I’m curious

by Jonathan Twombly
Last Updated: October 11, 2023

We’re about to close on my latest hotel transaction, and I’m thinking about other ways to take advantage of the opportunity presented by independent hotels.

I’m curious:  what do you think of this idea?

See, I’m always on the lookout for two things:

1.  Value – being able to buy something for less than it’s really worth

2.  Overlooked markets or asset classes

When you can find something that combines the two – overlooked value – you’re onto something.

Just as I was when I started investing in South Carolina a decade ago:  institutional money barely ever left the Big Six coastal markets, and what did was going to Texas.

South Carolina had strong population growth, but no one seemed to care.  Because the herd had focused on Texas, meaning South Carolina’s great demographics were overlooked.

I also noticed overlooked value in independent hotels. Few investors want to get their hands dirty repositioning these assets. That means opportunity for those who will.

Recently, I’ve noticed potential in small markets.

The housing crisis in big cities and in popular markets where the population is moving is well-known.

But smaller markets with unspectacular population growth are being overlooked.

When you go to these markets, you hear the same thing everywhere:  there’s not enough housing to meet demand.  Local investors are overwhelmed with applications when they put an apartment on the market.

In big markets, supply and demand are imbalanced because people are moving faster than apartments can be built (for the most part).

Small markets are experiencing a different process. Units are taken off market by aging out, fires, damage, tear-downs, or AirBnB.  But there’s practically NO new supply because developers mostly look at population growth and don’t see much there. So demand exceeds supply.

The problem is so bad that, for example, when we launched the Hotel Laurel @ Seneca Lake, one of the local politicians approached us because he wanted to know if we could build housing in the town. He practically begged us to help.

Now, here’s where these different strains of opportunity come together.

I’ve noticed a lot of small motels and hotels coming on the market, because the sellers want to retire.

These hotels are too small for my model, which requires enough rooms to support an onsite manager.

These smaller assets require self-management.  But few people want to take on managing a small motel.  A lot of the AirBnB folks have also noticed that it’s not so easy to manage these as some kind of giant STR.

The lack of demands for these assets means they can be purchased pretty reasonably.

These same towns have housing shortages, as I mentioned.

Local real estate investors don’t want to run hotels. But they do like small apartment buildings.

So ….. this smells like opportunity.

Buy smaller motels, reposition them into high-quality micro apartments, rebrand the properties, and then sell them to local apartment investors.

With our dedicated construction crews, we could knock out these renovations in a few months (zoning issues aside).

I’m wondering what you think of this idea.

And, more importantly, whether you’d want to invest.  It would be a short-term flip – buy, renovate, and sell fast.

We’d start off with something small to test the idea and move up from there if it works.

Please share your thoughts.

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