12/21/14: Fun in the Sun and Income Too – Hospitality Update from the Caribbean

It’s amazing how many real estate investor overlook hotels as an investment vehicle.

Sure, the numbers are big…and renting nightly instead of monthly, plus all the other services (housekeeping, restaurant, room service, etc.) are much more labor intensive than simply renting out little green houses month to month.The big money is made on the bigger properties

But anyone that’s ever played Monopoly knows the big bucks are in owning big red hotels…especially in premium areas like Park Place, Broadway….or the Caribbean???

From the Hard Rock Hotel in the Dominican Republic:

  • Your host with the most (travel miles) – Robert Helms
  • Hilton Worldwide Director of Development, Caribbean and Panama – Juan Corvinos Solans
  • Hard Rock International Executive VP & Chief Development Officer – Marco Roca
  • Wyndham Hotel Group President and Managing Director of Latin America and the Caribbean – Paulo Pena
  • STR Analytics Director – Carter Wilson
  • Caribbean Tourism Organzanization (CTO) Chief Executive Officer – Hugh Riley
  • HVS Capital Corp Executive Managing Director – Bill Sipple
  • HVS Caribbean Managing Director and CHICOS Chairman – Parris Jordan
  • Dominican Republic Secretary of State and Executive Director of the Center for Export Investment and Residential Development – Dr. Jean Alain Rodriguez

Co-host Russell Gray stayed home to wrap presents.

Wow.  You can already tell from the guest list that this show is PACKED with content.

But before we get into that, the BIG QUESTION is WHY should any investor consider hospitality as an investment niche?  And once you do…HOW does it work?

First, WHY…

Go play Monopoly.  How do you win?

Now that we understand bigger is better, what’s the difference between hospitality and other big rental properties like an apartment building, office complex or shopping mall?

The obvious difference is that apartments, offices and shopping malls are all long(er) term tenancies as compared to nightly or weekly hotel tenancies.

That’s good and bad.

Apartments, offices and shopping malls typically have a more predictable stream of income.  And while apartments might have six or twelve month leases, office and retail leases can be a decade or more.

Of course, with long term leases you give up the ability to raise rents quickly in response to changing market conditions (a concern in an inflationary environment).

That’s one of the reasons we like apartments better than office or retail.  It’s more work, but it can be more money (that’s a hint).

Of course, another concern with retail is how the internet is affecting physical product marketing.

It’s not the topic of this discussion, but when consumers are shopping online and not in stores, then your retail tenants suffer…and so do you.

So if you’re going to be in retail, it’s smart to cater to businesses which consumers must physically visit in order to conduct their business.  Things like healthcare, restaurants, grooming, etc.

Hotels generate more revenue per year because they're rented nightly instead of for months or years at a timeSo in addition to being able to generate  more revenue per unit per month with overnight rentals, one of the advantages of hospitality...the property is the product (or at least a major component…service being the other) and it serves a need which cannot be met online.

So once you’re interested in investing in hospitality, the next question is HOW does it work?

It’s really not that complicated.  In fact, it’s very similar to apartment investing.

Most apartment owners don’t personally manage the property.  They hire a property management company to operate the complex.

So in hospitality, you’ll have a property owner (the investors), and the property manager (the hotel operator).

But because keeping a hotel full is a marketing intensive operation, there’s a third player called “the brand”.  These are folks like Hilton, Marriott, Hard Rock, etc.

In some cases, you have multi-brand companies, and one of the biggest is Wyndham, which operates 13 different brands…most of which you’ve probably heard of.

In fact, hotel brands are typically household names because of all the advertising they do.

What you may not know is that most cases, the brand does NOT own the hotel…and in same cases, they don’t even operate it directly.

Instead, they simply rent their brand, group purchasing power and hotel operational savvy to independent operators…”franchisees”…just like other famous franchisers like McDonald’s (fast food) or RE/MAX (real estate).

All that to say, there’s room for private property investors to leverage the big name, marketing muscle and operational expertise of a brand, the hard work of an operator (your tenant), into creating cash flow from your property.

