Feedback on this hotel financial model
I am interested in a nice/historic 10 room motel deal in the area that I live in.  I put together a little financial model on the deal, and I'm getting a 6.5 cap with a 8% cash on cash.  Does this look right?  Or does it seem slightly off?  And lastly, does this look like a good deal?  Location is in a highly desirable tourist destination.   

The dropbox link to the spreadsheet is here: [https://www.dropbox.com/s/25v5e6qeuom13m6/Motel%20Deal.xlsx?dl=0](https://www.dropbox.com/s/25v5e6qeuom13m6/Motel%20Deal.xlsx?dl=0)
[{"id": "epzl3le", "text": "If the revenue is in $600k, you shouldn\u2019t be paying more than $2m for it. Also 10 room is too low of a room count to make it worth while.", "replies": [{"id": "epzo8gl", "text": "If I was to offer 2 million, that would take the property to a 14 cap.. probably wouldn't get the deal", "replies": [], "depth": 2}, {"id": "eq3vkg8", "text": "While a 3x multiplier makes sense, it is often not a one size fits all approach.", "replies": [], "depth": 2}], "depth": 1}, {"id": "epzo0qn", "text": "A hotel like that shouldn\u2019t trade that low of a cap.", "replies": [{"id": "epzoif2", "text": "Even in California?  I'm used to 3 caps in San Francisco with no upside, so maybe I'm just looking at properties in the wrong location..", "replies": [{"id": "epzovog", "text": "Yeah, hotels carry massive risks and are amongst the first to fail in a downturn.", "replies": [], "depth": 3}, {"id": "epzozqv", "text": "Where are your room expenses?", "replies": [{"id": "epzw6qr", "text": "I never received room expenses.  I just have the general expenses of the entire property from the income statement", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "epzommm", "text": "OK, so this looks pretty good.  I'm not going to comment on the valuation because I'm not in this market or industry and I'm not going to pretend I know what I'm talking about there.  I'm just going to comment on the actual underwriting.  I'm glad you increased your taxes to the purchase price, but I do see a couple of things that are missing.\n\nFor one, whether you manage this yourself or bring someone in, you probably want to add a management fee into your expenses.  I know a lot of people don't do this on smaller properties, but I still think you should.  I have no idea what this is in the hospitality industry.\n\nSecondly, and more importantly, you need to underwrite a replacement reserve. One day, rooms will need to be upgraded, mechanicals replaced, roof replaced, etc.  What the correct number to use is entirely dependent on the condition of the property, but I would guess, at a bare minimum, you're going to want to underwrite $250/door/year (disclaimer: I don't know much of anything about hospitality)\n\nSome other thoughts/questions I would have at first glance:\n\n\\- Who owns this now? Are their opex obtainable to a one-off investor or do they currently benefit from economies of scale?\n\n\\- What's in R&amp;M?  Make sure you are taking into account parking lot maintenance, and other \"routine\" items that come up every 3-5 years.\n\nOther than that, looks good - Good luck!", "replies": [{"id": "eq08tlb", "text": "Great feedback, I'm not as familiar with hotels either, hence why I was wanting some feedback.  That's a great question about the management and how much is expected of the new owner.  I think this place may be understaffed as well.  5 full time people for 10 rooms, but only paying $110K in payroll.  I think something is missing here... \n\nGood idea about the replacement reserves and $250/door seems like a legitimate benchmark.  \n\nI'll have to find out more about R&amp;M, their costs seem a bit low there also.  \n\nLooks like the cap rate is going to get compressed quite a bit!!", "replies": [{"id": "eq0w0zh", "text": "This is unfortunately typical with the smaller hotels \u2014 they just grab cash out instead of accounting for the owners/managers salary on their books (throughout Florida at least I\u2019m a hotel broker in sofla so cant speak specifically to California).\n\nBest way to check is request their tax returns and their room receipts during the due diligence period (make sure you get 60 day DD on these properties due to the funny biz played on their P&amp;L\u2019s). I would recommend ordering a STAR report but the comp sets would most likely not report but still could be useful. Good luck you\u2019re smarter than most with your modeling \u2014 nice work!", "replies": [{"id": "eq3dgll", "text": "For sure, there's gotta be some fudging of the numbers with these kinds of deals", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "epzr8sz", "text": "$180+ RevPAR o.o\n\n$67k / key in GRR\n\n$400k / key purchase price\n\nHow many years of historical numbers have you been provided?", "replies": [{"id": "epzsrjv", "text": "The listing agent provided the last three years of the Income Statement. On the spreadsheet, it\u2019s on the second tab. I extrapolated my numbers from averaging the last 3 years revenue/expenses, and adding a 3% increase", "replies": [], "depth": 2}], "depth": 1}, {"id": "epzs1k5", "text": "14 cap is very typical for hotel.You are buying a property AND a business. 6-8% is typical for office retail, most definitely a bad deal for hotel", "replies": [{"id": "epzw8hk", "text": "Interesting.. Good to know", "replies": [{"id": "eq0uzkg", "text": "I second this opinion \u2014 unless the hotel is on south beach and you intend to be the owner-operator. 