Evaluating hotel purchase

I am trying to figure this hotel purchase is a good investment or not: $1.4M room revenue (typical for past several years), $1.0M expenses, $335K/year debt services = $65K/year left after debt services. The hotel is listed for $5.8M (mid-scale franchise)
Please explain what numbers I should be looking for after debt services are subtracted if my initial investment is $1.2 - $1.7M.
In Buying Property - Asked by Steve T. - Dec 14, 2010
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Answer(s)

Ron O.
Broker/Agent
Mountain View, AR

My advice is if you have never "owned" and "managed" a hotel, I would go talk to a hotel owner who owns one similar in terms of size and revenue to the one you are wanting to purchase and run the numbers by that owner, because that owner can give you the best advice.

Dec 14, 2010
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Ben E.
Plymouth, MA

I am a broker who both lists and sells hospitality businesses and have also owned a hotel. To be honest your quesiton does not have a specific answer. You need to first determine however if the numbers your are looking at are accurate, the capacity the business has for revenue growth or operating efficiency. Location is also key factor, where the business draws its occupancy, how it affects tax status, your goals ie life style or income, is salary built into the expenses you are measuring. From what you described I calculate the ROI is between 3.8% to 5.4%, not a bad return in this economy but if its rate of return you are seeking you can get higher.
One last comment is that hotel revenues have been down the last several years so they should rise depending on location and generally it is a business that can keep pace with inflation. Unless of course the rates are higher than the competition.

Dec 14, 2010
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shaan S.
Troy, MI

Honestly if you have 1.2$ million and you r getting a return of only 65k a year, i would like into other hotels or other opportunities. A good business is one that can give ur initial return in 3 year.

Dec 14, 2010
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Nick H.
Lender/Mortgage Broker
Roseville, CA

We are seeing prices in the 2 to 3 times gross, or depending upon the flag a 10 CAP Rate.
So a 2.5 to 3.0 times gross the value would be $ 3.5 to $ 4.2 mil.
A 10 CAP the value would be $ 3.350.000 which is where I would expect it to be. Another thing to consider is what the flag will have in their improvement plan that you will have to complete. The lender will require a 1.25 DCR with strong cash reserves and you must have had hotel ownership in the last 2 years.

Dec 15, 2010
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Gregory G.
Broker/Agent
San Francisco, CA

I would be interested to know what market this property is in... Seems odd the room revenue hasn't fluctuated in the past few years.
Greg
415-225-9894

Dec 15, 2010
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gill s.
Corporate Investor
Schererville, IN

400000

Dec 15, 2010
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Todd J.
Owner/Investor
Mission, KS

That is a HORRIBLE investment in my opinion. It seems like it has much more downside risk than upside potential. That is nowhere near a safe investment. What is going to happen when you need to update the facility? Replace the roof? What if utilities, property taxes or insurance increase? There goes ALL your profits. You have no margin for error.
There are newly remodeled and updated properties on here that you can pay $1.5M cash for today and have $200k after debt service because you have no debt. They have have a history of much higher profits before the economy tanked.

Dec 15, 2010
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Todd J.
Owner/Investor
Mission, KS

If you would like to discuss my earlier post further I might add that I ran a bank for 14 years before getting in the hotel and restaurant business. (620) 891-0168 - Todd Johnson

Dec 15, 2010
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Matin T.
Broker/Agent
San Antonio, TX

You got $400,000 in NOI after expenses with the current management, then your purchase has 6.8% CAP rate with the way the business is running! LOW return! You can do much better with your money in other markets or doing something else. Unless you see a way to better manage the hotel and increase revenues or you know of something coming that will cause significant appreciation in that market, you are paying too much!

Dec 16, 2010
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Craig K.
Broker/Agent
Sharon, MA

Take your NOI and decide if the return is higher than what it cost you for the banks money plus yours, otherwise known as cash on cash. Look at the up and down side of the investment. The low return may be OK if the area has a strong upside. hotels have had some rough times but the occupancy seems to be rising lately.

Dec 17, 2010
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Jay S.
Broker/Agent
Norfolk, VA

This isn't a good deal. You must place a premium on risk, and I wouldn't consider any hotels regardless of flag under 12 caps on actual income. If you're looking for hospitality opportunities, check the bank. I have clients buying hotels in receivership for 10k a key in markets all over the country. Not to mention, you'd be very lucky to get leverage over 50% LTV on a performing asset. If you have 1.2-1.7 million, try multifamily for a safer investment vehicle. Fannie/Freddie debt is the lowest on record. We're seeing debt as low as 3.75% and 80% LTV. Not to mention... I have single tenant NNN leased assets with 9-11% going in yields, backed by corporate guarantees. You can simply sit back and clip coupons until the next up-cycle then maximize the value through cap rate compression and may earn an additional 200 basis points on the spread at disposition. Run the IRR, you'll see the logic....

Dec 21, 2010
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Brian B.
Broker/Agent
Palm Springs, CA

if you can take revenue times 3, that's what your purchase price should be....5.8M good, but the hotel #'s do not. It sounds like you should be grossing alot more than 1.4...how many rooms? I would hope at least 50....I sell hotels in Southern California desert. Give me a shout. I have some amazing properties/buys here. http://www.brianbeard.windermeresocal.com/

Jan 9, 2011
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