Get rid of them, if I can't find a way to sell them at a decent price, and if I can find a way to eliminate them that the owners will go along with.
I'm serious.
The same law of supply and demand that means you have to pay $175 to $300 per night for a mediocre room in a mediocre hotel in, say, New York or Boston, where scarcity of hotel rooms occurs naturally, also turns around to bite us in the butt when scarcity is . . . well, scarce.
So, I'm going to create some scarcity - even if I do it by letting some rooms go empty.
I might have an older 125-room property, for example, that was built in the '70's.
(Back in the day, that many rooms was about average size, maybe a little below average. Now, it's too big. Most hotels built nowadays have sixty to eighty rooms. Someone figured out, over the years, that that size makes more sense. If it turns out - and it usually does - that contrary to your rosy revenue projections on your mortgage loan application, once your new property opens, you can actually rent only forty to fifty rooms a night most nights, then you're not carrying an increased debt load on the extra forty to sixty-five rooms that you're not renting.)
I can rent around 40 of those rooms per night at around $65.00. I may fill it completely maybe three nights per year, during big events like graduation or homecoming for the local college, or a Watchtower convention in a nearby arena.
But on most busy weekends, I can rent maybe sixty to seventy rooms. So, obviously, in that location, I don't need more than 60 to 72 rooms.
Over the years, I have seen some very stupid things done to rent the extra rooms. Like cutting rates. Or engaging in "Don't let anyone walk away" marketing. Or renting them at weekly rates to SRO's - essentially, converting the hotel to a slum. (A slum, according to our old friend Jane Jacobs [The Death and Life of Great American Cities: Jane Jacobs: 9780679741954: Amazon.com: Books ], is by definition a place where people live because they have no choice [Page on meyersnave.com ].)
I've heard it said, the big problem with hotels and motels as an investment isn't overbuilding, it's under-demolition. I agree. People who cut rates, or do "Don't let anyone walk away" marketing, are the reason why, and it shows in the hotels they run.
Let's do a little hotel math, here:
Don't believe me? Go to TripAdvisor, pick a town or city you'd like to visit, select a date a week or two in the future, and when you get the list of available hotels, click the drop-down 'Sorted by' tab and rank them by "Price (low to high)". Then scroll down until you find a hotel with a bubble score of 3.5 out of five or more. (We'll use Parkersburg, West Virginia, as an example: Hotels in Parkersburg .) The rate will be close to my $60-to-65 magic number (that Red Roof Inn in Parkersburg came in at $67).
Exceptions are possible in the case of an older property that's been under the same ownership for so long that it's paid for, or that has an old mortgage loan whose monthly payments were negotiated in a year when its rates were much lower, before inflation did its power and magic and the mortgage payment gradually became a smaller and smaller part of the property's total revenue. Exceptions can also occur when the owner got such a good deal buying the property that, after necessary renovations, he can go a little easier on the rate and still get a return.
But generally, no matter where you go, if you're paying less than $60.00 per night, you're inviting an unpleasant encounter with housekeeping, maintenance and/or security problems. Asking for it. Begging for it. Cruising for it. As in, go tell your story to TripAdvisor, where someone might care, because I don't want to hear it. You brought it down on your own head and don't have my shoulder to cry on about it: I tried to warn you, you wouldn't listen to me, so forget you.
The average rate for 'the cheapest decent hotel in town' in all of the markets we've evaluated is $58.52 (and many of those markets are ones where we wouldn't want to put an economy hotel, but it was only after evaluating the market that we could know that with any certainty - so that brings the average down a bit). We define 'the cheapest decent hotel in town' as the lowest-priced hotel in any city or town that has a TripAdvisor bubble score of 3.5 or more. (We defined it so precisely because we're planning to use it as an advertising tagline for a new economy brand we're developing - Calico Inns - Beechmont Hotels Corporation - and intend to communicate that we're serious about it; that you can see, either we're doing it or we're not, and that you can hold us to it.)
A hotel with that score is maybe older, maybe beginning to show its age, but is kept up well, run well, and managing its problems. A hotel with a bubble score of 2 or less out of 5 is a bottom-feeder property. A hotel with a bubble score of one or one-and-a-half is still open at all only because the health department, fire department, or police department in that city has more pressing things to do than to pay it an visit and take a look around for code violations or evidence of criminal activity.
