In this episode we hear a recording of the talk that Chris gave at a serviced accommodation conference about one of their favourite models; Hands Off Hotels. Who in the accommodation market wouldn’t want to own a hotel? In this 45 minute talk, Chris will convince you it isn’t that difficult to own a hotel.
From bed and breakfasts to 20 bed hotels, if you are in this industry or looking at this model as your next entrepreneurial journey; this episode is for you.
The Serviced Accommodation Podcast is a show brought to you by Chris Poulter and Ritchie Mazivanhanga aimed at new and experienced property investors alike. With each show we help you Start, Systemise and Scale your Serviced Accommodation Business.
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Hi I’m Ritchie.
And welcome to the Serviced Accommodation Podcast.
Hi this is Ritchie. Today we’re bringing you a talk which Chris gave at the recent serviced accommodations summit around one of our models: hands off hotels.
So I’m going to be talking to you today about hands off hotels and just a show of hands who here likes the idea of owning their own hotel? Pretty good for your ego isn’t it. Well my objective today is that in 45 minutes time you’re actually going to think that might be realistic. And I’m guessing at the moment it might seem like a bit of a pipedream. So hopefully I can show you how that’s going to be possible.
There we go. So to give a little brief background on myself I’m essentially an entrepreneur, I’ve not been involved in property that long about 18 months, two years and I’ve had a number of businesses down the years. All of which doing different things trying to be a bit disruptive, do things in new ways. None of them have been particularly financially successful but I’ve learnt massive amounts along the way so that when I came into property I kind of hit the ground running and I’m sure you’ve all heard people teaching you that you should go in and you should start small, maybe get a single let and then do an HMO and move into some serviced accommodation and that kind of thing. Well that wasn’t really my style so my first property project was actually a 29 bed hotel.
So what I do now is I’ve got a serviced accommodation management company where we joint venture with owners or do it on an agency basis. We tend to find that these models are really exciting compared to the traditional guaranteed rent model. It’s something I talk a lot abou,t the different models of rent to rent serviced accommodation. I also do a little bit of mentoring and one thing that we’re doing in the background while we’re doing all these things is that we’re refining this model of hands off hotels which I’m going to talk to you about today. So it’s very much in its infancy, we’re still developing, it’s not a finished product but it’s very exciting and hopefully I can fill you in on some of the details.
I think the main reason we’d be interested in hotels is probably the same reason why we’re in this room looking at serviced accommodation, it’s because it’s very high cash flow. And on top of that you’re costs proportionally are a lot less than if you have that many serviced accommodation units. It’s the same reason why a lot of people like to have say 10-12 apartments in a block because your costs are that much lower. You’ve got one cleaner going in and doing a bunch of apartments at a time. You’ve only got one set of bills to worry about. So it does mean that you really benefit from the scale, both operationally in terms of how hard it is to organise and also in terms of costs. Now the other thing with the hotel market is that I always say to people the hotel market is like this and the service accommodation market is like this now it’s an exciting market and it’s growing but it’s still smaller at this point in time.
Now what the hotels allow us to do is to tap into this much bigger market and also then cross-sell and up sell. So we operate hotel sites but we also have apartments and if we get an inquiry or booking for a hotel room then we might say to people okay you’ve booked in for a room but there’s four of you had you not thought about maybe having a two bit apartment? Then you’ve got a bit more space, you’ve also got a living area, you can cook your own food and it’s a similar price. So you’re really able to cross-sell from a much wider market into the other things that you’re doing with serviced accommodation as well.
Believe it or not hotels can also have quite a low capital requirement and we’ll look at a few examples of that in a little bit.
So the first thing I’d like to do is you talk a little bit about the entrepreneurial question because, put your hands up here if you’re an entrepreneur, let’s see.
Has anyone next to you not got their hand up because if they haven’t then just give them a nudge. Because I assure you, we’re all entrepreneurs in this room. That’s what we do. And the entrepreneurial question is very important.
