@Joe Fairless thanks for the mention...
@Jeffrey Coleman
I've replied to several other threads with a similar topic. This is probably not the best platform to discuss hotel investing. There are very few members involved in the business and much of the industry is misunderstood among the masses. However that doesn't mean you can't be given solid advice especially as a new investor. It just means that most of the posters will probably push you away from hotels (& that's probably how my advice will sound as well).
I would be careful to take too much of what @Michael Siekerka states to heart. Although he did state some macro level facts (AHLA is a great source) it's very difficult to look at the industry from a macro level. All real estate investing is local & unless you are an institutional investor (I know of none on the site) I doubt the information would help you in making a decision. I wish it were that easy to understand at a high level however it's really not. Even multi-family macro stats don't mean much to a smaller investor. I think it's good to have an understanding of the overall macro outlook however I wouldn't use the information to underwrite a specific asset. Also on BP people love to create operating rules, like the 50% rule for multi-family operating expenses. This can somewhat work (top level) because most of the site is looking at C/B class multi-family properties with similar rents. However stating that 75% of revenue with be expensed for hotels can lead you in the wrong direction. It can be wildly, wildly different (both directions) based on so many factors including average daily rate (ADR), occupancy, & RevPar (revenue per available room, based on ADR & occupancy over a certain period of time). Also F&B (food & beverage) revenue can skew this greatly. Believe it or not most hotel restaurants and bars don't make money.
So back to your original question. Hotels are much more operator driven than multi-family properties. As Joel mentioned they run a cycle with the economy that generally lasts 7 years (give or take). We are heading to the top of the cycle & the market is extremely hot (industry experts expect 2-3 years of additional growth). RevPar is up year over year and in 2014 the increase came more from ADR than occupancy (it started with occupancy in the cycle). Which means more money flows to the bottom line (higher rate with same occupancy means not adding variable costs with additional guests). Although many CRE professionals specialize you will find that hotel professionals generally have one focus...hotels. Many in the industry came from top hotel schools, Cornell, Michigan State, NYC, Houston Conrad, UNLV etc. Although it's a large dollar amount industry it's rather small based on the number of players in the industry. Here are a few comparisons of hotels vs. multi-families that I would make...
- The industry has higher barriers to entry compared to small multi-family investment real estate. If you want to buy a motel for 1-2MM be ready to run the entire operation yourself (day & night). Hiring a professional management company & full time employees will not be in the budget at this level. Hopefully you can hustle to buy a few more properties, get the expertise to build a management company, & eventually buy an asset that will make you money (& not give you a job). However those assets generally start at 5MM (& can be professionally managed with a profit).
- Hotels are extremely operator driven and success of the property can vary by operator. Hotels have the business component which adds risk, that's why select service/limited service properties are highly sought after right now. More room revenue & less everything else. Multi-family is also operator driven however a lot less than hotels. If good assets are purchased and maintained you have a much more durable income stream than hotels. Hence market perceived risk is higher.
- Financing is different as mentioned by Michael however it can vary greatly based on several factors. Branded properties are easier to finance vs. independents. Hotel brands will generally require a new investor to hire an approved management company. Renovations can recur more often than multi-families & are capital intensive. They are also dictated by the brand. Generally you need to be more liquid to purchase a hotel asset compared to a multi-family property.
- Cap rates are 100-200 basis points higher than similar grade multi-family properties because of the perceived risk. However the debt & equity markets price the risk as well (higher interest rates, lower LTV's etc).
- STR (Smith Travel Research) aids in comparing pricing based on your comp set. Most branded properties are required to submit ADR and occupancy on a regular basis to STR. This allows STR to create a STAR report giving buyers, sellers, and revenue managers access to accurate real time and historic data. This is vital when developing or investing in an existing hotel asset.
- Hotels are rapidly changing, & although multi-family is as well, not quite like hotels. You might find yourself in a property that is obsolete in 10 years (if you invest in an older economy property). What do you do? Repurpose? Sure that's a possibility...however with multi-families generally a large renovation will solve much of your problems if you're in a solid location (if leverage isn't an issue).
- Hotels are something that many small investors dedicate their lives to, learning, networking, & investing in the industry. Multi-family investors can own a complex here and there with a lot less input & dedication (still hard work). However there are plenty of small investors that invest in private placements/syndications for hotel deals. There are also smaller investors that own a few 5-10MM smaller hotel properties (select service) and have a solid management company. These are generally high net worth investors & busy professionals. As Bill mentioned you can also invest in a REIT.
Although there are many hotel operators & investors that are killing it right now in the marketplace many have made it through the storm (many didn't make it). Good operators can return huge profits to investors, however that also comes with risk. If the asset class interests you I would consider learning more about the industry.
I'm in the hotel industry on the construction side. My knowledge has came from wanting to step over to the investment side of hotels along with my strong network in the industry. I've been carefully planning the steps & I'm hoping 2015 is the year we can develop an extended stay or limited service property. We own & invest in multi-family properties. I understand multi-family complexes & I really believe in the sector as a whole. My decision to jump over to hotels isn't necessarily based on return. It's also a sector a believe in & truly enjoy (+ we have experience in the sector). Returns & profits can be huge, however so can losses. It comes down to your goals, do you want to make real estate your business & career? Or do you just want to invest in it along the way? Those are questions that will help you answer which direction to choose in real estate. Good luck!