I'm not going to cut my rate below $60.00 (maybe a little lower if I can maintain the property well, and rent rooms at maybe fifty or fifty-five bucks and still get a return). Because if lowering my rates does increase my demand, most of that increased demand will occur only among a market segment that considers a hotel room a discretionary purchase: local people. People from the surrounding town who have a date and need a place to have sex - and those are the most respectable in the bunch (provided, of course, that they fornicate quietly and only with consenting adults, pay the bill, don't trash the room, don't have a lot of people over, and don't go wandering the property all night). The 'hot pillow' trade. The party animals, the drunks, the druggies, the prostitutes and their takers, the criminal element. People who don't go to bed at night - and who have lots of late-night visitors. The hellraisers. Basically, the kind of people that good customers who are willing to pay you $60 to $65 per night for a room will gladly pay twenty to fifty bucks a night more at another hotel instead, because they don't want to be around the kind of people you'll be getting if you drop your rate lower than sixty bucks.
What "Don't let anyone walk away" marketing gets you is people that you can't run off fast enough.
By setting my rates too low, I would not only be lowering the perceived value of my product, I would be lowering the actual value of it. I'd draw a clientele that would scare off any good customers that I could get. I wouldn't be able to keep up my property properly on that kind of revenue, and it would deteriorate. Forget it. I'm not going to do it.
If you're buying or selling a hotel or motel, one of the most commonly agreed upon rules of valuation is a multiple of gross room revenue (GRR). The magic number is usually three - 3xGRR. If I'm willing to pay more than that to buy a hotel, it's because I'm considering a property with a good history and an upward revenue trend (as in, I want to see the gross for the last three or more years, and it needs to be increasing every year, not declining), that is in pristine condition, with high barriers to entry; perhaps because I want that particular property and I'm willing to pay a premium. I'll happily buy one for less - maybe 2.5 or even 2xGRR - but at 2xGRR or below, I'm going to want to make sure the problems I'm probably buying are worth having and that I can solve them. 2xGRR is like buying a $500 car: anything that runs at all is worth that much, but you're probably buying a vehicle that's on its last leg, someone's mechanical problems. Likewise, you can always get a good deal on a leaky boat.
The lower my property is grossing per year in room revenue, the less it's worth. And if most of my revenue is eaten up by my costs, it's going to be worth even less (and as we noted, lowering your rates is a good thing only if it increases your total revenue by more than the total amount it will increase your per-room costs). If I'm not bringing in enough to keep up my property, it's going to lose value by any measure and become worth even less than that.
So, now my pride and arrogance has me sitting on a bunch of empty rooms. If I can't sell them . . . what to do with them?
Ideally, I want to sell the rooms, not bulldoze them or use them to store junk furniture and maintenance supplies. That's my job.
To too many people who think they are hotel sales and marketing geniuses, however, it's all about sell, sell, sell. (The smarter, more professional ones tend to be employed at pricier properties, which might have something to do with the reason why the pricier properties are more pricy.) That's where you get the unsustainably low, $42 per night rates, the "Don't let anyone walk away" marketing, and the look-the-other-way approach to bad behavior by guests who shouldn't even be allowed to rent there.
And they rent a few more rooms, but with the consequences that I've described, destroying any value that their property may have ever had in the process.
It's my job to sell the rooms, but first it's my job to preserve - and increase - the value of your property. If your property loses its value, you've got nothing to sell.
So, I try to approach hotel sales and marketing a little more intelligently.
In summary, if I let you have a room for forty-five or fifty bucks a night, it's because you're someone I want there at forty-five or fifty bucks a night; not just anyone who staggers up to the door because I'm so desperate that I have to rent the rooms cheap, and am willing take anyone that shows up even if I can't count on them for much more than to tear the place apart or scare off my other guests.
A big, very important, part of marketing is not only building your customer base, but shaping and sculpting your customer base.
But if I can't get a decent price for the rooms, then some of them are just going to have to go already, and that's that.
Keeping them in inventory is a cost factor if you're only going to rent them maybe three nights a year on big annual events. They're still going to have to be supplied with some level of utilities. Heat will have to be provided in the winter to keep the pipes from freezing. If they get too hot in the summer - especially in a high-humidity climate - they're going to be mold and mildew prone. If they're not ventilated, they're going to get all musty. They'll even need housekeeping: a room attendant will have to go through them once a week to dust everything, flush the toilet to keep a disgusting ring from forming in the bowl, and maybe squirt down the vanity top, sink and shower.