So to help demonstrate this I need a volunteer, a very brave volunteer so does anyone down from want to volunteer?
Round of applause for being brave for Clare here!
Thank you very much, right. Have you seen one of these before?
Clare: I’m not going back to the bedroom with you.
Chris: Do you want to put these on for me?
Clare: I don’t know how to put them on.
Chris: Yeah yeah course you don’t!
There you go. That’s one and the other side. Thank you very much.
So we’re going to talk a little bit about the problems which exist in the hotel market. And just to clarify when I talk about hotels I’m really talking about small guest houses, bed and breakfast, smaller hotels, things which don’t really work for the large chains like these guys. And of course the first problem in the hotel market is liquidity because smaller sites like that well you’re not going to have a Hilton take over a 20 bed hotel are you? It doesn’t make any sense, it doesn’t fit their model. So what this means is that the market of people who are looking for them are typically a retiring couple who have their heart set on this lifestyle business. Maybe they don’t quite get how much work it is but they think oh it would be wonderful we can retire to the countryside or the seaside whatever it might be and meet all these lovely people.
Yeah. Have fun with that.
The other thing is that in certain areas, in certain markets hotels are quite often converted to residential accommodation. They can be nice big sites, can work turning into a block of flats but some sites just aren’t suitable for it, the numbers stack up or potentially are for instance Bournemouth and Southampton, our local plans are very much about tourism. So if you try and convert a C1 site into residential accommodation the chances are the council are going to say no because their long term plans for the area, for the economic growth revolve around the tourism and they don’t want to take away short stay accommodation from the area.
So that’s the first problem. How are you getting on over there Clare?
So because of all these concerns that means that actually it’s not a very liquid market. It’s not like going in and selling a two bed flat. When you go and sell a hotel, there’s not a lot of people buying and they’re not buying very quickly.
So the second problem which we have is in terms of finance and hotel finance is very hard to range. We found this the hard way, chasing down a number of hotel sites only to have deals fall through because the finance was essentially impossible to arrange at decent loan to value. One of the reasons behind this is because you don’t get a mortgage when you’re purchasing a hotel. You get a business loan and so a lot of the time, they want to look at everything from you know the direct to the business previous experience long term projections. There’s masses and masses of things which they want from you before they’re willing to lend. Therefore it not only becomes a very hard process to go through but it’s a very slow process and they will look at your track record. If you’ve got a couple of these sites already, they might be a lot more willing to lend to you. If you don’t have any at all, that’s going to be quite hard.
What track record do you think most retiring couples have? Funnily enough, none at all. So again, even the people who are interested in buying these sites find it very hard to actually get finance on it.
For the reasons I’ve outlined there it also means it takes a long time to get finance so typically 12 to 18 months and the vendor is sitting around wanting to exit the property.
So you’ve got a problem at the moment, I’ve got a can of Coke for sale shall we say. Would you like to buy my can of Coke? No that’s okay. Never mind. I’m obviously a rubbish entrepreneur. I couldn’t make the sale.
So if we’re talking about avoiding VAT. So this is something which we see all the time. Maybe 70-80 percent of the small guesthouses which we go to, they take cash. What’s the reason for that? Because they want to stand for the VAT threshold, it’s great for them because they get to keep a lot of money, doesn’t go to the VAT man. Stop getting into discussions on the legality but of course what happens, well this finance which is already really hard to arrange. The banks are looking at it and going well this place hardly has any turnover. There’s no business case for buying this property. It’s a business loan. We’re not prepared to lend you very much on it. So what that means is that the banks are even less likely to lend because they’ve been taking so much cash. And so there’s a problem there.
