Buying a small hotel/motel in South Florida as 1st property

[Charles Barr]

Background

I'm a new real estate investor in Miami Beach trying to buy my first property, preferably locally*. I could spend at least $500,000 in cash on a property myself, $1-20 million if I go into it with a family member who's interested in being a passive investor, and I'm fairly sophisticated in terms of general investing know-how (financial modeling, Buffett-style value investing, general MBA stuff, etc.). I've read a bunch of real estate investing books as well. My two big limitations at the moment are (1) lack of general real estate experience and (2) handy-ness (I'm not going to be installing a countertop anytime soon and contractors are hard to come by here, so buying a SFH and doing a reno myself are unlikely). I do, however, have a mom who's very good at organizing renovations, design, and landscaping so I could find that a helpful skill in the toolbox.

Thesis

With the COVID-19 shutdowns, tourism is getting hit hard. Real estate prices might not yet reflect it, but I would bet that there are more than a few motivated sellers of properties reliant on tourism. Assuming that prices decline to where the hotel/motel could, post-COVID, be a reasonable investment while still operating as a hotel/motel, I might buy one. In other words, I wouldn't buy one in the hopes that some big developer buys the property later to turn it into luxury condos. I'd plan on holding it for the long-term and outsourcing the operations of the hotel/motel while I manage the property. 

My main long-term concern is AirBnB, since these kinds hotels compete on price with AirBnB, especially since they don't have a global or nationwide brand name. Miami Beach has been rather hostile to AirBnB, which is good for the hotel business, but I think it's good to assume that eventually the city will reach an agreement to allow AirBnBs.

So my question is this: if anyone has done this type of commercial property investment, what are the main things to avoid? Alternatively, if you think that are better opportunities in South Florida, commercial or residential, what would you suggest looking at and where?

Post Script: Investing outside the expensive Miami market

*I've read the BiggerPockets Guide to Long-Distance Real Estate Investing by David Greene, so I have some familiarity with the concept of investing outside my region. I'm leaving that open as an option, but I'd rather try to go local first just because I think I'll have a better chance of being able to manage the property. 

[Jeffrey Chan]

At $500K, without additional financing, you’re not going to be getting much at all in Miami Beach. Do you have any experience in the hospitality industry? If not, I would recommend learning more before you set your sights on a hotel/motel. With single family to small rentals, or fix and flip, you’re dealing with a product (house, apartment) which every adult in the whole world has experience with either as a renter or an owner. The sale/rental of houses and apartments is repeated every year all over the country by the millions, so there are no real unknowns. You can even read through the mistakes of other BP members to understand how badly your investment could go.

Hotels/motels and hospitality are a whole other ballgame. My first cousin works in hotel management based out of NY for an operator that operates nationally and I listen to her experiences with the South Florida market. The company regularly has to fly her from NY down to Florida to run things because the qualified and reliable talent pool down here is so limited. Your idea of “outsourcing of the hotel/motel” might not be as easy as you think. Any hotel operation would be reliant on people, and as is the case whenever you have staff, you have to deal with the possibility of turnover. This is just information she passes on to me – do your own due diligence.

Have you considered the possibility of a prolonged downturn? Whenever the economy tanks, leisure, travel, and restaurants are the first to go. If you buy now, make sure you buy conservatively – always remember that the market can remain irrational for longer than you can remain solvent.

With that much potential money, have you considered new development? The old school way of buying a plot of land and building a lot of cookie cutter homes is dead – there’s not enough land left close to central Miami. If you look at the big homebuilders such as Lennar, they are building houses far away. The next development trend near central Miami is vertical – low and mid rise apartment buildings.