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- [00:00]
Ashley Kerr
Do you think that you need millions to own a hotel? Today's guest used an SBA loan and a few friends to buy a 75 room property and now manages a portfolio of brands like Hilton and Marriott. If you've ever thought hotels were out of reach for rookie investors, this episode is your blueprint.
- [00:21]
Tony J. Robinson
That's right. Today's guest is a hotel investor and operator who's breaking down exactly how a rookie can go from a single family home or duplex to a full blown hotel entrepreneur.
- [00:37]
Ashley Kerr
This is the Real Estate Rookie podcast. I'm Ashley Kerr.
- [00:40]
Tony J. Robinson
And I'm Tony J. Robinson. And let's give a big warm welcome to Sujay Mehta. Sujay, thank you for joining us today. Brother.
- [00:46]
Sujay Mehta
Hey, thank you both so much. It's an honor and a pleasure to be here. Obviously, you know, bigger pockets has touched so many lives, so the pleasure is all mine.
- [00:56]
Ashley Kerr
Well, I want to start off with what are some of the biggest misconceptions that a rookie listening might have about hotel investing?
- [01:03]
Sujay Mehta
Yeah, I mean, first of all, most people traveling, right? Like how many of us have seen a hotel while driving down the road, driving down a highway? Most of them may have been like the Marriotts or the Hiltons of the world. Most people think Paris Hilton just owns half these hotels, right? And that's a huge misconception. It's not these billion dollar companies or you know, Wall street companies that own these hotels, but actually a lot of them are franchise. And so we actually as franchisees own a lot of these, you know, Holiday Hampton Inns, Fairfield Inns, and these are owned by, by small business owners just like us. And you know, now the big trend that's happening in the world is going into this like boutique hotel space, right? So as these hotels also start popping up, you know, I think it's, it's a big misconception that like a lot of these big players own these hotels. It's a lot of small business owners.
- [01:57]
Ashley Kerr
One of my business partners, he's like, I'm buying five Subways. And I was like, how is that possible? He was like 28 at the time. I'm like, we're not making that much money off of our properties. And I learned the whole franchise model and like I was is really eye opening to me how a lot of these big name brands are just small mom and pop people or young adults at 28 owning some of these businesses.
- [02:23]
Sujay Mehta
Yeah, absolutely. And it's, it's cool that you brought that up. You know, Subways, Taco Bell's, Burger Kings, you know, fast food restaurants, as well as even some of like the larger, like yoga studios that you guys may have heard of or like fitness studios. A lot of these are franchise and that's why every location operates a little bit differently. Prices may also, you know, differ from place to place, how the operations are, how the expectations are. But what these franchises do is they try to control the expectations and set a certain standard for every operator. Right. So I think, I think that's a huge eye opener, right, That a lot of these, you know, institutions or services that we use every single day are owned by, you know, our friends or family or you know, coworkers, whatever it may be.
- [03:09]
Tony J. Robinson
It's really interesting and I appreciate you sharing that the franchise model has been a big part of your scale because to your point, I don't think a lot of rookies recognize that. But I guess just if you can give us sujay, like the 30,000 foot view of how a franchise hotel is maybe different than a hotel that you just kind of build on your own. Like, like what are the, the key differences between those two different types of hotels?
- [03:35]
Sujay Mehta
Yeah, absolutely. So franchises in general, right? So franchises, the way they work is typically there's going to be some sort of royalty payment that you're going to pay every month. And usually the royalty payment is based on your revenue. Right. So let's say for example, I do a hundred thousand dollars in revenue in the month of January. On February 15, my re, my statement will come out and I will owe, if it's 8%, then 8% of that hundred thousand dollars as my royalty fee that will go to Subway or Hilton or IHE or Marriott, whoever it may be. Right. And then there's some, you know, set costs that will be per room basis or you know, be broken up into different ways as well. And some of those things are gonna be franchise dependent. So that's how you know, a royalty payment for the franchise works in general. Now for hotel specific, we actually own the land, we own the real estate, we own the operations, the employees are our liability. We have the loan and we guarantee the loan. Right. The only thing that the brand does is they put their name up on the, up on the hotel and create this huge booking platform for us and this loyalty customer base that drives so many customers to our hotel. The first hotel that we ever open, it was a new build property. It's called the Avid Hotel. Nobody had heard about it. We were one of the first 10 in the entire world to open up an Avid Hotel. It's a sister brand of Holiday Inn Express, so within the same umbrella of IHG. So if any of you guys have heard of IHE or loyalty customers, we opened up, I think at 3pm we got our certificate of occupancy, and at 5pm we already had bookings. So no Instagram, no website. Like, the brand does all of that for us. And it's such a, like a mammoth, right, in the industry that they're able to drive customers, I mean, every single day to our property. And so, you know, again, that kind of de risks us being a franchisee of these hotels in a lot of cases.
