LossHotels / Short-Term Lodging (Passive Hold)

The silent 30% of a 9-room inn still takes 40 hours a month

This belongs in the passive room as a warning about the word.

A friend who'd managed restaurants found a 9-room inn in a small tourist town, walkable to a state park entrance, doing about $290k of gross with an owner who'd stopped caring. Purchase was $840k with $210k down. I put in $63k for 30% and he put in the rest plus all the operating work. The document said I was a non-managing member with no obligation to contribute labor. I believed the document.

Year one gross came in at $312k, which was fine. What wasn't fine was that a 9-room inn cannot carry a real manager. My friend was the front desk, the booking system, the breakfast, and the guy calling the plumber at 11pm. By month five he was burning out and calling me, and because my $63k was in there I started answering. I built the rate calendar. I handled the review responses. I drove three hours twice to cover weekends when the one part-time housekeeper quit.

Call it 40 hours a month for about 14 months. I have no idea what that's worth but it wasn't zero.

We sold at month 26 for $865k. After costs and the loan balance my share of proceeds was $52k against $63k in, plus about $6k of distributions along the way. So roughly $5k down in cash and a year of my weekends gone.

What I'd do differently. I'd ask what the property can afford to pay a manager before I ask what it earns, and if the answer is that the owner is the manager, then nobody's interest in it is passive, including mine. Small lodging is an operating business with a building attached. I'd also have written down, in advance, what happens if the operating member wants out, because that conversation at month 18 was worse than the money.

Answer

1angela_burkeServicePRO6

The failure you're describing is one I recognize from years of running a small service team, though I'd name the cause differently than windlass. The revenue line was survivable. What killed it was that there was exactly one person who knew how anything worked.

Nine rooms can be operated for a fee, just not by a salaried GM. In the small tourist markets I work in there are people who run three or four inns on a shared back office, one property in each town with a local housekeeping contractor and a shared reservations desk. They charge somewhere in the range of 10 to 15% of gross plus reimbursed payroll, which on your $312k is $31k to $47k. That's real money against your NOI and it's less than what your friend's burnout cost the partnership, because his burnout is what forced a sale at month 26 into whatever the market happened to be.

The other thing I'd have insisted on is coverage depth. One part-time housekeeper is a single point of failure and she quit, which is the normal outcome. Two part-timers who each want fewer hours is more expensive per hour and it does not put you in a car for three hours.

So the fix I'd take from this isn't smaller ambitions. It's that before you buy, you find out whether a third party manager exists in that specific market and what they charge, and if the answer is nobody, then the deal requires an operator to live there and you're buying a job for somebody. Price it that way or pass.

3 replies

1luis_carrera Get yours

The number that jumps out is $312k gross on 9 rooms. That's roughly $95 a night at 100% occupancy, or something like $150 at 63%, and either way there is no version of that revenue line that supports a salaried GM plus housekeeping plus your debt service. Did you run that before closing, or did the owner's tired financials look good enough that the staffing question never got asked?

4Rena Expert

The distinction that decided this is between owning real estate that is leased and owning an interest in a lodging business. A single tenant net lease sends you contractual rent regardless of how the tenant's week went. A hotel or inn reprices every night and generates revenue only by selling rooms, which requires pricing, staffing, marketing, and service delivery every day. Ownership percentage does not change that. It changes who is legally obligated to do the work, which is a different thing from who ends up doing it when the operating partner runs out of capacity.

On scale, your numbers describe the structural problem with very small lodging. At roughly $312k of gross revenue, a payroll line sufficient for a full time general manager plus adequate housekeeping coverage consumes a share of revenue that larger properties spread across many more keys. That is why the sector's passive exposure generally sits in larger assets with a professional third party operator, or in structures where a manager is contracted and paid a fee, and why properties in the 8 to 15 room range are usually owner-operated businesses.

The operating agreement language you relied on described your obligations. It could not describe your incentives, and a 30% position in an asset that needs someone to answer the phone at 11pm produces exactly the pull you experienced.

One narrow point. Whether a non-managing member can be pulled into operations without affecting their liability shield or tax characterization depends on the agreement and on state LLC law, so anyone in a similar structure should confirm that with their own attorney rather than reading the operating agreement alone.