How to Invest in Commercial Real Estate

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Episode #099 - How to OWN A HOTEL! With Special Guest Sujay Mehta From Bloom Ventures

by Criterion, Braden Cheek, Brian Duck
March 27th 2023
00:00:00
Description

Today hosts Braden Cheek, Brian Duck and Joel Thompson discuss the logistics of hotel investments with special guest Sujay Mehta.

Time Stamps: 0:00 - Introduction 0:37 - Bank collapses &... More

Welcome back to how to invest in commercial real estate. We have a super exciting episode and we've been, we've been gone for a few weeks, right? So Brian was busy vacationing. Joel's Joel. You were in Japan, right? Just checking it out. Brian was just skiing. How boring. Nothing like Japan. But anyway, and you went to Branson small road trips. Yeah, it gradually declines as we keep talking. But anyway, since, since we missed a few weeks in the podcast here, you know, a lot's changed kind of in the financial outlook of the world, a lot is happening right now over the past few weeks, you know, um everyone's heard about some of these bank closures happening stateside. We've got um Silicon Valley Bank that that went under. Um and the, the Fed met again yesterday and we're talking about another quarter point on um the interest rate. And on top of that, we have, you know, the administration talking about how much of the SVB is gonna be forgiven and everything like that. So it's, it's kind of a, an interesting time where a lot of people, you know, I'm getting hit on, on all ends it seems like.

What are you doing with your cash? Oh, the world's ending, banks are going under and, and kind of everywhere in between and, you know, I don't think any, I don't think the world's ending. I don't actually think that many more banks are gonna fail. Uh, but, but fed front rate is up and prime now is 8% which is a pretty big deal from where we were. Uh, just a year ago. II, I think we're up almost two points in just the last year. Um And so it's making borrowing a little bit tougher, but the good news is for some assets, the 10 year treasury is remaining relatively low. And so the, the 10 year is about 3.5 right now and you know, you can still get deals done at two and a quarter over the 10 year. Uh So that puts you at uh what 5 75 versus 8% on prime rate. Um So we don't have to get too much into that. I want you to introduce our guest for today. Absolutely. So we have Su J here with Bloom Ventures and we thought this would be an amazing guest because like Brian mentioned right before we got on, this is our 99th. So we've been talking about commercial real estate for, for years now on the podcast.

And we've never had somebody who owns hotels who specializes in hotels, who I hear manages their own hotels, which is kind of even more difficult to do if you know anything about hotels. So anyway, I'll, I'll introduce our guest CJ here. Tell us about yourself. Tell us about Bloom and hotels. Absolutely. Thank you so much for having me here. Uh It's a, it's a pleasure and let's do it. I'm excited to debunk the idea of owning a hotel. Right. So, uh again, you know, like I mentioned, my name is Sue J. I'm from Columbus, Ohio. I'm a Buckeye at heart. Um, and you know, Bloom Ventures, it's, it's our real estate firm, we own, we own quite a few hotels. So, you know, we franchise the hotels with Hilton Marriott Hyatt. Um all these, all these large brands that many of you guys have heard about or, you know, driven past on the highway on the road, you know, when you go to visit cities and probably stayed that, to be honest, right? We don't like airbnbs. So, um we, we, we own those real estate assets and then we franchise with the hotels and we give a loyalty payment to those uh to those franchises.

And so, you know, my name is Sue J. We, we manage those hotels, we run the hotels, um and it's, it's one of the best asset classes in real estate that many people don't know about. And it's so awesome what you guys are doing and really getting that information out there. So let me, uh that's brings me to my first question because I think, uh, like you mentioned before, the podcast, so many people driving by, they think, oh, Marriott, Marriott owns that Hyatt Pyatt owns that. And they never thought, hey, that's a piece of real estate that I could own and I could be getting the castle off of that. And so you're here to kind of, you know, debunk that myth that the average person can be a hotel owner with some really quality brands in their portfolio. Absolutely. And, and, and it's crazy because the same place where people are finding multifamily assets for sale or other businesses for sale have these hotels listed. It's just, you know, we don't filter it that way and we don't look for it and we don't have that perspective in our mind that hey, I can own this asset class, right? So, you know, CBRE loop net, um Marcus Mill chap, all these places have these hotels 10 X.

