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Buying a hotel as a passive investment?


premfan
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Hi guys,

 

I'm looking at buying a hotel property as a passive investment. The numbers work and the hotel staff live on site. The concern i have is i have other obligations and if i make the deal i'm only able to check out the property about 2 days a month. I have no experience managing a hotel. My family used to own some apt units awhile ago but, i'm thinking thats a different animal compared to being a hotel owner.

 

Questions for any hotel owners or people that know hotel owners.

 

1.) Is managing a hotel really a passive investment?

 

2.) Is it realistic to only be onsite 2 days a month and still make it work?

 

Thank you guys!

Thank you guys!

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Hi guys,

 

I'm looking at buying a hotel property as a passive investment. The numbers work and the hotel staff live on site. The concern i have is i have other obligations and if i make the deal i'm only able to check out the property about 2 days a month. I have no experience managing a hotel. My family used to own some apt units awhile ago but, i'm thinking thats a different animal compared to being a hotel owner.

 

Questions for any hotel owners or people that know hotel owners.

 

1.) Is managing a hotel really a passive investment?

 

2.) Is it realistic to only be onsite 2 days a month and still make it work?

 

Thank you guys!

Thank you guys!

 

Depends.  If you have good management in place, then yes, it could operate quite well with you only on site some of the time.  At the same time, being on site only on occasion, also opens you up to considerable fraud or theft if you are incorrect in your judgement.  Not to mention your hotel's reputation for service, cleanliness, friendliness, occupancy and execution. 

 

I have a friend who owns a hotel about five hours from Vancouver.  He lives in North Vancouver, but he is on site usually for two weeks of the month, even though he has good management in place.  He has to be there and much of the administrative and book-keeping work is done on site, so it occupys a considerable portion of his life.  He has a wife and two young children as well, so he's a very, very busy guy. 

 

You should also consider what competition is around you as far as the hotel is concerned.  My friend's hotel is really the only hotel on the lake in the immediate area, and he owns the largest marina there, which is attached to his hotel property.  So, his hotel has certain amenities that the competition cannot provide, since that zoning is not available in the future for any other properties near his hotel.  Cheers!

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Depends.  If you have good management in place, then yes, it could operate quite well with you only on site some of the time.  At the same time, being on site only on occasion, also opens you up to considerable fraud or theft if you are incorrect in your judgement.  Not to mention your hotel's reputation for service, cleanliness, friendliness, occupancy and execution. 

 

I've been interested in hotels for some time and a big obstacle seems to be making the jump from owning one or two hotels and being there all the time, to creating a larger chain and having other people run it mostly. As Parsad says, getting quality and trustworthy management is key.

 

Just out of curiosity premfan, how big is the hotel you're looking at? I always find it interesting to think about the numbers... 

 

 

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Hi guys,

 

I'm looking at buying a hotel property as a passive investment. The numbers work and the hotel staff live on site. The concern i have is i have other obligations and if i make the deal i'm only able to check out the property about 2 days a month. I have no experience managing a hotel. My family used to own some apt units awhile ago but, i'm thinking thats a different animal compared to being a hotel owner.

 

Questions for any hotel owners or people that know hotel owners.

 

1.) Is managing a hotel really a passive investment?

 

2.) Is it realistic to only be onsite 2 days a month and still make it work?

 

Thank you guys!

Thank you guys!

 

Depends.  If you have good management in place, then yes, it could operate quite well with you only on site some of the time.  At the same time, being on site only on occasion, also opens you up to considerable fraud or theft if you are incorrect in your judgement.  Not to mention your hotel's reputation for service, cleanliness, friendliness, occupancy and execution. 

 

I have a friend who owns a hotel about five hours from Vancouver.  He lives in North Vancouver, but he is on site usually for two weeks of the month, even though he has good management in place.  He has to be there and much of the administrative and book-keeping work is done on site, so it occupys a considerable portion of his life.  He has a wife and two young children as well, so he's a very, very busy guy. 