So if we start to look at this is where the problem is. What’s a potential solution? So with any illiquid market one great tool to be using there is lease options. And this works really well in this case because you’ve typically got again a retirement age couple who have been working 5, 10 years. They thought it was going to be a lovely lifestyle business and suddenly they realize they’re working 12 hours a day without weekends. Very different from what they expected. Now they’re looking to sell the property and what they come up against is a market which is very illiquid, they’re really struggling to sell and they just want to exit. So a lease option can be a great option for them. It also means that in a market where the few people who are getting through who are serious and interested in buying this property, they’re also struggling with finance. So they’re probably not able to offer as much as they’re actually asking for the property. Now you’re not going to be tied down so much on that front because you might be buying it in five or 10 years’ time. Therefore you can offer the full asking price and for a lot of people that kind of pride of being able to get the money that they want for the property is enough to see them over that hurdle of knowing it’s going to be a few years before they actually see it. And a lot of the time people are working quite hard for a little amount of money and we find it’s not that hard to match the amount of money that they’re earning but without them having to do any work. That’s a very easy sale.
There seems to be a magic figure of about £24-25k a year net which guest house owners seem to take home. And typically if you work out their costs and put two grand a month on top of that it might work as a deal, very easy sell when all they’ve got to do is go retire somewhere, do no more work and they get the same amount of money. It also allows you a period of time to build up a track record for the bank.
And if they come back to you saying well it’s going to be worth more in a few years’ time then there’s a very easy way around this. When you’re taking on the property you need to make sure that everything is going to be up to the spec that you want. You don’t want boiler systems breaking all the time, you don’t want issues with the electrics so the chances are you can spend a good amount of money at the start making sure everything’s up to scratch. So what we typically do is secure the property with the full repair and insure lease which means it’s just like you get on a commercial property like a warehouse. As soon as you sign the lease you’re fully responsible for the upkeep of that property. An argument with this is that because we’re responsible for the capital upkeep we should also be benefiting from the capital uplift of the property.
So tell me. You seem to have a little problem at the moment. Yeah. So what problems seems to be holding you back the most?
Clare: The fact that you have me up here in cuffs.
Chris: Yeah. I imagine that’s sort of a comfortable position to be in.
Clare: No it’s not one I’ve experienced before.
Chris: Especially what there are 250 people watching
- So what kind of thing do you think would help you out right now? Where are you looking to be? What do you want to do?
Clare: I would like you to give me a key that you’ve got in your pocket somewhere.
Chris: OK. So if I was able to let you out of those handcuffs you could go and sit down then that would be what you’re looking for right now? Well you’re in luck.
£20? No I’ll let you have that. Well thank you for being brave and let’s have a round of applause for Clare.
So I threw that in because I thought you might be a little bit tired after lunch. I don’t know about you but I always have a bit of a carb coma, probably because I eat far too much. But what that really does is it shows a point that when we’re selling this kind of deal just as in any other type of property deal we shouldn’t be go into it thinking what we are looking for. We should be thinking about the other person’s situation, what’s their problem and what potential solution might work for them?
Once we’ve worked out what might work for them, if we can find some synergy between what worked for them and what works for us that’s when we have a deal. Otherwise you can give them solutions which might work for them which don’t involve you. So we’ve told people to go to auctions before, we’ve told them to do a couple of years without taking cash on the side, various different things. But if you start from the point of view of what are they looking to achieve, how’s it going to work for them? That’s how you do these kinds of deals because otherwise you’re going to come up against a brick wall.
And that for me is the entrepreneurial question. It’s like what’s the problem? And what’s our solution that we can actually make money from?
So just to take you through a quick example deal, this was the first deal I did a property as I said before, a 29 bed hotel. It was essentially a 22 bed BnB at the time but it had seven studio flats at the back which were let out to LHA tenants. So of course we looked at it and we realized the first thing we would do is get rid of the tenants and turn it into more units of self-contained studios. Now the problem in this particular case was that this is a relatively wealthy family in Southampton, they have a large portfolio in the hundreds. But when their daughter got married she’d said oh what I really want to do is I really want to run a BnB.
Each to their own I guess!