10 rooms won\u2019t generate enough rev, regardless of the ADR, for it to be a true passive investment", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "eq0y47f", "text": "If you are looking for financing through a bank (vs. a hard money lender), and you have no experience, you may want to consider an SBA loan, most banks won\u2019t lend to startups. \n\nThe bank will likely prefer a 25 year amortization (max). Pricing is typically at WSJP + a spread for their risks and adjusting every 5 years or so after that. That makes your interest at least 5.5% (WSJP as of today).", "replies": [], "depth": 1}, {"id": "eq1l6w8", "text": "Hotels are the riskiest of all asset classes, caps of large limited service hotels are at like 10% nationwide https://www.hvs.com/article/8429-hotel-cap-rates-hold-steady-values-under-pressure\n\nYou're in a motel which gives you concentration/stability  risk since you have less rooms, you have higher fixed costs per room. If you're in a riskier market (not nyc) then the cap rates go higher. This is a class C building in a non core market, in a risky asset class, it should be way cheaper! What do you think the first thing people do when a recession hits? They cut discretionary spending...no more trips to Napa to drink wine.\n\nWhy are your CC fees 6.2%? Standard is .30 per transaction + 2.7% \n\nYour financing makes no sense. 30 year fixed rate mortgage at 20%? This isnt a residental house. Try a 10 year commercial loan amortized over 25 years with a balloon payment...unless you have some kind of track record (obviously you dont) then no bank will give you 20%..try something like 30% minimum for you\n\nThe interest rate is too low. You can what you'd get for different properties here http://www.cushmanwakefield.com/~/media/reports/corporate/Global%20Reports/CW_Capital_Markets_Update.pdf but i'm not gonna look up a motel specific one\n\nNothing about this pencils out\n\nAlso you made it too easy to find this property. https://www.loopnet.com/Listing/1727-Main-St-Napa-CA/16214283/", "replies": [{"id": "eq3dd4w", "text": "That's great feedback.  I agree with a lot of what you said, but Napa is a little bit more recession proof than you think.  \n\nI do agree that my financing underwriting needs work, I didn't go out and get a quote on the financing, I just put some placeholder values in... \n\nAnd nicely done on finding the Loopnet listing..", "replies": [{"id": "eq3h8sr", "text": "I really have no way to way to prove that Napa is not special when it comes to what you say because I dont have time to look up specific economic data on what youre looking for. If you look up the GDP of the area it wont be indicative of the tourism economy because they are an export HEAVY area (look up the location quotient although this is very obvious).\n\nHere's a very poor proxy for what youre looking for:\n\nhttps://www.fhfa.gov/DataTools/Downloads/Pages/House-Price-Index-Datasets.aspx#qat\n\nQuarterly All-Transactions Indexes \nBuild on the purchase-only index data by adding prices from appraisal data obtained from the Enterprises.\n\nWhile this is the SFH index, you can see Napa dropped 42% during the recession. If it was so good people would have been able to rent out homes during that time instead of needing to sell https://imgur.com/a/MrsDZnp", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "eq3x1go", "text": "While a 400K/key might sound outrageous to some people, I am familiar with the Napa market as I have financed a few hotels there. \n\nOld World Inn Bed &amp; Breakfast sold for 800K/key in 2017\n\nKenwood Inn &amp; Spa sold for $486K/key in 2017\n\nBest Western Plus Elm House sold for $415K/key in April 2018. \n\nOP- there is no flag for the hotel right? And no amenities? There is some risk with unflagged properties. Even if its a lower quality flag like a best western, its sometimes better than no flag. \n\nLet me know if you have any questions from a hospitality financing perspective, happy to help in any way I can.", "replies": [], "depth": 1}, {"id": "eq3ybcd", "text": "I have hotel experience, but I have not worked on a small bed and breakfast like this. My experience has generally been in flagged hotels with a minimum of about 80 keys, but I'll provide some feedback fwiw. Overall, you did a pretty good job. Your income statement is not very detailed, and I would definitely add more detail to your revenues and be looking at revPAR. Look at getting a STR report on the property as well. Adventures in CRE has a hospitality model you should look at. Payroll looks low, considering there are 5 full time employees. Your debt assumptions are also off, as others have mentioned. Additionally, I would use a 4% of EGI reserve above NOI, which is pretty standard. It is common for a lender to require a 4% reserve for hospitality. Another metric I would look at is revenue multiple. It is common for smaller hotel deals to trade on revenue multiples instead of capping NOI. Overall, $400k/key doesn't seem unreasonable for Napa based on comps. Lastly, I would definitely contact a hotel broker who has sold deals like this in the area. They will be able to help immensely, and will be worth it considering you don't have experience with this product type.", "replies": [], "depth": 1}]