Absolutely. You know, and, and you guys alluded to kind of the bank crisis happening right now and you know, it's, it's gonna create a lot of opportunities for people to buy uh at a very, very good price coming in here soon. So well, uh I'm gonna sorry to interrupt you, but I'm gonna ask a couple of questions because I know people will have uh you know, these questions is compare uh the hospitality industry, which is how you need to search if you're on some of these net platform you're looking for hospitality that's gonna include hotels. Uh But what are the cap rates you can buy these at? What are the typical cash on cash returns you're trying to hit? And then what does the the debt picture look like? What's the leverage on these compared to a retail strip center or a multifamily deal? That's a good question. Perfect. So three questions is what I heard. So we'll start with the first one. So the first one was, you know, kind of, what kind of cap rates are we looking for? So when you look at multifamily, I guess, you know, a couple of years ago, 2021 cap rates were really at around 3.5, you know, 3.75 depending on class A class B, class C, right?

Um Moving into this year, you know, I feel like cap rates have really gotten up to the 4.5 range. Um when looking at the hotel industry, it's a, it's a little bit different. So we don't really have, you know, there, there's class A class B uh class C assets, but those are really quantified by, you know, one, the age of the property to the flag that they're associated with, right? So when, when you think of what's the best hotel, what's the Louis Vuitton of Hotels, right? You would think Hilton Marriott, um probably the two big giants at the top. Um you have Hyatt as well that have some pretty nice properties. And then IG so, you know, when you have those, those assets, those are kind of at the top of the tier, um where, you know, most of the times those are class A and those are gonna trade for a little bit lower cap rate um than you would if you had a choice asset. So Comfort Suites, um Best Western, some of those, and then you have your economy brands that are kind of a little bit more at the bottom. What you would refer to as a motel exterior corridor, um, maybe right off the highway or in a smaller rural area.

Again, those are gonna have the best cap rates and, you know, a lot of times those are, those are the cash flowing assets. So maybe not the prettiest, but definitely where the dough is, right? So, um, but yes, going back to the cap rate, you know, it could be anywhere from eight to about 12% cap rate. And, you know, again, it depends, is, is it a distressed asset? Is there an opportunity to bring value through renovation or, um, you know, what we call it a pip a property improvement plan? And so a lot of those factors really come into play here when, when, when thinking about cap rate. So, um, the second question was cap, uh, cash on cash return, right? So cash on cash return, something that we look for um as an investment firm. And it's kind of our strategies, right. So there's no right or wrong, but our strategy is to get a portfolio deal, a deal that we can keep inside of our portfolio for 15, 20 years. If we have to, we don't want to be limited to, hey, the circumstances is changing now, we have to pivot, you know, real estate is very similar to the stock market in a sense where, you know, if you hold on to the asset or you hold on to that thought for an extended amount of extended period of time, you're not gonna lose your money.

Now, if you have, you know, if you over leverage, if you're on margin, if you're doing options, now, all of a sudden you're bound by the circumstance of the time or what the situation is. And so, you know, we look for about 10 to 12% cash on cash return at least. Um and that could, you know, that could factor in, you know, new management changes, increasing the efficiency for the bottom line and um and, and, and doing that. So cash on cash return about 10 to 12% plus, then you're building equity because you're, you're holding on to this asset for 15, 20 years, you're paying down the principal payment. Um And which kind of segues into your third question, which is what does the debt look like? Um, so typically, you know, 2018, 2019, you know, we were finding deals for almost 20% down 25% down, um, 80% 75% you know, bank leveraged. But now we're, we're seeing a little bit more resistance on that 25% down payment and it's, it's kind of almost sneaking a little bit more into that 30% especially if you're going nonn recourse or, you know, institutional lending.