- [05:36]
Ashley Kerr
So, okay, so I think this has probably intrigued everyone's interest, but there's still the big price tag, the capital needed to invest. So we what does this look like for a rookie investor? If they actually do want to go and buy a hotel, how do they pay for it?
- [05:51]
Sujay Mehta
Yeah, absolutely. It's a great question. So multiple ways to do it, right? And again, I talked about branded hotels, but there's also independent or boutique hotels. And so hotels for me is it's, it's a vessel, right? You invest in this vessel and then you can make it your own. Right. And so the number one thing that I always say is like, you know, we have to underwrite, figure out what the price point is. So I'll give an example. Let's say we're buying a Hotel for $1.5 million. Okay. And I give that example because we're actually closing on one tomorrow, which is 1.5.
- [06:24]
Ashley Kerr
Congratulations.
- [06:25]
Sujay Mehta
Yeah, thank you. Thank you. So great for rookies, right? So that's why I give this, give this example. So $1.5 million hotel. We're going to do $500,000 of renovation at the hotel. So, you know, total price is going to be 2 million, plus some fees and costs and whatnot. So let's say 2.2. Right? 2.2 million is, is the total price tag for this hotel. So what is different about investing in commercial real estate in general, moving away from residential real estate is you have so many more lending options and products that are available to us that aren't available in the residential world. So a lot of Airbnb investors or single family home investors who are moving into this commercial real estate space, you really need to get, you know, acclimated and familiar with all these different lending products. And so one of them is an SBA loan. So Small Business Administration loan. And hotels are different from other real estate asset classes because it's a business plus real estate. Right? And so it being a business unlocks this additional, like, product that's available for us in the lending world. And now, you know, a loan that's backed by the government is available for businesses, is also available for my real estate purchase, right? So you can get an SBA loan on this kind of property. The other thing that we use pretty often is community banks or regional banks. So if I'm investing in, you know, I'm from Columbus, Ohio, so I'm going to say Columbus, Ohio. I'm going to go to Google Maps and I'm going to type in local banks in Columbus, Ohio, and it's going to spit out a list of banks that are, you know, North Valley bank, the Community Bank, First Financial bank, these banks that you may not have heard of, right? It's not your typical Wells Fargo, Chase, bank of America, but these small banks are very eager to invest in the community. They're looking for these types of loans to, to give out to, to good small business owners who are, you know, who are aggressive, are looking to get their first property or second property because, you know, they don't have that deal flow that a Chase or a Wells Fargo has, right? So they're eager to find rookie investors and they'll help you, you know, lock down your property, right? So that's a conventional loan. So we have SBA loans, We have conventional loans. And then you can use private capital, right? So you can leverage friends and family. You could do syndications. You can also do creative financing, which is seller finance, falls in that category. So you can negotiate with a lot of these hotel owners who have owned these assets for, you know, 15 years, 20 years, and they're just tired. They don't want to do the renovation that's needed to take the revenue from, you know, 300,000 to 600,000, and they just don't have the bandwidth to do it anymore. And they're willing to, to sell or carry this hotel for you. So that way you can lock it down without any other loans and you can negotiate an interest rate with them. And they're happy because they get, you know, they get an annuity for the next 10 years, 15 years, even though they retired. They get this, you know, passive income check that comes in every single year. So there's so many different products that are available for rookie investors when getting into the hotel space. It's just a matter of, you know, figuring out what hotel you're investing in and creating a business plan and creating, like a plan of attack, right? Like what makes the most sense what's my plan A? What's my plan B? What's my plan C? And every single one of these products are going to have pros and cons to them as well.
- [10:00]
Ashley Kerr
Tony, for your hotel that you did, did you use any of these ways to fund that property?
- [10:06]
Tony J. Robinson
Yeah, I mean, Susie, you bring up a really good point about the seller financing, because that's exactly how we funded our first hotel acquisition as well. There were a brother and sister, siblings who inherited this property from a. A parent who had passed away that tried to run into themselves and really enjoy it, wanted out. And seller financing was the best route for them because like you said, they got this nice fixed payment every single month. And you know, it was a win win for both of us. And we got great terms. You know, I think it's a seven year note. First two years were interest only. It was a smaller down payment than what we would have gotten had we gone to a bank. So. So it all worked out. And I know you said you're closing on a deal tomorrow. How did you structure the, the, the funds for that deal?
