All Forum Posts by: Joseph Stewart

Hello! I am close to putting a gas station / convenience store / liquor store under contract. $8M asking price, $3M to business, $5M to the real estate. The sellers are requesting what I consider an unusually short due diligence period to evaluate the business side -- only 20 days. They are ok with allowing a 60-day DD period to evaluate the real estate itself (given that environmental inspections and whatnot will likely take that long). I'm concerned about evaluating the business that quickly, and of course the red flag inherent in a seller trying to "rush" things along. Supposedly the 20 days is non-negotiable at this stage. I'm willing to pay their asking price (if the numbers hold up, it appears to be around a 13% CAP rate with very little competition) and the other terms we've negotiated have been acceptable. I'm just debating walking away over this DD timeframe, but thought I'd reach out to see if anyone has any guidance here.

Given that the owners own some other similar properties, one of my big concerns is that they could easily be running expenses against a different business, to the benefit of the subject property.  For example, buy a case of product under Company B's books, but sell it through Company A.  Company A therefore appears more profitable.  Given the huge number of individual inventory items in a convenience store and liquor store, selectively doing this would presumably be pretty hard for me to track down.  Or using employees that are being paid by Company B, to work at Company A.  Etc.

I'm wondering if anyone has any suggestions for how to best conduct due diligence on this type of business, what other common trickery or red flags should I be on the lookout for?  I obviously plan to request detailed POS reports, purchase receipts, bank statements, payroll reports, tax returns, and all the rest, but I'm not sure I can dig into all that within 20 days.

Thanks in advance for any guidance!

I am in the process of selling a commercial retail property which should net me about $2.3M or so. Have been looking at hotels (or larger multi-family) as the next move. I've owned a bar/restaurant in the past as well as a nightclub and a retail computer store, so I'm pretty comfortable with the "business side" of the hotel business and the inherent risks in this type of investment. I don't really want to get into a smaller self-managed hotel situation, though, as I'd rather hire professional management. This seems to mean I'd need something with 100+ rooms and so presumably in the $6M+ purchase range. My main question is whether this will be feasible on my own with $2.3M or if I'll need to partner up. I have great credit but don't have much liquidity beyond the building sale, and I'm not sure what the typical requirements (and/or recommendations) are for liquidity and cash reserves.  I know some hotels require more PIP than others, and that PIP can sometimes be rolled into the loan.  How do you know in advance what the franchisor will require in terms of PIP?

Other questions:

(1) What's typical for Cap ex reserves?  Since hotels require major renovations periodically I'm wondering if you typically set this aside out of cash flow or obtain financing for these regular renovations.  How frequently is major renovation typically required, and is it typically done in stages or do you shut the hotel down entirely for a period of time?

(2) Assuming we're near a "peak" in terms of the economy and hotel market, what might a typical "trough" look like in terms of revenue swings?  In other words if the hotel is seeing a RevPAR of $100 today, what might I expect in a typical recession?  $70?  $50?  I understand it's highly dependent on location etc but just wondering about a reasonable average I could use for underwriting purposes.  Does a typical well-run hotel lose money in a recession or do you more typically just swing toward break-even (or better)? 

Thanks!

You're saving $14k+ a year in rent ("if your numbers are right"...make sure they're right!!  Use the calculators on BP if you haven't already).  Over a 5 year span that's $70k...certainly seems more than sufficient to cover the maintenance expenses.  I'd echo the other comments that the property should be a good deal even with those repairs needed, but even if it's not a smoking deal, you've still got a pretty nice house hack situation.  As long as you're ok with setting aside much of that $1200/mo savings for these repairs you know you'll need, you should be fine.  You'll be building equity and can presumably raise rents as you improve the property.

I'd be a little careful on that sewer main replacement issue, too...those can get a little hairy having to dig up yards and streets and whatnot, depending on how extensive it is.  Plus not having working sewer plumbing for a time period could be a problem with 3 other tenants living there...

Hey Alec. If the issue is needing cash for furnishings, maybe finding an investor...payback should be reasonably quick as you can use most of your cash flow to get them paid off. If the issue is that you're personally having to sign for too much, maybe structuring your deals a little differently. I assume you're getting the landlord's permission to STR the space (I hope!), and if they're ok with it, maybe approaching them to partner a little more directly in the deal...like if they'll leave utilities in their name, you'll pay them an extra $X per month. If you can show landlords that you have a solid background and experience in the arena, and you make it worth their while, they might be more willing to help you out. Might also be a solution to the furnishings issue, to have the landlord help with that. Turn it a little more into a "I will manage YOUR Airbnb listing" type business, rather than "I will Airbnb your regular rental". Less cash flow but probably less risk and easier to scale.

@Andrea M. Yeah there's definitely some risks with the short-term rentals laws being in a state of flux right now in San Diego.  We haven't had issues in El Cajon that I'm aware of (obviously it's nowhere near as common out here).  I'd be really surprised if they actually banned them, but you never know. Worst case you could obviously revert it to a traditional rental...it sounds like your numbers work out ok for that. 

Airbnb aside, I'd look at a few things:

 1. How much equity you have presently and whether that could be leveraged more effectively elsewhere.  For example if you sell it and pocket $200k after costs, could you invest that $200k in a different property/opportunity and make better cash flow?  I think this is the biggest question to answer with regard to your situation.

2. What kind of repairs are on the horizon? Sounds like you're already looking at that...if you know you're going to need a new roof or some major repair, then that's important to consider, especially if your cash flow is going to be minimal.  

3. If you don't have much equity in the property and the likely future expenses are minimal, then I'd say go the rental route...cash flowing $400 a month isn't all that exciting, but rents will likely continue to climb and the property value will go up, so what may seem like a bit unexciting deal today will look a lot more enticing 10 or 15 years down the road.  If your time frame for holding the property isn't long term, though, it might not be worth dealing with.  But in general I say if your situation allows you to hold onto the property, and your return relative to your equity makes it attractive compared to other options, then keep it.  Landlording is pretty easy if you're careful about who you rent to and craft a good lease (I've self-managed my rental in Denver for 10+ years with minimal hassles).  Good luck!

Little late to this thread but I'm in San Diego and have done this type of thing a few times.  We've had great luck with using Airbnb in these house hack situations...definitely a bit more work but you can much higher rental income than with a regular rental.  We had a live-in Airbnb situation with 3 rooms listed and were taking in about $10k a month while paying $6k a month for the space...basically living for free AND cash flowing $4k/mo.  Presently have nearly our entire mortgage covered with a detached guest house listed on Airbnb in the El Cajon/La Mesa area.  I'd estimate we take in about 50%-100% more revenue with Airbnb than a regular listing.  It's definitely more work but you can outsource the cleaning and the management side is fairly minimal work especially if you can set it up for self check-in and whatnot.  @Meredith Stowers is spot-on with the ADU tip...huge opportunities there. Happy to join in any direct discussions if I can be of help!

Hi Andrea!  You might look into putting the house on Airbnb...we've been able to consistently get probably 50% more rental revenue here in San Diego with Airbnb versus a regular rental.  It's definitely more work...mainly the cleaning, but you can hire that out.  The management honestly is pretty straightforward and requires minimal time and we automate our check-in process so we don't have to be physically present.  If you're near the coast I think you'll do very well (we get $3500-$4500 a month with a 1400sq ft guest house in El Cajon, so coastal area should be even better).