Hi all! I'm buying a hotel and decided to document my entire experience here for posterity, from finding a deal to financing and owner-operating the place. This post will be an "intro" to what put us on to hoteling and a prospective deal my partner and I are looking at. Feel free to chime in with any advice, comments or questions! Thanks for reading!
I am a brand-new real estate investor with a serious passion and drive for financial freedom. Unfortunately, my first deal (a triplex in Illinois) just went south and I had to call it off because of a bad home inspection report. I don't have much in way of savings and am recovering from some bad credit decisions (credit card defaults 2 years ago in the total amount of about $60k). Yep, we were irresponsible idiots, and as a result, my credit score is about 680 and rising. But my wife recently got an awesome job, our income skyrocketed to $200k+ per year, and we are tightly budgeting and saving like mad.
So, I discovered this world of financial freedom through real estate investing and was absolutely enamored. I dove in HARD, 12+ hours every single day of researching and analyzing deals online. Finally, we made an offer on that triplex I mentioned. It was $100k and would have produced about $1800 in rent plus had an unfinished basement that could be converted to a fourth unit. Seemed awesome until the home inspection report indicated cracked foundation and water damage, so I backed off quickly. Better to be out the $2k for home inspection and appraisal than deal with that.
So, I began looking at larger multifamily and apartments on loopnet, which somehow led me to hotels. Hotels are expensive, so I really needed to take stock of what I had and what I was willing to sacrifice to make a hotel happen. I had $75k in a Roth 401(k), about $80k equity in my principal residence (pending a new appraisal), and only about $12k in savings (my wife just got her job about 3 months ago and was in college for 2 years prior to that, so things were pretty tight.) Knowing what I know now, I would not get a 15-year mortgage; however, it worked in our favor this time because we were able to build up a ton of equity in our home (the crazy market right now doesn't hurt either). I quickly made the decision that I wanted to at least not touch my savings, since I need something if it all goes south.
I formed a Wyoming Close Series LLC online, because it will allow me to put each property into its own "liability bubble". That cost me about $600. Worked on photoshop and made a nice logo (I'm a hobbyist photographer and very amateur graphic designer), and am working on a website, company email address and business bank account right now. At the same time, I was scouring hotels like a madman on loopnet looking for that great deal. Don't get me wrong, I wouldn't call this analysis paralysis or anything - something that cash flows like a hotel is more of a business than a passive investment, so I had to at least make sure I would profit a baseline amount. Throughout my analysis, I quickly learned that lack of due diligence can burn you much more quickly with commercial real estate, especially a hotel, compared to residential investment property.
I found a partner in one of my good old friends from my days in Navy training. I had seen on Facebook that he was a realtor in Honolulu, so I decided to reach out to see if he might be interested in helping me find property in CONUS. Turns out, he was already an active member here on BiggerPockets and owned several cash-flowing residential properties around the country. After talking for a LONG time, we decided to go 50/50 and dive into the hotel world together.
Not long after I discovered my first (and current) prospective deal; a franchise-flagged hotel in Illinois for $750k. In what is practically a ghost town, very small and underdeveloped, but at the intersection of two major highways. From the analytics I've seen, the majority of guests here are workers, truckers, or people traveling through. After speaking with the realtor and viewing relevant documentation such as tax returns and profit & loss statements, I became more confident that the deal was good.
The seller was formerly owner-operating the hotel before a disabling injury in 2018. Prior to that, he was making a net income of over $75k/yr after splitting with his partner. Following his injury, he elected to step away from having a hands-on role in the hotel, but also did not hire a professional hotel management company. As a result, the employees are running the hotel (into the ground). Time fraud is rampant, with the employees frequently logging 90+ hour weeks since no one is there to stop them. They are also not cleaning and maintaining the hotel, which has resulted in dirty and subpar rooms and a rodent problem.
