How to Buy a HOTEL as Your Next Rental Property
Commercial real estate investing might seem intimidating, but in many cases, this kind of rental property is even easier to buy than a single-family home. After two failed attempts, our own Tony Robinson unlocked the blueprint for buying commercial properties as a beginner!
Welcome back to the Real Estate Rookie podcast! Recently, Tony took down his very first commercial deal—a thirteen-unit property he plans to transform into a hotel with self-check-in convenience. But this huge triumph didn’t come without a few costly mistakes. Before landing his “golden goose,” Tony missed out on two properties and lost thousands of dollars in the process. By his third attempt, however, he had cracked the code!
If you want to scale your real estate portfolio and become a full-time investor, buying a commercial property might be your best bet. In this episode, Tony dives into the numbers and projections for his new hotel, as well as the biggest takeaways from his experience. He also shares how to find a market for a niche property, how to raise private capital for a large deal, and why it’s easier to approach an owner about seller financing on a commercial deal!
Ashley:
This is Real Estate Rookie episode 367. Today’s guest, we are going to be talking to someone about buying a motel. We’re going to learn how this is actually achievable for a rookie investor like you or me. And we are going to talk about a couple failures they had and how much money they lost. And also, we’re going to go through how they made it possible to purchase this 13-unit motel.
I am Ashley Kehr, and today I am solo. I am joined by the guest, Tony Robinson. Tony Robinson, welcome to the show.
Tony:
Ashley Kehr, I’m so excited to be here and I think that might be the best podcast introduction I’ve ever had in my life.
Ashley:
Even with all the stutters?
Tony:
Even with the mic check. “Oh, we got something coming through.” Yeah. No, I love that. That was good.
Ashley:
Besides that, I still do need you to do your co-hosting portion, so please tell us what is the Real Estate Rookie Podcast?
Tony:
Well, Ash, I’m super happy to do my usual co-hosting responsibility. So, this is the Real Estate Rookie podcast where every week, multiple times a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. And like Ash said, today, I’m actually sharing my own story. I’m sharing some stuff going on in the world of Tony Robinson, some things that I’ve done and hopes that we can inspire some of you rookies out there to maybe swing a little bit bigger for that first or that second deal.
Ashley:
Yeah. So, Tony, we’re going to be talking about a motel that you purchased. And I’m sure a lot of you are already thinking, “What does this have to do with me? I’m a rookie investor. I only have one deal.” Well, Tony’s going to talk about how that is actually achievable. So, Tony, what made you first of all want to purchase a motel?
Tony:
It was actually advice from Brandon Turner, and I think I mentioned this in the podcast before, but I was hanging out with him a few years ago. This was back in late 2021. And he told me one of the things that he regretted in his investing career was that it took him so long to go bigger. And he’s like, “So, Tony, if I can give you any advice to go bigger sooner.” Because Brandon spent a decade… He said, “It took me 10 years to get to 100 units,” in whatever, the four or five years that he was running Open Door Capital, there were almost like a billion dollars. Something crazy like that.
It was like, “I wish I would’ve done this sooner because I literally cost myself hundreds of millions of dollars worth of real estate.” So, it was that conversation. I don’t even think Brandon realized how impactful that was to me, but it really kind of changed that trajectory of how I wanted to focus as real estate investor. And at that moment, I set a goal of, okay… I think we had 15 properties at that time. I said, “I really want to scale up into the commercial space,” and that’s what kind of got me going down this path initially.
Ashley:
So, was this your first attempt and was it successful at getting your motel? Let’s hear the full story of you on your journey to get a motel.
Tony:
It was definitely not my first or my second. There were a couple of false starts here. And just to give you guys some context, a lot of you know my story, some of you don’t. But when I lost my job back in 2020, the only way we were able to continue scaling was through the use of partnerships, raising capital from other people. That’s how we bought the vast majority of our properties after I lost my job. So, I had already kind of built the skill of raising capital in some regard, but we were doing it on these smaller projects, right? We’re buying homes for $300,000, $400,000, $500,000, $700,000 $800,000. They’re all single family properties. So, I said, “Well, we’ve already got this skill of raising capital. Instead of doing it for one small single family home, what if we just blew that up so we did it on something bigger?” And it made sense. There’s more scale that comes with bigger properties, you can do that faster. Said, “Okay, that’s the goal.”
