Is starting a hotel chain a worthwhile investment?
As a contrarian investor, b Invested founder Nathan Birch is always looking for new and unique ways to get ahead. Every couple of years, he likes to try something completely new.
One of his most recent ventures was to begin a hotel chain.
Having more than 230 investment properties meant his foundation investment property portfolio was big enough to buy whole motels and make the most of a lack of buyer competition in that space.
He established his hotel chain- Birch Hotel Group- with a goal to buy five motels in the first year and then see how it all went. In 2021, he exceeded expectations and bought 10 motels.
So what did he learn and is it worthwhile to try and do the same thing?
From the beginning
Nathan had the idea to buy motels when he realised he was sourcing a lot of investment properties for property investor clients in certain former mining areas. He was getting investment properties for less than $100,000 for his buyers that had been worth far more before the mines went bust in the area a number of years earlier.
Some were as cheap as $50,000 or $60,000 and have now already doubled in value since being bought for clients. Nathan thought to himself that he really should pick some of these investment properties up for himself.
He came across a couple of motels in the area. Motels are like multiple investment properties in one in the sense that they have many income streams. If a motel has 35 rooms, that’s 35 streams of cashflow.
He had had bad experiences with motel purchases a number of years back but this time around he decided to buy five, give it a crack and if it doesn’t work, then so be it. He had managed to purchase the venues for less than the cost of rebuilding them, so was happy with where he was at value wise.
Earnings and learnings
So far, Nathan is happy with how things have gone. He’s made some decent earnings, but also learnt a few valuable lessons along the way.
First, buying a motel means you’re not just buying a piece of real estate, you’re also now a business owner-operator. You’re operating a motel, you’re turning sheets and doing room rentals. Then, you’ve got to manage the staff, you need HR, Fair Work compliance, a legal department, corporate governance, processes, procedures, manuals and the list goes on.
You can’t just turn all this over to a property manager like you would for a regular investment property.
Then there are the costs. Compare council rates and water for example. If you have a normal residential house you may have a few thousand dollars to pay a year. But a motel means you might pay 10 times as much. This is because you might have 30 toilets and use 30 times as much water or electricity. You’re going to get slugged a lot more for all that.
And then, if things go wrong, you have 30 bathrooms that might need fixing or upgrading rather than one or two.
Meanwhile your market is very condensed. A motel is a motel. You can’t change it to something else if it’s not making money. So if there’s another pandemic and travel is banned, you may suddenly have no income, but you can’t change the way you operate.
Always have a plan
Nathan has learnt a lot this year but he always has a strategic plan in place. Getting a big parcel of land with existing infrastructure for a bargain price is a good thing for his strategy whether a motel is successful or not. Suddenly he owns a big slice of land in a sought after location and it puts him in a good position to negotiate further deals down the track.
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