How do I make sure a hotel will stay profitable?

If I want to buy a hotel, what statistics and data can I look at to make sure it’s in an area that will stay profitable?

And what statistics and data do I look at to see what areas are growing and would be good areas to buy in?

“If?”

Pardon, if this sounds harsh, and I’m trying to shut you down. I’m not, but until you decide that you want to buy a hotel, anything offered here will be an exercise in group, mental masturbation. Sure, it’ll be fun, but in the end you won’t have what you need.

Otherwise, once you’ve made a decision to invest in hotels, you simply need to analyze the operating numbers from 100 of them for sale, and in the process, you’ll discover what’s important to know, and recognize trends and conditions that create an opportunity for you, or not.

But that only comes after you’ve committed to actually investing in a hotel.

I know this is blunt force feedback, but nobody loved me the way I’m loving you right now. So, stop procrastinating, and calling more ‘research’ progress toward buying a hotel. Instead start analyzing the operating numbers from 100 deals for sale. Eventually you’ll be able to recognize a profitable deal, and more importantly why it’s profitable, and you won’t need any more advice.

So, your next question is “Where do I find operating numbers?”

Start combing the internet, loopnet, cityfeet, and any other places that list commercial real estate for sale. Talk to commercial agents, sellers, brokers and actual hotel owners, and pick their brains. Other than that, the market conditions apply to any real estate. Employment, overall vacancy rates, population growth/decline, business activity, closing businesses, which can be found by simply observing what’s happening. Talk to people. Pay attention to local news, etc.

Hotel investment is not easy. Location is key in this line of business, tourist spots and populated areas can be a good place. Now if you already have the hotel and you want it to stay profitable then just give your clients the best possible treatment. Also promote the place, a hotel can only keep going if it constantly acquires customers.

Okay, I’ll rephrase. I’m going to buy a hotel. Hundreds of them in fact, but I have to start with one. I already know which ones will be most profitable based on loan terms I can qualify for and financial statements.

My question is, how do I find statistics on which areas are likely to grow and which may decline or not grow as fast. Is there anything else to look at other than population? I plan on building these hotels for decades and I want to know what could go wrong short of a nuclear disaster.

For example, there is a hotel in looking at with a NOI of $128,000/year last year. Is there any reason that this hotel will suddenly tank due to some unforeseen event that I could have predicted just looking at some statistics more carefully?

Anything other than population projections? Because I already have those.

OK, I feel better now.

You can buy demographic profiles and projections for various cities across the United States. However, there’s no guarantee of squat happening.

Donald Trump heavily invested in Casinos in Atlanta, and realized in short order that this was a losing proposition and bailed. However, he had all sorts of positive supportive data telling him this was a good move. And it turned into a rotting turkey loaf.

That said, if you stay with bread and butter projects, that appeal to middle class clients, you’ll be safer.

Meantime, there’s always ups and down in a given market. Plain old business activity can effect the bottom line of a hotel. Gas prices can effect sales.

So, one answer, as I mentioned earlier, is to look at the history of operating numbers of existing hotels. Rarely do things just ‘fall apart’ without notice. Things trend up, down and sideways over five years, or so. Look for trends.

Perhaps the trend is downward, and that’s why the seller is selling?

Or perhaps it’s finally going back up, and a seller wants to take advantage of the current wave, before things correct, and let some other sucker suffer a correction, after paying top dollar, and using the highest leverage imaginable. Just saying.

If you’re gonna build, this is another can of worms altogether. Are you planning to keep the projects, or build to suit?

Go to the planning department ask what’s being projected by the city. Are there lots of new corporate businesses coming into town? Are there new permits being pulled?

What about corporate lease ups?

That all said, assuming there is not an undue influence on the market, the markets change slowly enough that you can adjust. The easiest way to adjust is not starting out by over-leveraging. Leverage in an unstable, or changing market can be deadly. That’s not news, but…

The other thing I would look at is how much competition is there? Am I building where nobody else is? Why? Am I expecting a demographic shift in this new directions? How many years until I’m no longer on the growing edge of town, but the stagnating middle, or worse?