 

You should also consider what competition is around you as far as the hotel is concerned.  My friend's hotel is really the only hotel on the lake in the immediate area, and he owns the largest marina there, which is attached to his hotel property.  So, his hotel has certain amenities that the competition cannot provide, since that zoning is not available in the future for any other properties near his hotel.  Cheers!

 

Thank you for the advice parsad. I'm thinking 2 days to manage the hotel isnt realistic. I have some choices to make if i want to do the deal.

 

 

Depends.  If you have good management in place, then yes, it could operate quite well with you only on site some of the time.  At the same time, being on site only on occasion, also opens you up to considerable fraud or theft if you are incorrect in your judgement.  Not to mention your hotel's reputation for service, cleanliness, friendliness, occupancy and execution. 

 

I've been interested in hotels for some time and a big obstacle seems to be making the jump from owning one or two hotels and being there all the time, to creating a larger chain and having other people run it mostly. As Parsad says, getting quality and trustworthy management is key.

 

Just out of curiosity premfan, how big is the hotel you're looking at? I always find it interesting to think about the numbers... 

 

 

 

The gross revenue is in the low 500,00k

Its on the market for 2x gross revenue

It nets between 120-140k

The guy runs a really lean hotel so i'm thinking i cant add any value there. The things i add some value to is there is a vacant bar/resturant space in the hotel. I can lease that and make some additional income. The hotel needs some work though. So 20-25 percent of net income would go to improvement of the property. This leaves me with about 100k cash flow. Its looking like the property will go in the mid 900k's.  60 plus units.

 

PS.  I have noticed hotel prices have gone down since 2009. It hasnt reached a bottom yet

 

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my 2c. I've known people that have owned hotels, & motels. Be very sure you are looking at clean books. If the profits aren't good enough to really pay management well and you can't be around much then watch out. Like small bars they are easy to skim from. Then it becomes a real headache. Who is going to be able to spend the time to clean things up if you can only be there 2 days a month?

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Hi guys,

 

I'm looking at buying a hotel property as a passive investment. The numbers work and the hotel staff live on site. The concern i have is i have other obligations and if i make the deal i'm only able to check out the property about 2 days a month. I have no experience managing a hotel. My family used to own some apt units awhile ago but, i'm thinking thats a different animal compared to being a hotel owner.

 

Questions for any hotel owners or people that know hotel owners.

 

1.) Is managing a hotel really a passive investment?

 

2.) Is it realistic to only be onsite 2 days a month and still make it work?

 

Thank you guys!

Thank you guys!

 

Depends.  If you have good management in place, then yes, it could operate quite well with you only on site some of the time.  At the same time, being on site only on occasion, also opens you up to considerable fraud or theft if you are incorrect in your judgement.  Not to mention your hotel's reputation for service, cleanliness, friendliness, occupancy and execution. 

 

I have a friend who owns a hotel about five hours from Vancouver.  He lives in North Vancouver, but he is on site usually for two weeks of the month, even though he has good management in place.  He has to be there and much of the administrative and book-keeping work is done on site, so it occupys a considerable portion of his life.  He has a wife and two young children as well, so he's a very, very busy guy. 

 

You should also consider what competition is around you as far as the hotel is concerned.  My friend's hotel is really the only hotel on the lake in the immediate area, and he owns the largest marina there, which is attached to his hotel property.  So, his hotel has certain amenities that the competition cannot provide, since that zoning is not available in the future for any other properties near his hotel.  Cheers!

 

Thank you for the advice parsad. I'm thinking 2 days to manage the hotel isnt realistic. I have some choices to make if i want to do the deal.

 

 

Depends.  If you have good management in place, then yes, it could operate quite well with you only on site some of the time.  At the same time, being on site only on occasion, also opens you up to considerable fraud or theft if you are incorrect in your judgement.  Not to mention your hotel's reputation for service, cleanliness, friendliness, occupancy and execution. 

 

I've been interested in hotels for some time and a big obstacle seems to be making the jump from owning one or two hotels and being there all the time, to creating a larger chain and having other people run it mostly. As Parsad says, getting quality and trustworthy management is key.