So, back in summer of 2022, so this was, I don’t know, maybe six months after that conversation with Brandon, I’m like, all in, gung-ho, “Let’s make this thing happen.” We ended up finding our first commercial property that checks all the boxes that we were looking for at that time. It was, I don’t know, I think 23 separate cabins. It was a cabin resort here in California. 23 separate cabins, but all in the same parcels, one hotel that they ran. And I said, “This is great. This is exactly what we’re looking for.” And it was just under $6 million was the total amount we needed to raise to take that deal down.
Ashley:
Tony, before that, what was the most expensive property you had purchased and now you’re jumping up to 6 million?
Tony:
I think before that, in terms of purchase price, our most expensive was like 800K.
Ashley:
So, that’s a big jump, you got to have some confidence.
Tony:
That’s a massive jump, right? It speaks to how maybe overconfident I am in myself sometimes. But yeah, we went from, I think it was a 785 to a 5 million… And that was just the raise. That was all the money we needed to raise, so it was actually a little bit more than that. But yeah, so I said, “Cool, we found this property. Let’s start doing the work.” And we started going down the path of raising money and it started off pretty strong. We did the presentations and we’re talking to investors and money was coming in. And after a while, things just started to dry up. And we got about halfway through that raise, just under 3 million bucks and we just couldn’t get any more cash. We had kind of tapped out my resources, we had tapped out my network. And it was also just a difficult time to raise capital during the summer 2022.
That’s as the market kind of started to shift and folks who I knew who were way more successful than me in the world of syndicating, they were also having difficult times. Granted, they’re raising 100 million to my six, but even for them it was difficult to kind of make that happen. So, I think part of it was timing. We didn’t step into this to do it the first time at the best time, but also I think we didn’t really lay that foundation strong enough to step into it and be super successful off the bat. So, unfortunately, we had to end that raise. Someone else came in and they made an all-cash offer to this person.
And we were able to negotiate to where they gave us back our EMD, which is 50K. I was very happy to get that 50K back, but we lost probably another 50K, maybe even more on due diligence. Legal fees alone were like 30,000, 35,000 bucks. There was environmental studies, an appraisal for a property that big is expensive, the inspection reports are expensive, we scoped the sewers and all these other things. So, those costs we never got back, but luckily, we were able to recoup some of those funds.
Ashley:
And EMD is your earnest money deposit. That’s what you’re putting down saying that, “I am going to purchase this property.” And it’s usually refundable until you do the due diligence. And then, once that time period is done, you keep it. So, you must’ve been past the due diligence period then?
Tony:
We were past the due diligence period. Money was hard, it was non-refundable. But we were honest with the seller and said, “Hey guys, look, we don’t think we’re going to be able to finish this raise off.” And they said, “Okay, we actually have someone else’s interested.” And we gave them all of our due diligence. So, all of that, the appraisals, the inspections, we gave them everything we had to the new buyer, so they didn’t have to spend that money and that’s why the seller ended up giving us back our 50K for the EMD.
Ashley:
What a great little technique to try to negotiate that back, instead of just walking away and that money a loss. Okay, so one thing you did mention was that you felt very confident because you were raising capital. What are three things a rookie could do today to become an expert at raising capital? So, they haven’t even purchased a property yet, but they want to learn how to raise capital, whether it’s $10,000 to pay for rehab, whether it’s enough cash to purchase their first property from somebody. What are three things they should be doing today to be actionable at raising money?
Tony:
I think first, this is my approach, other people out there might have different ways of doing this, but I can tell you what we did and I’ll try and break it down into three steps. First, we built our own competence in a certain asset class. So, we became really good with our own capital at first, at identifying properties that are good for short-term rentals, identifying ways to analyze those deals, and we built that skillset of our own. From there, the focus was on growing our network. So, obviously we do podcasts. I have a lot of stuff on social, YouTube, we go to events, we host our own events. There’s a lot of different ways that we come into contact with different people who might be a good fit for what it is that we’re going to do.
And then, the third step is you make the offer, right? Once you have a good opportunity, you’ve got to have the guts to reach out to these people who you feel might be a good fit to say, “Hey, look, Ashley, I know we talked a few months ago and you kind of expressed an interest that if I found a good deal, you might want to see it. Well, hey, do you mind if I share something with you?” And it’s a simple conversation like that. And I think those are the three steps. Build your skillset, build your confidence, build your network, and then make the offer.
Ashley:
Tony, I want to get into the next property before the 14-unit motel and find out what lessons were learned in that one that failed for you, your opportunity costs there. But we’re going to take a short break and we’ll be right back.