And of course what happens they get married and they go oh no we want to do something else. So this couple got lumbered with a BnB. Eight years later, the wife is turning up at 6:00 in the morning to assist the cleaners, make sure they’re doing the right things, doing all the check ins all through the day, leaving the site at 9:00 and 10:00 at night and this has been her life for the last eight years. So there’s a very big problem there and it’s a problem that is no easy solution for because it’s not a very liquid market. They couldn’t sell it. They don’t particularly want to sell it because they see it as an asset and so finding a solution is the key to that deal. So what we did in this case is we took them on a lease deal if you like or rent to rent. So this is the deal we did with no lease option. We’ve changed the model a little bit since then. But essentially our solution of leasing the property from them allowed them to take home a guaranteed amount of money each month. It was still good living as you’ll see shortly. But it also meant that they had the freedom to be unlocked from their handcuffs and kind of move on with their lives and do the things which they actually wanted to do, go on holiday for the first time in five years.
So it’s a real important solution which you have for people there.
So if we go through the figures on this very quickly. So the turnover on the 12 month figures because again it’s seasonal. I prefer to work on a yearly basis monthly because otherwise which month are you talking about? Is it good month or bad month? So 400 or so turnover over a year. The lease is £13k a month, our other costs come up to a similar amount which means that the gross profit is about nine and a half thousand a month on that particular site.
So you know we said high profits from the hands off hotel model. Well this is the example.
Now that doesn’t necessarily tell the whole story because as you can see I’ve put in a gross profit. So we still need people to actually manage the site and in our particular case we put together an office team of staff answering phones, a little bit of out of hour’s service so that they could check people in, talk to guests, do all the admin and that kind of thing. Now obviously the more of these sites you get the less of your overhead becomes and the more money you make. You’ve got to bear in mind that there is a management cost. And even if it’s a serviced accommodation apartment single unit I always tell people take into account the management costs when you’re doing the figures.
So we’re going to whizz through a few different elements of the matrix as I call it. We’ve got the onsite elements which are set up, cleaning and maintenance. And we’ve got the things which we do off site which are the customer service, the marketing and the admin. Now all of these things apply to everything from the studio flats up to hotel sites.
If you’ve got no intention of doing hotels then hopefully this will be useful as well for you but we’ll also point out the specific ways that we do things when it comes to hotel sites.
Now obviously one of the big areas when you’re taking over a site like this is how do you set up a hands off operation? And there’s a few changes which we need to make to bring it into use.
So first of all, a lot of the time there’s not a lot of spare cash with these vendors, these owners and they’re not making huge amounts from it and often it’s quite a long time since they last refurbed the property before. Quite often you’re going to want to do refurbishment as soon as you take over the property. Now that doesn’t need to cost a lot of money, typically we found that a lipstick job, as we call it which is carpets, painting and furniture is between about one and a half thousand, two thousand per room. So as a rough guideline you could see with a 20 bed property it might cost you £45k or so for a quick refurb. Now one of the keys to this model is the remote locks and we use a Yale keyless variety for the simple reason that we can access all of our sites through one single cloud based interface which we do everything from the office. So it makes life very easy because suddenly we’re not having to have someone on site to check in guests all the time. We can send them out codes and they’ll be able to access the property that way.
Utilities is obviously something that we need to sort out when we take over the site and cleaning spec is one of the most important things. When it comes to quality of cleaning, which we’ll talk about in a little bit, it’s one of those things if someone’s doing a good job you don’t really notice it all soon but as soon as someone does one small thing wrong it becomes a major problem. When we’re taking over a property we do an extensive cleaning specification and go round with the head cleaner, talk about what things they do on a daily basis, what things they need to get cleaned and of course look at communal areas. How often should they be done? Should the communal corridors be hoovered every day, a couple of times a week? Setting out the expectations from your cleaners when you set up the site.
One of the most important areas of course is a fire risk assessment and key knowledge with this is that even if you’re operating a single apartment you have to do a fire risk assessment on it. Very, very important and yet most people I’ve met haven’t done fire risk assessment on their properties. Now that’s a real danger because if you do have, even not a fire but an issue which is flagged to them and an inspection is booked then they will take a very dim view of the fact that you don’t have a fire risk assessment.
