#30 : Buying A Hotel
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Sometimes Mike and I like to update you on what’s going on in our business, and we have some exciting news today: we just closed on a new hotel property! We thought this would be a great opportunity to walk you through what the process was like, from finding the property initially all the way through day 1 of new management.
This is our second hotel property, and we’ve found that investing in a hotel is different from regular real estate or even multifamily properties. There are a lot of small, interesting nuances that go into buying and running a hotel, but it’s a fascinating business that we’re excited to share more about.
In today’s episode, I’m interviewing Mike about the step-by-step process that helped us close on our newest investment. We’ll talk about how we found the property, how we chose it over some other options, and the differences in a deal like this versus regular multifamily. We’ll also talk about evaluating the financials, applying for loans and using legal counsel, and what we did when we hit a snag late in the process.
In this episode, we’re discussing…
How we found the latest hotel that we recently closed on.
What the due diligence process for buying a hotel looks like.
Why it’s so important to have your own legal counsel when doing a deal of this size and in an industry like this one.
What the step-by-step process was for understanding the hotel’s financials, making new arrangement with vendors, and telling hotel staff about the new management.
The financial snag that came up late in the process and how we managed it.
Our Top Tips:
Buying a hotel isn’t like buying multifamily real estate – while there are some similarities, there are some important differences in the hotel industry that require extra attention and due diligence.
Make sure you have your own counsel – a deal written by the seller’s broker might be framed in their favor. Be sure to have your own counsel to help you figure out what the deal will really mean for you and if there’s anything you need to question or push back on.
Have a great team behind you – from our lawyers, to our operations manager and partner, to our investors and our new hotel managers and staff - you can’t do this alone, and you don’t have to. Make sure you have a great team behind you every step of the way!
Resources:
Unsure where to start investing your money? Check out our free quiz for guidance and ideas about what to do with your money that’s smarter and can help you generate extra income now.
Like what you’re hearing on The Richer Geek? Have questions you want me to cover? Connect with me on LinkedIn and let me know – I’d love to hear from you!
+ Read the transcript
What if you could be doing something smarter with your money that creates income right now? If you're an IT professional who is wanting to get ahead financially and enjoy greater freedom of choice. And if you wonder who else in tech is creating ways to make their money work for them? You want actionable ideas with honest pros and cons and no fluff. Welcome to The Richer Geek Podcast for helping IT professionals find creative ways to build wealth and financial freedom. I'm your host, Nicole Stohler and in this podcast, you'll hear from others who are already doing these things and learn how you can too.
Hey, everyone, welcome back to The Richer Geek Podcast. I am super excited to share the news with you today that we closed on another hotel project it actually closed on November 1. This project was five plus months in the making from the time the hotel was identified, but even longer as my was looking at a lot of different hotel options. And I think with today's episode, if you can take away just a little bit about the due diligence process, and then obviously there's some nuances specific to hotels. But I am really pleased to welcome Mike to join us on the show today. Welcome.
How's it going, everybody?
And I'm going to interview you and we're going to jump right into it. Let's start with how did you find this hotel? And what process did you go through to evaluate it?
Great question. It all starts out. I have an operations partner that is on board with our prior and current hotel. And once we make the decision to let's look, you know, let's evaluate we like the market. Then we set out and reach out to brokers, we reach out to Luton at all of our different type of sources, and we come up with one or two and each type of market that we'd like. And then we dig a little bit further. I think we ended up looking at four or five towards the end. And then it comes down to before we've been contacted brokers just kind of looking at the market, the area, what type of area? Is it? Is it a residential is an industrial? Is it a resort type? You know, there's all these type of questions you go through in each of those four or five. And then you just kind of start narrowing it down to about three. And that's when you sign an NDA, you contact the broker and Okay, let's look at high level and see what the hotel is all about. We look at those high levels, and then we start narrowing it down, narrowing it down to then we got this one.
Awesome. Let's talk a little bit about and I'll just add a few context around the hotels that you were looking at. You were for a while. You and our operations partner we're considering a new build more of a boutique type of hotel and obviously, there's a whole bunch of different considerations around that. You were also looking at an independent hotel that was not part of a flag brand. And then I think you narrowed it down to a few specific flag brands in the Phoenix metro market, when you started really getting into the point where you wanted to sign an NDA and look at due diligence.