And welcome back to the show. We have our wonderful guest today, Tony Robinson, who just talked about his first commercial property where he did not succeed at purchasing it and some of the lessons learned. And we’re going to go into one more before we actually get into the golden goose, a 14-unit motel. So, Tony, I’m definitely excited to get more into the actual success of the property and learn how rookies can learn from your mistakes and also achieve something similar. But first, what happened with the second commercial property you tried to purchase?
Tony:
So, our next goal was to try and just scale back the raise a little bit. So, since we raised just under 3 million on that first property, we said, “Okay. Well, if we already did almost 3 million, let’s just make sure the next raise doesn’t exceed that amount.” But now, mind you, almost a year had passed between that first attempt and when we tried to go around the second time. And we hadn’t done a really good job of keeping those relationships warm, we basically just didn’t talk to people for a year. And obviously, a lot of things change from over the course of 12 months. So, when we found this next opportunity, it was a development property that we were working on and it was somewhere on the East Coast and it was just over $2 million. We’re like, “We got this in the bag because we’ve already done this before.”
So, we go out doing a lot of the stuff we did before, reaching out to folks, but the response was a little bit quieter because we hadn’t done any work beforehand to warm these people up. And even though my audience had grown, even though my reach had grown, I hadn’t done any work to introduce those people to the idea of what it is we were working on. So, it was incredibly difficult the second time around. And I think the fact that it was development, we had never even done development before, so it was something new totally to us as well. We failed miserably on this raise. And again, we lost another 30,000 bucks on legal fees. We actually had a lease option we were paying for in this property, trying to hold it down, so we could do the raise. So, we probably sunk another, I don’t know, 40, 50, maybe even more into this deal as well before we had to pull the plug on it finally.
So, the main lesson we learned after both these failures, two really, first is that you’ve got to consistently be raising capital even if you don’t have a deal, and we weren’t doing that. We were just banking on the fact that Tony has his reputation and we can send one email out and hopefully raise $2 million. It’s not how it works. So, we learned that we need to make sure that we’re constantly raising capital, even if there’s no deal. And the second lesson we learned was that we just needed a really small base hit. We don’t need to, like you mentioned earlier, Ashley, go from 785,000 to a $6 million raise. We need to go from 785 to like a million, and that’s what we ended up doing on the deal that we actually ended up closing on.
Ashley:
So, let’s get into that deal because that’s the exciting part. We want to learn how you did this. So, let’s do a little rapid fire first. How did you find the deal? What did you purchase it for? How did you negotiate it? Where is it located? What’s my discount code to book it?
Tony:
We’re actually going to do a big grand opening, so if you want to come out, we’d love to have you. But we found the deal was actually listed right on Crexi or LoopNet, whichever you want to call it. So, no super ninja thing there. It was originally listed for over a million bucks. We ended up closing-
Ashley:
Will you just say what those are real quick? I mean, most people know Zillow, realtor.com, but-
Tony:
Yeah, so think of Crexi and LoopNet as your commercial equivalent of Zillow and Redfin. So, whereas Zillow, Redfin are primarily small, multifamily and single family homes, Crexi and LoopNet are majority, or I think all commercial properties. So, you’ve got hotels, motels, multifamily, office, et cetera.
Ashley:
Okay, so sorry to cut you off there. I just wanted to explain that because those websites aren’t as common as the single family ones. So, then you found the deal and what happens next?
Tony:
And quick side note, another site that we look for that works really well in the hospitality space is BizBuySell.
Ashley:
Oh, I’ve seen that one. Yeah.
Tony:
Yeah, you wouldn’t think to look at that website as a real estate investor, but if you’re doing commercial hospitality, there’s actually a lot on that website as well. So, we find the deal and we end up in negotiations with the seller as we look at some of these commercial properties. And one of the beauties of investing in commercial real estate versus traditional single family or the small multifamily is that sellers are more open to seller financing, especially when you find some of these mom-and-pop run boutique motels, hotels, et cetera, because they understand that if their books aren’t great, these aren’t super bankable assets in a traditional sense. They almost have to consider seller financing if they want to get this property sold.
Now, this property had been owned by a gentleman and he ran it, did an incredibly great job with it. He ended up passing away back in 2016 and his kids inherited the property. And you saw just year over year revenues decrease once the kids took over because they weren’t on site, they didn’t really have the desire to do this. It was just something they inherited after their dad passed away, and I just don’t think they really wanted to be in this space. So, revenue peaked under the dad the last year that he ran it. It was like 600,000 bucks in annual revenue for this property.