So, they have to be converted into some other use.
Interior Spaces, Features and Finishes
Do this right, plan your tenant selection so that those who show up will add to the ambiance of your hotel rather than detract from it, and you can add to the value of the hotel as a hotel business. But you have to plan it carefully.
You can't just let the extra rooms sit there.
Originally appeared on Quora
I'm serious.
The same law of supply and demand that means you have to pay $175 to $300 per night for a mediocre room in a mediocre hotel in, say, New York or Boston, where scarcity of hotel rooms occurs naturally, also turns around to bite us in the butt when scarcity is . . . well, scarce.
So, I'm going to create some scarcity - even if I do it by letting some rooms go empty.
I might have an older 125-room property, for example, that was built in the '70's.
(Back in the day, that many rooms was about average size, maybe a little below average. Now, it's too big. Most hotels built nowadays have sixty to eighty rooms. Someone figured out, over the years, that that size makes more sense. If it turns out - and it usually does - that contrary to your rosy revenue projections on your mortgage loan application, once your new property opens, you can actually rent only forty to fifty rooms a night most nights, then you're not carrying an increased debt load on the extra forty to sixty-five rooms that you're not renting.)
I can rent around 40 of those rooms per night at around $65.00. I may fill it completely maybe three nights per year, during big events like graduation or homecoming for the local college, or a Watchtower convention in a nearby arena.
But on most busy weekends, I can rent maybe sixty to seventy rooms. So, obviously, in that location, I don't need more than 60 to 72 rooms.
Over the years, I have seen some very stupid things done to rent the extra rooms. Like cutting rates. Or engaging in "Don't let anyone walk away" marketing. Or renting them at weekly rates to SRO's - essentially, converting the hotel to a slum. (A slum, according to our old friend Jane Jacobs [The Death and Life of Great American Cities: Jane Jacobs: 9780679741954: Amazon.com: Books ], is by definition a place where people live because they have no choice [Page on meyersnave.com ].)
I've heard it said, the big problem with hotels and motels as an investment isn't overbuilding, it's under-demolition. I agree. People who cut rates, or do "Don't let anyone walk away" marketing, are the reason why, and it shows in the hotels they run.
Let's do a little hotel math, here:
- First, if you have an older hotel or motel, you are much better off renting 40 rooms at an average rate of $60.00 per night than you are renting 60 rooms at an average rate of $40.00 per night. Either way, you're going to get the same $2400 in room revenue, but the extra bodies in the other twenty rooms aren't doing you any good. They're just adding to your variable costs - your housekeeping, your utilities, your food if you offer a free breakfast - and devaluing your product and making your overall marketing more difficult. If lowering your rate will get you enough extra, good customers that your increased total revenue is more than your added, total, per-room costs; then okay, it's a good move. If not - as is usually the case - then don't do it.
- Second, about $60.00 to $65.00 per night is as low as most older, modest hotels and motels can set their rates, and still cover their costs and stay on top of their housekeeping and maintenance needs, and give the owners a reasonable profit. (With many owners, if they have to choose between keeping up their housekeeping and maintenance, and making a good profit for themselves, guess what they're going to choose?)
Don't believe me? Go to TripAdvisor, pick a town or city you'd like to visit, select a date a week or two in the future, and when you get the list of available hotels, click the drop-down 'Sorted by' tab and rank them by "Price (low to high)". Then scroll down until you find a hotel with a bubble score of 3.5 out of five or more. (We'll use Parkersburg, West Virginia, as an example: Hotels in Parkersburg .) The rate will be close to my $60-to-65 magic number (that Red Roof Inn in Parkersburg came in at $67).
Exceptions are possible in the case of an older property that's been under the same ownership for so long that it's paid for, or that has an old mortgage loan whose monthly payments were negotiated in a year when its rates were much lower, before inflation did its power and magic and the mortgage payment gradually became a smaller and smaller part of the property's total revenue. Exceptions can also occur when the owner got such a good deal buying the property that, after necessary renovations, he can go a little easier on the rate and still get a return.