As you listen to all the various interviews in this episode, you’ll discover that the overall mood of the hospitality sector is upbeat and optimistic.

But you’ll also hear that there’s still time to get in…the industry cycle hasn’t peaked yet.

Plus there are some great lessons to be gleaned from all these savvy business people.

Here are a few of our takeaways:

There’s Opportunity for Private Money

Not a lot of hotels are being built right now because the financial markets haven’t recovered enough to provide adequate funding levels.  The same thing happened in housing.  The opportunity is for private equity syndications to help get things built.

And right now, hotel cash flows are good, which means private equity can be rewarded.  Sounds like opportunity to us!

Transportation Infrastructure is EssentialAirplanes are an important part of bringing business to report properties

Duh.  No one can stay in your hotel if they can’t get to it.  And in the Caribbean that means airplanes.  Cruise ships typically don’t deliver overnight guests.

That’s why Belize investors get so excited when they hear that multiple airlines are adding flights.

But even if you choose a landlocked location, you better make sure there are roads, rails and runways to bring trains, planes and automobiles full of people to your property.  And some business and tourist attractions are helpful too.

You Can Partner with Big Players…Even if You’re Not

We already talked about big hotel brands.  When you build a property for a brand, you get all their marketing muscle pushing occupancy.

But as you’ll hear, there are resort destinations that realize they need tourists to grow their economy.  So they have entire agents and budgets dedicated to promoting their market.  And they NEED YOU to provide the rooms to hold the people their marketing brings to town.

We don’t know about you, but we LOVE free marketing.

The Condo-Hotel Concept is Poised for a Comeback

This could be the most exciting thing (of many) that came up in these interviews.

Condo-hotels got a big black eye in markets like Las Vegas when the financial meltdown wiped out the loans.

Lots of people were left in the lurch when the financing they were counting on to complete the transactions all dried up unexpectedly…and almost overnight.

But the basic premise of a condo-hotel is a sound one.

The idea is that a small private investor buys a single hotel room in a big hotel.  It’s just like buying a residential condo, which is essentially an apartment in a large residential complex.

The investor owns it, while the operator manages it under the brand’s name.

The contracts can be set up different ways, but the bottom line is that it’s a way for small investors to participate in big projects, own a pride-of-ownership unit they can actually enjoy themselves from time to time; and they get income, tax-breaks and a hands-off management experience.

The difference this go ’round is that everyone is a lot smarter about how to organize the deals so they aren’t as vulnerable to mood swings in the residential financing markets.

The opportunity is to get into the space while most others haven’t quite seen the light.  And that’s a universal principle applicable to all kinds of markets, property types and investment vehicles.

So much to learn.  So little time.  But that’s why we’re here traveling the world, seeking out ideas and perspectives you might not discover on your own.

Hey, it’s a rough job traveling to the Caribbean to stay at an all-inclusive luxury resort….but someone’s gotta do it.

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10/4/09: A Bird’s Eye View of Opportunities in Lodging & Hospitality

“Get rich in a niche” is a classic piece of advice for almost any profession. Specialists almost always make more money than generalists.  On today’s show, The Real Estate Guys discuss one of the most unique niches in real estate niche: lodging and hospitality.

Joining in the conversation are:

  • Host Robert Helms
  • Co-host Russell Gray
  • Six decade investor “The Godfather of Real Estate”, Bob Helms
  • Special Guest: Ed Watkins – 35 year industry veteran and Editor of Lodging Hospitality Magazine

The dialog was lively and informative as The Guys discussed:

  • An Overview of the Resort Market Today
  • New Trends in the Hospitality Industry
  • Boutique vs. Lifestyle Hotels
  • The Outlook for Condo-Hotel and Fractional Product
  • Opportunities for the Investor in the Resort Space

While the hotel business is flat and financing is almost non-existent, we discovered the picture is quite different in the boutique space.