So it’s very easy to do, if you go and google it you’ll be able to find that the government guidelines which are very easy to follow and you can put a fire risk assessment in place.
Now obviously with a hotel site it’s a bit more in-depth. You’ve got a lot more elements to it but it applies to every type of serviced accommodation. So again if you take one thing away from today write on your to do list do a fire risk assessment please.
Of course we’ve got a bunch of software we need to set up in the backend so that we can manage this successfully. And so the software and marketing set up can take a little while and it’s something where generally we can improve quite a lot from its current use because a typical retiring couple aren’t necessarily marketing gurus, they’re not necessarily IT whizzes and so there’s quite a lot that you can do to improve their listings, improve their availability online so that more guests can find you and more guests can book.
So with cleaning we tend to use one or two things, either an employed or a self-employed cleaning team. Obviously an employed team is easier to work with as they are under your direct control but from a point of view of legislation, self-employed is typically better because you’ve got less commitment to them, a lot less law involved and employment law can be a bit of a minefield at times.
What we do is we just have a head cleaner, they have access to the property management system. So rather than us having to tell the cleaners what to do, they have access to the software, they can look at it, they can assign what cleaners they need on specific days – all those kind of things. It’s again a very hands off way of taking care of the cleaning. As long as you have someone in there that you trust and can manage the site for you then it’s a great way of doing it. We also use an iPad on the site and it has software called When I Work which is essentially timekeeping software, timesheet software so when the cleaners turn up at work they log in on the iPad and when they leave they log out of the iPad. So again you might think well its hands off, they could make up their time sheets but it’s a great way of kind of reducing that fraud.
We talked about the specifications earlier walking around the property with the cleaners. Again it’s a great way to do it even if you’re just looking at a single apartment because they need to know your expectations from the clean. You might be expecting them to clean stuff which they’re not actually doing at the moment. So what we do is we just take the specification, we turn it into a checklist which is really tricky process, you just put some boxes on the right hand side of the piece of paper, it can be that simple. We actually use an electronic version we use iAuditor. And so every time a clean goes on, the cleaner logs into the software, they select the property or the room which they’re cleaning and then they run through the full checklist. So in terms of quality control it’s a great way of making sure that your guidelines are being followed every single time.
On top of that you can cut down the amount of complaints you get about maintenance issues because you can put some basic maintenance checks in the cleaners checklists so when they’re looking through you can get them to check that things which break regularly like shower curtains that type of thing.
And when you’re very clever with the technical staff you can get all the cleaners systems to talk to the maintenance systems so that as soon as they’ve flagged up an issue it gets put on the maintenance schedule which is what we’re going to talk about next and this is again one of the areas where you can suddenly be hemorrhaging money because as we all know with service accommodation the maintenance costs are higher than a single let. And I would say with hotels the maintenance costs are higher again. So we need to make sure we’re doing everything we can to keep those kind of costs down.
One of the key ways we found of doing that was by having a clear definition between what’s emergency maintenance and what’s scheduled maintenance because what we’re finding that if it was left down to staff judgment then far too many things were flagged as emergency maintenance. We’ve ended up having a call out charge which could be quite expensive you know 60-70 quid because the TV is not working. Now it’s a lot cheaper to apologize to the guest, tell them no one can look at it until tomorrow but give them a £10 refund than it is to spend 50-60 quid on the call out and they might not even be able to get it working.
So that was one of the key ways that we found to reduce maintenance. And what we do with the non-emergency stuff we put things into a schedule and once it is at least half a day’s worth of work then you can have someone come out on a low hourly rate, not an emergency call out rate and have them take care of a number of different issues. And so that’s a great way with apartments, with hotels of reducing your maintenance costs. And with that site before we had it under control to give you an idea we were spending about two, two and a half thousand pounds a month on maintenance so that can really escalate if you don’t get a hold on it.