Ashley:
Tony, how useful do you think that was that you found that information out, that the dad passed away, the kids were running it remotely across the country? And do you think it’s useful for somebody trying to purchase any property to find out as much as they can about the sellers?
Tony:
It was super useful because we knew that the kids didn’t really want to do it anymore, and they had attempted to sell the property. It had been listed for a while, but they were asking too much. So, we had that information and we knew that there was a strong motivation there. We did our best to make it a win-win. But obviously, I think it worked a bit in our favor to get some favorable terms from them. So, what we saw when we dug into the data was that the property had capped out. The very last year that the dad ran the property, it did like $600,000 in top line revenue, which is pretty good. 13-unit motel in the city, 600 grand is pretty solid. The kids, the last year they ran it. It was like 190 something thousand dollars.
Ashley:
Big difference.
Tony:
Yeah, only a few years later, but it goes to show what management can do. So, we said, “If we can just match what the dad did, we’re going to have a pretty good deal on our hands.” So, we were able to negotiate with the sellers. We got them to seller finance, 80%, we had to put down 20%. Again, they’re originally asking over a million bucks for this property. We got the purchase price down to $950,000. It’s a 30-year amortization. It’s a 10-year term, and the first two years are interest only. So, our payment right now during this interest only is under 5,000 bucks for a 13-unit property. I have single family homes right now where the mortgage is the same amount, which is crazy to think, right? So, we got an incredible deal in the seller financing for this one.
Ashley:
Was this your first offer to them or did it take some negotiation?
Tony:
We went back and forth a few times, but we did what we talked about, but we gave them a few options. We said, “Hey, if we need to go out and get big financing, this is the number. If we need to go out and do this, this is the number. But if you guys want the most favorable term for you as well, hey, let’s talk seller financing,” and that’s the route we end up going down.
Ashley:
Okay. So, the question I have with this deal before we go any further into it is, did you find the deal first or the market first? What came first, the chicken or the egg? Because I feel like a motel is very specific and it’s not like you can go into one neighborhood and have 100 to choose from. So, did you go and select different markets or how did you kind of find that with having such a rare niche of property?
Tony:
Ash, you’re totally true because if we were doing traditional multifamily, I could say, “I’m going to focus on the Dallas-Fort Worth, metropolitan MSA,” whatever it is, and I can spend my whole life investing in that one market. With hotels, with hospitality, there’s not that heavy of a concentration. So, you do have to kind of spread things out, especially for the buy box that we had. So, I talked about lessons learned after those two failures. We had to redevelop what our buy box was. So, we said we wanted something that was $1 million total. We didn’t want to raise any more than a million bucks on any deal moving forward. It doesn’t matter what the purchase price for any of that stuff was, but the raise had to be no more than a million bucks.
We knew we wanted something that wasn’t going to be a full gut rehab. We didn’t want something that we were going to have to take down to the studs and replace everything. Cosmetic stuff we were okay with, but we didn’t want a full gut rehab. And ideally, we wanted something that gave us the option to at least attempt to blend the idea of traditional hotel stays with an Airbnb type philosophy, which is what we found. So, when we had that buy box, rehab, purchase price raise, it kind of narrowed down what we were looking for. And since we already had experience investing near national parks, we were looking to lot near national parks. To answer your question, we found the city first because it was kind of centrally located near some national parks in Utah and Arizona. And we actually offered on a deal last year in that city, they didn’t accept our offer. We just kept our eye on that city and then this deal ended popping up and we were able to close on it.
Ashley:
Okay. Yeah, because I wondered about that as to being so specific as to how to find it across the country. Is it pulling up the map and it’s like, “Okay, I’m just going to start from the West Coast and head to the East Coast looking for motels”?
Tony:
Yeah, let me just really quickly just talk about what I saw in this market, because this applies not only to a commercial, but you can also use this when you’re doing single family stuff as well. There’s five cues I look at to understand if a city is ripe for increased competition.
Ashley:
Can we call this almost like your buy box for the market then?