We also contrasted the condo-hotel model (think City Center in Las Vegas) to the concept of “fractional” ownership.  We’ve heard great things about fractional structures and Ed was able to share some interesting and valuable perspectives.  There’s no substitute for 35 years at the center of an industry when it comes to being aware of cycles, distinguishing between fads and sustainable trends, and having one’s thumb on the pulse of a niche market.

We closed, as always, asking where the opportunities are for today’s investor and Ed gave us some great ideas to think about!

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  • Don’t miss an episode of The Real Estate Guys™ radio show.  Subscribe to the free podcast!
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The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training and resources that help real estate investors succeed.

Reality or Mirage?

Today’s Wall Street Journal reports that MGM Mirage is cutting the price of  the condominiums in its spectacular City Center project in Las Vegas, Nevada.  How big a cut?  Thirty percent!  We’re not sure what their margin is, but that’s probably all of it and then some. Ouch.

Worse, it’s probably still not enough. But only time will tell.  The cuts are a little surprising to us, but clearly they’re the result of a major reality check for MGM Mirage.  And this post isn’t really about Las Vegas, MGM or City Center.  It’s about the LESSONS available in this situation for all of us.

Lesson #1 – The market sets the price. Whatever MGM needs to cover its cost is interesting, but only to MGM.  The market decides what its willing to pay.  In this case, MGM is hoping it’s just 30% off.  Before it’s all done the market may want more.

Lesson #2 – The market is fickle. Three years ago people were willing to pay more. That’s why MGM sold so many.  People had equity, unemployment was half what it is today, financing was readily available for almost anything related to real estate  – even condo-hotels.  But a funny thing happened on the way to the closing table.  Okay, not so funny.  But the stream of foreign money through Wall Street into mortgage backed securities got shut off almost over night, taking with it equity and working capital.  A market heavily driven by momentum did an abrupt 180.  Whether you’re rehabbing a fixer upper or building a skyscraper, if your success requires you to find a ready,willing and able buyer (or in MGM’s case, thousands of them), you better get to market fast – because things can change.

Lesson #3 – Have a Plan B. Donald Trump’s Plan A was to sell the condos in his Las Vegas project, just like MGM and every other developer participating in the Las Vegas rush for real estate gold.  When Plan A bit the dust, he converted the project into a hotel.  Still a tough gig, but the goal is to get some cash flow to hold the property until things improve.  Rich Dad Advisor and Robert & Kim Kiyosaki’s investment partner Ken McElroy says they only do deals they can afford to stay in for 10 years.  Plan A may be to build or fix up for quick sale, but Plan B is to structure the deal so it still makes sense if they have to hold.  Plan A is a win and so is Plan B.

Lesson #4 – Understand the other party’s needs, wants and desires. When you’re in a deal that’s going sideways, whether for reasons under your control or those not (certainly MGM could not predict, much less control the mortgage meltdown), it’s easy to fixate on your own pain.  If buyers aren’t willing to close on City Center, should it be assumed they are unwilling because of the price?  Could they be unable because of lack of financing?  Could they be afraid of reduced rents on their units due to the soft economy?  Until you know what the issue are for the other party (again, in MGM’s case, thousands of them), you might give up or give away profit unnecessarily.

Lesson #5 – Use Creativity to Protect Profits (or minimize losses). Certainly we don’t know all the considerations for MGM, and presumably these are extremely smart people, but we know many investors who are in contract for units in City Center and we haven’t heard any discussion of owner financing.  We know that condo-hotel pricing has all but disappeared. For many buyers getting a conventional third party loan is an impossibility.  But what if City Center carried back the financing?  It doesn’t get cash, but it gets an asset (a mortgage). For those buyers who need income to service the mortgage, couldn’t MGM as the hotel operator, steer more guests into the unit? After all, they still get their operator’s share of revenue, plus they get the mortgage payment.  The owner may need to kick in a little cash flow to feed the mortgage, but better than losing one’s deposit. After all, it’s still one of the premier properties in the country.  Where do you think values will be in 20 years?

You may not be a Big Time Operator like MGM.  But real estate is real estate and when you watch what’s happening for the BTO’s, many of the lessons will apply to you.