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REAL ESTATE Can I get your input on evaluating this property?

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yveskleinsky

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Jul 26, 2007
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I have learned A LOT in the past couple of months, and I am thinking about tweeking the direction that we are headed. Before anyone screams "focus!" let me tell you my lessons learned and why I am thinking about pursuing this route instead before I ask for help evaluating the numbers.

Cabin lessons learned:

1. Confusion and extra travel. When you have a handful of cabins that are not co-located it can be difficult to keep track of service calls and housekeeping.

2. Laundry. Currently we do not have a central place to do laundry. Housekeepers have to juggle either taking laundry home, doing a load there, both, or sacking it up and leaving it for next time- and let me tell you it stacks up like you wouldn't believe. ...There is a cabin operation down the street that has on-site laundry, but because they are all individual units the housekeeper has to load up a wheelbarrow and push it up hill to get the clean linens and stuff to the cabins! I can't even imagine doing that in the snow with the ice and all! Brr!
Benefit of an Inn: On-site laundry and you don't need to go outside to make beds!

3. Utilities. Having a bunch of cabins all over can get expensive. If there are built like a tri-plex or larger then the utilities go way down.
Benefit of an Inn: Cheaper utilities, and co-located service calls.

4. Housekeepers. Biggest pain in my a$$. We have 2 housekeepers- it is hit or miss if they can get to certain cabins- depending on weather. We can't have this happen!
Benefit of an Inn: Off the main drag, streets are always clear and housekeepers don't need to drive up steep hills. ...Also, we can pay them hourly, instead of $60 bucks to clean a full cabin each time- much cheaper!

5. Hedging the bet. Guests that stay at our cabin are out of luck if something happens to that particular cabin- as owners we are also out that income!
Benefit of an Inn: More rooms, can switch rooms if need be.

6. Cost. One cabin= $150k; a duplex= $125; six plex= $335; Inn with 14 rooms=$650k, or $46,430 a door. (Consider that the rent for a cabin is around $125/night and a room at the Inn is $75.)

I am trying to make a solid, responsible decision out of balanced logic and not emotion. So this decision won't be made without a lot of DD. :)

Ok- with all that being said, is someone up for double checking my numbers and seeing if I am evaluating this place correctly? I suppose for nothing else, it would be good practice.
 

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yveskleinsky

yveskleinsky

Bronze Contributor
Speedway Pass
Jul 26, 2007
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lol. I didn't post them yet- I just wanted to see if people were open first.

Here's the numbers (my estimates, not the sellers):

Asking price: $650k for a 10 room Inn with owners quarters (which I would make into a game room and coin-op laundry) as well as 2 duplexes- so 14 units in all. (There is also 2 huge out buildings that I would convert down the road into more rooms.)

NOI: $11,025 (figured $75/night per room X 14 with a vacancy rate of 65%- which is low)

Annual expenses (taxes and insurance may be low, but shouldn't be that off):
Property taxes: $3k
Insurance: $3,500k
Maintenance and repair: $10k
Advertising: $1500
Utilities: $15k
Housekeeping: $36,000

Total CF: $506/month. ...Keep in mind that the NOI is worst-case, and the expenses are average. During peak season vacancy drops to about 25%- giving me a NOI of $23,625.
 

JScott

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FASTLANE INSIDER
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When you say "NOI," do you actually mean "monthly income?"

NOI is generally the *net* operating income (meaning the income minus the expenses), and is generally calculated based on annual income/expense numbers. An NOI of $11K means a monthly cash flow of about $1000 (not including debt service). Debt service on a $650K property will be about $3500/month (assuming 20% down, 7% interest rate, 30 year amortization), so if you're really at $11,000 NOI, your cash flow is going to be negative by about $2500/month.

Based on your numbers, I'm going to assume that your monthly income is $11,025...

If that's the case, here are the numbers I'm getting:

- Annual Income: $132,300
- Annual Expenses: $69,000
- NOI: $63,000
- Cap Rate: 9.7%

Based on your $506 per month cash flow, I'm assuming you're figuring a debt service based on 30 year fixed at 8% with $0 down? Is that correct?

Assuming so, here are my thoughts:

1) Are you going to be able to get this financing? How?

2) Have you factored in all the expenses? What about things like attorney fees (to review contracts), website associated costs, etc? My concern is that you can easily eat up that $6000 per year cash flow in "hidden" costs and actually see a negative return.

3) How much work will this require from you and your husband? Is $6000 per year a reasonable return for the effort you'll have to put in on an on-going basis?

My biggest suggestion would be to run the numbers for future growth to determine if this is a good long-term investment. How much will revenue grow year-over-year? Will you be able to trim expenses in the future? Will you be able to sell for a lower cap rate in a couple years?

For example, if you can grow revenue at 3% YOY while expenses only grow 2% YOY, and then be able to sell at a 9% cap rate in 5 years, you can expect to make over $200,000 over the lifetime of the investment.

But, you need to decide what future numbers are reasonable, and decide if it's a good investment based on your criteria and goals.

Which brings me to my final question: What *are* yours goals for this investment?
 
