Motel (13 Unit) Or Strip (5unit)? Which Is More Desireable?
First commercial deal here...I am pondering which way to go ( not that it has to be either one if they are bad).
Motel - weekly rentals
$84,240/year gross ( 100%)
$ 16,500/yr expenses
$ 5,000 sales tax ( previous owner never pays)
$325,000 asking price
This is in a rough neighborhood. Building is solid and rehabbed but neighborhood is not a winner.
Strip center -
$$600,000 asking price
$ 530,000 my offer would be
$ 71,760/year income
$ 11,502 /year expenses
This is in a fair neighborhood that is going thru some rejuvination and is a target for the city to revitalize.
Any thoughts from the pros on which looks better?
Thanks!
Most hotels do not rent at 100%. Ask for past financial statements/tax returns to verify numbers.
A hotel/motel is a business...not simply a piece of real estate. Are you looking to invest in real estate or buy a business? Both can be profitable.
Ask for the past 3 years tax returns for both properties to verify the numbers.
How's the location on the strip center? How nervous would you be if you lost a tenant and how hard would it be to fill. When it comes to commercial property (especially something like a strip center) location is key.
I assumed 100% financing at 8% and 25 years for both properties. Based on the numbers you've provided here's my analysis:
Motel:
Cap: 19.3%
Yearly Cash flow: $32K
DSCR: 3.0
GRM 46 (or 3.8 if you do monthly).
Thoughts: Motels have a lot more day to day maintenance (eg. housekeeping, reception, buying supplies, etc). Your yearly expenses seem really low to me, unless that includes free rent for the receptionist (in which case that needs to be deducted from the income). 19% cap is suspiciously high. High cap generally means high risk. When you say "gross rents 100%", do you mean that if every room were filled every day of the year, then that would be the income? if that's the case, then that is a necessary number to have, but you need to look at the vacancy rate. I assumed a 50% vacancy (same assumptions) and you get these numbers:
Cap: 6.3%
Yearly Cash flow: -$9K
DSCR: .9 (you'll never get financed)
GRM 46 (or 3.8 if you do monthly). (does not take into account vacancy)
That's a VERY different story! I'd also talk to the on-site receptionist. Is that person the owner? Are they willing to continue working for the compensation that they've been recieving? ALSO, who cares that he doesn't pay his taxes. He's lucky and he's gotten away with it, but make sure to take that into consideration when runnning numbers. You may be able to get away without buying insurance either, but you're playing the same lottery. I'm seeing LOTS of red flags around this deal.
Strip Center (at $530K) and same assumptions (100% occupancy)
Cap: 11.3
Yearly Cash flow: $11,100
DSCR: 1.77
GRM 88 (or 7.6 if you do monthly).
These numbers look MUCH more realistic, although not as lucrative. I think you can get the strip center and have fewer headaches with it than you would with the motel.
Things that you need to find out:
-NOI of both properties (according to their tax returns)
-Verify expenses on the motel
-figure out how you'd run the motel if you had it
IF (and I say this very cautiously) everything checks out, the Motel could be a great investment. However, If I were to guess, the motels expenses would be much higher than what you stated, income much lower, and with more oversight and headaches.
what would be your cash investment in each? This will return your real ROII.
Hibby is the authority on this issue, I have only done small multi's under 10 occupancy and very few.
I did look at a motel in Mtn Home Idaho and someting I would look for is "deferred maintenance" Even if the outside looks clean and bright that doesn't mean the structure is sound and that you won't have any expenses in the near future.
I check crawl spaces, roofs, plumbing (especially the sewer) and the check all the electrical outlets. Also what type of construction does it have?
I am sure that Hibby would also point out that $35-$50 a month per unit for maintenance might not be out of order.
Finkel and Conti do say however that on multi's you get more bang for your buck in areas that are not as "nice" as the more upscale apartments. Rent between these areas can differ as little as $50 per month but the land is a whole lot cheaper on one.
Good luck!
This is a no brainer for me...do the strip, subject to environmental assessment, verification of mkt. rents v. those of this propt, and fully analyze each lease for all obligations of each party, thorough title search and title policy at closing, seller-financing or bank acceptable for your goals and projected holding period. I like these deals as well as SF for buy & hold. Good luck & let me know if you want to flip/broker another such in TX next time.
I don't relish running a motel however I got enticed by the initial numbers...they now look not so good! The strip has leases with the tenants for three years ( not that they couldn't break them I guess). Current is $5 / sf. Market I think is $8 - 15/ sf. Hopefully by the time the leases run out the neighborhood is popping.
Thank you for helping organize these deals for me!!!! By the way, Hibby, what is DSCR and GRM? Those are figures I don't know much about. Thanks again!!