So customer service is obviously really key when you’ve got a hands off hotel because you’ve got no staff on the premises to actually deal with the customer issues. So the fundamental idea behind the model is that there’s not full time staff on site. Instead that whole role is taken on by a telephone team in the central office and they’re the people who are dealing with things like inquiries and bookings, taking payments, giving people a check in information and of course the odd request and inquiry from an existing guest.
So these are really important functions but we can actually do that all from a central office because we don’t need to meet them face to face through the actual check in part of the process. Of course we don’t want to be involved any time that there’s a broken shower rail or something like that so to make it hands off for us at director level we make sure that the customer service team are in direct communication with the cleaning and the maintenance staff so that any issues can get flagged up and dealt with straightaway and we were able to keep a top level view on the business seeing what’s spent and why, what issues there’s been rather than having to deal with any hands on activities.
The marketing I talked earlier about how much we can improve from the way the hotel’s been run before and revenue management is probably up there with the most important things that we can do. Because typically what you see is that our retirement couple, if you like, set a price and they may be set in 5, 10 years ago and they’ve never changed it since. And going into a property there’s a couple of ways immediately we can improve the revenue from that.
So for instances some days in all of the hospitality industry is very very quiet, typically you’re looking at very low occupancy rates for the Sunday which obviously brings down your overall rate. So the first thing that we do on most sites is reduce the Sanday rate by about 40 percent say. Now it sounds counterintuitive that by reducing the rates that much you’d make more money. But typically we’re seeing revenue increase of about 200 percent by doing that. So essentially tripling your Sunday income just by reducing the price by 40 per cent because there’s a lot less people staying but proportionally there’s a lot more people staying at your hotel.
Channel management, we’ve talked about a little bit already today. Amelia is going to be talking about Facebook in particular. But channel management is very important in terms of making sure that we’re optimizing all of our listings, getting guests involved. We’ve got up to date photos and you wouldn’t believe how many photos are still from the 80s on booking.com. I can never believe it! These are all the things we need to improve when we take out the site in order to drive up the revenue.
Of course dealing with direct bookings by the telephone team and repeat customers so these direct bookings need to come from somewhere. Typically speaking to a lot of operators what we’re seeing is that the initial inquiries might come through one of the big engines so booking.com, Airbnb but the key is then being able to spot that with saying earlier and convert them into direct and recurring guests and that will cut out such a big chunk of your costs that really add to your profitability.
On top of that you can do bespoke marketing campaigns whether that’s outgoing calls, whether that’s Facebook marketing, whether its AdWords, any of the other things that you can do to actually drive the direct guests. And of course keeping your website and social media up to date as well is something which the marketing department can do again based from the head office.
One really key thing I find is with review management because there’s a number of factors which your guests will look at for instance on booking.com when they’re booking in with you but probably the two most important factors are the price and the review rating. They’ll essentially do an in their head value analysis of okay so this £50 a night but it’s only rated five out of 10 but this one is a fiver more but it’s rated seven out of 10 or seven and a half out of 10 so I’ll go stay there. It’s really important because that is the way your guests are looking at the property. So anything that you can do to increase the quality and the number of your reviews is going to have a massive impact.
Now Ritchie we’ve got like a 20 minute podcast coming up on this haven’t we? In fact I think it might be out already so another reason to subscribe!
But I think the fundamental concept behind this is that the more reviews you get, the better are the most important thing to now is that people are much more likely to leave a review if they’ve had a bad experience thsn a good experience and so if we offer more reviews that’s going to drown that out a bit. And typically what we’re seeing is that when people put systems in place to actually start capturing these reviews that they’re seeing an increase of about one out of 10 on booking.com. Now obviously that’s going to depend how long we’ve been going, how many reviews you already have, but fairly consistently across our mentees we’re seeing 1 out of 10 increase in your review rating on booking.com. Now we’ve done research in our area and we have rough correlation that you can charge for a double room an extra £10 a night for an extra one out of 10. Now it doesn’t take long to work out how much extra you can make per month just by getting a small increase in your review rating when you’ve got a property like that.