Tony:
I guess you can. It almost is like the buy box for the market, right? But there’s five cues. There’s design, amenities, pricing, photos and reviews. Okay, design, amenities, pricing, photos and reviews. Design, I want to look at the competition and understand when was the last time these units were renovated? Are the majority of the properties 2024, super modern, nice furnishings or are they 1990s or early 2000s type stuff? If I see a lot of properties that are lacking strong design, that’s a sign for me that I can go in there and compete at a high level because I know we’re going to design our properties incredibly well. Next are amenities, what are the things that people actually put into their properties to make it stand out? Are guests getting pools? Are they getting hot tubs? Are they getting game rooms? Are they getting things that people want to enjoy while they’re on vacation? Or are most of these properties bare bones where you’re just getting a bed, a mattress, and some forks and silverware?
How do the photos look? Are there professional photos that really capture the space in the best light or does it look like someone hired their grandma with their 1999 Razr flip phone to take all the photos of the property? And if you see a lot of those amateur photos, that’s another sign that there’s an opportunity for you to go in and compete. Pricing is a fourth option, or the fourth cue I should say. If you see static pricing, where they’re charging one flat rate during busy season, one flat rate during a slow season, and it doesn’t matter if you’re willing to pay more or less, you don’t have a choice, that’s a sign of me that we can go in and probably optimize our revenue by using tools like dynamic pricing.
And the last cue I look at is reviews. If I can go into a property or go into a city and see that there’s poor design, a lack of amenities, terrible photos, no dynamic pricing, yet all of those properties, the majority are still getting strong reviews, that’s a sign to me that if I go in with a superior product, I’m going to immediately be competing at the top of that market. And we saw all of those cues in the city in Utah.
Ashley:
That is awesome, Tony. And I think that easily can relate to flippers in a sense too, or even just long-term rentals is going online and looking and comparing to the actual listings that are out there. You can usually tell if a house is a flipper because there’s nothing personal, even if they have it staged really, really well, that it looks like someone’s living there, but there’s no personal photos anywhere or things like that. But comparing as to what is the general norm in this area, or is there even any kind of quality of flipper? Things like that in the finishes. And then for long-term rentals, just what are the finishes that are in different apartments too? And you can go to the different property management websites and actually look at reviews too of the different properties, especially for complexes in the area too.
So, we’re going to take another short break, and when we get back, I want to hear about Tony’s team. So, Tony, Superman, amazing, bodybuilder, but did he do this all you himself? We’re going to find out and when we come right back.
Okay, we are back from our short break. So, Tony, please tell us how you took down this deal all by yourself.
Tony:
I did every single piece of this deal from start to finish by myself. No. So, when I made the decision to get into commercial, one of the first things I recognized was that we still have so many other things that we’re juggling, right? With our existing single family portfolio, our content, our cleaning company, like we’re getting into property managers, a lot of the things we’re doing. So, I wanted to focus on more of a top-down approach where I could find a really solid right-hand person and let him kind of run with everything that needs to be done. So, I did that. And he was an old coworker of mine who just also happened to start investing in Airbnbs separately for me.
And we bumped into each other at BP Con back in New Orleans a few years ago, and he said, “Tony, I’ve been following along. Love what you’re doing, brother, and I’ve got a few myself.” And that conversation led to him becoming the COO for Robinson Capital. So, he led a lot of the charge with this deal, and it was great because we would sync once a week. He’d given the update, I’d let him know, “Hey, here’s what I think.” But he really led the acquisition. He led most of the negotiations. He made sure that we had the licenses and everything. And really, took this one across the finish line, and I got to act in more of an advisory role on this one.
Ashley:
Tony, at what point do you think someone should consider hiring their first acquisitions person, their first COO for their company? That’s a responsibility is to bringing somebody else on your team who’s not a lender and agent that has other clients they’re working for, but bringing somebody on to be on your team specifically?
Tony:
Yeah, this is one of those situations that’s kind of unique where it’s more of a do as I say, not as I do, because I know I want the top-down approach. But again, I’m in a slightly more unique position where I’ve got a larger reach to a lot of folks who will probably enjoy the opportunity to work with me, and I’m super grateful for that. But for a lot of our rookies that are listening, they might not have that opportunity. So, I think for rookies that are on the call, instead of going top down, unless you can pay for staff and you’ve got the ability to just kind of bankroll that, you’re probably going to have to go bottom up, to where you’re going to do everything to begin with. And then, as your portfolio starts to grow, you start to pull people into those different responsibilities. But I think that’ll be the process for most folks who are listening to this podcast right now.
Ashley:
Okay. So, besides X, who else on your team did you bring on?