That is correct. And we did decide that in today's market, the we're looking at the boutique, and then we're looking at the flag, the boutique was in an area that we saw some potential problems with the water rights and different things that are that you wouldn't think about. You think, you know, let's build something and then water will come right. Well, not necessarily. There are there are some specifics around that. Then we looked at this particular one, which we really liked. It's in the area and city that is really growing and has a lot of potential. And that's where we made her focus was on this one.
Then we went in toward the hotel, which is itself is an interesting story because just like any business that's for sale, same thing with multifamily. You aren't really talking to the employees about the fact that the business is for sale. And we went to go tour this hotel, I walked into the lobby the staff was super friendly, immediately greeted me asked me if they could help me and I was waiting for you to come in and the broker and I didn't know what to say. And I'm sure they thought I was just a complete idiot because or some weird person hanging out in their hotel lobby because I just said I think I'm supposed to meet someone here, which is just odd in itself but anyway, side note there. I have learned since that what we what we would say that we're here for an inspection we are here we're insurance agents, we're something anything makeup, something we're just doing a small inspection.
Exactly. That's who we become.
That was my learning lesson there. All right, toward the hotel, decided to go ahead with a Letter of Intent. Tell us a little bit about that process.
Yeah, so when you when you get into this type of commercial dealing some of the larger multifamily, you don't go through your real estate forms, you don't use any of those forms, you use different contracts, you use actual Letter of Intent instead of just putting in an offer. And I did my due diligence, I do what I do, you know, as far as the analytics, and, of course, us wanting a price that I wasn't going to pay. So you send them out, the broker out and Li, they get back to you. And, you know, they cut this amount, you know, go back and forth. It took about a month or so. And then I finally, at one point said no, I'm not interested at this price. And then I said this is why and I did a very drawn out very detailed reason why I thought it was worth this instead of what he was asking and they actually, it was funny. I asked for a specific amount Then he came back in one to $25,000 more. And so it's like, okay, fine, I'll give you 25,000 for whatever you need to pay off, I don't know what it is. So we got the deal done and entered into a contract for $25,000 more than what I was asking.
And that was about a month of negotiation back and forth. Also just in the contract itself, the wording and the like.
Correct. You know, the attorneys have to feel like they have to, you know, are worth their penny. So you and you have to do this you cannot accept an Li from a broker that is representing the seller only or the buyer. You need your own counsel to look at it because it is going to be biased if it was written for the seller is going to be biased towards a seller. You need somebody that's looking after your own good to review it and that again, yes. And then it got into minutia of these different type of words and how its wording News. It was kind of funny and expensive.
Yeah. So got through that part. Now it's under contract. And you have an NDA. So now you get the dropbox file with more details for due diligence. What kind of information Did you get at that point?
You get a lot. Remember, this isn't just a multifamily. This is a business. hotels are businesses or companies that have employees. They have probably 3035 vendors. You look at three years of historical data, you look at finances, you look at their tax returns, you look at in the hotel industry, what we consider what we call star reports, str reports, to look at comparisons of how this hotels doing in previous years, based on its own competition set based on the city based on other types of those hotels. You just go on and on and on. In just a lot of detail, and you have usually very little bit longer due diligence period, just because you have so many factors to consider. I think we had probably three month due diligence period. Just a lot of stuff to go over.
Yeah, a lot longer than even in the commercial multifamily. So then at that point, while you were doing that due diligence, you were also talking with different lenders.
Yeah, there's a, there's a lot of things that happened at the same time. That's why it's very important to have a team at the same time that I was, you know, looking through the due diligence, I was also needing to find lenders. I was also in talks with our attorneys on different aspects of the different paperwork, and they were looking at some of the financials. And then I decided, you know, what kind of loan do I want and I was interviewing banks, and Do I want to go the SBA route don't want to go conventional route interest only don't want bridge. There's lots of different types of loans that you can get through hotels. And we decided on an SBA through a regular bank and then using it what's called a BDFC as the intermediate intermediary for the SBA.
And at the same time, the other in parallel piece that was happening with the team was working with legal and the private placement, memorandum paperwork.
Right because then, you know, we knew we were going to do syndication Well, what kind of syndication there's, there are no right or wrong black or white answers. Do we do a full ppm? Are we going to advertise? Is it going to be just a friends and family? But do we want to credit investors and all these different types of things based on what we think we can do and what we think that we can raise? So it's, you have all of that muscles looking the due diligence plus also Talking to banks. And there's probably a few other things I was doing at the same time. So that was, it was definitely a crazy time.
