Mar '23 in General discussion
Deal or No Deal - Hotel Deal
This is a hypothetical deal - I just want to educate you on how to evaluate a hotel deal.
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Let’s say you have a hotel with 100 rooms, it charges an average of $90/night (ADR) with an occupancy of 65%. It’s a Holiday Inn in a Tier 2 city like Cincinnati, Ohio. The seller is asking $8M. Is this a good deal or a bad deal?
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Here are the 4 Steps to calculating what a hotel is worth without using a spreadsheet:
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Step 1: calculate the number of available rooms (AR)
Formula: number of rooms x 365 nights
AR = 100 rooms x 365 nights = 36,500 available rooms
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Step 2: calculate the hotel room revenue
Formula: AR x ADR x Occupancy
36,500 x $90/night x 65% = $2,135,250/yr
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Step 3: calculate the Net operating income
If there’s no other income, (say it’s limited service hotel), then you multiply the hotel room revenue by a factor between 20% to 40%
Formula: Factor x Revenue
Since it’s a Holiday Inn, which is a limited service hotel, that factor is around 30%
NOI = 30% x $2,135,250
$640,575
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Step 4: calculate the Value
Formula: NOI / cap rate
For a hotel, its cap rate is dependent on the brand and area. For this particular instance, a 9% cap rate is appropriate for a Holiday Inn in Cincinnati:
Value = $640,575/ 9% cap
$7,117,500
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Since the seller is asking $8M, the quick answer is that this is not a good deal. But that’s not necessarily the case. $7.1M is the value right now but what if with some renovation we can push the nightly rate, and combined with better marketing we can increase the occupancy, then the proforma value will be higher.
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Because of the overwhelming response I got last Saturday on our FB group, we’ll do a Masterclass on Hotel Investing. One of the things you will learn is how you can increase a hotel’s value. Most importantly, during the Masterclass, you will learn HOW you can be a HOTEL INVESTOR and OWNER. (and it does not matter even if you’re broke or even a newbie investor).
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The Masterclass will be on Wednesday, March 29, 8 PM eastern. There will be NO REPLAY. Comment below to get the Zoom link.
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Deal or No Deal - Hotel Deal
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