Tony:
We had some acquisitions, interns, we had some folks helping with investor relations, and we had some marketing folks as well. So, most of those people were with us just for a couple of months. Again, it was more of an internship thing where they kind of jumped in, they got to see behind the scenes and hopefully learn a thing or two about how we do it. But my COO is the main person that’s been with me from start to finish on this.
Ashley:
Okay. And the most important person on your team is?
Tony:
My wife.
Ashley:
Yes. Good, you answered correctly. I was nervous there for a second with the hesitation.
Tony:
It’s always my wife. It’s always my wife. So, Sarah, she wasn’t super involved and she usually isn’t on the acquisition side, but now that we’ve closed, that’s when the baton really gets passed to her. So, we actually got our crew from California to agree to drive up to Utah every week to drive up on, I think Saturday afternoon, come back home the following Thursday night or Friday morning, whatever it may be, and they’re doing the rehab for us. That was a huge relief for us because we didn’t have to go into this new market and try and source someone new who we’ve never worked with to do our biggest rehab job ever. So, the fact that we’ve got a crew that’s already done a lot of work for us, that we know the back of our hand, who we’ve got a great relationship with, who Sarah has a great relationship with, now she’s been managing the rehab, making sure that they’re executing on design and doing everything we need them to do there.
Ashley:
What about licenses and permits for that area?
Tony:
So, here’s the thing, it’s easier in a lot of places to get licenses for your hotel than it is for a traditional single family Airbnb. All we had to do was renew our business license, which was, I don’t know, a couple of hundred bucks for this entire commercial property. And I have properties in California where we’re spending like $1,300 for a two-year Airbnb license. So, significantly easier, significantly less expensive, and it’ll vary from city to city, but that’s what we had to do for ours.
Ashley:
Okay, so the last thing I want to know about before we wrap up here is what is the structure of the actual ownership? Because you have your team, you have you, you’ve raised private money for this. So, tell us how is that structured?
Tony:
So, we have four partners that have actual equity ownership in this deal. So, if you guys know, a lot of times I’ll just do JV agreements. We actually created a new entity specifically to take ownership of this property. So, I own 21% of that LLC. My COO owns 9%, and then we have two partners that brought the majority of the capital, and they own the remaining 70%. There are decisions that we have to make collectively. So, this isn’t a syndication where I have the final say so on all these big decisions. So, they are somewhat actively involved in making those big decisions. Luckily, they do defer to me as the expert here to make a lot of those choices, but that’s how we have it set up. And then, my team is going to do their day-to-day management. So, we also get a management fee for doing that once the property goes live.
Ashley:
Okay. So Tony, congratulations on this deal and I’m super excited for all of us to follow your journey as you’re renovating this motel and for all of us, all the rookie, the whole rookie community to come and stay at it for the grand opening. But how is this possible for a rookie investor to make this happen?
Tony:
One of the first things I’ll say is that commercial itself doesn’t necessarily mean bigger always than traditional single family homes. I know people out there right now… Again, our purchase price was $950,000. I know people right now who are buying single family properties or small multifamily properties, duplexes in some places for over a million bucks. It’s not necessarily a bigger price tag every single time. So, I think that’s the first thing that people have to understand is that every market’s different and you can sometimes find these boutique motels and hotels for less than the cost of a single family property in your market. So, I think that’s the first misconception. And AJ Osborne mentioned this when we interviewed him, Ash, it was episode 340 where he said, “I can go out and buy a self-storage facility and get 50 units for sometimes less than the cost of someone buying a single family home.” And it’s the same thing when you get into the commercial hospitality space as well.
So, I think that’s the first thing. People just have to understand that the second piece, and this was the big part for us, is that the opportunity to get seller financing is also greater when you go into the commercial side of things. So, you can be in a position where depending on the seller, maybe they only want 5% down, maybe they don’t want anything down. It’s all what you’re able to negotiate. But there’s also not only the possibilities get a lower purchase price, but you could also get less money out of pocket to own and control this asset. So, I think that’s another thing that folks need to understand. And in terms of how to actually do this, once you’ve got those beliefs out the way, what do you actually do?
Decide on your buy box. Again, we went through three iterations of what our buy box looked like before we found the right version of that, but decide on your buy box. How much cash do you have to put into it? What purchase price do you want? What level of rehab are you trying to go after? Do you want commercial assets in metro locations? Are you trying to buy in Los Angeles, in Detroit, in Chicago, or do you want vacation destinations like where we’re at, near national parks and things of that nature? So, decide on your buy box and then go out there and start making offers. We looked at a bunch of deals, a bunch of deals before we found this one that made sense. So, you’ve got to have a commitment to every single week, reach out to brokers, analyze those deals. And with enough volume and a really tight buy box, there’s a good chance you’ll find your own property as well.
