How Do I Valuate a Motel?

Question

hi,

I am interested in buying a motel in a tourist destination but I am not sure that I am valuating it well.  I am interested because I think I can increase their income because there are so many obvious things that they are not doing. e.g online marketing, a website, social media, etc.

Here are the numbers:

1. asking for 1.3m2. Price per room 84k

3. CAP Rate 11%4. Debt Coverage 2.35. NOI 158k6. Gross for 2016 was 251k and occupancy was 36%, ADR 108 Rev PAR 397. Gross for 2015 was 199k and occupancy was 25%, ADR 122 Rev PAR 30

8. Gross for 2014 was 149k and occupancy was 24%, ADR 95 Rev PAR 23

I intend to run it myself (the seller has been managing it himself and  is retiring and he is willing to train me as long it takes).

thanks

Joseph M. · Answer

I agree that I should get a management company to manage the properties.  My goal is to get 2 or 3 income generating hospitality properties in tourist areas. Tahoe has 2 or 3 very slow months but they are carried by the busy months (Tahoe is a popular destination in  both winter and summer).  Unlike other destination places like San Francisco, Tahoe motels have low average occupancy (less than 40%). This motel has 18 rooms.

thanks

Joseph M. · Answer

The net operating income is about $156k.

thanks

David Gerlt · Answer

Joseph,

You might want to check tripadvisor to find out how guests are treated. There might be a poor management/cleanliness issues that once corrected will boost occupancy and revenues.

Also you might want to have an appraisal done for the property. Most hotels are valued at a number times gross earnings. Generally in the mid west and south it is three times gross, but lately it has been increasing. In California, as usual, all bets are off.

What you really might want to do is drill down on is the expenses. I have analyzed a number of properties and with most you should be netting about 20-30% of your gross. That means the property you describe should have a net operating income of $75K, so make sure you see all of the expenses.

Best

Jonathan Orr · Answer

@Joseph M. I was in the hotel management business in the beginning of my career and now focus in the development of hotels.  One thing I can say is if it is in the budget...get a professional management company.  You will run into alot of headaches, especially with a older hotel/motel.  There are aspects like marketing and revenue projections that need to be handled by a seasoned revenue manager.  I my first hotel I was in was a 135 door hilton that was being self managed and the guy ran it into the ground and the hotel was sold due to bankruptcy (I was only a front desk agent at the time)  I then was promoted with a very large management company that came in and I learned the intricacies of what is needed to run a hotel just on the operations side, and learned a little about revenue management, sales and maintanence. Even with a smaller hotel you are either having to do everything yourself or hire out people and pay close to a amount that you would pay a mgt company, plus most managmeent companies can work off a percentage of revenue so even if it is a bad year you are in it together.  The one thing I think a management company can help with is your turn over of employees, they know what to look for when an employee quits or if you are seasonal when to staff heavy to help with the good times and when to lean out for the bad ones.

From looking at your recent financials from what you posted seems extremely low for a destination area.  How many keys is the motel?  Additionally I would be careful with a place like Tahoe.  I was looking at doing a deal in mammoth and turned it down partially because of the seasonality of places like that.  You are having to depend on things like snow and weather to make your break your year.  Also I imagine it is not a flag motel which means your marketing is reliant on public sites like priceline and trivago which require constant updating with pricing to reflect the time of year and having to manage a reservation system to go with those sites. Also that revpar needs help.  With ADR being that high and maybe getting a third of that in revpar means alot of overhead is being spent on things like employees, maintenance, marketing, etc... I think a management company could help bring that revpar up.

Let me know if you have any other questions and I can help to the best of my abilities.

Joseph M. · Answer

I am not a "professional" motel owner.  That is why I posted my question in this forum. I am aware that running a motel is hard work and that it is not the same as offering on a SFR or MFU. I am well conversant with reading long contracts (I am a semi retired Corporate Attorney and I draft/review/negotiate contracts and other documents that are several times longer than 40-80 pages.

But I am interested in the running a motel.  My goal is to get a bigger one later this year and have them run by management companies. Actually, the seller has another bigger hotel that he would sell to me in the same area. He bought them 15 years ago and he had no experience too. His background is in medicine but he run them well.

I chose to go for smaller one because the SBA told me that I could get up to 125% funding to acquire the second motel if I already have a motel.

thanks

Jeff B. · Answer

Offering on a BUSINESS is very different than offering on an SFR or MFU, which are the 'investment grade' properties.

Priyanshu Adathakkar · Answer

Is it a flag? If yes any PIP involved? if yes when and how much? If you are confused with these terms, you are way over your head! Running a budget property is hard, hands-on, full-time job. It is not meant to be a passive investment.  If you want to still buy it get help from a professional with experience, the purchase contract itself runs into about 40 to 80 pages, just to give you an idea of the complexity.

Joseph M. · Answer

it is in Tahoe.  Average occupancy is about 35%.

e.g for Jan 2017 daily inv was 5,925; monthly inv 183,675; room nights 57,917; occupancy 32%; gross receipts $8.6m; ADR $153; RevPar $48.35

Dec 2016 daily inv was 5,930; monthly inv 183,830; room nights 55,715; occupancy 30%; gross receipts $10.8m; ADR $193; RevPar $58.79

Nov 2016 daily inv was 5,636; monthly inv 174,720; room nights 35,490; occupancy 20%; gross receipts $4.1m; ADR $118; RevPar $24

Motel was built in early 70s and the seller took out a loan to renovate it 3 years ago.

thanks