Hotel Investing Secrets: Exposing Hidden Renovation Costs

Hotel Investing Secrets: Unveiling Hidden Costs in Hotel Investing. In this mini-episode of The Gould Mine, I delve into the intricate world of hotel investing, focusing on the often-overlooked financial hurdles of Property Improvement Plans (PIPs) and unexpected renovation expenses. From my firsthand experience, I share insights into why navigating these costs is crucial for anyone considering hotel ownership. Here I take a real life example of a promising deal in Omaha and explore how PIPs and hidden renovation costs can make or break your investment. Join me as we dissect how to effectively analyze potential investments, question every cost, and prepare for the unpredictable in the hotel industry. Welcome to The Gould Mine, everyone, where we unearth the real cost of hotel investing...

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Transcript

•  What's up gold miners welcome back today. I was reading through some of my notes here over the last couple of months and I was reminded about this deal that I was looking at in Omaha and it's funny because the same thing that was happening 6 months ago is still happening today and uh in the hotel world for those of you who don't know Hotel investing and don't understand Hotel investing maybe you're a multi family investor maybe you invest in retail centers or you invest in single family homes but in hotel speak. Renovations are known as Pips property. Improvement plans and typically these Pips are mandated by the hotel Brands and so when you uh change ownership. Typically you are going to be hit with a pip a change of ownership pip by the brand whether it be Marriott Hilton if it's unencumbered if there's no brand. Obviously.
•  There's no need to do a pip although theoretically if there is uh some sort of value add component to your underwriting if you're assuming or if you're underwriting that the proper is going to perform better once you take over have to ask yourself. Why is it going to improve why is it going to perform better and typically. It's because you're going to give the property a facelift and so in the hotel world.
•  We call those Pips and the Pips.
•  Uh can be rather expensive and so I was looking back at this deal that I had in Omaha and at first it looked like a grand slam. It was like a almost over a 3X Equity multiplier over a 5year period which I mean like if you could triple your money in 5 years. I think anyone would do it and so it looked like a grand and slam kind of deal and then when we dug in further we realized that the PIP we we we underwrote. It like a like a $20,000 a key uh pip or or in other words like the renovation was going to cost us about $20,000.
•  A door right for for uh more multif family apartment speak and we got far enough in the due diligence process to where we recognized or realized like that number was way off and and it was going to be more like $50,000 a room $50,000 a door $50,000 a key and so what was once a phenomenal deal quickly turned into a deal that didn't look so great and by the way some people still might have done it. Some groups still might have done it but we know what our investment thesis is we know what our buy box is and we know what our criteria is and it just no longer made sense and so this is a theme that is still occurring to this day where we are looking at a property.
•  We look at the financials we look at the pictures that we can find on online and we've assigned what we feel in our minds is a fair pip estimate based on what we're seeing and of course like some are easier to do than others. This one was different for a lot of reasons that I won't get into there was elevator issues.
•  There was ball.
•  There were ballrooms that needed to get completely redone doors. I forget what you call those the zero gravity doors ones that you know in the that are the ballrooms that turn like you know four turn one Ballroom into four lots of expensive things. Elevators I don't know if I mentioned that before but there's just a lot of things that needed to be done. In this hotel there was a restaurant that would needed to be completely gutted and there was a lot that we didn't see that you wouldn't you wouldn't naturally or or or think to put into your a renovation estimate and so there something that has come up frequently now though or frequently enough for me to want to make a mini gold. Nugget episode which is this definitely make sure that there's room in the underwriting there's room in your deal analysis for things that come up during the renovation period because what we're finding right now is like hey. Whatever we think it's going to be due to to inflation due to the increased cost of Labor. Due to the increased cost of of supplies and goods. You have to make sure that there's some meat on the bone and well we like that one was a was $30,000. A door which would have been like I think an additional I want to say 7 or 8 million that we would have had to spend on that property. It was a big hotel but something that's been coming up a lot and hope that you take that little gold nugget and apply it to the next time that you're underwriting these deals or you're looking at deal even if you're not a sponsor or general partner in these deals and you're you're a passive investor make sure that you ask the hard questions right like hey how much are we factoring in per per room or per key into this model and do we have room if the renovation goes over the state of gold. Everyone hope you found this little gold nugget useful n.