But generally, no matter where you go, if you're paying less than $60.00 per night, you're inviting an unpleasant encounter with housekeeping, maintenance and/or security problems. Asking for it. Begging for it. Cruising for it. As in, go tell your story to TripAdvisor, where someone might care, because I don't want to hear it. You brought it down on your own head and don't have my shoulder to cry on about it: I tried to warn you, you wouldn't listen to me, so forget you.
The average rate for 'the cheapest decent hotel in town' in all of the markets we've evaluated is $58.52 (and many of those markets are ones where we wouldn't want to put an economy hotel, but it was only after evaluating the market that we could know that with any certainty - so that brings the average down a bit). We define 'the cheapest decent hotel in town' as the lowest-priced hotel in any city or town that has a TripAdvisor bubble score of 3.5 or more. (We defined it so precisely because we're planning to use it as an advertising tagline for a new economy brand we're developing - Calico Inns - Beechmont Hotels Corporation - and intend to communicate that we're serious about it; that you can see, either we're doing it or we're not, and that you can hold us to it.)
A hotel with that score is maybe older, maybe beginning to show its age, but is kept up well, run well, and managing its problems. A hotel with a bubble score of 2 or less out of 5 is a bottom-feeder property. A hotel with a bubble score of one or one-and-a-half is still open at all only because the health department, fire department, or police department in that city has more pressing things to do than to pay it an visit and take a look around for code violations or evidence of criminal activity.
I'm not going to cut my rate below $60.00 (maybe a little lower if I can maintain the property well, and rent rooms at maybe fifty or fifty-five bucks and still get a return). Because if lowering my rates does increase my demand, most of that increased demand will occur only among a market segment that considers a hotel room a discretionary purchase: local people. People from the surrounding town who have a date and need a place to have sex - and those are the most respectable in the bunch (provided, of course, that they fornicate quietly and only with consenting adults, pay the bill, don't trash the room, don't have a lot of people over, and don't go wandering the property all night). The 'hot pillow' trade. The party animals, the drunks, the druggies, the prostitutes and their takers, the criminal element. People who don't go to bed at night - and who have lots of late-night visitors. The hellraisers. Basically, the kind of people that good customers who are willing to pay you $60 to $65 per night for a room will gladly pay twenty to fifty bucks a night more at another hotel instead, because they don't want to be around the kind of people you'll be getting if you drop your rate lower than sixty bucks.
What "Don't let anyone walk away" marketing gets you is people that you can't run off fast enough.
(Want to try it with your hotel? It'll get you an average of fifty rooms a night -- if you drop your rates to $39.95 per night -- and a TripAdvisor bubble score of 2.5, if you put people on your own staff and their friends writing bogus, glowing reviews from time to time without getting caught. You'll be averaging 24 police calls to the property per month, and have several major crimes, including two rapes and at least one homicide [one other guy was found dead in a room under suspicious circumstances, but could not definitively be ruled a homicide], occur on your property in a four-year period, if you can get away with it that long. That's exactly what happened to the last hotel I saw do it. To give their dipstick corporate management company some credit, they did take care to keep up their housekeeping and maintenance carefully -- resulting in an annual loss of $150-200k per year to the hotel's investors for the last three to four years before it was sold . . . for half its original asking price . . . and only after the investors agreed to take back a note from the new owners. That property's housekeeping supervisor could have done a better job of running it than the prior corporate management. How do I know that she could? Because she already has. When the new owners took over earlier this year, they made her the general manager, despite her lack of management experience, and she's already done an impressive job of turning it around (their TripAdvisor bubble score is back up to 3.0 now [Innkeeper - Winston Salem South ] and climbing). Of course, I did advise and coach her a little, partly because she's a friend, I like her, and I want her to succeed; and partly because I want to see its former corporate management embarrassed and humiliated when it becomes clear to all that their one-time 'maid' does a better job of running that hotel than they ever did.)
By setting my rates too low, I would not only be lowering the perceived value of my product, I would be lowering the actual value of it. I'd draw a clientele that would scare off any good customers that I could get. I wouldn't be able to keep up my property properly on that kind of revenue, and it would deteriorate. Forget it. I'm not going to do it.