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yveskleinsky

yveskleinsky

Bronze Contributor
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Jul 26, 2007
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You are right- the $11k is monthly, I was looking at rental income-vacancy rate=net rental income. So annual gross income= $132k and annual expenses are $69k leaving us with $6k/year. ...Maybe a better question is how to average the occupancy rate, because during peak season they are at 75% occ, and off season they are at 35% occ. Is my math right that I would have around a 55% occ? If this is the case I would be bringing in around $60k a year. Which would make it worthwild.

My goal for this property is to own a small business that I wouldn't need to be in daily, but that I would enjoy vacationing at and enjoy working in. I also think it would be fun to develop it into it's full potential and make it a great place for people to visit.
 
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yveskleinsky

yveskleinsky

Bronze Contributor
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Jul 26, 2007
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As far as future numbers, I don't really know what a good estimate would be. I suppose I can ask the Inn keeper how often he raises rents so I can get an idea of what any increases in income would/could be. I would also convert the two side buildings and make them into more rooms which would really increase income.
 

andviv

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how familiar are you with the vacancy rates for inns? I know you are very familiar with the numbers for cabins in your area.

Taking a look at the numbers is the logical way to go
however...
I think that cabins and inns target different types of customers
meaning also different behaviors and probably numbers for vacancy, marketing, etc

So I think that you will need to first get a better understanding of the numbers and how that business (inn) differs from the cabins.

And yes, your logic of cost per door and rent per door was one of the biggest reasons why I switched from SFHs to multis.
 
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yveskleinsky

yveskleinsky

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I only have a rough estimate from the owner as far as vacancy. Slow season: 38%, high season: 75%. That's a big difference. ...I went up there again last night to show WildAmbitions, (and to fix a dishwasher :puke:mini-hijack here: Russ, you'll appreciate this- I thought to myself, how can I enjoy the process of fixing the dishwasher? Answer: turn on some Paul Simon. So there I sat jammin to "Me and Julio Down by the School Yard" as I was sucking God knows what out of the dishwasher with a turkey baster) and she made a great comment- "Yeah, I would love to work there too- but I don't want to have to." That's the kicker! We would need 2 front desk people and a cleaning person (these roles might be able to be combined). We both agreed that we didn't want anymore 3am phone calls of shit fountains in the backyard like we got over Christmas. So how do we run an Inn and remove ourselves from being integral parts of the day-to-day operations? I think the answer is similiar to apartments in that if you have enough doors you can justify (and afford) the expense of a manager. ...Is there a magic number as far as a minimum number of doors we should look at? (This place has 14 as it stands, but could easily be 15 if we didn't have someone live there, and there is a large out building which could be converted into a minimum of 5 more rooms.

Russ, how many rooms do you have? Can you shed some insight as to what you've learned so far? ...If you had to do it over again what would you have examined more carefully or what caught you off guard?
 
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yveskleinsky

yveskleinsky

Bronze Contributor
Speedway Pass
Jul 26, 2007
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497
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Taking a look at the numbers is the logical way to go
however...
I think that cabins and inns target different types of customers
meaning also different behaviors and probably numbers for vacancy, marketing, etc

So I think that you will need to first get a better understanding of the numbers and how that business (inn) differs from the cabins.
I'm sure that they do target different customers. As for marketing, the guy (Ron) has one static webpage with the wrong contact info on it! He does some print advertising, but I think that is a dated way to go. We do 100% of our business via the web, so I think we could do a larger push for online stuff and less in print. Granted, his customers are trained to just walk in v. make a reservation online- but I think they would prefer the ease of the web. ...All the customers that I've come across there so far have been about my age- which I thought was kinda weird- but promising, as I would love to convert the downstairs into a gameroom and target families and possibly young couples.

As far as getting a better understanding of the numbers and how it differs from the cabins- how would you recommend I go about doing that? Should I get a proforma from Ron and post it here to start?
 

andviv

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I was thinking more of the lines of contacting commercial agents in the area, they should have those numbers. Also, an Association of Inns or something like that, that could provide this type of information. How did you find out the occupancy numbers for cabins when you were making the buying decision?

Proforma numbers are a nicer way for the seller of saying "I'm giving you crappy numbers to make us both feel god" and I tend to not focus that much on those.
 
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yveskleinsky

yveskleinsky

Bronze Contributor
Speedway Pass
Jul 26, 2007
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I was thinking more of the lines of contacting commercial agents in the area, they should have those numbers. Also, an Association of Inns or something like that, that could provide this type of information. How did you find out the occupancy numbers for cabins when you were making the buying decision?

Proforma numbers are a nicer way for the seller of saying "I'm giving you crappy numbers to make us both feel god" and I tend to not focus that much on those.
I agree with proforma numbers being a load of hooey, but there are no commercial agents in the area- and even bankers aren't any help. I called a commercial banker last week, and when I asked her how they would evaluate the property she said they don't use a Cap Rate- they go based off of three different appraisals (income, comps, replacement/condition).

I suppose I could look into as Association of Inns or something like that and see what info they could provide. I was thinking about asking to see the guys tax info and see what that shows.
 

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