- [10:47]
Sujay Mehta
Yeah, so that's a. So that hotel that we're closing tomorrow, we are actually going to use a conventional loan. We originally reached out to one of the best brokers in the game, right? And he got us, you know, he got us a good financing option, but it was a 10% interest rate. And we were, you know, we were going to get construction financing as well as, you know, financing to, to buy the property. But what we started doing is obviously, you know, like, this is the secret, right? Don't stop, don't stop. Once you have an option, you know, that doesn't mean it's the best option. Keep going. Right. So we dug into it more again. We did the Google Maps thing and we started searching local community banks in the area, in the market. This one's in North Carolina. And so we started looking and we found this local bank there that was very excited to invest with us. And we started talking to them and they gave us a 7% interest rate. Interest rate. And they're going to fund a part of the renovation as well. And our fees are a lot less with this community bank than it would be if you're going through a broker. So we ended up pivoting and we ended up getting this loan through this conventional loan through the small community bank. And so they actually funded 80% of our purchase. And then the 20% that was left, we syndicated it so. Well, actually, we started with the syndication process, found a large Check writer, which. Tony, I know we've talked about that in the past as well. We actually JVD it. So we got a couple investors. I think we have three investors total, and one of them is a large check writer. So we were able to, you know, fund most of the down payment through that one investor. And we were able to lock down that hotel with a jv. Right. So JV brings the equity, and then the conventional bank brings the, the primary loan on the, on the property.
- [12:37]
Ashley Kerr
Can you explain what a joint venture is and why it's actually a, a better, easier method for a rookie investor to follow than doing a syndication to raise that extra capital?
- [12:48]
Sujay Mehta
Absolutely. Great question. And so there's two ways to kind of like, raise capital. I'm sure there's a lot more, but two main ways. So one is joint venture, one is syndication. So joint venture is, is cheaper from like a legal perspective. Right. You don't have to, you know, create the ppm, the subscription agreements, and it's, it's more like an operating agreement that you create with your part. Right. Again, I say partners, not investors. Right. Because when you do a joint venture, there are certain boxes that you have to check. Right. So these people have to be a partner with you in the business. So they have to have some roles and responsibilities. They have to have some rights when it comes to big operational decisions or big business decisions. So, like, for an example, when we refinance or when we sell, you know, they, they have to have a vote or they have to have a say in that process. Right. So there's certain boxes that we have to check legally in order for it to be a joint venture, I would definitely consult a lawyer. You know, I know we all have great recommendations. So feel free to reach out to me anytime, and I'll point you in the right direction for, for our SEC attorney that we use to make sure we're compliant. But yeah, so that's kind of the pros of a joint venture. It's a lot quicker. You can, you can reach out to your investors, you can collect the money, you can have this operating agreement, they become partners with you in the business. And what a syndication does, though, the pros of a syndication is, you know, you're able to blast it online, you're able to, you know, send out the offering memorandum to your investors. It could be people that you've never met before. You're able to utilize social media, and you can have people invest 50,000, 100,000, and you could have a mix of accredited investors and unaccredited investors as well in a syndication. So there's pros and cons to both. But obviously, if you have, you know, the network and the contacts, a JV is the path of least resistance, for sure.
- [14:48]
Tony J. Robinson
And, Sujay, that's exactly how we took down our first hotel as well, was through a joint venture. And like you said, our partners who brought the capital have voting rights. They can fire me as the property manager. You know, they. You know, they can decide when we sell, when we finance. So, yeah, there's some things we worked in there to. To make sure that we checked all those boxes. One more question, just, like, on the general state of investing, I want to switch gears a little bit after that, but why do you think right now is the golden time for rookies to get into hotel investing?
- [15:20]
Sujay Mehta
Oh, dude, that is such a good question, man. You know, to be honest, very seldomly in our life do we get an opportunity to be ahead of the curve. You know, if I want to get into the Airbnb space right now, there's definitely opportunities out there, right? I mean, we just stayed in one a couple weeks ago, and I was, you know, because I booked it, and we're entrepreneurs. I'm doing the math, running the numbers, and I'm like, dude, this place cranks, right? Like, it's probably cash flowing like crazy. So there's definitely opportunities, but we all know that space is crowded, right? It's saturated. You're competing with families who are looking for their primary residence. You're looking for families who are, like, I love the, you know, the landscaping here. So I want to overpay for this property, right? Like, you're competing with these, like, emotional metrics, and even when you sell it, you're. You're. Again, you're selling on emotional metrics. But right now with hotels, a lot of people don't know about them, right? A lot of people don't know how to get into them. There's, you know, again, there's like, we call them the Patel cartel, right? Like, all these, like, old Indian families who have owned hotels for a long time. And I can joke about it because my wife, Patel, before we got married, but we call them the Patel Cartel. But, like, they've owned these properties, and it's been the best kept secret for years, right? And, like, finally, the cat's out of the bag, right? You know, we're all. We're all talking about it, but really, to be honest, it's probably all over your feed because you're looking into it, But. But for People who aren't, they don't even know that you can invest into hotels. So very seldomly are we able to get in to a trend before it blows up. And if you're listening to this, you're already ahead of the curve, right? So