 

Just out of curiosity premfan, how big is the hotel you're looking at? I always find it interesting to think about the numbers... 

 

 

 

The gross revenue is in the low 500,00k

Its on the market for 2x gross revenue

It nets between 120-140k

The guy runs a really lean hotel so i'm thinking i cant add any value there. The things i add some value to is there is a vacant bar/resturant space in the hotel. I can lease that and make some additional income. The hotel needs some work though. So 20-25 percent of net income would go to improvement of the property. This leaves me with about 100k cash flow. Its looking like the property will go in the mid 900k's.  60 plus units.

 

PS.  I have noticed hotel prices have gone down since 2009. It hasnt reached a bottom yet

 

 

Is it just me, or does this sound like a basket-case? 

 

Annual Gross revenue of $500k/365 days per year = $1,370 per night.

Nightly gross of $1,370/$100 nightly room charge = 13.7 rooms occupied per night

Nightly Occupancy of 13.7/60 units = 22.8% average occupancy rate?

 

 

What doesn't add up here?

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Is it just me, or does this sound like a basket-case? 

 

Annual Gross revenue of $500k/365 days per year = $1,370 per night.

Nightly gross of $1,370/$100 nightly room charge = 13.7 rooms occupied per night

Nightly Occupancy of 13.7/60 units = 22.8% average occupancy rate?

 

 

What doesn't add up here?

 

I'm guessing the area this hotel in isn't $100 per night average rate, not that it matters much.  If it were $75 per night we'd be talking maybe 1/3 occupied, and for $75 unless this is an extremely rural area I'd be worried about damages from guests.

 

To someone else's point maybe you're not looking at the right books? 

 

The real world investments are fascinating.  Ultimately the price is 9x cash flow on this thing for a private illiquid deal.  This speaks volumes, especially when I see a stock trading at 3x FCF and someone tells me the price is appropriate because the stock is illiquid.

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Is it just me, or does this sound like a basket-case? 

 

Annual Gross revenue of $500k/365 days per year = $1,370 per night.

Nightly gross of $1,370/$100 nightly room charge = 13.7 rooms occupied per night

Nightly Occupancy of 13.7/60 units = 22.8% average occupancy rate?

 

 

What doesn't add up here?

 

I'm guessing the area this hotel in isn't $100 per night average rate, not that it matters much.  If it were $75 per night we'd be talking maybe 1/3 occupied, and for $75 unless this is an extremely rural area I'd be worried about damages from guests.

 

To someone else's point maybe you're not looking at the right books? 

 

The real world investments are fascinating.  Ultimately the price is 9x cash flow on this thing for a private illiquid deal.  This speaks volumes, especially when I see a stock trading at 3x FCF and someone tells me the price is appropriate because the stock is illiquid.

 

I've looked at a ton of hotel development deals. There are three things I generally dislike about them:

 

1) Heavy price competition. Hotels (within each tier) have very little pricing power.

2) Required capex every seven years or so for franchised hotels

3) Heavy debt loads required for decent returns. Many people tell me their goal is to operate breakeven on a cash flow basis and profit when they sell it. I don't know...

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The real world investments are fascinating.  Ultimately the price is 9x cash flow on this thing for a private illiquid deal.  This speaks volumes, especially when I see a stock trading at 3x FCF and someone tells me the price is appropriate because the stock is illiquid.

 

You are so correct! 

 

Don't forget leveraged as well.  I suspect Premfan is buying cash, but many people would buy this property with a mortgage...generally 3-1 debt to equity.  Even if your illiquid stock carries corporate debt, it is highly unlikely the leverage is greater than 1-1 debt to equity...often, you can find illiquid stocks trading at less than cash with no debt..which is what I'm buying right now. 

 

But investors, professionals and amateurs alike, stay away from these ideas because of their size and apparent illiquidity.  Cheers! 

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Hi guys,

 

I'm looking at buying a hotel property as a passive investment. The numbers work and the hotel staff live on site. The concern i have is i have other obligations and if i make the deal i'm only able to check out the property about 2 days a month. I have no experience managing a hotel. My family used to own some apt units awhile ago but, i'm thinking thats a different animal compared to being a hotel owner.