Um You're looking more at about 30 35% even. So that, that makes sense. I mean COVID was a huge shock uh to the hospitality system so I can see lenders being a little bit more conservative coming out of that type of a period. Yeah, I'd love to maybe talk about your portfolio through COVID. I mean, it sounds like you guys own a decent amount of hotels and I would think that's the scariest thing in the world, right? Because people love to give us crap about retail. Oh, Amazon's gonna in the, in the world COVID mess your life up, bro. You ain't got no money. So like nobody traveled during COVID, obviously hospitality went down. But you know, give us the the practical sense of what you guys experienced. All right. So Rudy Gobert has that press press conference touches the microphone. NBA shuts down the rest of the world shuts down, right? Like that's kind of how it happened. Uh going back a couple of years and I remember that week, we actually we were building, we were building a hotel and we were about 90% complete. We were getting ready to open. Um End of April of 2020 was our opening date and you know, the city went on lockdown and city officials weren't working.

So people who are coming to inspect the property, they stopped working and it was, it was chaos, right? So they're not working. People aren't coming to visit our properties. It's just essential workers, traveling nurses. We started getting calls from the city asking if we want to turn our hotels into hospitals or shelters for homeless. Yeah. And, and, and so at that time, as a, as a business owner and we're always pivoting, we're always thinking on our feet, right. So we had to make a decision that, hey, you know, do we want to turn our, our asset into a homeless shelter or, you know, a shelter for the underserved and, and possibly run down our real estate and still be able to make some money in this time or should we, should we just hang on sit tight and kind of weather the storm and we, we actually decided not to take any of those opportunities. Um, which I, you know, in hindsight, I'm glad we did that because, you know, a lot of, a lot of assets now are shut down because, you know, those those properties were just run down so much in the last couple of years and now they can't rent it, you know, to regular leisure customers.

So, you know, it was a really tough time and like you said, we were, we were freaking out. I mean, uh to, to say the least everybody was, we were struggling and, and to be honest, you guys can make fun of me a little bit, but I just got a hair transplant about 34 months ago. That's why I'm always in this hat, right? I just got a hair transplant because I lost all my hair in 2020 no joke. Right. So, um but, but we bounced back really well, you know, at, at by the end of 2020 you know, we were able to, I mean, we occupancy was high, you know, with inflation, the great part about hotels is we're adjusting our rates every single day, right? So when, when rates started going up, we don't have leases that are locked in for one year, 18 months, 16 months, you know, those kinds of leases that lock us in, we're able to adjust every single day where that hurt us in the beginning of 2020 where we, you know, people were just able to walk away or negotiate really low rates. You know, typically we're charging $90 a room and we're taking people in for $55 right during that time.

But now at the end of the year, when people were kind of cooped up, sick of cooking and sick of staying in their house. And a lot of people were just driving wherever they could. They were staying at hotels in between cities when they're traveling. And we were really able to take advantage of that. We weren't serving breakfast, which is a huge cost. So that added to the bottom line, even if our revenue was down, we were able to make money because, you know, that $4 or $5 a room that we budget for breakfast was coming straight down to the bottom line. Housekeeping or cleaning costs had gone down. So, uh, you weren't cleaning the rooms. I used to get the notices that, hey, we're not coming in your room and, and so yeah, the labor labor cost had to go up to almost zero for you guys. It was, it was, it was good. It was a blessing in, in a way and it was a safety thing too. Right? We didn't want one person on our, on our, uh, payroll gets sick and it, it just spreads to everybody and, you know, we had to deal with that stuff too. But, um, but, you know, we ended up bouncing back pretty, pretty well in 20 2020 2021 was an astronomical year.

