Many first-time hotel investors can recall the same advice being handed down to them time and again: Acquire something with low risk and a good reputation, like a franchise. If one has the financial means and right business experience to purchase a DoubleTree, Hilton Garden Inn or even Super 8 as their first hotel, I'm all for it.
Most likely, however, that person is not a young investor trying to make their first million. If you are in this boat, as I was only eight years ago, I'm going to go out on a limb and recommend thinking outside the box, at least for now. If you're willing to do so, the opportunity you are looking for can be much easier to find. Actually, it could be right under your nose.
As investors, many of us avoid mom and pop shops, but it is easy to overlook one thing that mom and pop were bang on about: Wealth does not only come from perfectly procured packages, wrapped in ribbons of low risk and good reputation. As the CEO of a hotel investment group, I remember driving by the first motel our company's investors thought of purchasing. It was a run-down, empty property that required major rework inside and out. Furthermore, it was a Class C property in a city neighbourhood with a relatively high crime rate compared to surrounding neighbourhoods.
Higher rents, placement in upscale neighbourhoods and access to the finest amenities are typical of the Class A/B properties that can reel in investors hook, line and sinker. Costs to maintain these luxuries, however, eat away at the limited investment capital one has as a new investor. Class C and D properties, on the other hand, found in somewhat neglected areas and opportunity zones, can be much more lucrative.
At first, fixing up a Class C or D property requires a sizeable investment. Security, repairs to the envelope and/or foundation and bringing the property up to code are paramount to getting the new business up and running. Remember, however, that the C or D Class motel was bought for pennies on the dollar compared to the cost of an A or B Class hotel. You also get a bigger bang for your buck: Spending $100,000 in capital infrastructure on a C or D Class property could have a much higher economic impact, and not only for your own pockets.
Converting dilapidated and unused spaces into affordable homes or businesses that offer useful services can benefit the macro-economy, and in my experience, the results trickle back to us. Young investors who have the energy and enthusiasm to improve the conditions and future outlook of others are wise to do so, because in the process, they'll also make the political and social connections needed to expand their ambitions. A good support network of influential thinkers and decision-makers can help make up for what one might lack in age, experience or financial backing.
No doubt, money is the rainmaker. Without it, one cannot plant the seeds of any investment. However, the key to growing those seeds into a successful business is to provide a service people actually need. Improvements to a once-neglected neighbourhood - i.e., gentrification - open the doors to a population that will come in droves with an ongoing demand for cheaper rent, new jobs and new business opportunities.
Once the newly acquired property is ready for public consumption, it is important to remember what market segment it serves. Create staff positions dedicated to marketing, especially when re-opening properties that have been shut down by local authorities. Repetitive advertising is key to ensuring your target audience is aware there is an improved, more affordable option in town under new management.
As you bring new customers in, hiring staff who live on-site is essential to helping you manage the property effectively. Two of these key positions should include a property manager and courtesy officer. Property managers are needed 24/7 to deal with maintenance issues. They should also have experience working in the same asset class. Incidents that usually take place at newer A or B Class properties will not likely be the same incidents a property manager would see at a C or D Class property. These buildings are typically older, in need of ongoing repairs and in socio-economically challenged areas. It is also helpful to have a property manager who has worked or lived in the local area in order to help guests settle into their new surroundings.
A courtesy officer is another key role required around the clock. Their focus, however, is on security. Having them live on-site, readily available to report incidents to the police, is important in areas with C or D Class properties. It is even more important when these properties are lodging for families with children.
For any investor, paving their own path away from the franchise route can be hard work. In addition to capital, it requires additional research on how best to staff the property, creative thinking on how/where to market the property and unrivalled skills in relationship management. Any investor, especially a budding millennial investor who more likely has the time and means to take up such a challenge, would be prudent to start this journey now while opportunities for gentrification still exist.