 

Questions for any hotel owners or people that know hotel owners.

 

1.) Is managing a hotel really a passive investment?

 

2.) Is it realistic to only be onsite 2 days a month and still make it work?

 

Thank you guys!

Thank you guys!

 

Depends.  If you have good management in place, then yes, it could operate quite well with you only on site some of the time.  At the same time, being on site only on occasion, also opens you up to considerable fraud or theft if you are incorrect in your judgement.  Not to mention your hotel's reputation for service, cleanliness, friendliness, occupancy and execution. 

 

I have a friend who owns a hotel about five hours from Vancouver.  He lives in North Vancouver, but he is on site usually for two weeks of the month, even though he has good management in place.  He has to be there and much of the administrative and book-keeping work is done on site, so it occupys a considerable portion of his life.  He has a wife and two young children as well, so he's a very, very busy guy. 

 

You should also consider what competition is around you as far as the hotel is concerned.  My friend's hotel is really the only hotel on the lake in the immediate area, and he owns the largest marina there, which is attached to his hotel property.  So, his hotel has certain amenities that the competition cannot provide, since that zoning is not available in the future for any other properties near his hotel.  Cheers!

 

Thank you for the advice parsad. I'm thinking 2 days to manage the hotel isnt realistic. I have some choices to make if i want to do the deal.

 

 

Depends.  If you have good management in place, then yes, it could operate quite well with you only on site some of the time.  At the same time, being on site only on occasion, also opens you up to considerable fraud or theft if you are incorrect in your judgement.  Not to mention your hotel's reputation for service, cleanliness, friendliness, occupancy and execution. 

 

I've been interested in hotels for some time and a big obstacle seems to be making the jump from owning one or two hotels and being there all the time, to creating a larger chain and having other people run it mostly. As Parsad says, getting quality and trustworthy management is key.

 

Just out of curiosity premfan, how big is the hotel you're looking at? I always find it interesting to think about the numbers... 

 

 

 

The gross revenue is in the low 500,00k

Its on the market for 2x gross revenue

It nets between 120-140k

The guy runs a really lean hotel so i'm thinking i cant add any value there. The things i add some value to is there is a vacant bar/resturant space in the hotel. I can lease that and make some additional income. The hotel needs some work though. So 20-25 percent of net income would go to improvement of the property. This leaves me with about 100k cash flow. Its looking like the property will go in the mid 900k's.  60 plus units.

 

PS.  I have noticed hotel prices have gone down since 2009. It hasnt reached a bottom yet

 

 

Is it just me, or does this sound like a basket-case? 

 

Annual Gross revenue of $500k/365 days per year = $1,370 per night.

Nightly gross of $1,370/$100 nightly room charge = 13.7 rooms occupied per night

Nightly Occupancy of 13.7/60 units = 22.8% average occupancy rate?

 

 

What doesn't add up here?

 

Stubble,

 

Its an economy brand and its in a rural area. Room rates are in the mid 50's.

 

my 2c. I've known people that have owned hotels, & motels. Be very sure you are looking at clean books. If the profits aren't good enough to really pay management well and you can't be around much then watch out. Like small bars they are easy to skim from. Then it becomes a real headache. Who is going to be able to spend the time to clean things up if you can only be there 2 days a month?

 

Very good point! I would have to research management fees and see whats going to be left over.

 

 

 

Is it just me, or does this sound like a basket-case? 

 

Annual Gross revenue of $500k/365 days per year = $1,370 per night.

Nightly gross of $1,370/$100 nightly room charge = 13.7 rooms occupied per night

Nightly Occupancy of 13.7/60 units = 22.8% average occupancy rate?

 

 

What doesn't add up here?

 

I'm guessing the area this hotel in isn't $100 per night average rate, not that it matters much.  If it were $75 per night we'd be talking maybe 1/3 occupied, and for $75 unless this is an extremely rural area I'd be worried about damages from guests.

 

To someone else's point maybe you're not looking at the right books? 