And I think, you know, for those listening, what we're describing is you have a lot of balls in the air, you're just juggling between all of these different factors. And there's a lot of moving pieces. So the point where they come together, it doesn't necessarily become clear for a while, because of all these pieces happening in parallel. Now, there was a piece you had to, I think, for the loan, create a business plan, and submit that to them.
Yeah. So this - Yeah, this is something else that you deal with. When you get into SBA, you deal with larger projects. You can't just put a contract in and try to buy it these types of people with these type of businesses. You do resumes, what kind of experience do you have? And then you have to put a business plan together a very detailed business plan. On how are we going to make This hotel is success. And at the same time, they were wanting a 24 month, month by month performance. So I had to come up with every month for two years, what we think this hotel is going to do. And this is all at the same time of dealing with the PPM dealing with the syndication dealing with the due diligence, so yeah, I was a little crazy for several months.
And once you work through that process, got the ppm paperwork back, finished, you know, understood what what things were going to look like from the lending side. Then you worked on the waterfall and financials.
Correct. Yeah, you really need to have someone on your team that's very analytical. I'm lucky that I am. So now I had to create an Excel spreadsheet that had all the formulas for the type of syndication that we were going to do and what we're going to offer most of the hotel multifamily that they do what's Cloud a waterfall syndication, which is based on a preferred rate of return, and then you have an internal rate of return waterfall, based on performance. It's not easy to come up with. So you have to come up with this is how much downpayment we want, this is how much we want to raise, and then you look at it and go, year by year, you have to determine what is fair for an overall return for investors, what they will are willing to invest with. But also it's fair for us, because we're putting in all this work in order to complete the deal. So that was in itself a pretty big task.
And the next step was now you have the numbers and you have you can actually present what the overall project looks like, was meeting with investors.
And that was the fun part. You know, it's like, hey, let's meet for drink. You know, most people knew the people that we talked to that I talked to knew what we do and what we've done in the past. So it wasn't a surprise. Some of them are saying You know, it's like, hey, talk to me, you know your next deal. We want to get involved. That's kind of how we got into the syndications. Correct. I mean, people were saying, hey, you're doing all this multifamily, you're doing these hotels, how can I get involved? I want to be in two. I don't know how, but I have the money. Here's money, go invest it for me. And that's that's how we've got into this idea of doing hotel syndication. So I went back to those same people that were had interest prior. And it was fun. I think every single person, you know, that we talked to, when we showed them the numbers, it was very positive. And I'd say everybody joined that. That could have been maybe one or two people that just things fell out and things happen, but it was it was very good. turnout.
And then the loan was officially approved. The both the commercial and the SBA and the flag. We had to get approval from the actual franchisor.
Yeah, so the just getting approvals from the SBA and the bank, the bank was very easy. within about three, three and a half weeks, the bank said, Yep, it's a great deal to making money. You're approved on the SBA side, I could write a book. And I might do this on just trying to get SBA approval on hotels, or any type of deal. It's just one thing after the other and all of these different things and you can't really argue with them because they can say yes or no, you know, they have the power. So you just have to do what they want. And it took we had several extensions, because of the SBA. just kept asking and asking, asking for more, more information.
And then we hit a snag, right when all this was we were moving along, we hit a snag because when she got the flag approval, they provided some additional information, which changed what we were expecting for required to improvements.
Yeah, this one was very interesting. During my due diligence period, the seller gave me the PIP. And to give a little bit of background, this private in November of 18, was a Marriott, and then they switched the flag. And so there were still some items left to do the conversion from the old flag to the new flag. And I was given a tip that the seller had been given. And then on page 42, of the RFP, and it's lucky that I'm analytical because I read every single page and I came across but page 4647 in new Pip, and I was looking, I was like, there's a lot more to this thing. This is a lot more involved, there's a lot more so I need to figure out if the amount of money that I had built into the loan was going to cover this brand new amount. So that put everything on hold until I had now had to get ahold of vendors get ahold of the seller, we had to talk to people and say, you know, how much is this stuff going to cost me and then had to do spreadsheets all over again.
And do spreadsheets all over again. I love that and obviously a delay. But then we finally set a closed day and are leading up to that, then you are working with the vendors that you talked about in the very beginning. After you got them from the drop box, you had a list of vendors.