that's 1, 2. Interest rates are high. So interest rates are really high right now when you're underwriting to factor in debt service that's not interest only is very difficult when investing in multifamily assets, self storage assets, all these passive real estate asset classes that people want to invest into, it's really difficult to underwrite and to make them make sense. But hotels, I say it again, it's real estate plus business. And that business portion of it allows you to flow so much cash flow to the bottom line that you're not only able to meet your debt service requirements, but you're also able to get creative, maybe have, you know, like a bridge debt or a mez debt or, you know, a seller carry that you've negotiated on top and you're able to syndicate it, pay off the investors or pay off your partners and still have money to take home, right? And that is all because of the high cash flow that exists in hotels. And while there's a lot of investors that are scared right now that are sitting on the sidelines, this is an opportunity where if we're able to find a hotel that makes sense right now and if we can refinance in a year or two, dude, it's just gonna crank. It's gonna cash flow like crazy, right? So, you know, again, and I can go on and on and on, but you know, there's just so much you can do. And you know, hotels are a vessel. You can create additional income streams. You know, we, there's a property that we have an accepted LOI on. It's on 50 acres of land. It's a boutique property. They, they actually have horse buggies that go through the land and go through trails and they charge for this, right? So they charge $150 for a horse buggy ride and they, they pay the guy who actually drives the horse buggy like $75 per ride, right? Like that's an additional income stream. You already have the customers staying at your property. You create all these experiences and you're able to upcharge for them and, and drive more cash flow. So much, you can do so much value add.
- [19:06]
Ashley Kerr
I really hope my partner does not listen to this episode because we have a property that we just turned into short term rental and Right down the road is this horse farm where they have the big Clyde style horses and then they have like the big like buggy chalet thing. I can't think of what it's called, but pulled behind it and you can go for the like the wagon rides and stuff. And he's like, we should stop and talk to the guy, tell him, you know, we'll book people, we'll split the profits, all this stuff. I'm like, I'm pretty sure this is like a hobby farm. Like this is not like something you want to do as a. But he has like all these ideas in his head and now this is just gonna solidify like I told you, Ashley, we should go and do these horse and buggy rides.
- [19:46]
Sujay Mehta
Oh, I hope he's listening. Cause that's awesome. That's a great idea. I love it.
- [19:50]
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- [21:50]
Ashley Kerr
Before we continue with the show break though, I do want to talk about my first rental. I thought collecting rent would be the hardest part and I was actually wrong. The admin never stops. The expenses, the receipts, tax forms, tenant issues. I didn't expect the behind the scenes work to take up so much of my time and help headspace. Every night was another round of paperwork and I started thinking, if it's like this one, how do people handle 5 or 10? Baselane helped me get out of the weeds. It's the official banking platform of Biggerpockets that handles the whole backend for me. Expense tracking, financial reporting, rent collection, even tenant screening. It's the first time I've felt in control. And now that I'm not drowning in admin, I finally see how my real estate business business can scale. So do yourself a favor. Sign up@baselane.com BPtoday and get a 100 bonus. All right, if you've been nodding along and thinking I want in, here's where Sujay takes off the gloves and gives you the step by step roadmap to make that first hotel a reality. Okay, so let's start with step one. What kind of hotel should a rookie look for and what kind of should they avoid? And out of my own personal curiosity, so far in this podcast, I've been wanting to ask the question, should you go for a seasonal hotel where it's like at a lake, but it's very seasonal, or is that a bad thing to do? So let's start right there with my curiosity question. Then you can expand to all the other types of hotels.
- [23:25]
Sujay Mehta
Yeah, perks of being the host of the show, right? You get to ask your questions live. So I love it. No, but I mean, great question. So you know, for me we, you know, unfortunately I live in Columbus, Ohio and, and we do have winters here, right. But we also have falls and fall and spring and summer. You know, obviously, like I hate the cold, right? So I'd love to be in Florida, but a lot of our properties are seasonal. Right. When we say seasonal though, it doesn't have to be all or nothing. Right. And that's one of the greatest things about hotels as well is, you know, unlike Airbnbs, you're not running at a, at 100 or a 0 occupancy. You can run at a 40% occupancy, a 50 occupancy. So what, rather than deciding if we should go seasonal or evergreen. Right. What I look at is I look at the financials. So what the first thing I want to do is look at, you know, past financials. I want to look at the last three years and as long as the, the numbers make sense and, and you know, the property is maybe cash flowing or breaking even and there's a significant upside, I'm all in on that. Right. And that we look at that from like a T12 perspective. So for those of you who don't know, T12 is a trailing twelve month, you know, cycle that we look at. So if I'm looking in April, I'm looking at April 2025 to April 2024. That would be the trailing twelve month for this hotel. Right. And so, so within a 12 month period, you're going to have winters, you're going to have summers, you're going to have springs, you're going to have falls. Right. So all the seasons are kind of aggregated within this one financial statement that you can look at. And what you want to look at is like the overall cash flow of the property. Right. And then as a hotel operator, it's my duty to be able to manage the cash flow during the slow season or during the, you know, during the high season. I don't want to distribute all my money just because we're doing really well in the summer. I want to make sure I have some for the winter or have some when my property tax is due. Right. So these are the types of business decisions that we have to make when operating a hotel.