I mean, it was great. We at least most of the hotels in our portfolio. We were able to beat 2019 numbers as far as a profit standpoint. Um, business travel hadn't come back as much but leisure travel was just, uh, people were flushed with cash because of like $7 trillion of stimulus being flooded into the market, quantitative easing, quantitative easing whatever we wanna call it. But it did, I'm sure it helped because everybody had all the cash and they wanted to spend it now. Nobody's got cash and we're doing some quantitative tightening. That's all it is. That's all it is. Just, just some tightening tax season comes and they get the refunds. All of a sudden our hotels are filled. I mean, it happens and it's, it's a, it's a trend that you get to see so much in the hospitality industry. So j you need to, you, I think you need to help us buy a hotel. I definitely think we wanna buy hotels with you. Uh Because I, like I said, I've literally spent years like looking and making some offers and then COVID hit and I was like, ok, I don't know anything about this. Uh But no, that'll be super fun.

So let me ask you this because sometimes cap rates one me uh measure the debt we can get on. It's another, but there's also metrics like price per foot. And I think uh in hospitality it may be price per key or price per door. Uh So do you kind of factor in those metrics to, to, to, you know, buy on an overall value basis. Sometimes you sound like a real hotel guy now price, right? So when we're, when we're underwriting, we, we look at a lot of different things. So one of the things that we do look at is um replacement cost, right? So that's, and we, we, we call it per key. Um I know in multifamily they call it per door. But uh you know, in the hospitality industry, we say per key um because we have those, you know, we have those keys that get us in and out of the doors, right? So, um typically, and it depends what the brand. So typically, when we look at an asset, we look at the age of the asset. So if it's within 67 years, it hasn't even gone through its first renovation yet. We, I consider that as fairly new.

And so when I'm, when I'm looking at a 67 year old asset, I'm looking at what is my replacement cost, right? So, um typically for a home two suites, which is Hilton's new extended stay crushes it. I mean that that asset is, I mean that uh flag is so profitable, uh because of the, you know, extended stay portion that it has and the way that it's able to command rates, it's so profitable. And I would love, I mean, we're building one right now and I would love any opportunity to pick up a home to suites as I could. So you know, but those are a little bit higher on the construction cost. So, you know, those are about 100 and 30 to 100 and $50,000 a key depending on location, land value, um those sort of things. And so when we're looking at an asset that's 5 to 7 years old, we really compare it to, hey, if I were to build a new one tomorrow in the same market, how much is it gonna cost me? Versus how much of a discount am I getting for this 57 year old asset?

The other thing that we have to consider is, you know, for me to build it will take a minimum of 18 months, probably closer to 24 months, you know, from beginning to the end. And that's two years of not having cash flow, not having revenue. So when you're going in and you're buying an asset, I mean, that's something else that we look at and we're looking at those two year save. So that impacts your irr significantly, right? So that two years of no return. So I mean to answer your question, we're always looking at uh replacement costs and how much it costs per Keith typically, you know, in this environment, it's gonna cost between 100 and 10 to 100 and 50 $1000 a key um to build that uh to build that hotel. And you know, obviously the number of doors that you have and all those things are, are taken into consideration. Plus the flag. Is it a Marriott? Is it extended stay? Is it limited service? So, very interesting. You know, at the end of the day, it's, it's very similar right to multifamily or to, to retail. Uh we look at those things when we talk about buying existing properties or development.

So at the end of the day, it's really, it's similar, I mean, if you can get 10 to 12% cash on cash, that sounds familiar. And if you can give me a 20% irr and if you can give me an asset, I can hold for 15 years without having to go and work and try to buy more and, and deal with the disposition and acquisition. I mean, why aren't we buying more hotels? That's the question I'm asking myself when I'm, it's, it's the same point. We've told people on this podcast from the beginning, you're, you're just one piece of knowledge away, you're one person, uh away, you're one piece of experience away from getting comfortable enough to put your money down and buy it. And it's just like self story or, you know, any other asset class that we haven't really done a lot with it. Just, you just have to have somebody that knows or uh can make you feel like, hey, this is gonna be ok when, when you know the occupancy drops, here's how we're gonna deal with that and so once you can get comfortable, that'll, that'll give you the confidence to, to, you know, move forward. II, I would ask one other question. I know we're kind of getting long on time so we'll wrap it up after this. But uh I do think on hotels, there would be some additional consideration with, uh how many doors there are in a given radius or a given market?