Even with all these issues, the hotel grossed about $300k in sales this year with a $100k net profit (without loan payments since the current owner is free and clear). Additionally, the net profit is likely higher due to write offs like vehicle expenses, etc. The fact that the hotel is still cash flowing under these conditions makes me confident that it can easily be turned around, back to the days of 2016 when the hotel made a net income of well over $150k. I have zero experience in the hotel industry, but I had zero experience in real estate investing or financial freedom two months ago (other than just stuffing money in my 401(k)). I research and dive into these things like a madman.
Apparently part of the process involves a month(ish) long training provided by the hotel franchise, which involves everything from how to make the beds and fold the towels, to renovating and managing contractors and operating the computer booking system. This will happen before closing. As such, we decided to place an offer on the hotel for asking price ($750k) plus a $100k seller credit at closing to fund our reserves (to pay for unexpected expenses, initial payroll, etc).
Currently payroll expenses are almost $100k with 4 employees. I reached out to some of my close family members who have a history with housekeeping for hospitality properties and reached out to them with a deal: I will help you form your own LLC, then I will contract you to perform housekeeping and lobby duties. I will provide them with a room at the hotel to live in and wil pay the two of them a total of $1500/month. They were happy to accept. The contract nature of their employment also means I won't need to provide benefits (which is fine for them as they already receive government-funded health insurance coverage).
I am aware that dealing with family in this way can quickly become complicated, so part of our contract will be a periodic performance assessment to make sure they are doing a good job. Also, I am planning to make a clause in the contract that says that my partner can overstep our 50/50 partnership and fire them at any time if he so chooses due to their poor performance, damage to the hotel or any other reasonable reason. After the two of them plus myself, one more full time or two part time employees will be needed (budgeting about $30k/yr). Suddenly that $100k payroll expense is instantly reduced to under $50k, giving us a $150k/yr profit before loan payments, and that's before any improvements or overhauls in cleanliness, pest control and efficiency.
THe hotel also has a detached owner's home (3/2 I think) with a fenced-in yard for my dogs. It is an hour away from two larger towns where my wife can easily find ~$100k/yr work as a Nurse Practitioner. Our current budget is $6k/mo for minimum debt payments (including car payment and mortgage), $2k/mo for wants and needs, and $4k/mo to savings. Our monthly after-tax income is $5k from my wife, $5.5k for me, and $1.8k tax-free for military disability. Losing my $5.5k income will easily be replaced by selling our principal residence in New Mexico, eliminating $2.4k of monthly mortgage payment, plus income from the hotel if I can net at least $36k/yr after taxes, which seems more than reasonable given everything I outlined above.
The seller is still evaluating our offer but I feel confident that he will accept. The next big hurdle is financing. I am currently working with two commercial mortgage brokers and hoping to get an SBA 7(a) loan. Apparently loans with a down payment of less than 25% are unicorns in modern times, but my realtor seems confident that we can be approved for financing with 15% down even with my poor credit history. We will have to wait and see about that and what my options are; however, assuming 15% down, 6% APR and 25 year amortization gives my partner and I an annual net profit of at least $50k/yr each, which more than meets my $36k/yr standard to maintain my current income.
On top of that, I am budgeting 20% of asking as total cash out of pocket required. Since we are 50-50, that's roughly $75k each. Given my $75k in Roth 401(k) currently (roughly $65k after the 10% withdrawal penalty), I should be able to come up with my part without tapping into my home equity, giving me another $80k in liquid cash to put towards another hotel once I sell my home! I know this seems a bit backwards, but the second hotel will definitely be professionally managed unless it's very close geographically and my partner and I feel comfortable with me doing it. But that's in the future. Potentially 6 months from now I can add another basically $2k+/month cash flow with the second hotel, which means the financial freedom snowball will definitely be rolling then! I would love for my wife to also be financially free, and possibly us own 3 hotels in about a year and a half from closing on this one (March 2022 target) if all goes right. I'll definitely keep you all posted!
Thanks in advance for any comments or advice. I am well aware that I have no experience in this industry, and owner-operating a midsize franchise hotel seems a bit insane, but I am totally confident in my ability to adapt and learn. It will be my new job, after all!