- [25:34]
Tony J. Robinson
I think the one for me, Sujay, is, is what about like franchise versus independent room size? Right? Like, does it make sense for a rookie to go after a 300 room hotel or is there like a sweet spot? What have you found is like the, the ideal hotel type in that sense?
- [25:50]
Sujay Mehta
Yeah, yeah, no, definitely. Great question. So again, same thing. Like, you know, with boutique hotels what you get is, you know, you have full flexibility, you're able to do whatever you want, however you want it. I might be a great interior designer and so a boutique hotel might be a great investment for me because I know that I can take this old tired motel and put a little bit of, you Know, vibrancy and color and character into the rooms and turn it into an experience, right? And, and so like that's going to be right up my alley. But for someone like me who's terrible with design, right? Like my, my wife will be the first one to raise her hand if, if you ask her. But, but I'm terrible with design, right? So I love like these franchise hotels because it's hotel in a box. They give you the SOPs, they give you the expectations, they tell you, you know, how the rooms are supposed to look, where to order it from. They already have negotiated rates with the vendors and it, it's a hotel in a, have to then get the employees, train the employees and do the, the hands on the operations type stuff, right. And so, you know, the first thing that we need to do is we need to understand our skill set and we need to understand who we are as investors, as operators and what is the best fit for me. So do a little bit of a study difference between branded and boutique. I think from a price point you can find both of these assets, both, both of these types of assets within the price range that you're looking for, right? So my first acquisition was four and a half million dollars. So not huge, but not tiny either. But that was kind of my, my price point and it happened to be a Best Western, right? So you can look branded or you can look boutique. To answer your question in terms of size, do not make the mistake of going for a 300 room property. Right. Also, you know, be very conscious or just mindful when looking. Oh, like this has a full spa and a full restaurant. Like those things look nice and, and they're pretty to put on Instagram and the flyer looks good. But remember, like when you're operating a full service restaurant, that's a whole nother business that you're running in addition to the hotel, right? So what I would say is, is focus on a limited service hotel, right? Something that offers a good night's stay, maybe has, you know, a nice common area that you can create, maybe has some, you know, additional excursions that you can, you know, like we talked about, draw additional revenue from. But if you can avoid a full service restaurant at the property, you know, that, that might not be a bad idea when you're starting out. So look at those limited service hotels and I would say to kind of stay under 100 rooms. Remember the whole game here is, is being able to scale, right? So multiple units within one roof. So if you can get, you know, a 40 unit or a 50 unit. That's probably going to be better from the standpoint of like economies of scale than getting a seven unit boutique hotel. Right. A ten unit boutique hotel. So I typically like to say, you know, kind of aim between that 20 to 80 range when looking at, you know, what is the, the buy box that I should be looking at.
- [29:10]
Tony J. Robinson
Yeah. And Sujay, you, you hit on a point that like really drew me into the commercial side was the economies of scale. You know, we, we, we have just under 30 single family Airbnbs across a few different markets. And it's kind of a pain in the ass, you know, from like a management perspective to have so many different roofs and, and cleaners and, and maintenance and this and that and the other. And I have these operational meetings with my team and like, I'll have the hotel team and like our single family team on the same call. And the hotel is just so much easier, like when I'm like hearing it back to back, like all the issues on the single family side versus the issues on the hotel side and the, the hotel is just so much easier. So that, that is a big draw for me is that like, you get these economies of scale where it's one roof, it's, it's one team, you know, and they're all, they're all kind of working together now. Sujay, what about on the underwriting, like the analysis side? I think part of what makes single family, even small, multifamily, so accessible for rookies is that the underwriting is so easy. But you know, for us, like the hotel that we purchased, we actually hired someone to help us build this underwriting tool because I didn't have one, you know, and it's like I'm not even sure all the different elements that should go into it. So what if I'm a rookie and say I want to find this like, you know, 30 room independent hotel. What am I looking at from an underwriting perspective to evaluate whether or not it's actually a good deal?