On the admin side of things, there’s all the typical business things you need to take care of. Again bookkeeping, compliance and the KPIs are really important because that’s your link with the hotel. We’ve called it hands off hotel because it is, we’ve got teams in place doing all the different areas of the business but the KPIs and the reporting, that’s how we keep an eye on things from the top level without getting too involved. And so the better reporting that we have, the closer we are to the ground, the more we can understand how it’s doing and the more we can improve the performance. So that’s the operational matrix as I call it.
We’re nearly wrapping up now, just a couple of things to talk to you about with regard to this model. One of the key things I think with property is that you always want to Plan B, something you hear time and time again is that you need to have a Plan B. Now that’s actually very hard with a property like this for all the reasons we’ve talked about earlier when we’re talking about liquidity because the Plan B might be selling it. Well no one might want to buy it, it might not sell very quickly. The Plan B might be developing it, maybe the council don’t let you develop it. So it’s a lot harder with this type of site to come up with a solid Plan B. So in order to deal with that we need to de-risk it in as many other ways as we possibly can. So if we look at some ways which we can de-risk this type of property then the first one and one of my favourite ones is operating at the low end of the market because at the low end of the market you have a big cross-section of customer segments, you’ve got contractors, you’ve got professionals, you’ve got people staying with family, people travelling for leisure because people are always going to need the cheapest hotel rooms in town or the cheapest apartments. Therefore what happens with price at the lower end of the market and we know that there’s always going to be someone who’s going to want to stay in the property and we also know that in the event of a recession when the overall short stay market is going to shrink. The budget end of the market’s actually going to increase because some people will stop doing stays, unessential stays but people will still need to travel for various reasons but they might say well I’ll go but I’ll just go and stay somewhere cheap, bare minimum type thing. So you actually find that during the recession the budget hotel operators actually did very well in expanded massively because that segment of the market expanded. So that’s one really key way that we could actually de-risk what we’re doing.
Second of all this implies to all property investment I’m sure, be conservative from your figures. Don’t jump straight in there being optimistic, thinking you could do this, thinking you can do that. You always want to be on the conservative side of things and you always want to make sure you have contingencies in place so you need to have an allowance for things like maintenance. I told you earlier how big your maintenance bill can be if you’re not managing things in the right way. Now if you haven’t allowed for that, you could possibly be losing money rather than making money. Typically everyone has different requirements for what you’re looking for when you’re deciding is it a deal, is it not a deal? But one way that you can very much do risk is by having a big profit buffer in there. So you know that the market would have to drop off significantly, your revenue would have to drop off quite significantly before you actually start losing money on it and that means that with this type of deal you really need to set your bar higher than you would do if it was just an apartment because it’s a much riskier investment and there’s obviously a lot more potential exits when it comes to an apartment deal.
The final thing that we can do with this is careful structuring. And Paul talked very eloquently earlier about the different structures which we can use in our businesses and with this particular model it’s very important that you actually use an SPV for it because let’s say that you went and did five of these deals and you had a problem with one site. Would you want that taking out all four of your other properties? By using an SPV and as we’re talking about earlier, limited liability we’re making sure that each property is isolated within its own limited company and therefore if there’s a problem with one particular site it’s not going to affect the rest of your portfolio.
Now obviously that’s not practical to do if you’re working on individual apartments, one-two beds but with hotels it’s absolutely vital because as the size of the property expands, the potential issues and the size of any comeback could be quite large. So when we structure these type of deals then we’re looking at putting them into an SPV. We try and limit the liability through this and we also build into the model our management cost. I talked about how we developed the model on from the first deal that we’d done because we hadn’t actually accounted for the management cost in there and we did it directly into our management company. So moving the model forward then we developed it and said okay we do deals in an SPV and that actually has a management contract with our management company. And so there’s no connection between all the staff who are managing the property and the actual risk of operating the property. The other benefit of this is that you might want to for instance work with an investor on a particular site but not another one. And so for each hotel with its own SPV you can have different shareholdings, different directors, you have a lot of flexibility in terms of how you want to set it up.