Ashley:
I actually saw listed a campground, or maybe it was a mobile home park, and it was just maybe 10 pads on it, and it was 265,000. I mean, I don’t know anything about the market it was in or anything like that, but there are smaller commercial deals that you can purchase starting out. You don’t have to start out with a 40-unit apartment complex or 40-unit motel. And also, depending on the market you look at too, a 13-unit motel in Palm Springs is probably going to be way more expensive than the 13 unit motel that you purchased depending on the market too.
So, I’m going to go over real quick, all of my notes that I took down to kind of summarize for you guys the lessons that we learned today from Tony and his search for the boutique motel. So, the first thing is raising capital. Three things that you can do is become an expert in your asset class and what your strategy is. And then, build your brand and network. And then, the third thing is to make offers because once you get an offer accepted, you now have an opportunity to present to someone else.
The next thing is sticking with your strategy and what you know. Don’t get shiny object syndrome, don’t try to take a twist on your strategy like Tony did with trying to do new development and raise money, stick to what you know. And also, have a defined buy box and pivot if you need to. Not overreaching, not too large of a jump. I couldn’t almost read my handwriting. But that’s when Tony went from buying his most expensive to 900,000, all the way up to now a $6 million deal. So, don’t overreach. And then, have a team with you. Start building a team, even if it’s one virtual assistant that you’re paying $6 an hour to do some deal sourcing for you. And then, have contingencies or reserves in place for failures.
So, Tony talked about in his first two failures, all the money that he lost just from due diligence. Make sure you can afford to lose that money. Don’t be dumping your life savings, maxing out your credit cards for appraisal fees on deals and then not have it go through because then you might get into the situation where you don’t have a choice but to continue forward because you just don’t want to lose that money, and you don’t want to have to feel that pain. So, I have actually another whole page of notes, but the next thing is like market or deal. Figure out for your strategy what’s most important to define first and build out the buy boxes for both. So, Tony, thank you so much.
Tony:
That was such a lovely recap. Yeah, I love that you put a little bow on that perfectly, Ash.
Ashley:
Yeah, is there anything else that you would add?
Tony:
No, I think that’s it, right? I think the last thing I want to share is just how the property, at least what we’re projecting, what it might do. And look, before I even touch on the numbers and what we think from a revenue perspective, one of the big reasons we wanted to transition into commercial was because you have a little bit more control over the value of the property than you do with a traditional single family home. With a single family home, your value is only based on the appraisal and your appraisals are based on comparable sales. So, appraisers are looking for other three bedroom two baths and seeing what they sold for that is similar to yours, and that’s what your property will appraise for.
So, even if you have a long-term rental that’s exceptionally profitable, or even if you have an Airbnb single family that’s exceptionally profitable, that doesn’t necessarily play into what that property is worth from an appraisal standpoint. When we got into the commercial space, now we understand that the appraised value, the value of that property is based somewhat on what other properties are selling for, but also, it’s based on the income and the NOI, the net operating income of your own property.
So, for us, even if the other values and other properties in that city stay the same, if we can just increase the net operating income, we’re increasing the value on the backend of that property. And when you see big guys like Grant Cardone and Sam Zell and all these other really big commercial real estate players, the way that they’re really making a lot of their money is not even necessarily from the cashflow, it’s from buying an undervalued asset, increasing the NOI, refinancing, and now they’re getting back multiple 7, 10, 8 figures back and it’s all tax-free because it’s debt. So, there’s a lot that goes into this that we’re really starting to uncover. So, I think we’re really excited for that piece of it.
Ashley:
Yeah. And just to showcase what some of those things are that you do to add that value is increasing the rents or increasing the daily rate, renovating the property to increase that. And then, just the overall management and the operations of the property too. So, okay, let’s talk about that. You talked a little bit about how the value is based on the appraisal. What was the appraisal when you purchased the property?
Tony:
So, we bought it for 950 and it appraised for just under a million bucks, so pretty much spot on to what we got it for.
Ashley:
And then, when do you plan on refinancing and what do you project the new appraised value will be?
