Building boutique hotel/apartments
Hi all,
I'm looking to build a small boutique hotel in one of the flyover state capital's metro areas, and am not sure how to proceed.
I'm coming from software development, and have been saving/investing for a very long time. I've got quite a bit of scratch put together. I fucking hate working with all these fucking nerds, though, and have been planning a transition into real estate development and the hospitality industry since before covid.
I want to build a 4 or 5 story hotel building, then operate it for a few years. If successful, expand the business model to other locations. If not successful, convert the hotel rooms to long term rentals and manage it as a regular apartment building.
The building would be new york style: 26x70 footprint, basement, retail/hotel lobby on the main floor, 3 or 4 floors of living space. (Random example from street view on Google maps to get a sense of the building size/type im talking about. 1110 Fulton St, Brooklyn, NY 11238 ). Location has excellent walkability (for a flyover state) with lots of restaurants and other touristy stuff within a block or 2.
So how do I go about breaking into building this type of building? I already own 5 other residential properties generating cash and have a shit ton of stocks, so I guess I could pay for it myself if i liquidate but that's not what I want to do. Can't use a VA loan like I did for 2 of my other properties either, construction loans seem like an option but banker I talked to basically told me they aren't interested in anything this small with the current interest rate and real estate markets.
Any advice on how to get this built?
Edit: I'm specifically asking about financing options, not whether or not it's a good idea.
I've already explored a new construction home loan, but banker wasn't interested because it's not a residential property. Same issue with a VA loan. Personal loan is an option, but not in the amount I'd like and the rate is crazy because no assets to back it (the hotel isn't built yet). I explored cash out refinancing a few of my existing properties, but would rather not comingle funds across LLCs.
Also explored creating a new company and issuing bonds, but my lawyer said not a good idea. Id rather not take in partners by raising capital.
so what other types of loan even exist? Is it even possible to get a loan to do this?
If you need to ask WSO, a forum made up mostly of college students, how to build a hotel...then maybe you shouldn't build a hotel? Buying a couple properties and holding them as rentals is very different from developing/constructing ground up, especially a hotel. Hotels are different from other forms of real estate because they are an actual business, not just property that you lease up and collect rent. I'm going to assume that you have no experience operating a hotel, since you are asking WSO how to build one. Do you know what staff members you need? How will you go about hiring staff? Since you are a software developer, I'm assuming you can build a website, but do you know how to build a website for a hotel and takes reservations? Do you know how to market your hotel? How does the whole payment system work? Do you just buy a credit card machine and link your bank account to it? Do you know what basic amenities you legally need to provide? Outside of development costs, do you know how much it will cost to start the operation?
These are all questions a financier, including a bank is going to ask. They are going to look at your experience at operating a hotel and if your answer is that you've never operated a hotel, then they are not going to finance you and that honestly means that you probably shouldnt finance it/do it yourself...I mean if someone with 0 experience in software development came to you and said they wanted to build a software company, would you be comfortable investing in them?
If you really want to operate a hotel, then my advice would be to work at one first or work at a firm that at least invests in them and then buy your own fully operating hotel first before starting one from scratch. The problem with endeavors that you have 0 experience in is that you don't even know what you don't know. You don't even know what questions to ask, so you can't even seek out the answer
I'm specifically asking about financing options because I've never built a property before and the types of financing i have worked with in the past generally arent applied towards new construction in mixed usage zoning.
I already know the rest of it and have hospitality experience as well as have been running my own software company, and my own property management company and know how running a business works, thanks.
There are loans that do this. They are called construction loans. You just need to find the right bank/lender that finances hotels. In my opinion, your major hurdle even if you find a bank that finances hotel construction is one that will specifically finance you. You know…someone who has no experience in development/construction nor operating a hotel…either call some banks/lenders and ask or hire a debt/equity broker
Oooof....as someone who just came from a meeting on Friday with a tech millionaire who tried to get into real estate and flushed a solid $2-3M down the drain on a development without even a building to show for it, this hits home.
You are looking for a construction loan from a bank, but you aren't going to get one right now. You need to find a development partner who has experience with developing hotels. That's your only shot of a bank backing you. Developers with decades of experience are finding it almost impossible to get bank debt on hotel developments....a person without any experience doesn't have a shot right now. Don't take that personally by the way, it's just the state of the market at the moment.
You could try and find a hard money lender, but don't. They are sharks and will eat you alive if you run into any issue.
If you really want to do this, see if you can fund the project all-cash and then refinance once it's built.
Also the bond idea...lol
You may as well just liquidate everything you've got and apply it to just an all-equity financing of this project (assuming you really want to go through with it), because (a) no one is going to finance you, and (b) even if they did I get the strong impression that you'll not only be signing personal guarantees on the construction loan, but will certainly be tapped for those guarantees when you blow through your budget and need the additional capital/the bank reaches into your pocket to be made whole.