 

The real world investments are fascinating.  Ultimately the price is 9x cash flow on this thing for a private illiquid deal.  This speaks volumes, especially when I see a stock trading at 3x FCF and someone tells me the price is appropriate because the stock is illiquid.

 

I've looked at a ton of hotel development deals. There are three things I generally dislike about them:

 

1) Heavy price competition. Hotels (within each tier) have very little pricing power.

2) Required capex every seven years or so for franchised hotels

3) Heavy debt loads required for decent returns. Many people tell me their goal is to operate breakeven on a cash flow basis and profit when they sell it. I don't know...

 

Good points. Thank you for the info.

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This is not a bargain for what is apparently an old hotel with low occupancy, even if the books are clean.  If you think this is going to be a successful investment without being on site 24/7 and having the fortitude of one of the "Patels" as described by Monish, I've  got a bridge in Brooklyn I'd like to sell you at a bargain price.

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Stubble,

 

Its an economy brand and its in a rural area. Room rates are in the mid 50's.

 

 

That's even worse!  Your basic costs to keep a room cleaned, linens changed, new plastic cups, fresh little soaps and shampoos, etc will run you a minimum of $15-20/night even with a crappy hotel in a rural area.  The margins totally suck and you are still running at only half occupancy.

 

The only way to make this work well is the Patel way!  The whole damned family needs to work long hours and not take a real salary....  Since you want to work 2 days per month, you are a far cry from a Patel! (but there's no shame in that either).

 

 

SJ

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Stubble,

 

Its an economy brand and its in a rural area. Room rates are in the mid 50's.

 

 

That's even worse!  Your basic costs to keep a room cleaned, linens changed, new plastic cups, fresh little soaps and shampoos, etc will run you a minimum of $15-20/night even with a crappy hotel in a rural area.  The margins totally suck and you are still running at only half occupancy.

 

The only way to make this work well is the Patel way!  The whole damned family needs to work long hours and not take a real salary....  Since you want to work 2 days per month, you are a far cry from a Patel! (but there's no shame in that either).

 

 

SJ

 

You would also have to sell your home or rent it out, and move your family into one of the rooms at the hotel.  ;D  But it works!  Cheers!

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Not the same ... and perhaps easier to manage. I'm currently buying "distressed" (forced sellers, still some foreclosures) of condos and single family homes - seeing unlevered yields of 7 - 11% after operational management fees (which will run you at 7 - 10% for someone good as well).

 

Seems a bit less hassle than a hotel - and somewhat less dependent on people travelling.

 

Perhaps pick up some PEB next time Mr. Market marks them down?

 

Cheers - C.

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my 2c. I've known people that have owned hotels, & motels. Be very sure you are looking at clean books. If the profits aren't good enough to really pay management well and you can't be around much then watch out. Like small bars they are easy to skim from. Then it becomes a real headache. Who is going to be able to spend the time to clean things up if you can only be there 2 days a month?

 

One other thought here. Does the net include the current owner/manager salary? If his salary isn't shown in expenses non on site owners net will not be 120-150000.00. Also will be pretty hard to re-sale I'll bet. How long did current owner have property? I look at least 4-5 years tax returns. In Calif. I also look at property taxes to get an idea what they paid for property by working back from their current property taxes you can get a ballpark idea of what they paid.

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my 2c. I've known people that have owned hotels, & motels. Be very sure you are looking at clean books. If the profits aren't good enough to really pay management well and you can't be around much then watch out. Like small bars they are easy to skim from. Then it becomes a real headache. Who is going to be able to spend the time to clean things up if you can only be there 2 days a month?

 

Require that management has “skin in the game”. The people who work with me know that, if services are not delivered in time, they won’t get paid, if (big) mistakes are committed, they won’t get paid, if 20% of all the revenues that come in don’t stay in the company for me to invest, they won’t get paid.

Of course, even this way, I check on them every day!  ;)

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

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my 2c. I've known people that have owned hotels, & motels. Be very sure you are looking at clean books. If the profits aren't good enough to really pay management well and you can't be around much then watch out. Like small bars they are easy to skim from. Then it becomes a real headache. Who is going to be able to spend the time to clean things up if you can only be there 2 days a month?