- [30:34]
Sujay Mehta
Yeah, no, great question. So there's two things that we want to look at for underwriting, and I love that you leverage somebody who, who may be, maybe better have the time to, to dig into it. Right. Because I'm sure you could do it if you dug into it enough. But someone who has that experience going into it. But two things that I typically look at when I'm underwriting a deal. Right. So one is as is like, let's say worst case scenario, I'm not able to increase the revenue at all not able to increase the noi at all. You know, what is this property worth? Right. As is. So I'll do an underwriting and I'll do evaluation. Really there's three main ways to underwrite a hotel or come up with a value for a hotel. Right. And so one is using revenue multiplier. Right. So we want to look at what the revenue is and depending on your market, your market will have kind of like a standard revenue multiplier. So over here in like the, the Midwest, the East coast, revenue multipliers somewhere between three and five. You know, typically it's about around four. If it's a brand new hotel, that revenue multiplier is going to be higher, increasing the value of the hotel. If it's an old, tired, beat up hotel with a lot of maintenance issues, you know, the revenue multiplier is going to be lower. Right, Right. So again, this is a rule of thumb. It doesn't, it's not applicable to every single hotel, but it's a, it's a good start. Right. So let's say a four times revenue multiplier. So my first acquisition I ever did, it did about $1.5 million in revenue. It was a little bit less than that, but we'll use 1.5 for whole numbers. So $1.5 million in revenue. I did a revenue multiplier and I actually did a four times revenue multiplier on the property. Property. So four times revenue multiplier would give me a six million dollar valuation for that property. Right. So like very easy back of the envelope math that you can do looking at that property. Right. The second way to underwrite the property is using cap rates. Right. So similar to revenue multiplier, the cap rate will also adjust depending on the condition of the property. You know, the location is the land worth more. That will usually compress the cap rate to bring it lower. So that increases the value. Right. So what I do is, so this property had about, I want to say like 350 to $400,000 of NOI. Right. So let's use 500,000 for whole numbers. So if it has a $500,000 NOI, and I'm looking at this property from, you know, somewhere between an 8 to a 10% cap rate as is. So let's use 10% because it's easy math, that gives me a value of about $4 million. Right. Based on the NOI for the property. So again I use revenue multiplier. So that gave me $6 million. I use the cap rate method. Which gave me a value of about $4 million. So, you know, I know that the value of that property should fall somewhere in between, right. As a buyer, I'm usually going to go with the one that gives me the lowest value, right? So when I'm buying a hotel and I'm submitting Lois or offers on these properties, I want to try to use whatever's in my favor, right? So for this particular property, I started negotiating at $4 million for the property. So the third method that we use to evaluate a property is a per key basis, right? So when I'm looking to buy a property, there could be a property that has, you know, it does crazy revenue and it does crazy high noi. But, you know, that doesn't mean that I want to pay, you know, $10 million for this 10 room property, because that's a million dollars per room, right. And I could probably build that hotel if I built it ground up for $5 million or $4 million. Right. So the last method that we use to kind of check our math is a per key basis. And I want to understand how much I'm paying per key. And so in the Midwest, typically, you know, I want to be under $200,000 a key, you know, depending on, you know, how many rooms there are, that number will drop, right? So if it's, if it's a hundred room property, you know, I want to be closer to like 120 or $130,000 per key. Because if I were to go out and rebuild that property, I could probably build it for around that number. Right. Because of the kind of economies of scale. So three main ways that we use these, like checks and balances to underwrite a hotel back of the envelope. And then I think the next step from there is to then utilize these, you know, calculators and underwriting tools that you can use to plug in, like, okay, this is how it is. This is what the property is worth as is. Now if I, you know, add that character and spunk to the rooms and do some like, design value add, if I'm able to increase the efficiency of the, of the property and create some like, forced appreciation through noi or cash flow, if I'm able to add more rooms, right? Like, what does that look like? Right. Like, does that give me the home run that I want, even if I buy it at like a fair market value? So that's typically how I look at these deals. Tools that I use to underwrite these hotels is CoStar, right? So CoStar is a great tool Costar also owns another company called str. So Star Reports is what we call it in the industry. So Star Reports will give us kind of like what the ADR or the average daily rate for these rooms, like how much they're selling for on a nightly basis. What is the occupancy in the market? Right. For hotels that are within this, you know, let's say like the Columbus, Ohio market, how much are the, you know, what is the occupancy for the hotels in this market? Right. So it will kind of give me these metrics to be able to, to like run the math properly and say, okay, like the potential is here, it's underperforming. Right. So we also use these tools to help us underwrite and, and, and then, yeah, like the last thing I would say is, you know, go down and, and do rate shops, right? Like make phone calls to hotels, go visit them, go talk to like these are 24 7, there's staff at the property. So you know, go, go to the bar, go grab a coffee if they have a coffee shop or, or book a room, right? Book a room, talk to the staff, see, you know, see how much they're selling the rooms for. Ask them if it's busy, ask them, you know, like, do you guys have enough rooms at this property when it gets busy, right? They may say like oh no, like we don't have enough rooms. Like so many times we have to turn people away. That tells you that I may be able to add more rooms to that property or another property that I'm looking at in the market. So ask questions. I mean oftentimes times we, we rely on the computer and spreadsheets and all these things. But you have to go to the market, you have to, you know, be at the property because you know, that's what's going to give you the edge compared to other investors and allow you to kind of make that leap, right? So I think that's very important in the underwriting process. Sorry, I might have gone a little too deep in there.
