How much money does it actually take to get into hotels at the smallest end?

Question

Underwriting is my day job, and this asset class has never come across my desk, so I'm asking the entry-level question deliberately. Every hotel deal that crosses my desk is $8M and up with a brand and a management company attached, and the equity check is $2.5M to $3M. I don't have that and neither does anyone I'd co-invest with yet.

What I want to know is what the floor looks like. Is there a real market in 15 to 30 key independent motels where the entry number is a few hundred thousand of equity, and if so what breaks at that size? My assumption is that below some room count you can't afford a general manager, which means the owner is the general manager, and at that point I've bought a job in a small town. I'd rather hear that clearly than discover it. Also curious what people at that scale pay for property management systems and channel connections, because the brand-level stuff I see quoted is priced for 150 keys.

Rena Guide · Accepted Answer

The small independent motel market is real and it's mostly 12 to 40 keys, often on old highway corridors and in secondary or rural markets. Purchase prices at that end frequently run $25k to $60k a key depending on condition and location, so a 20-room property might trade between $500k and $1.2M. SBA lending is common at this size because the hotel counts as an operating business, and down payments in the 15 to 25 percent range come up, with the specifics varying by lender and by your experience in the sector. Confirm any of that in writing with the lender before you count on it, and expect them to ask who is running the hotel.

Your assumption about the general manager is correct. A salaried GM costs $55k to $80k in most markets, and a 20-room hotel at $70 ADR and 60% occupancy generates around $300k of annual room revenue. That figure cannot absorb a GM, so at that size the owner or a live-in couple does the job. Many of these properties come with owner living quarters attached, which tells you what the market expects.

On systems, small-property cloud property management systems run roughly $5 to $15 per room per month, and channel managers that push rates to the online travel agencies run another $50 to $200 a month. The bigger cost is the online travel agency commission itself, typically 15 to 18 percent of the booking, and at the small independent end those channels may be most of your bookings.

One thing to price before you go further: transient lodging tax collection and remittance, plus local licensing and health inspection for lodging, is required in most jurisdictions and the rules differ by state and often by city. That's an administrative load that doesn't scale down with room count.

samantha_ruiz · Answer

The GM math is the whole thing. I looked at a 24-key place and the seller's P&L had a $0 line for management because he and his wife did everything including the laundry. Add a real GM and housekeeping at market wages and the NOI went from $118k to about $40k. The ask was priced off the $118k.

raj_mehta14 · Answer

keystone, that's the same problem I keep hitting reading note deals, where the seller's numbers assume free labor. Is there a standard adjustment for hotels or do you just build the staffing from scratch?

paulgrant17 · Answer

You build it from scratch. Housekeeping is usually quoted per room cleaned, something like $12 to $20 a room depending on market, so at 20 rooms and 60% occupancy that's roughly 3,650 cleans a year and real money before anyone touches the front desk.

tylerbrooks9 · Answer

Sextant, the version of this that seems survivable to me is the extended-stay-ish small property where guests are staying a week or more. Fewer check-ins, fewer full cleans, less front desk coverage. Same building, completely different labor profile. Whether the local demand exists for that is the whole question, but it's the one small-hotel model I've seen that doesn't obviously require the owner on site every day.

aaron_fitz10 · Answer

Does the SBA thing come with a residency or hands-on requirement? I was told somewhere that they want the borrower actively involved and won't fund a passive owner with a management company, which if true kills the whole "buy it and hire someone" idea at this size.

joe_delgado5 · Answer

kestrel, SBA programs generally do expect the borrower to be operating the business rather than passively holding it, but the specifics change and the lender applies their own overlay on top. Ask the lender directly and get it in writing. What I'd worry about more at 20 keys is that your revenue is one bad review season away from falling apart. Two months of a 3.4 rating on the booking sites and your occupancy drops ten points, and there's no brand loyalty program backfilling it.

nicole_adeyemi · Answer

Something nobody's priced yet: the land under an old highway motel is often worth more than the operating business, and in some corridors the zoning already permits a higher use. I've looked at two of these purely as land plays where the rooms cover carry until an assemblage makes sense. That's a different underwriting exercise than RevPAR.

brandonlee36 · Answer

parcel, that only works if the rooms actually cover carry, and old motels have a way of not. Roof, PTACs, and a septic system designed in 1962 for half the current load. The two properties I've walked at this size both had deferred capital in the $200k range on a $700k ask, and neither seller had a reserve line in the P&L at all.

priya_n21 · Answer

So the honest floor is somewhere around a few hundred thousand of equity plus you personally living there and doing the laundry. That's not income without a second job, it's a second job with a building attached.

kevin_lombard · Answer

marlow, that's roughly where I landed too, though the fund and REIT route mentioned in the other thread here seems to be the answer for anyone who wants the exposure and not the front desk. Sextant, given you underwrite for a living, wouldn't a sponsor's deal be the easier place to apply what you already do?

How much money does it actually take to get into hotels at the smallest end?

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