Of all of the common real estate investment vehicles, I've long been convinced that hotels and motels are the most risky. First and foremost, they often require inordinate amounts of money to build, and oft times developers over populate the area with rooms.
When I was 24, I was an officer of a St. Louis bank. For some reason, I was assigned to represent the bank in its negotiations with a longtime client who was planning to build an upscale franchise motel near the St. Louis airport. The thing ended up with one cost over-run after another, and the occupancy never reached break even within the first two years of operation. Consequently, the borrower was not able to replace the bank's loan with a permanent loan. The bank foreclosed the motel.
So here's the shocking news about hotel/motel foreclosures in Dallas.
This report from the Dallas Morning News, appeared in the latest issue of RECON the newsletter of Texas A&M Real Estate Center:
DFW HOTELS DISTRESSED
DALLAS (Dallas Morning News) - Addison-based Foreclosure Listing Service recorded 43 hotel and motel foreclosure filings in the Dallas-Fort Worth area in the first quarter, more than the 41 filings for all of 2009 and 18 in 2008.
Properties ranged from luxury hotels, such as the Four Seasons Hotel & Resort in Las Colinas, with $183 million in debt, to small roadside motels with less than $1 million in debt.
Hotel income in DFW has been declining for the past few years. From late 2006 to late 2009, area hotel occupancies fell 8.3 percent to 45.5 percent, according to hotel analyst PKF Consulting.
Over the same period, average hotel room rates fell 6.9 percent. Currently, rates are down 12 percent from the 2007 peak.
The hotel industry has the highest proportion of troubled properties of any real estate type nationwide with an estimated $38 billion in locations considered distressed, according to Real Estate Research Corp.
BILL CHERRY, REALTORS
DALLAS - PARK CITIES
214 503-8563
It can be very difficult to service the debt on a hotel. Margins can be very thin and labor costs can be high. Not an easily profitable business for sure.
WOW I did not know much of this, good information.
Very Interesting information.
Mr Cherry, what would be a better business investment over hotel as i was looking into investing in local motel in DFW.
Ben, apartments near one of the colleges, universities or hospitals. The good news is that the economy rarely has much affect on their income stream, and if you do a good job of maintaining them, the investment usually increases at a greater rate than other real estate investment that the "common man" can afford to own.
You're welcome to call if I can help.