- [37:25]
Ashley Kerr
No, that was great and I really liked how you highlighted that. Go to the market because oftentimes as investors we get caught in the, the, oh, you got to be hands off. You got to be a passive investor investing out of state. You can do that without ever visiting the market. But I think it's a great reminder that it's not a bad thing to go to the market to do some hands on research. Especially when you are making a million dollar investment or more. It's worth the 200 per night to spend on a hotel room in that market to, to see what's going on there.
- [37:59]
Sujay Mehta
Yeah. And it's a write off. Right.
- [38:00]
Ashley Kerr
So kids, I'm taking you on vacation. We're going to Columbus, Ohio for the night. My question though is before even do the underwriting, where are we finding properties to even underwrite? I think maybe I saw a 110 unit motel before on Zillow, but other than that it doesn't seem like they're listed on most of the residential MLS sites.
- [38:22]
Sujay Mehta
Yeah, a great question. And honestly it's another reason why hotels are great for rookies. Right now the brokerage space or the, the, the way to find hotels is fragmented across the board right now. Right. So there's a ton of different, like national brokerages that will have hotels for sale. Right. But unfortunately there's nothing that funnels all of these listings into one platform. And so you, I mean every day, you know, people are going to have to log into all these like national listing brokerages where you can go into their website, go into their portal and find, you know, properties that are in your buy box or in your market where you're looking. And then additionally you got to get on these brokers email lists. Right. So every city or every state is going to have local brokers that may not be attached to these like national brokerages like a Marcus and Mil Chap or a cbre, but they, they're, they have their own local, you know, real estate brokerage company within the state of Ohio or within New York or you know, within California. And they have their, you know, 10 properties for sale. But you can't overlook those because One of those 10 might be your next hotel purchase. Right. So you got to be paying attention to those as well. And then the last one is, you know, get in the right rooms, get in the right communities, get in the right conferences, go to these conferences, start rubbing shoulders with other hotel owners and operators because you never know when that buyer is going to be a seller. Right? Right. For example, for us like I'm always buying hotels but I'm also selling certain properties. Right. Like when I, when it's run it's investment course with me, I'm going to be offloading. So even right now, like we're offloading a couple of our properties as we continue to scale and get into maybe larger properties or, or more rooms, we're offloading our 50 unit, you know, properties that are in, you know, smaller market. So I could be a buyer, but I could also be a seller. So so, you know, rub shoulders with the right people, be in the right rooms. And again, it goes back to get, get out of the house, right? Like you can't just sit, sit at home, sit on the laptop, like, you know, and, and I see this especially on this podcast because that was the number one thing that I learned from my father who was an entrepreneur is like, you don't, don't sit at home, you know, don't, like, if you can make a phone call, great. But like go out and meet them, do a meeting. Because when you let people know that, hey, I am looking to buy my first hotel and I am hungry, I'm ready to go, things will start coming, right? Like put it on social media, you know, put it out on LinkedIn, on Instagram, whatever it is, but let people know that you're looking, right? So, and then the deal flow will start coming to you as well.
- [41:08]
Tony J. Robinson
Sujo, you've got a lot to share, man, and I want to keep digging into it. And what I want to get into next is like the operational component, right? Like what happens after you buy the hotel where things can, I think, fall apart fast for rookies. And how can we maybe avoid some of those rookie mistakes that kill cash flow? But first, we're going to take our last break and hear a word from today's show sponsors.
- [41:28]
D
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- [44:58]
Tony J. Robinson
All right, we're back. So Sujay, let's say man you you close on your first deal, right? But it feels like at that point the the real work is just starting when you close in that first hotel. I I really want to know like what what does it take to run a profitable hotel operation and how to avoid some of those mistakes that first time investors make. So I guess maybe let's start there. Like, what do rookies totally maybe underestimate when they take over a hotel operation?