If you're buying or selling a hotel or motel, one of the most commonly agreed upon rules of valuation is a multiple of gross room revenue (GRR). The magic number is usually three - 3xGRR. If I'm willing to pay more than that to buy a hotel, it's because I'm considering a property with a good history and an upward revenue trend (as in, I want to see the gross for the last three or more years, and it needs to be increasing every year, not declining), that is in pristine condition, with high barriers to entry; perhaps because I want that particular property and I'm willing to pay a premium. I'll happily buy one for less - maybe 2.5 or even 2xGRR - but at 2xGRR or below, I'm going to want to make sure the problems I'm probably buying are worth having and that I can solve them. 2xGRR is like buying a $500 car: anything that runs at all is worth that much, but you're probably buying a vehicle that's on its last leg, someone's mechanical problems. Likewise, you can always get a good deal on a leaky boat.
The lower my property is grossing per year in room revenue, the less it's worth. And if most of my revenue is eaten up by my costs, it's going to be worth even less (and as we noted, lowering your rates is a good thing only if it increases your total revenue by more than the total amount it will increase your per-room costs). If I'm not bringing in enough to keep up my property, it's going to lose value by any measure and become worth even less than that.
So, now my pride and arrogance has me sitting on a bunch of empty rooms. If I can't sell them . . . what to do with them?
Ideally, I want to sell the rooms, not bulldoze them or use them to store junk furniture and maintenance supplies. That's my job.
To too many people who think they are hotel sales and marketing geniuses, however, it's all about sell, sell, sell. (The smarter, more professional ones tend to be employed at pricier properties, which might have something to do with the reason why the pricier properties are more pricy.) That's where you get the unsustainably low, $42 per night rates, the "Don't let anyone walk away" marketing, and the look-the-other-way approach to bad behavior by guests who shouldn't even be allowed to rent there.
And they rent a few more rooms, but with the consequences that I've described, destroying any value that their property may have ever had in the process.
(Want to do it with your hotel? It'll increase your revenue by about 17% -- for the first year. At the end of that year, your TripAdvisor bubble score will have plunged from a 3.5 to a 2. At the end of the first quarter of the following year, your room revenue will be less than that you had during the corresponding quarter from two years ago, your franchise reservation contribution will have plunged from twelve to maybe three percent, nearly ninety percent of your business will be walk-ins and local people, you'll have lowered your rate by ten to fifteen percent because that's the only way you can sell any rooms at all, and there's no way your end of the year revenue is going to match that from the end of the year two years ago. That's exactly what happened to the last hotel I saw do it. By the numbers - 3xGRR if it were in good condition - it's worth about two million. But it's not in good condition: it needs a couple million in renovations. And the numbers are irrelevant, because it has very few customers left that I'd want to keep after I'd shut it down for a few months, renovated, and made the investment in repositioning it. So, what's that hotel worth now? Do the math: c'mon, it's basic grade school subtraction, two million minus two million, any number at all minus itself, what do you get?)
It's my job to sell the rooms, but first it's my job to preserve - and increase - the value of your property. If your property loses its value, you've got nothing to sell.
So, I try to approach hotel sales and marketing a little more intelligently.
- Needless to say, that property is going to be squeaky clean, I'm going to be more anal than Leona Helmsley at her worst about maintenance and security; and if I could get Anthony Melchiorri to come out and look at it (Hotel Impossible : TV Shows : Travel Channel ), I'd like to dare him to find anything wrong there. I'll take any criticism he has to offer. Just find one. Bring it!
- I'll run a promotion - on more or less a permanent basis - that gives you ten bucks a night off the cost of a room if you donate five bucks to a local charity or non-profit. This gets the local non-profits and their supporters referring business to me.
- If, out of those 125 or so rooms, I only have 70 or so that I can rent for around sixty to sixty-five bucks, those are the ones that'll be offered for rent. The others will be blocked until I can renovate them one by one out of revenue and make them worth close to seventy bucks per night. There's my artificial scarcity, and no one gets a bad room.
- Or, I'll combine two of those rooms and make suites (Michael Forrest Jones' answer to Why can't many hotel suites, including presidential suites, be booked online? ). Residence Inns sell one-bedroom suites at a rate in the $150-200 range. Candlewood sells them for something around $120 to $150. How would you like one for several days at a rate around an even hundred?
- Jacuzzi rooms, whirlpool rooms, or waterbeds? Get out. What kind of business do you think I'm pursuing? Want to check in, maybe with the wife and kids, in the room next to one? If I find one in an existing property, it comes out. You want it, come get it: offer me something - dinner at McDonald's, a couple packs of smokes, anything - and bring a truck to haul it off. If not, it's still coming out. With a Sawzall, if need be.
