Does this resort cash flow?
Does this resort cash flow?
This might be the question we get asked the most about the resorts we have for sale. It is an excellent question and if you are asking this question, it means you know that resort ownership is not all about the lifestyle - you have to pay the bills too! What you may not realize is that resort ownership isn't analyzed like other opportunities.
So, what does it mean when someone talks about if a resort cash flow? Perhaps it makes sense to start with what it does NOT mean. An owner operated resort is NOT like buying a strip mall, it is NOT like buying an apartment building, it is NOT like buying a triple net lease investment property or a Delaware Statutory Trust, NOR is it even like buying a cabin that you plan to AirBNB!
Why is it different from these investments and how does this relate to cash flow?
1. The biggest difference is that with the exception (maybe) of the AirBNB, most resorts will involve you adding your creativity and efforts. Maybe your specialty is marketing, bookkeeping, web development, construction, landscaping, or public relations - resorts have lots of places for your "value added" contribution. Unlike an AirBNB, the economies of scale really allow you to get a return on your investment. A bigger investment - sure - but real estate investment is always about money leverage AND economies of scale.
2. Many resorts include an owner's home that the resort "rents" to the owner as part of their compensation. Sometimes this rent is implied in the compensation and sometimes is it specifically detailed on the profit and loss statements. Every resort accountant does it slightly different and it is easy to miss this rent when looking at cash flow. Resort buyers who work with a resort buyer's agent will learn about this, but many residential realtors - and sadly some commercial realtors - aren't familiar with this important consideration when looking at cash flow. Once again, this is very different than other investments.
3. Because you are directly involved in the business, you can direct business expenses to the areas most important to the business AND your lifestyle. Want to add some more sand to the resort beach? Want to buy some more sand toys? How about rental fishing boats or pontoon boats? These are all very real business expenses that you will enjoy right along with your guests.
4. Sometimes a company vehicle, utilities, retirement payments are included as compensation. Banks and appraisers look at these expenses when making loans and you should too. Unless you are working with a buyer's broker who knows what to look for, you can easily miss a great opportunity!
5. Finally, the ultimate cash flow is figured when you look at BOTH the short term AND long term implications of any investment. In the short term, you will want to look at where you can improve the business or raise the rates. In the long term, you have to realize that the mortgage payments you are making to your bank for the resort is not unlike the house payments you are making right now. Home appreciation is most likely a reflection of your home's market along with its features. Resorts represent a larger investment, but also a larger return - a return that will be more reflection of your "value added".
Why do many people struggle with these concepts?
1. Most commercial real estate investors are looking at a Cash on Cash return without expending any effort. They assume that all business functions will be done by someone else and that managers will live off site. If you apply this same concept to a resort - it may or may not cash flow - certainly it will be harder to pay all the bills. Invariably, if you pay someone else to do a task that you can do, your return will be lower. If you haven't already read our blog posts on Cash on Cash return and Cap Rate - now is the time!
2. Many people fail to understand the power of the concepts contained in items 2-5 above. They often look at the "bottom line" without considering that in their current line of work, these items aren't covered. For example, if you make $100K at your current job, your "bottom line" is not $100K - it is what you have left over after paying for your taxes, your house mortgage, medical expenses, etc. Take some time to review your current budget, extrapolate that over time and you will understand. If you expect to have your resort "bottom line" be $100K to replace your $100K job, you simply aren't comparing apples to apples.
3. Because resorts are purchased and leveraged with other people's money, your principal payments and appreciation should be part of your long term cash flow calculations. How much is the principal payment on your house in year one versus year ten? The same concept applies to resorts - and to a much larger extent because the investment is bigger.
If you are thinking about buying a resort, let Lake Country Resort Sales help you find the right resort for you based upon your needs.
If you are thinking about selling, let us help you determine a reasonable selling price for your resort. Maybe you are not ready to sell right now, but you need some Exit Planning to help maximize your return. We are here to help.
It is never too early to start planning.