Hotel Profitability
What are potential cap rates on an average or really good hotel deal prior to a situation like Covid. For example multifamily usually goes from about 6-10% on most deals, but I am wondering do hotels have higher upside potential?
Google hotel cap rates - you will be able to get a sense of where they are. In terms of profitability, I can't tell you if they more profitable from a standpoint of operating profit ratios (MF expenses are approx. 40-50% of revenue, I don't know where hotels generally stand). But I can tell you hotel investing is riskier, and from that standpoint, they trade at higher cap rates to multifamily. What this doesn't tell you though, are capex needs. Some assets may trade at higher cap rates because capex needs demand it. However, from this standpoint of higher cap rates, hotel investors 'demand' higher rates of return than MF investors due to the inherent extra risks a hotel has.
I'd say your MF cap rates are a bit high. Also, hotels usually aren't valued as a straight capped NOI valuation. Google a hotel appraisal and read the different methods the appraisers use. Hotels are sort of a totally different animal. Often they use a 10 year DCF with a capped NOI in the exit year. Obviously, you can look at historic transactions and take the price paid and the NOI reported and make a cap rate as well. To answer what I think is your question, hotels are riskier than MF and thus have a higher upside and higher downside potential.
This is what I have seen as well. Also agree those MF caps are high by a couple % points.
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