 

Require that management has “skin in the game”. The people who work with me know that, if services are not delivered in time, they won’t get paid, if (big) mistakes are committed, they won’t get paid, if 20% of all the revenues that come in don’t stay in the company for me to invest, they won’t get paid.

Of course, even this way, I check on them every day!  ;)

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

how did you build that expectation into your culture ??

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If your last name is Patel, hotels are literally THE status symbol in the community.

 

Regardless of economics, regardless of quality, regardless of location, all that matters is how many "beds" you operate.

 

E.g. Mahendra, please meet Rupesh. He owns or joint-ventures in 5K rooms in Florida, Alabama, and Texas. He is the man!

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my 2c. I've known people that have owned hotels, & motels. Be very sure you are looking at clean books. If the profits aren't good enough to really pay management well and you can't be around much then watch out. Like small bars they are easy to skim from. Then it becomes a real headache. Who is going to be able to spend the time to clean things up if you can only be there 2 days a month?

 

Require that management has “skin in the game”. The people who work with me know that, if services are not delivered in time, they won’t get paid, if (big) mistakes are committed, they won’t get paid, if 20% of all the revenues that come in don’t stay in the company for me to invest, they won’t get paid.

Of course, even this way, I check on them every day!  ;)

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

how did you build that expectation into your culture ??

 

Well, a few reasons:

1) First of all we are small: practically, I give work only to professionals, who do all the work: we have no secretaries (except one, who works half-time), and I do all the accounting (with a little help from a friend of mine, who is an accountant).

2) Through “unpleasant” examples: in the beginning I had to fire a few people who weren’t aligned with my way of seeing and doing things. Others left soon afterwards. Those who remained are a great team and still happy to work with me.

3) Through incentives: they are almost completely free, and enjoy very flexible work hours. They just know the quality of the work they have to deliver and its time schedule. It is up to them to manage their time and work. If they are able to deliver a higher quality work, in less time than it is required, they enjoy economic benefits accordingly.

4) Though I am not sure about that, I cannot rule out it also helped the fact that in Italy we have been through 5 recessions during the last 10 years… And the professional man was hit particularly hard! So, it might have been easier than usual for me to find the very few people aligned with my way of seeing and doing things.

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

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my 2c. I've known people that have owned hotels, & motels. Be very sure you are looking at clean books. If the profits aren't good enough to really pay management well and you can't be around much then watch out. Like small bars they are easy to skim from. Then it becomes a real headache. Who is going to be able to spend the time to clean things up if you can only be there 2 days a month?

 

Require that management has “skin in the game”. The people who work with me know that, if services are not delivered in time, they won’t get paid, if (big) mistakes are committed, they won’t get paid, if 20% of all the revenues that come in don’t stay in the company for me to invest, they won’t get paid.

Of course, even this way, I check on them every day!  ;)

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

how did you build that expectation into your culture ??

 

Well, a few reasons:

1) First of all we are small: practically, I give work only to professionals, who do all the work: we have no secretaries (except one, who works half-time), and I do all the accounting (with a little help from a friend of mine, who is an accountant).

2) Through “unpleasant” examples: in the beginning I had to fire a few people who weren’t aligned with my way of seeing and doing things. Others left soon afterwards. Those who remained are a great team and still happy to work with me.

3) Through incentives: they are almost completely free, and enjoy very flexible work hours. They just know the quality of the work they have to deliver and its time schedule. It is up to them to manage their time and work. If they are able to deliver a higher quality work, in less time than it is required, they enjoy economic benefits accordingly.

4) Though I am not sure about that, I cannot rule out it also helped the fact that in Italy we have been through 5 recessions during the last 10 years… And the professional man was hit particularly hard! So, it might have been easier than usual for me to find the very few people aligned with my way of seeing and doing things.

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

Thanks

That took some capacity for our suffer in the beginning. But I think freedoms key also those that left or fired are not worth anyone's time. I think your incentive structure build quite brilliantly and would have worked in any environment.  Maybe a bit harder in a good environment with the temptation of money. But who love what they are doing would value freedom more than compensation and will take most importantly take pride in the what they do. In the end doing good work and contributing to society.

