It can be difficult to make money in hotels under the 5MM price point, I know that sounds like an arbitrary number however it's more or less true depending on area etc. Older economy hotels tend to trade at a multiple of revenue (say 3X) where midscale + branded assets trade based on cap rate. Older economy properties are generally owner operated and run very lean (based on necessity). You would be buying yourself a job rather than investing in an asset. You can have older economy properties (under 5MM) professionally managed however the numbers don't generally pencil out (main reason why they trade based on a multiple of revenue). Now many great hotel investors and operators started out running their first hotel however thats probably not the course I would take. A 100 room Hampton Inn in the Midwest that trades at 80k/key/9 cap and is professionally managed runs much more like an investment than a 100 room Baymont Inn that trades at 25k/key/revenue of 833k.
Hotels are very capital intensive and are very operator driven. Understanding how to work with the brands and the PIP (property improvement plan) process are extremely important to underwriting hotels. Beyond that understanding the operational side, ADR, & RevPar are essential even when not managing the property yourself. Understanding PIP costs goes beyond normal construction knowledge, it's important to develop a team you can trust within the industry. Because a PIP that costs 5k/key vs. 12k/key might not be very evident from someone looking in from the outside.
The lender and brand will require experience when buying or building a hotel asset. Depending on the brand they will require a hotel management group that is licensed to manage the specific brand. If you are acting as the sponsor they will also require strong financials, specific real estate experience, or both. Weak financials (even if you can raise the capital) and no experience will make it difficult to obtain a loan. SBA 504 loans are easier to obtain for investors starting out however they are full recourse. CMBS is very active in the space right and offers great rates/terms on non-recourse debt. You will likely be looking at 70% LTV with CMBS, however they will wrap in PIP costs. Most lenders will wrap in PIP costs as it's very common to hotel transactions.
I will also note that you are entering the space towards the upper end of the cycle. Most industry experts believe we have another strong 3 years however it's unclear what the future holds beyond this (on-going real estate debate I know). There's a lot of capital in the market right now and hotels are becoming somewhat of the hot real estate class (think multi-family 2-3 years ago). The issue with hotels which is different from other CRE asset classes like Office, Multi-family, etc, is additional supply can instantly affect your bottom line. If a new property opens up across the street from your hotel you will instantly feel the rate/occupancy effect unless the market can absorb the supply. With office/multi-family it takes years for additional supply to affect stable properties. Now there's a flip side to that, you can capture rate increases instantly as demand pushes where other asset classes can not. The hotel industry is performing extremely well right now, RevPar is up and it's from rate not occupancy, which means more dollars fall to the bottom line. However something has to give with so much supply coming on board over the next 12-24 months. The market can probably absorb the supply over that period however I'm more worried about 36 months down the road.
I've mentioned this in other posts however if you have a strong interest in the hotel space you need to either change your career path or actively become involved in the community (networking, industry events, news, etc). Hotels are not really something you can dabble in, the industry has a very small circle of players, and these people are generally solely focused on the industry. Many investors have been burned by the industry, it takes time to learn the operations, revenue management, construction, asset management, etc. And although there is a lot of money to be made in the industry there is also a lot of money to be lost.
We are a national hotel contractor specializing in major branded hotel renovations. We also invest in multi-families and have been trying to enter the hotel investment side for about two years. I've been very careful with entering the space, even though I'm somewhat well networked in the community and am able to control one piece of the transaction (construction). I think 2015 will be our year to enter however I'm extremely focused on mitigating risks for my team and our investors. It's an interesting time in the cycle but that doesn't mean opportunities don't exist.
Also I would definitely reach out to @Jimmy Klein as an experienced resource in the community. There are a handful of industry conferences throughout the year, it would be worthwhile to attend several if you are interested in the space. Also you might want to think about doing a JV deal with an experienced developer or investing passively in a deal to understand the financials/process. Good luck!
