How To Figure Out If A Hotel / Motel Is A Good Investment

Hello this is The Atypical Hustlers. One of our Main Hustles is being an owner operator of a Motel. As well as split owner of another property that we have had for 16 years. Time to dive into the number game to see how things will fare and what you need to look for.

The Big Number

The Gross Revenue means absolutely nothing just like most other businesses. The fact that a property grosses $1 Million a year isn’t anything to get excited about. Whats a little more important is the Net Income. I can’t stress “little” enough. There’s a lot of variables that go into this final money statistic. As well as a lot more that you need to look for.

Would you like to be an owner-operator?

This is a huge question. Let me start by explaining how demanding being an innkeeper is. You are marrying your motel if you choose to go this route. Its a 24/7 job without any room to negotiate. When you live on property, you can choose to lock up the front office at a certain time, but you’re going to want to have yourself a door bell to rent that 4 a.m. room. More times than not, the one that rents a room at 4 a.m. usually wake you up a second time by returning their keys at 6 a.m. instead of dropping them in the key drop. You have created this key drop for the purpose of sleep for yourself. Make no mistake, it is for your own sanity. Moving on with the demands, if you’re planning on being a one man (or woman) band with the property then make sure you have yourself a very small Motel. A single person owner manager should have no more than 15 rooms to upkeep on their own. If its more than that, then you should probably see about hiring at least a housekeeper. Just to reiterate, this is 100% of your life. Sometimes you can put a phone number on the door and sneak away around 2 a.m. to go grab a snack or see what kind of errands you can run that time a night. This is why we are Atypical because we are nocturnal having an innkeepers life. Money is another reason this choice is so important.

Does it pencil out?

This choice is one of the most important aspects of how the motels income pencils out. Say a property you are looking at purchasing has a Net Profit of $15k per year. Well that doesn’t sound like a very successful property to invest in no matter what it costs for the most part. Make sure to look at what all is occurring to make that $15k. Maybe that $15k is an offsite owner and he’s paying a manager $50k per year to run it. It may seem a little better deal if you’re planning on running it yourself. Or it may have the opposite effect if the current owner is an operator and you’re planning on being an absentee owner. Definitely something to keep in mind when searching for the perfect property.

What is ADR?

Average Daily Rate or ADR is a performance statistic exclusive to the hotel motel industry. Its self explanatory but also very important. This is the average room rate that you rent your rooms for. Some only look at this stat as a future stat. We prefer to look at it as a past statistic that way it is more precise. Just because your room rates start out at $100 per night does not mean this is your Average Daily Rate.

For this example we have the Average Daily Rate for 1 motel that has 4 rooms. This is simply the average of the rented rooms. We only average the rooms that were actually rented.

Room 1Room 2Room 3Room 4ADR
$100$0$90$100$96.67

This is blown up to a bigger scale when figuring it by the month or by the year. Hotels and Motels sales fluctuate greatly. For example, some properties peak may have an ADR of $100 but may only have an ADR of $60 during their slow months. The amount of traffic that a property gets is something that certainly matters.

What should the occupancy be?

The occupancy should be 100% obviously! We can only wish. There’s not really a blanket answer for this question. Higher the better. It’s definitely a stat that you need to see. If the place is running 5% and other properties in the area are sitting around 90% then there’s certainly a problem. If you’re wondering what the occupancy of your competition is then simply call and ask them. Very likely they will tell you. Its a stat that helps both of the properties out. This is a practice that’s common in the industry. We can see the ADR and Occupancy but the statistic that is formulated using both of these is beneficial to know.

What is RevPar?

Revenue Per Available Room or RevPar is a performance metric that is calculated by dividing the properties total room revenue by the room count and the number of days in your sample.

For this example we have used the same 4 room motel with a sample size of one night. Notice Room 2 says $0. This room did not get rented this night. So we take that into consideration and take an average while using that room that rented for $0.

Room 1Room 2Room 3Room 4RevPar
$100$0$90$100$72.50

Lots more to look at!

The possibilities of income on a property are endless. There may be numerous more means of income that the current owner may not be cashing in on. Restaurants, Spas, Gift Shops, Vending, and Guest Laundry are just a small percentage of additional money makers at a property. Make sure you look into all avenues before you just give up on a potential money maker. Who knows, it may become your expedited retirement if you play your cards right!

-The Atypical Hustlers

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