Again building is a completely different animal than investing for equity, or cash flow.

BTW, if there’s lot of new construction being planned for an area, and permits are being pulled, it’s better to be in front of that wave, than behind it.

OK, that’s really all I got. Good luck and start analyzing current operating data sheets, even if you’re a builder.

I didn’t mean to say build. I am not building anything. I am buying currently operating businesses.

I have found a lot of data on census.gov.

I think I am just being paranoid. For example, the population of Florida is going to grow. If I buy a hotel that has been existing and operating in Florida at a profit for years, I see no reason why it would suddenly stop.

Unless there is something I’m missing. Sure, there are ups and down on the scale of a few years, but if I’m looking at it as something I will hold for 50 years, I don’t see how I can go wrong short of a nuclear disaster. And even then, my insurance should cover it.

Hi,

I am one of the few guys on this forum with a lot of hotel experience. It surprises me your talking data and statistics as hotel success is really about location, traffic, occupancy, management and marketing. 

I don’t know and you don’t say what kind of real estate investing experience you have or whether you know anything about owning and managing hotels? It’s an interesting goal to own hundreds of them but if you can’t figure out how to buy the first one, you sure won’t buy 100 of them.

I want traffic to drive my purchase decision, I can have a hotel in a town of 50 people provided I have a major freeway with lot’s of traffic or a location with weekday or weekend events with big attendance numbers. In all actuality you can have a hotel where there is only seasonal traffic provided the demand for that season supports costs and provides the ability to service debt and provide cash flow.

Just because the seller hands you financial numbers does not mean they are correct. You can buy a perfect hotel and 6 months later drive it into the ground if you don’t know what your doing.

Now when I say location I mean an area which has traffic as I said above a hotel could be in a little town of 50 people but without traffic your doomed from the start, I would never buy a hotel in a back country area in the boonies because the odds of making enough revenue to pay the operating costs, service the debt and be able to make a cash flow are pretty slim!

Now traffic could be created by a location like the entrance to Disney World, a major city or town, along a high use freeway, outside of a resort area like a lake, national park, hiking area or vacation hot spot. If you choose places where there is a lot of people passing by or needing to be there your in the right spot.

If you buy a 100 room hotel and you multiply your rooms times 365 days this is your maximum occupancy per year or 100%, this 36,500 room nights is your maximum occupancy. Now if the current seller says I get roughly 15,000 room nights per year then your average occupancy is 41%, there is a lot of room for improvement as 41% is a lot of room for growth.

But if you buy a 40 room hotel with and the seller tells you, I get a little over 14,000 room nights per year; you have pretty much topped out of a possibility for growth as the room nights average 95.9%.

Now rate modeling is important as your second hotel example with a 95.9% room night average is probable priced lower than market average will allow. Rate modeling is setting a specific Friday, Saturday, Sunday and week day rate designed to achieve maximum room rates based on demand. Now rate modeling is also important around holidays and events as your room rates may be 200% of normal for a concert, show or exhibition.

Managing a hotel is hugely important but it involves financial projections, operations, maintenance, safety, security, risk management, etc. These management issues are complex and not something you can be educated for overnight.

Marketing your hotel is huge with social networking if you provide less than stellar service everyone will know and it’s important to use technology to provide ability to book and sell rooms. Your marketing is specific to your needs, location and type of hotel.

If your looking to purchase a flagged hotel make sure you read and understand the franchise agreement and what and how your expected to maintain and uphold standards, your ability to advertise and be a Best Western is only yours if you maintain their high standards.

By the way a hotel is a commercial property, your ability to buy and qualify is based on your ability to provide down payment, reserves and operating capital. Your looking at a property you state has a $128k NOI which probable has an asking price of around $1.5m. Make sure you understand and project accurate operating expense costs and calculate needs for manpower accurately with burden.

The main reason a hotel will tank is owners tend to treat hotels as piggy banks and rob the hotel of money which should be put back into improvements and maintenance, also not seeing the problems or ignoring things because you don’t or can’t face them or afford to fix them.

