09/06/15: In Search of Yield – Hotel and Resort Investing

In the second installment of our series on looking outside of little green houses for higher cash flows, we turn our attention to a Monopoly favorite….big red hotels.

Except in this case, they aren’t big, they aren’t red…and they aren’t necessarily on Boardwalk or Marvin Gardens.

So in this episode, we sit down with a seasoned real estate investor and international boutique resort developer for an insider’s perspective on how hospitality real estate works…and where the opportunities are.

In the studio to help us check in to the four-star ideas for hospitality investing:

  • Your hospitable host, Robert Helms
  • His last resort co-host, Russell Gray
  • International resort developer and regular contributor, Beth Clifford

In a world of artificially low interest rates, artificially high asset values, and overtly managed (manipulated?) financial markets…queasy investors are trying to find something real to cling to.

For most investors, that means income.  But not all income investments are created equal.

With stocks and bonds arguably in a bubble, where can you invest for income without risking a huge loss of principal?Debt-based investments like bonds expose investors to the triple threat of low yield, default and collapsing principal value.  Yikes!

And with interest rates SO low, and the looming threat of rising interest rates, it seems like bonds would be a scary place to be.

At least with real estate backed debt like private mortgages (NOT derivatives of mortgage-backed securities), the debt is backed up by a real asset.  One that presumably can generate sufficient income to make the payments…even if the lender has to take over operations.

So while we would be very hesitant to use bonds or bank accounts to generate income from debt (remember, when you make a deposit in a bank you are effectively loaning them your money), we’d be a lot more open to making loans against quality cash-flowing real estate.

On the equity side (buying a property versus lending against one), we like to borrow whenever we can generate more cash flow from the property than it costs to borrow.  And with interest rates so low, it’s better to be a borrower than a lender in today’s market…unless you’re able to lend at above average interest rates and still attract credit worthy borrowers and quality collateral.

Now if you’re an active residential real estate investor in single-family or apartments, you know that rates are low on both sides of the fence.

That is, though loan rates are low…so are cap rates (cash-on-cash returns).  That’s because lenders and borrowers both rushed into residential in search of better yields and security.

That’s why we think now’s the time to look outside of mainstream residential real estate for better yields.  The principles are the same, but the numbers are better.

In this episode, we consider hotel and resort property investing…and not just domestically, but globally.  And whether you want to play in the debt or the equity side, hotel and resort properties offer some very unique and attractive characteristics.

First, the properties are typically nicer…Resort properties are fund to use and to rent out

Sure, you could buy or loan against a dump.  But except for motels that are really more like psuedo-apartments for transients, most hospitality properties are operated for a more discriminating clientele.  Therefore, the properties are in good shape and located in nicer areas.

Next, the properties are professionally managed

While it’s true that you can hire a professional manager to handle your single-family home or apartment building, some investors are tempted to practice do-it-yourself property management.

But running a hotel or resort is much more work because instead of monthly or yearly leases, you’re dealing with daily or weekly tenancies.  And a good operator is the key to success, and it probably should not be you.

Hospitality has a new guest…

A new generation of mobile workers are able to live, work and play...all at the same time...in hotels and resorts.Hotel and resorts are grabbing a new and growing demographic…the mobile workforce.

In today’s technology empowered free-lance world, it’s easier for people to live a far more mobile lifestyle.  It’s no longer necessary to take off work to stay in a hotel or resort.  You take your work with you.

Hospitality properties are easier than ever to market

The same technology which facilitates a mobile workforce also opens up international markets to the small time hotel or resort operator.  From social media to travel sites, it’s just a lot easier for prospective guests to find a property.  So while it’s nice to have a big brand affiliation, it’s a lot more level playing field for boutique operators to compete for attention.

A sweet spot to store your wealth…

If you invest in a very small property, you may not get the economies of scale necessary to attract a professional operator and generate a respectable hands-off bottom line.

If you go too big, the obvious obstacle is you have to have…or raise…a lot of money.  And then you’re competing with other whales.

But there’s a sweet spot…above the small-time operator, but below the mega-chain, where an individual investor can play and there’s still enough meat on the bone to make it profitable.

And if you can find a niche, or a market, where there’s more need than there is supply,  you can get in and stake your claim early.

Rents from the affluent

One of our favorite things about hospitality investing is it allows us to collect rents from businesses and (relatively) rich people.

When you’re buying little green houses or apartments, your customer (tenant) is typically a working class guy or gal…maybe even on some kind of government subsidy like foot stamps, Social Security, Section 8, etc.

These are the first people to feel the pinch of rising food, energy and healthcare costs.  They just don’t have a lot of extra money after paying for essentials.  So when their cost of living rises, it makes it harder for them to pay you rent.

And if the government subsidy goes away or is reduced…or if interest rates on your tenants’ consumer credit goes up…then it becomes even harder for them to pay you rent.

But, while affluent people would probably never rent their home from you, they’ll pay you rent to stay in your resort property.

There are other ways to derive rents from the affluent, but resort property is one of our favorites.

And right now, the yields are much higher than apartments, so we like it even better!

So tune in and take in a heapin’ helpin’ of our hospitality…discussion, that is.  And consider how you might begin to put some paradise in your portfolio.Collecting resort properties can be a fun and profitable way to invest in real estate.

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