- [45:23]
Sujay Mehta
Yeah, I, I think the, the, the first part of it, you know, starts even. And I'll just drop this like, real quick because I know we're talking about operations, but the purchase sale agreement agreement, a lot of people come from the residential world and they're used to these like model purchase sale agreements that they don't realize you can negotiate anything and everything, right? And so when you're buying your house, the realtor sends you a purchase sale agreement and says, hey, sign this. Click, click, click, you sign it, dot loop, it's done, right? And you might negotiate like, you know, the hot tub is to be included with the home, right? Like, that's about it. But there's so much in hotels, so the purchase sell agreement is really key. And, and you know, for a lot of the people in our community, like, that's something that I, I really stress is like, make sure we review every single line item of the purchase sale agreement because you can save a ton of money before you even buy the property and, and, and get into the operations if your purchase sale agreement has all of the clauses and terms that, you know, that we've, that we can have in there, right? So I think that's really important. I think from an operational perspective, your staff is very important. And you know, I know Tony and I have joked around about this a little bit with, you know, some of the shared experiences we have with, with our hotels that we own, right? But like, your GM is your mvp, right? Like without them, you're just a proud owner of a, of a dumpster fire, right? And like, that's not what we want to be. Like, your, your staff is everything, right? Like, like if your staff is not properly trained, if you don't have the right people in the right places, your reviews are going to go down really fast. Your revenue is going to start dropping. You're going to lose a lot of the group revenue that you may have already at the property, right? And, and repeat guests, it's going to go downhill. And once they leave and start testing out other hotels, it's difficult to get them back. Right? So one of the things that I've learned through just like the iteration of buying more hotels is making sure that I, my presence is felt kind of when we get to those last few weeks before closing and the staff knows that, hey, you know, like there's going to be A culture shift. And I'm big on culture at our properties. Like, our, our culture is family. Like, that's our go to. So, you know, like, all of our staff knows that. Like, you know, we're going to treat them like family if they treat the place like their home and they treat us like family. Right. And that comes with, like, trust us, we'll go above and beyond if, if they're in a tough place, like, we'll go out of our way to make sure that they're okay. I remember during COVID time, you know, one of our staff members had Covid and we went grocery shop. I literally went grocery shopping for them and dropped off groceries at their house. But like, that person will never leave me. And even during the great resignation, she's, she's the one employee that is still with me today, right. Five years later, after Covid, she's still working for me and she'll never leave. And, and anyway, so taking care of your staff and making sure that there's continuity when you purchase the hotel is very important. So make sure that you have your employment agreements already written out, you've already presented it to the new employees, so they're not out looking for jobs. Once they find out that the hotel is selling. Right. Like, they know that they have a steady position, nothing's going to change. They have their job. And you're able to retain the people that you want to retain. Right. Like, I think that's very important. Second thing about operations is this isn't like an Airbnb where you can just have a third party cleaner and you know, you book them and assume that your property is going to get cleaned and everything's going to be perfect. Right. Which I know is not the case with Airbnbs either, but you know, people are a lot more hands off in, in that sense with their cleaners. And, you know, once you put the third party people in the right place, but it's because they have a boss, they have someone else who's training them, they have someone else who has expectations for them, they have SOPs laid out for them. If you do not continue to train and retrain your staff, those things are going to go downhill really fast. So, you know, like, we have cleaners at all of our properties. They're on our payroll. They're expected to come to work at the same time every single day. But we still have to, to, we still have to check their work. Right? Like, I have to make sure that my GM is going and inspecting five rooms every single day and I have checks and balances to make sure from an operation standpoint that this is all getting done right. And so I think just having that awareness and a pulse on the property and every task that's being done at the property is, is going to be key and vital as an operator. And it may seem stressful and it may, may seem like it's a lot, but when you take a step back, it's the same thing as, you know, having a 10 unit multi family property, right? Like, you got to send a maintenance person. You have to have, you know, all these, you know, someone mowing the lawn or taking care of the landscaping or dealing with the hoa. You have all these issues that you're going to have. But really, I mean, the, the beautiful thing is you have a team and once you train the team, you start building a business, not building a job for yourself. Right? So. So, you know, don't let any of this, you know, make you feel like it's overwhelming. But really, I say this to make sure that, you know, we don't run into these pitfalls when you do close on your first hotel property.
- [50:42]
Ashley Kerr
Well, Sujay, thank you so much for coming and speaking with us today on the Real Estate Rookie podcast. Where can people find more information about you and reach out to you?
- [50:52]
Sujay Mehta
Yeah, absolutely. I think Instagram is a, is a great place, so feel free to reach out to me. DM me on Instagram. Um, if you listen to this and you don't agree with something, you know, like love it, you know, feel free to tell me I'm crazy. And also, if you loved it, feel free to tell me like, yo, I listened to it and I love it and would love to have a conversation. So I love meeting people over Instagram. Suge Mehta is my, is my Instagram handle, so feel free to reach out.
- [51:18]
Ashley Kerr
Well, thank you so much. We, I definitely learned a lot today about hotel investing in general and we'll have to have you on another time too to get go over franchises and go more in depth about franchise investing. So thank you so much. I'm Ashley. He's Tony. And thank you so much for watching or listening to this week's Real Estate Ricky episode.