From the desk:Hotels / Short-Term Lodging (Passive Hold)

What would I actually be buying in a $410k roadside motel?

Small town, two hours from anything, single-story L-shaped motel, 14 units, all with exterior doors onto the parking lot. Seller is 74 and wants out, asking $410k, says he'd take $380k for a fast close. Roof was done six years ago, HVAC is through-wall units, half of them old.

His income story is where I get lost. He says the place is full and collects about $9,800 a month, which would be $117k a year on a $380k price. But when I asked about nightly rates he said hardly anyone stays one night. Nine of the fourteen units are people paying weekly, and four of those have been there over a year. He has a state lodging license and charges lodging tax on everything.

So I'd be buying something that looks like a motel, is licensed like a motel, and is occupied like a cheap apartment building. My deals are usually flips and I'm out in six months, so this is outside what I know. Expenses he gave me are $2,100 a month, which I don't believe for a second on a building with fourteen through-wall units and a parking lot.

What I can't work out is which set of rules I'd be under, and whether the weekly people are tenants or guests. That changes what happens the first time someone stops paying. I have a walkthrough Thursday and no idea what to ask him.

Answer

2megan_doyle15 Get yours

I'm new at this so take the questions as questions, but I chased something similar in a rural county last spring and the answer came from the county, not the seller.

The tenant versus guest line is set by state law and sometimes by local ordinance, and the usual trigger is length of stay. Plenty of states flip someone from a transient guest into a residential tenant after a set number of consecutive days, often around thirty, and once that happens you can't lock a door and put belongings outside, you go through the eviction process like any landlord. Your four people who have been there over a year are almost certainly on the tenant side of whatever that line is where the property sits. That's a question for a local attorney, and it's the first call I'd make, before Thursday if you can.

Questions I'd take to the walkthrough. Ask to see the actual lodging tax filings for two years, because that's a government form and it either matches his $9,800 or it doesn't. Ask what he does when someone doesn't pay, and listen for whether he describes a court date or a padlock. Ask for twelve months of utility bills, since he pays them on a building like that and $2,100 a month total expenses sounds like it's missing insurance. Insurance on a lodging use priced differently than an apartment building, so get a quote before you commit.

The thing I'd worry about most is the license. If you keep the lodging license you keep lodging obligations, and if you convert to residential rental you may need a different permit and the units may have to meet a residential code they currently don't. Ask the county building department directly what the fourteen units are permitted as.

What would I actually be buying in a $410k roadside motel?

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