financing, but you won't need them to stick around to transition operations.

After acquiring the properties and assets you wish, you would either run your own business, or part-out and resell some of the assets.

From your post, it does not sound like parting out the properties is a viable path and where you admit to having no experience with vacation rentals or the resort business, you might want to explore purchasing the business with the current owners hanging around for a bit to help you get your feet wet.

Regardless of approach, it needs to have legs to be worth pursuing.

[Jeff B.]

Norther Minnesota resort - - but current revenues are small

So it's a seasonal operation. Mom-n-Pop are getting tired of too much work for so little return.  These kinds of places are Works of Love and a life style - - are you looking to live there and take on a new life, OR are you an investor looking for a return?  

Don't force fit a Value when the return just isn't there.

[Tim Johnson]

@Roy N. and @Jeff B. Thanks for your responses...you summarized the options well.

While the property might be beautiful, if the numbers don't justify pursuit then the right thing to do is walk away.  Regardless of how pretty the sunsets are.

Thanks again for your sage advice. 

[Chad Olson]

Did this property end up selling? If so, what followed?

[Tim Johnson]

@Chad Olson, I walked away. I had thought the owner was going to transition ownership to his grandson.  But, looking at the website just now, it looks like they are still running things.