In the hotel business you have, again, it's like running the business. There's 30 or 40 vendors. And about two weeks up, all of a sudden you have to go from the top one to the end one and you have to do all these conversions. You have to change out the contracts. You have to on several of them. It takes two or three weeks. You know there are some that were just really a pain in there somewhere you get older people that are I don't know what part of country they're in and you have no idea what they were just you were just saying And they you hang up and you're like, I don't know what we accomplished, you know, so you wait a couple of days to call them back. It's like, you know, did we actually do something here was something done because I'm not getting anything in the notification. And then they say, well don't get us, you know, transfer my call and then it's, you know how it is you get put on hold, you're trying to, you're in the rat hole of never ending transfers. But some of them take several weeks. Some of them we have to do credit report some of you know, they do credit checks, some of them are easy. So it's, you just have to go through the process, you know, several weeks out to try to get everything so that come November 1, when we took over, everything was smooth, everything was on cable was still working, the electricity was on the hold music was still playing. I mean, there's so many little different details, you know, the waffle mix was there. It's just all sorts of things that you have to make sure you know flows on day one.
Let's talk about as we're getting closer to day one, you and our operations partner, were interviewing general managers. and ended up you hired a general manager with a start date of the day before close.
Correct. Yeah. So I want it was very important. The way hotels work in larger multi families. The staff doesn't know. Well, they usually know but they aren't told that the asset is being sold. So we came in the day prior to introduce ourselves, you know, the new team, and we had very lucky we very wonderful GM that we hired these is the onsite and introduce ourselves to the staff and answered any of their questions and kind of give them the way that we do things. Because it you know, seven o'clock, the next morning, we're up and running.
And we're lucky with this one too, because the previous owner, whose family worked at the hotel are helping and assisting with the transition because it's not so much the day to day inner workings of a hotel, but is more about the systems specific to that flag and learning where to get reports and information, etc.
Correct. Yeah. RGM has 30 years of hotel experience, but he's never worked at this flag. So it was very important that the current GM from the seller stayed on for two to three weeks to train our new GM, just on the differences of the flag and how this flag the requirements of the flag is you don't realize, you know, some flags don't require background music to be played in the lobby, some do. So you have to learn all the intricacies of this particular flag and what they require.
Yeah, such a great point. But I will sum it up and say we just told you about almost five months worth of work in, you know, a short amount of time on this episode. wanted to give you guys an overall concept of what's involved. Obviously, there's a lot of moving pieces. And we're really excited about this particular hotel, primarily because of the location and the opportunities for growth. And we saw that immediately. So when you looked at the other hotels, and nothing really came close to all of the economic development and other pieces that are happening in this area. I agree.
Yeah, it's a fantastic location. We're extremely fortunate to be able to purchase this, this asset.
Well, thank you for coming on and sharing a little bit about your last five months.
You're welcome. Yeah. And it's it's time to kind of a different kind of stress now we're, it's it's ours. We're up and running. And now it's ours, now comes the fun stress.
Yeah, and this is a lot where our operations partner is a very involved and of course, the general manager as well. Thank you all for tuning in this week. I wanted to let you know that if you have an idea for a topic you'd like to hear covered on the show or something you're curious about that you read about and you want to get more information, drop me a note, either connect with me on LinkedIn, and just shoot me a message as to the topic or idea that you have. Or you can also connect with me via the website. Now, if you say something that we haven't covered, I will go find those experts. I will go find people in those different areas. I'll tell you that I did a recording recently. And I learned all of these interesting crowd investing sites that I was not aware of that are not in real estate, because obviously, I'm pretty familiar with the real estate crowd investing. We've featured folks on the show before, but this was all these ways that you could invest in local companies and other startups and healthcare related. So I will be doing episodes on that. But I just wanted to share with you that I'm completely open to covering tonight. topics that help you figure out what's the best way for you to invest in or buy a business or start a business.
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ABOUT NICHOLE AND MIKE
Mike Stohler is the founder of Gateway Private Equity Group, a real estate investment firm whose portfolio has included a hotel, multifamily, and residential properties. Mike is a Navy Veteran and previous commercial Airline Pilot. Between apartment complexes, houses, and their hotel, Mike has owned or operated over 1300 units. When Nichole and Mike first started in real estate investing in 1999, they lacked experience and failed. Through committed action to learn, grow their skills, and help others, they have created immense change in their business and lives.