- If I don't have refrigerators and microwaves in all my rooms, I'll price the ones that do have refrigerators and microwaves a little higher. If you want one, you'll pay an extra ten bucks for a room that has one - unless you're staying more than one night. People staying in town for only one night usually eat out anyway (unless they're local, in which case they just use them to keep their beer cold). People traveling on business, or families, who stay several nights and don't want to spend a lot of money doing it, and who pick up a few re-heatable items at the nearby supermarket, are who in-room refrigerators and microwaves are for, so we want them to have one.
- I'd structure my pricing so that you automatically - without having to ask for it - get a twelve to fifteen percent discount if you book for a stay of three or four nights . . . or a discount of twenty percent if you stay for a week. (After all, you're doing something for me in return: you're reducing my housekeeping costs. Every three days or so, I'd send the room attendant around to change out your towels, empty your trash and vacuum: it'll take her an entire ten minutes. And every week, you get your linen changed. So, I don't mind sharing the savings with you.)
- I'd rent to local people: their money spends the same as anyone else's -- so long as they're willing to pay full price. (No discounts of any kind. Period. For you, it's always going to be the same price, no matter who is the clerk on duty. Negotiations are over.) And, of course, behave themselves. While 85 to 90% of your problems come from local people, 85 to 90% of your local people give you no problems. You just have to deal assertively and conclusively with the ten to fifteen percent who do. (Screw up just this much and you're out of here, permanently. For whatever kind of offense - even answering back to a clerk -- and I'm not going to mediate or overrule: when I'm not here, the clerks run the hotel, you don't. If I wouldn't want my 11-year-old niece sleeping alone in a room next to one we put you in, you are not getting a room here. If following our rules is a problem for you, and you want to try your luck at a motel up the street, fine, I'm not going to allow my hotel to be or become dependent upon that type of business, anyway; and you'll be a walking advertisement for us: any decent customers there who see you acting the way you do will stay with us next time so they won't have to be around people like you. End of negotiation.) Watch that ten-to-fifteen percent figure get lower and lower over the coming months.
- I'd negotiate as many corporate and group accounts as I could: I'm giving up some discounts here, but what I'm getting in return is business volume.
In summary, if I let you have a room for forty-five or fifty bucks a night, it's because you're someone I want there at forty-five or fifty bucks a night; not just anyone who staggers up to the door because I'm so desperate that I have to rent the rooms cheap, and am willing take anyone that shows up even if I can't count on them for much more than to tear the place apart or scare off my other guests.
A big, very important, part of marketing is not only building your customer base, but shaping and sculpting your customer base.
But if I can't get a decent price for the rooms, then some of them are just going to have to go already, and that's that.
Keeping them in inventory is a cost factor if you're only going to rent them maybe three nights a year on big annual events. They're still going to have to be supplied with some level of utilities. Heat will have to be provided in the winter to keep the pipes from freezing. If they get too hot in the summer - especially in a high-humidity climate - they're going to be mold and mildew prone. If they're not ventilated, they're going to get all musty. They'll even need housekeeping: a room attendant will have to go through them once a week to dust everything, flush the toilet to keep a disgusting ring from forming in the bowl, and maybe squirt down the vanity top, sink and shower.
So, they have to be converted into some other use.
- Corporate office space is always an option. No hotel company's corporate office space needs to be more than 5000 square feet or so, about the size of a good-sized house. Any hotel company that needs even that much has at least one hotel with a vacancy problem. It doesn't even have to be in the same town: electronic communication and cheap, sometimes free, long distance service make it a telecommuting option and assures daily visits from people who'll let you know it in a hurry if a property is in a decline. I'd locate back office functions, sales and marketing, and multi-unit managers' offices in such facilities.
- Leasing some converted room bays as office space is an option, if they're on a low floor, or convenient to the entrance of the property. I'd try for people who run some sort of solo practice and do not do a lot of business with the public, where in-and-out traffic is minimal and signage requirements are minimal if non-existent.