 

How did this emerge? Or did you just think about this for some time and just applied it?

Also how did you do compensation?

 

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my 2c. I've known people that have owned hotels, & motels. Be very sure you are looking at clean books. If the profits aren't good enough to really pay management well and you can't be around much then watch out. Like small bars they are easy to skim from. Then it becomes a real headache. Who is going to be able to spend the time to clean things up if you can only be there 2 days a month?

 

Require that management has “skin in the game”. The people who work with me know that, if services are not delivered in time, they won’t get paid, if (big) mistakes are committed, they won’t get paid, if 20% of all the revenues that come in don’t stay in the company for me to invest, they won’t get paid.

Of course, even this way, I check on them every day!  ;)

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

how did you build that expectation into your culture ??

 

Well, a few reasons:

1) First of all we are small: practically, I give work only to professionals, who do all the work: we have no secretaries (except one, who works half-time), and I do all the accounting (with a little help from a friend of mine, who is an accountant).

2) Through “unpleasant” examples: in the beginning I had to fire a few people who weren’t aligned with my way of seeing and doing things. Others left soon afterwards. Those who remained are a great team and still happy to work with me.

3) Through incentives: they are almost completely free, and enjoy very flexible work hours. They just know the quality of the work they have to deliver and its time schedule. It is up to them to manage their time and work. If they are able to deliver a higher quality work, in less time than it is required, they enjoy economic benefits accordingly.

4) Though I am not sure about that, I cannot rule out it also helped the fact that in Italy we have been through 5 recessions during the last 10 years… And the professional man was hit particularly hard! So, it might have been easier than usual for me to find the very few people aligned with my way of seeing and doing things.

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

Thanks

That took some capacity for our suffer in the beginning. But I think freedoms key also those that left or fired are not worth anyone's time. I think your incentive structure build quite brilliantly and would have worked in any environment.  Maybe a bit harder in a good environment with the temptation of money. But who love what they are doing would value freedom more than compensation and will take most importantly take pride in the what they do. In the end doing good work and contributing to society.

 

How did this emerge? Or did you just think about this for some time and just applied it?

Also how did you do compensation?

 

Well, I don’t really believe in business plans… It just emerged through trials and errors. I knew from the beginning that my goal was to extract as much capital as possible from a “poor” and “unpredictable” business, then to deploy it into “great” and “very predictable” businesses (at good prices). Every time I encountered something useful to achieve my goal, it stayed with me. Every time I encountered something that hindered my goal, I threw it as far away as possible. Something got shaped out of this process. And it is still reshaping itself every day!

Compensation is very easy: we have two bank accounts, the first I call the “bank account for operations”, the second I call the “bank account for investments”. Every time a client pays us, he/she deposits money on the “bank account for operations”, right afterwards I shift 20% of that sum to the “bank account for investments”. If I cannot find anything sensible to do with that 20%, it stays in cash. But: once on the “bank account for investments”, it will NEVER go back to the “bank account for operations”. Of course, all costs must be managed through what’s left on the “bank account for operations”. If costs are less than what’s left on the “bank account for operations”, then we are all happy, and the surplus will be distributed among the company and the professionals who work with me. If costs are higher than what’s left on the “bank account for operations”, the professional who work with me will receive a lesser compensation, and will have to wait for a better month, when the company will be able to refund them. Truth be told: the second instance, fortunately, has happened very rarely.

Sounds silly?! Well, you asked…!  ;D

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

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my 2c. I've known people that have owned hotels, & motels. Be very sure you are looking at clean books. If the profits aren't good enough to really pay management well and you can't be around much then watch out. Like small bars they are easy to skim from. Then it becomes a real headache. Who is going to be able to spend the time to clean things up if you can only be there 2 days a month?

 

Require that management has “skin in the game”. The people who work with me know that, if services are not delivered in time, they won’t get paid, if (big) mistakes are committed, they won’t get paid, if 20% of all the revenues that come in don’t stay in the company for me to invest, they won’t get paid.