Uh because there's only gonna be so much that they, that, that you're gonna be able to withstand in a, in a given area of the town. I think maybe I didn't say that right. But yeah, yeah, so it's it's supply and demand, right? You wanna, when you look at a market, you wanna make sure that if you're entering that market, what is the trend? So two things here, one, when you're looking at an asset that's already existing. So a hotel that's been around for 10 years, 15 years. The great part about going into a deal like that is you have historical, right? You can pull the last five years P and Ls. You can can look at the trends, you can see, ok, it did $2 million in business last year, it did $3 million in business last year. Um You know, chances, chances are that that's not going to just disappear overnight, right? So you can look at the last three years, you can see, is it trending up? Is it staying flat and consistent. Is it going down? The other thing you wanna do? Which I'm sure, you know, everyone does, no matter what asset class they're looking at is new supply coming into the area. Right. So you can go to the city, you can see, have any permits been pulled.

Um, we can call the franchises, we can see. Is there any new flags coming into the market and, and that's really it, right. When, when, if there's history of demand in that specific market, if there's businesses there, there's, you know, maybe, maybe uh an attraction for leisure travel. I mean, chances are, it's not going to just disappear per night um with AD RS and inflation and uh we say ad R average daily rate with rates going up, you know, even though our occupancy may increase 5% if we're able to keep our rate up, you know, revenue is actually growing year over year, even though occupancy may be down from last year. Um And so that's one thing for when you're buying an existing property, when you're building a new property, which is, I mean, I love building new properties, right? And um you know, it's, it's something you can hold on for 15, 20 years. You talk about generational wealth. I mean, it's something that will stay in your portfolio if you manage it right, for a long period of time. But when you're building a new hotel, let's say you're going on a trip, there's a brand new Hampton Inn and there's a 15 or 20 year old Fairfield Inn.

One's a Hilton, one's a Marriott. Which one are you staying at the same price? The new one, right. So, the beauty of building a new property is you just have to steal business. Right. Even if you take 15% from 10 different hotels, you're, you're, you're over 100% in demand. Right. So, um, that's the beautiful thing about, you know, having, having the newest on the block or the best property on the block. So maybe we don't want to buy it. Well, we may wanna buy hotels, but also, so we want to build them. I may have a site for you that you can compete on. Actually. What, what site with our Bigsby development, the east part of the the city's development, we're looking at a potential hotel. It's right across from a brand new mixed use uh multifamily class, a multifamily retail deal. So, and it's right across from city Hall in Bigsby, Oklahoma, which is a small, small town, but they don't have any hotels. So I, I feel like now uh you know, me and Brian need to be looking at that deal with CJ over here the hotel path. This sounds like a win, win, win, win. We, we'll go ahead and wrap it because we're almost half an hour. This has been so informative for me.

Uh First of all, congrats on your success. Uh And thank you for sharing some of your insights and information and what you've been successful doing with us and our listeners. We really appreciate it. Yeah. Do you have a plug? You have a website that uh our listeners can go to? Yeah. Follow, follow, follow me on Instagram uh sujmehtas meta. Uh My website is bloomed out ventures, but Instagram is fun. So, follow me on awesome man. We will definitely be in touch with you. We'd love to help fund one of your deals. Uh Thank you again for coming on. It's been a pleasure. Let's connect. All right guys. Sounds good. Thanks.

Episode #099 - How to OWN A HOTEL! With Special Guest Sujay Mehta From Bloom Ventures
Episode #099 - How to OWN A HOTEL! With Special Guest Sujay Mehta From Bloom Ventures
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