- You can fit up an individual, 12-by-24-foot room bay to make the perfect size office for a one-person shop, or you can combine several. (Since many older properties have load-bearing walls between rooms, I'd be careful if, and where, I put new openings in them; especially if it's a midrise property. I once contemplated doing just that in a five-story motel and my architect friend warned me, "I'd want an engineer standing there while I'm doing it.")
- Retail space frequently doesn't work in a hotel even when it's located in purpose built space. I have seen a hair salon, located in a set of converted rooms, that did. The important thing to remember if you're in a spot where the rooms are easy to get to and can be converted for this use is tenant selection: you want people who can draw their customers to their space, not people who are going to rely upon traffic from your hotel.
- Even the iconic Plaza Hotel in New York has converted several floors of its former rooms to apartments (Inside an Apartment in the New Plaza | Pied a Terre | The Plaza ), so there's certainly no shame in that (Historic Motel Converted to $5.7M Low-Cost Housing; Downtown Sears Building on the Market | NewLife Homes, Inc. ). You lease the space, you have steady income, and you don't have to worry about housekeeping. To do it right, however, requires some work, care and investment (17.400.080 Hotel and Motel Conversions ). Your apartments need to be a minimum of two room bays - 576 square feet - because you're not turning your rooms to SRO's (more to come on that one and what I think of them). Screen your tenants carefully: you want to collect the rent promptly when it's due, and your guests will see them most every day. (Unless you're providing a separate utility hookup to each of your new apartments, you will be renting them utilities included, so keep that in mind when you verify income, credit and employment. I'd also do a background check.) Your rent will be a little on the high side, especially if you offer them utilities included, or furnished, and allow them the use of the hotel's facilities such as the pool or fitness room. Each apartment rental will be an individually negotiated transaction, not to be confused with a room rental.
Interior Spaces, Features and Finishes
- I'd be very hesitant - indeed, possibly quite recalcitrant - about single room occupancy; renting to people by the week who have no permanent address elsewhere. Remember, you're trying to turn around your hotel, not bring about its ultimate decline. If I rented to people by the week at all, I'd certainly not allow them a leasehold interest: they'd sign off on a registration card like any hotel guest, with the addendum that This is a licensed lodging facility and the laws governing hotels apply. I acknowledge that I acquire no leasehold interest here, regardless of the length of my stay..., etc. We actually got hauled into the local landlord-tenant court in a cheap property in Connecticut by a weekly renter who got behind on his rent - and who habitually left a small child alone in the room every day so we couldn't lock him out. Well, one day, he took the kid with him, and we applied the lockout - and got served with a summons a few days later. Fortunately, we showed up with a copy of our business license and it was quickly resolved, but we should not have needed to make the trip.
- Another problem you're going to have with SROs, even the more respectable ones, is the "one missed paycheck away from homelessness" syndrome - or in this case, the "two days out of work with a cold or flu away from homelessness" syndrome. (The $250-300 per week rent you're charging them is much of the reason why. Anyone who can spend that much of their income on rent and still save ahead isn't going to be staying there long, anyway - they'll find a place to live where they don't have to live in one room, can rent by the month, and don't have to pay out so much of their income in rent.) Eventually, anyone who spends that much of their total income renting a room by the week is going to fall behind, and you have a tough decision to make: do you let them slide, knowing they'll probably never catch it up? Or do you throw them out in the street (along with maybe an ill spouse, one or two kids, and pets) after you've bled them dry with your high weekly rental rate? Could you do that, and go home at night and feel good about yourself?
- Forget about unit ownership. I have never seen a hotel sell its rooms - without, before, or after converting them to apartments - as condominiums without having serious problems at some point. Even the Plaza in New York rolled out its apartments in 2007 at a price higher than people were willing to pay, even though they were intended and designed for the wealthiest of the wealthy. Even with purpose-built condos and co-ops, you're in another, entirely different field of management. Because ownership is, by definition, permanent; you increase the odds of getting into a situation that can be resolved only at catastrophic cost. Any hotel manager can manage apartments and collect rents. Not all of them have the transferable skills appropriate to condominium management. Chances are, your hotel is an older one, which you'll be converting to more modest apartments or office space, so unit ownership will probably be good for much more grief and aggravation than it can possibly be worth.
Do this right, plan your tenant selection so that those who show up will add to the ambiance of your hotel rather than detract from it, and you can add to the value of the hotel as a hotel business. But you have to plan it carefully.
You can't just let the extra rooms sit there.
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