Of course, even this way, I check on them every day!  ;)

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

how did you build that expectation into your culture ??

 

Well, a few reasons:

1) First of all we are small: practically, I give work only to professionals, who do all the work: we have no secretaries (except one, who works half-time), and I do all the accounting (with a little help from a friend of mine, who is an accountant).

2) Through “unpleasant” examples: in the beginning I had to fire a few people who weren’t aligned with my way of seeing and doing things. Others left soon afterwards. Those who remained are a great team and still happy to work with me.

3) Through incentives: they are almost completely free, and enjoy very flexible work hours. They just know the quality of the work they have to deliver and its time schedule. It is up to them to manage their time and work. If they are able to deliver a higher quality work, in less time than it is required, they enjoy economic benefits accordingly.

4) Though I am not sure about that, I cannot rule out it also helped the fact that in Italy we have been through 5 recessions during the last 10 years… And the professional man was hit particularly hard! So, it might have been easier than usual for me to find the very few people aligned with my way of seeing and doing things.

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

Thanks

That took some capacity for our suffer in the beginning. But I think freedoms key also those that left or fired are not worth anyone's time. I think your incentive structure build quite brilliantly and would have worked in any environment.  Maybe a bit harder in a good environment with the temptation of money. But who love what they are doing would value freedom more than compensation and will take most importantly take pride in the what they do. In the end doing good work and contributing to society.

 

How did this emerge? Or did you just think about this for some time and just applied it?

Also how did you do compensation?

 

Well, I don’t really believe in business plans… It just emerged through trials and errors. I knew from the beginning that my goal was to extract as much capital as possible from a “poor” and “unpredictable” business, then to deploy it into “great” and “very predictable” businesses (at good prices). Every time I encountered something useful to achieve my goal, it stayed with me. Every time I encountered something that hindered my goal, I threw it as far away as possible. Something got shaped out of this process. And it is still reshaping itself every day!

Compensation is very easy: we have two bank accounts, the first I call the “bank account for operations”, the second I call the “bank account for investments”. Every time a client pays us, he/she deposits money on the “bank account for operations”, right afterwards I shift 20% of that sum to the “bank account for investments”. If I cannot find anything sensible to do with that 20%, it stays in cash. But: once on the “bank account for investments”, it will NEVER go back to the “bank account for operations”. Of course, all costs must be managed through what’s left on the “bank account for operations”. If costs are less than what’s left on the “bank account for operations”, then we are all happy, and the surplus will be distributed among the company and the professionals who work with me. If costs are higher than what’s left on the “bank account for operations”, the professional who work with me will receive a lesser compensation, and will have to wait for a better month, when the company will be able to refund them. Truth be told: the second instance, fortunately, has happened very rarely.

Sounds silly?! Well, you asked…!  ;D

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

I like it. Everyone knows the rules ahead of time. It's open to see. Disciplined. Fair to everyone. The only question I would have is if someone leaves, what happens to their portion of the 20% in the investment portion. I'm sure you have a good system Gio. Just curious how you handle retirements, etc. ron

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I like it. Everyone knows the rules ahead of time. It's open to see. Disciplined. Fair to everyone. The only question I would have is if someone leaves, what happens to their portion of the 20% in the investment portion. I'm sure you have a good system Gio. Just curious how you handle retirements, etc. ron

 

Hi Ron!

Now I must leave in a hurry... but I will answer your question as soon as possible!  :)

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

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Maybe I'm not thinking about this in the right way, but depending on how you finance this deal, you might be able to make a good return and grow nicely.

 

It costs $900,000 to buy and if you can get away with only putting up $100,000 cash and have the seller finance the remainder of the down payment and you make $100,000 a year and you  can reinvest that in another hotel and then two more... extrapolating out a few years, you might own a few hotels and be making a good chunk of change every year.

 

Maybe your hotels wouldn't have the best margins or occupancy rates, but if you can make 5x your money in five years and do that multiple times you'd be doing nicely in life. Just a thought.

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