All Forum Posts by: Shiv Patel

Happy to help. We've been investing in hotels for quite some time. 

GP meaning Gross Profit? So it really depends on the deal and sponsor. Typically we'd like to be at 35% NOI margins on our hotels. However, we focus on the limited service space. If your in full-service/resort properties, the margins will be around 25% or so because of the increase in overhead in F&B.

Happy to help you analyze it. For most hotels the balance sheet wont be of much value. Is this a new acquisition or are you being brought on as a partner? If your being brought on, then the BS will have some value to it. Typically you need to analyze the PnL and cross reference with the STR report. This how we analyze all our hotel deals to get a preliminary look to see if the deal is feasible. PM me if you want and Id be happy to take a look.

The cap rates/returns will be significantly higher compared to other asset classes due to the higher risk profile associated with them. The key difference is the management. Hotels require more extensive and hands on management compared to that of multifamily. Pros are honestly the higher returns compared to most property types. Cons are that you just have to be more involved. It is a misconception that hotels are extremely risky. The properties we own are limited service hotels which are easier to manage. Historically our hotels have done well even in recessions. For example, during the financial crisis, the average occupancy drop was only around 10%. Obviously the pandemic has been pretty rough, but everyone has been hurt here. The banks have been very friendly and willing to help as well so most hotels will be fine through this crisis. 

@Jack McWatters

Nothing near resort areas. We tend to stay away from seasonal locations such as this and the beach for a variety of reasons. One major issue is its seasonal. For example, in many beach markets or even ski areas, the majority of your business happens in 3 months. If in those 3 months, there is a hurricane hitting a major weekend like 4th of July, it will hurt your revenue badly. For ski areas, you may experience a hotter winter than expected which means not only will it not snow, but the resorts wont be able to produce fake snow either. Another issue as I mentioned above is finding employees. Employees need a stable job and they will not work in a place for only 3 months unless you pay well above market. These are the primary reasons why we avoid this. We tend to focus on highway markets or suburban areas close to cities with multiple demand drivers. 

Sure. We only own hotels so can share some insight. What you need to look at is RevPar (revenue per available room), this basically factors in your ADR and Occupancy. With resort hotels, they tend to be highly seasonal in areas like ski resorts and beaches. So essentially you want to see what a full year RevPar looks like. The best thing to do is get a STAR report which will let you analyze your comp set to see if you're underperforming the market. Utilities are typically 6-8% of room revenue, but since its in a ski area and possibly an older property, you're looking at a higher amount. Analyze historicals and factor in the need for a renovation, make sure it underwrites well at that value. One major factor to consider with these seasonal areas is finding employees. It can be extremely difficult to do so.

Yes it can, but it depends on the cost structure for the conversion. You'd have to get the asset for well below replacement cost. The market would also need to justify the rents you project. I have seen successful deals happen and have also seen several fail in this space as well. Part of the reason is that, you need to reconfigure the whole building from plumbing, walls, electrical, etc. Especially if the rooms don't have kitchens. This can be extremely pricey. I know of deals where a conversion happened and the investors effectively got a multifamily property at a 4% cap rate. This means they went through all that trouble and achieved poor results. They would have just been better of buying an existing multifamily deal. So my recommendation is to account for all the costs.

@Haseeb M.

Houston is a bit of a different story. That market has been hit particularly hard. In general, Texas, has truly been the wild west for new hotel construction. Dallas and Houston have seen some of the largest increases in supply and are continually adding. This is partly because land and construction costs are cheaper. However, the properties are not underwriting too well. Its a tough market over there. I personally know owners down there that did great 2009-2015 and now have handed back their keys to the lender.

The key to investing in hotels is to locate markets where the supply/demand factor is balanced.