Why not find a GC that specializes in building hotels, or a merchant builder that does the same, and then pay them a way above market rate to sponsor the deal and build it to your specifications? As in, form a JV with Small Hotel General Contractor LLC, you fully capitalize the entity to the extent that will be needed to do this project, and then build in some terms that allows you to wholly buy them out, or that allows them to put the building back to you, for some agreed upon price once the project has it's Certificate of Occupancy (or whatever the relevant cert is for a hotel in your municipality)?
Can't argue with that logic.
Yeah, see, I really, really disagree with this, because this is such a Wall Street mind set and very much not a real estate mind set. What you're basically calling for is to create some super risky product/project, convince someone it's a good idea, and then privatize any gain that results and socialize any losses. Which is basically Wall Street's mantra.
That isn't how it works in real estate. You take on risk, and you get rewarded when things go well. And if they don't, you bear the pain alongside your investors. The people who mix "creativity" and "chaos and money" are the ones who say "hey, wouldn't it be creative to take funds from one account to finish this other project, and then repay it when I'm finished and make all my promotes?" Those guys end up in bankruptcy court, or in jail, or both, and rightly so. The commodification of the transacting in real estate is a huge problem, in my book. It's why all these syndicators and MF lenders are losing so much money, because they stopped giving a shit about the assets (or never did in the first place) and viewed the transaction itself as the "deal."
As someone who works in the Hotel sector, I echo the first post here, that if you’re coming to a forum to ask how to build a hotel, then you might want to do some more research first.
I’ll budge for the heck of it Here’s some questions though to get you going:
- Have you done any market research/analysis yet on current supply in the BK hotel market?
- You say you want to operate it for a “few years”..do you realize Hotels are not just a piece of real estate but also an operating business? Are you prepared to be an employer?
- Your concept isn’t anything new. It’s basically a hotel rental program that plenty of hotel brands work within.
- Do you understand the NYC Hotel zoning process?
- What is your marketing/branding strategy? Independent/Boutique hotels are great as you bypass the fees the large brands will hit you with, however, you need to have a sound marketing strategy as you will not have the Marriott/Hilton/etc. reservation distribution system to help drive bookings.
- No lender is going to lend you a dime on this business plan especially without any prior experience.
Not that it really matters, but he is located in a flyover state or at least wants to run the hotel in a flyover state.
I also wanted to add that I love this guy's mentality, specifically when he says
If he's already planning for failure and is so whimsical about it, then it probably means that he hasn't done any research into starting a hotel and has no thesis as to why a hotel would be in demand. I doubt he knows what the average occupancy rates and average daily rates in his area. His thought process is: I have a piece of land zoned for hospitality -> Let's build a hotel -> if fails, then convert to apartments. Rather than: I have a piece of land zoned for hospitality -> is there demand for my hotel -> if yes, then build a hotel -> if no, then build apartments. Also he talks about converting from hotel to apartments as though if it can be done overnight and won't cost millions of dollars more. Unless he plans to build his hotel with kitchens already...that's going to be a very expensive conversion.
Actually the plan is to build the building as a normal apartment building, but then operate it as a hotel. Maybe glorified air BNB would be a better term for it than hotel, but whatever. But yeah, no conversion costs if it fails, just rent them as long term rentals instead of short term rentals if that happens.
I mean, it's a 4 story 26x70 foot building - it's not very big. I get the sense everyone here thinks I'm taking about some huge Ritz Carlton with a thousand rooms when I'm just talking about basic apartments in a mixed zoning area, operated as a hotel.
the mixed use zoning and the retail/hotel lobby on the main floor makes it different than just building a normal triplex or quad, which is why I posted.
And I'm glad I did. Learned that my banker is an idiot and he was probably wrong when he said a construction loan wouldn't work. So I now I'll talk to some other banker and do it with them instead.
Shifting from software development to building a boutique hotel is a bold move, and it sounds like you've got a solid vision for it. Financing such a project, especially with the nuances of your situation, does present some challenges. Keep us updated please!
since traditional construction loans and VA loans are off the table, and personal loans aren't fitting the bill, have you considered approaching private lenders or investment groups? another avenue could be to explore partnerships with businesses that could benefit from your hotel. For example, a local restaurant or retail chain might be interested in collaborating, which could open doors to alternative financing methods.
Since you said you don't want to be convinced that this is a bad idea I won't do that, even though I live and breathe hotels more than probably anyone else on the forum. I will urge you to take a good hard look at your underwriting on the hotel side though and understand how you're going to run this thing in terms of staffing and operations, particularly distribution / sales. And be VERY conservative on your adr/occ.
Your only option is a hard money lender, I don't know who else would bank a project/sponsor like this. If you're rich, maybe go open a high net worth revolving credit facility and draw on that could be another option.
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