Also remember a hotel is a business and as much as you may like your manager, if he or she is not performing and the hotel is not operated effectively then the employee must go, this is primarily about customer service and the hotel service, cleanliness and amenities are up front in success or failure.

Your financial projections and modeling assessment is your basis for success or failure, keep in mind a Motel 6 will never be a Hilton so what you buy is what you’ll get, and your stuck with your decision once you own the property.

Condition of rooms predicates what you can get in rates so making a proper evaluation is key to understanding your upside and keep in mind that financial earnings equal value as your potential cash returns (Cap Rate) is how hotels are bought and sold.

Good luck,

              GR

OK, I could’ve just said that! Ha

GR, I didn’t realize your experience in this niche. Great feedback. You also reminded me why I have no interest in hotels or motels.

Great post.

Awesome post GR!

How can I verify that a hotels financial statements are accurate?

I have about 5 of them now. Would the seller really just lie?

And couldn’t I kind of verify them myself with simple math, just looking at how many rooms there are, the occupancy rate, etc?

Gold River,

How did your hotel owning experience go?

Did they turn a nice profit?

http://www.loopnet.com/xNet/MainSite/Listing/Profile/Profile.aspx?LID=19359073&SRID=6166178322&StepID=101

Here is a listing for a hotel at $670,000 that says it has a NOI of $116,386 for last year.

Is there any reason that I should not believe it’s numbers on this website?

Wow, you are new! j/k

Here’s a couple of rules to follow regarding sellers:

  1. Sellers lie.
  2. See rule one.

Meantime, you can verify the seller’s statement with three year’s of tax returns on the project. The bank will want verified numbers to support it’s financing decision as well. Otherwise, you’re confirming utility costs, labor costs, insurance, taxes, etc. etc.

Otherwise, all the numbers have to be confirmed. This is often a challenge, but it’s all part of your due diligence.

I don’t know how it is with hotels, but with apartments, I like to talk with the onsite manager by himself, and pick his brain about the operation of the property. There’s always some insight to be gained doing that. Sometimes it confirms that this person needs to be fired.

I have fired every manager I’ve inherited, AFTER I learned all I could from them about what was happening with the property.

It’s my experience that managers invariably get lazier and lazier, and feather their nests to the point they cost me money.

You won’t have this problem, I’m sure, but I inherited a ‘drug lord’ for an onsite manager. She was bizzy, bizzy getting kickbacks from the actual dealers in the building, who were free to operate, in return for ‘a little help.’

Talk about padding her nest. She also just happened to store old, non-running cars that clogged up the parking lot. She surrounded herself with a lackeys that served as protection and enforcement. Real nice.

Well, she had successfully managed the building until the occupancy was hovering at 25%. Which is why I was able to steal it from the frustrated, ignorant, money-losing, and incompetent owner.

Which brings me to say that if you can learn to recognize a mismanaged hotel, and negotiate a price accordingly, with an equally motivated seller, and apply profitable management to it, you could create a gold mine for yourself.

This is exactly what I’ve tried to do with every apartment purchase I’ve made.

Not all were mismanaged hell holes like I described, but the upsides are significant, when you can buy a property that can be re-positioned, and/or stabilized.

Anyway, hope that’s helpful.

It was. Thank you.

I love the part about firing the manager after picking all the information out of them. Sounds like my style as well.

Hi,

The Loopnet listing you show is a motel, not a hotel. I do not own any motels! The motel you show is as stated a 17.37 cap rate! Does that indicate anything about the condition and value? This is at very best a class d motel! Remodeling may make this a class c motel!

Take a look at this property you highlighted on Loopnet, what jumps out at you first thing? I guess I really should say what things jump out at you first thing? Are you intending to live on this property and manage / clean rooms as a Mom and Pop deal?

Do you notice anything about income? Expenses? NOI?

                   GR

No, I would not plan on living there.

I don’t really care if it’s a Class D, Class C, or whatever. All that matters to me is the numbers.

Do I notice anything about the numbers? I just read what they say.