So to give you an example of how the models evolved in another deal which were doing at the moment taking all this into account, so this is in Bournemouth. It’s currently a 13 bed property but because of the way that the model is we can actually turn that into an 18 bed property. It has two bed owners accommodation in the basement which we can convert into additional rooms and it also has a dining area which we’ll remove and turn it to an additional very large family room with a double and two single beds. We will also create a small kitchen area so people still have the advantage of having somewhere to cook, somewhere to eat their breakfast but typically what we’ve seen with previous properties is that not a lot of people are using the kitchen area, particularly at one time so we don’t have to have something massive for an 18 bed property. A relatively small kitchen and dining area is going to be sufficient.
So in this particular case the vendors, the problem with them, again talking about the entrepreneurial problem. They wanted to move out of the country, they’d had the property in the market for a couple of years, it wasn’t selling for all the reasons that we outlined before and therefore they just wanted to go, their parents are aging. They wanted to be able to spend their parent’s final years together with them back in Portugal. And so we agreed a lease option with them because it ticked their boxes, it was a solution for them. It allowed them to have enough money to live going back to Portugal and it allowed them to go and spend that time with their family at the most crucial time.
And of course as I said we put this into an SPV and what this allowed then was and I think it’s being cut off the bottom. Essentially we’ve worked with an investor on this deal who’s put in the cash required for the premium on the lease for the refurbishment and for operating capital. And then they’ve taken a shareholding in the SPV so they are essentially part owners of the property and their security is that they have a shareholding which has a real world value because essentially you could sell it to another investor for the return which it generates.
So the 12 month figures on this, obviously lower being an 18 bed property and these are projections because obviously this site is still coming through at the moment. It’s not up and running yet. So the turnover at 256, the lease fee much lower on this particular property, got other costs in there. Now what you’ll see is that we’ve also built the management cost into this deal. So we’ve got the SPV sitting here which is the operational thing and then it’s got a contract with our management company to manage it at 20 percent of turnover.
So this really does turn it then into a hands off model because you’ve got an SPV, you’ve got no operational involvement for it. you’ve got cash in there and it’s delivering an investment return. So this is what completes the cycle and turns it into a proper hands off hotel if you like and for this particular deal it’s going to be returning over a 12 month period an average of just under five thousand per month which for the level of investment involved is a relatively good return for the investor. When we take into account a small amount of potential capital growth plus cash flow over the 10 year period that essentially works out about 25 percent per annum so it’s a very good deal for the investor and obviously for us, we get to own a property, fully managed without having to put any cash in.
So what the key learnings from today? Well I think I proved you don’t have to start small if that works for you then great but if you have the confidence, if you have skills which you can take from whatever else you have been doing in life before property then take them, use them, make the most of them to make sure that you come into property at a level that you feel is appropriate for you. Again this applies to everything that you’re doing, always ask that entrepreneurial question because if you’re just doing something to make money then at some point it’s going to come unhinged. Even if it’s a single property you need to be thinking what the problem is there not enough high quality low cost accommodation in the area? Is it hard for families to find a large property with large enough bedrooms for the kids? Always be asking the entrepreneurial question because if you can find a problem and a solution which makes money, then that’s scalable and profitable. And I’d hope that after this talk you also, everyone who put their hands up saying yeah I’d love to own my own hotel feel now that maybe that’s a little bit easier than you thought.
I think fourth takeaway never volunteer for Chris.
So that’s it for today like I say thanks a lot for listening. Please do make sure you like the Serviced Accommodation Podcast on Facebook. If you have any problems with that come find us during the break but otherwise thank you very much for listening.
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