Tony:
Yeah, so we’re doing the rehab right now. So, the goal is hopefully to get this thing launched. And again, our goal, what we underwrote at was just to really match what the property was doing before the kids took over. We think we can probably exceed those numbers, but if we can just get back to steady state of half a million bucks a year in top line revenue, that should really increase the value of this property. All right. So, what we’re projecting here, Ash, is that assuming we can hit our projections, getting the property back to the performance when the dad ran it, again, we bought it for 950, assuming cap rates hold and they could fluctuate over the next couple of years, but we’re projecting it to be valued at about 2.1 million bucks once we’re all said and done with it.
Ashley:
Wow. So, a nice big increase there.
Tony:
Hopefully. Fingers crossed we can get there.
Ashley:
That’s amazing. So, you’re projecting to get to around half a million a year. And what are some of the things that you’re going to be doing on the operations side? You talked about that you’re renovating, but what about the actual operations piece to increase that revenue?
Tony:
Yeah, so the goal is once the renovations are complete, we’ll obviously start to bump up the ADR, so that we can make sure that we’re charging the right value for our product. The kids weren’t running the property year round.
Ashley:
ADR for non-experienced short-term rental is average daily rate.
Tony:
Average daily rates. Yeah, average daily rates.
Ashley:
Okay. Because I was like, “I’m not sure if I know that one.”
Tony:
Yeah, so we want to get the rates up, what we’re charging on average. The other thing we’re going to do is we’re going to run it year round. The dad was running the property all 12 months. When the kids took over, they were shutting it down from, I think, October 30th through I think March 1st or something. So, they lost a few months out of the year. It does get slower during the winter months, but a lot of folks are still open. So, we’re going to run it 12 months a year like the dad was. And then, our goal is to try and really control the expenses as well.
They had a lot of just random stuff that they were charging to the property that maybe shouldn’t have been charged to the property. So, we’re really going to make sure the expenses align with the actual operations there. So, control the expenses, get those in check, grow the revenue. And then, what we want to do, our goal is to make this a self-check in hotel, motel. So, there’ll be no front desk, we’re probably going to turn the lobby area into a bit of a hangout spot with some vending machines and games and things like that. So, we can potentially generate some more revenue there as well. But that is the operational game plan that we’ve got for it right now.
Ashley:
Are you going to have Sean start a vending machine business and have him operate the vending machines in there?
Tony:
He’ll have to pay rent just like anybody else will if he wants to.
Ashley:
Well, Tony, thank you so much for sharing. Real quick, before we end though, what is the timeline of this? So, when did you purchase this? Did you start rehab right away? When is rehab going to be done? And when should I book my flight for the grand opening?
Tony:
So, we started negotiations over the summer. We ended up going under contract, I want to say I think it was early September, and initially it was a 60-day escrow. So, we would’ve had all of September and October to do this. The sellers came back to us and during the inspection, during the due diligence, we found some issue with termites. They had to basically tent the whole place and make sure that termite issue was resolved before we bought it. So, it took them another like 45 days to do that, to give us back the certification that the issue was resolved. And then, as we were kind of going through our capital raising, one partner ended up backing out, so we needed another 30 days in the back end to replace that person.
So, we ended up closing literally the last Friday of the year in 2023. So, it was… What is that? Four months almost is what that period took. And we started rehab almost immediately, I think like a week after we closed, the demo started. And we’re projecting to be done with the rehab hopefully in March. So, about 90 days, give or take. And yeah, we’ll do the grand opening right there afterwards. So, book your trip to Utah so you can come check it out.
Ashley:
Sounds great. Well, Tony, thank you so much for sharing your most recent deal with us and congratulations.
Tony:
I appreciate you having me on. I feel incredibly grateful to be a guest on your podcast today, and I do hope my story inspires some folks to take that next step as well. But Ash, I got to say, you are a phenomenal podcast host and you are far better than that other guy who typically co-hosts with you. So, I’m glad I got to talk to you today, not the other guy.
Ashley:
Well, if you were inspired by Tony, make sure you check out his book Real Estate Partnerships. He donates 50% of the profit to Ashley Kehr. So, you can check that out on biggerpockets.com in their bookstore or on Amazon. And if you want to learn more about Tony, we will link his information in the show notes. I’m Ashley and I’ve been your host today. I hope you enjoyed the show. It feels so awkward because I usually do Ashley and Tony. But yeah, Ashley and Tony signing off.
Palm Springs, Florida might actually… Is that a place? It’s Palm Springs in Florida or is that California?
Tony:
Palm Springs is in California.
Ashley:
Oh, my God. Tony, you’re rubbing off on me.
Speaker 3:
(singing)
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