What should I be noticing?

Well, yes you do care. There’s managing a “D” grade motel in the 'hood, where your main clientele has oddly the same first name of “Candy,” and rents rooms by the hour, and then there’s something else.

One requires your manager to keep an AK47 behind the counter, and the others simply have 911 on speed dial.

This failure to appreciate the difference,s is why you need to focus on analyzing 100 operating data sheets, so that you know what to expect simply by looking at noting the GSI, the number of units, the vacancy rate, the expenses, and immediately recognize the upside potential.

Hi,

Redstar your light is diminishing and burning out of the night sky! You have just shown your true colors and your obvious lack of experience.

First thing this motel is basically operating as an apartment complex right now, no it’s not monthly but weekly rooms are far from a true motel operation. Second I would probable doze this property for the lot as the structure is way out dated and according to the listing and it’s pictures it has a boat load of differed maintenance and rehab / remodel required.

Figure you should spend upwards of $15k per room, maybe more updating plumbing, electrical, HVAC (Wall Inserts) painting, carpet, furnishings, doors and door locks, new bath tub / shower inserts, toilets, sinks, lighting, TV’s, cable, internet, etc.

Then it will probable cost you $120k to re-do the parking lot, landscape, paint the exterior, put in duel pane windows, exterior lighting, etc. Then if you need signage figure another $10k to 15k and then if city sewer and water is now available I would advice getting hooked up to public services which will run you another $25k to 40k or more plus tap fee’s.

There is no way I would buy a public lodging facility on septic field systems as it is trouble in the making and means coffin tanks should be pumped out probable quarterly or bi yearly being used for multiple rooms and people. Just the idea of having to deal with it is un-appealing.

In a motel operation you need a manager and usually 3 additional front desk clerks, night auditors for 21 shifts a week. Now for this property you might get by with 3 people, but you can not legally expect 1 person to run your desk 24 hours a day, seven days a week.

You will need 3 full time house keepers and maybe 1 part time as a housekeeper is limited to a maximum of 12 rooms by law and you have to carry 7 days or 14 shifts and probable will need someone to come in and handle your wash room for your busy days.

You will need at least a part time maintenance person to fix and maintain your facility and equipment. So your going to need to employ at least the equivalent of 6 full time employees and a manager. The manager will cost you $35k per year and an onsite managers apartment is a bonus to you, not a deduction to him or her as most people don’t consider it a benefit to live on site and we don’t deduct pay from a manager that does live on site.

Then you will need 6 plus full time shifts of employees minimum, figure another $150k per year with burden even though your basically paying closer to minimum wages. So right now you have $185k just for employees and we have not turned the power on or connected phones, cable or internet.

By the time you include electric, cable, phones and internet figure another $2,500 per month or $30k for a year.

Now were up to $215k and we have not provided a single roll of toilet paper, a single box of Kleenex, or a bar of soap for our rooms or any detergent, cleaning supplies, replacement of towels, wash cloths, bed sheets, key cards, etc.

How much money is this thing making right now? What’s the potential upside?

Now we have yet to pay debt service for mortgage, property insurance, property taxes, liability insurance, payroll service, quarterly and yearly accounting, pest control services, termite control (If Applicable).

Now I believe this is over priced for what you get and I would check to see what the FMV of the lot is as the structures are probable worth $5k to 10K per unit at best.

And now you understand why I questioned income, operating expenses and NOI as there presenting a number to you which is not a motel!

So are you a rising star or a falling star? Only time will tell?

Good luck,

              GR

Hi,

I don't see any upside for this property at 20 rooms, even at 80% of available room nights average and a average rental rate of $60 per night after a remodel you will gross about $345k per year, but your total investment would be in the $1.1m range and debt service and cash on cash return requires a $92k per year payment before expenses. 

I already figure all your expenses outside of debt service cost you over $250k per year which is your break even point!

         GR

Between the time I wrote this post and now, I switched my strategy from investing in hotels to building and selling new houses in rural areas.

The ROI is about 5x as high building and selling.