Tuesday, April 17, 2007
I know something about Key West Guest Houses, because I used to own one -- Eaton Lodge located at 511 Eaton Street. Selling it ranks in the top five mistakes of my life. Buying it was one of the best things I ever did. Taking as long to buy it cost me big time. The time value of money.
I pretty much decided that I wanted to own a guest house after my first trip to Key West in 1984, but I put off even looking on that trip thinking I was being too impulsive. I had stayed in other guest houses in Provincetown and California during the four previous years and those experiences led me to believe I could be a very good innkeeper. Kind of like Bob Newhart on NEWHART.
When I first started to look at properties guest rooms were being sold in the range of $25,000 - $35,000 per room. Most recently the rooms have been sold around $300,000 per room. Quite a dramatic increase in20 years. Yet the prices pretty much fall in line with the price appreciation of single family homes in Old Town.
The reason it took me so long to buy a guest house was my failure to listen to my Realtor. I kept on insisting on over-lawyering every offer I made. I kept trying to weasel the last nickle out of every deal. And I kept not getting any deal done.
I ended up buying Eaton Lodge at a public auction conducted by the Small Business Administration. It had foreclosed a mortgage on the property and let the building sit vacant for two years. It is a beautiful Greek Revival building with mature gardens in a heck of a great Old Town location. Because of the auction, I was forced into accepting the building "as is" and without any ability to negotiate anything. I couldn't over-lawyer or nit-pick. Thank God.
I tell buyers to consider the following factors when looking at prospective guest houses:
1. Location. Once vacationers arrive in Key West, they can't drive anywhere. Pick a good location that is easy to find and that is near Duval. Many visitors come to Key West without reservations, so the better the location, the more likely you are to stay full.
2. Improvements. Every guest house that I know of was built and was used as something else before converted into a mini-hotel. And even though guest houses may be priced similarly, the fact is that each property is very different in the quality of renovation and utility for it's end use. Some buildings have more deferred maintenance than others. Others may have code violations. Or some properties may have more guest rooms than transient licenses. Some may have locational problems (noise, lack of any nearby parking, distance from Duval, etc.).
3. Book of Business. It is virtually impossible to create a new guest house out of an existing building. The City of Key West has so many restrictions on buildings that it is just easier to buy an existing business. Look for a business that is operated as a business. Request and study the business's financial records. Study the reported income for the periods of January through April. Well located guest houses ought to be near 100% occupancy during the entire period. If the numbers are not there, then something is wrong with the numbers or the operation. Some owners operate "off book"--they do not report all cash income. This can have a severe impact on a potential sale because all banks require appraisals based on the number of legal rooms (rooms with transient licenses) and verifiable income. Operations that are successful are easier to takeover than businesses that are mismanaged. Sometimes property costs more because it is worth more.
4. You are not Newhart. Many people think they will live in one of the guest rooms and live the life of Bob Newhart in his charming Inn. Wrong. You have to be rich, really rich to live on site. On most properties you would lose $200 or more per night in room income for 365 days a year. It is less expensive and easier on your mental health to live near, but not on the property.
5. Help. No, not "help me!", but how many employees will you need and how much will it cost to pay them. A mom and pop type of operation can usually handle a small guest house with 6 or 7 rooms with one or two additional employees to help as maids and relief from the front desk. But that mean mom and pop will be doing a lot of the work as well. Guest houses with 13 to 14 rooms become very profitable because you can afford to have enough employees to let you run the business and mingle with the guests as necessary. Some guest house owners use a service company that provides maids on an hourly basis, so the owner pays a flat fee to the company and that is it. The worker is not an employee of the guest house so there are no FICA or unemployment taxes to pay. However, many very successful guest houses run just the opposite. They pay their employees a good hourly wage, offer some form of medical insurance, and maybe even paid vacation. The latter businesses have employee loyalty and longevity. And returning guests know the names of those employees and come back year after year because they are treated nicely. In employee relations cheap labor can be very expensive.
A Realtor should be able to help you understand how these factors impact your potential investment in a Key West guest house.
Earlier I said "Selling it ranks in the top five mistakes of my life." After I sold Eaton Lodge I understood that I had thrown away years of easy income for a quick (real quick one time profit). Running a guest house is not an easy business, but it is not hard one either. Making the right choice and operating a business as a business and not as a hobby can provide a good and stable income and significant property appreciation.
To view all current Key West Guest Houses that are for sale CLICK HERE.
CLICK HERE to checkout all current Key West mls listings. Then give Gary Thomas, that's me, a call for more information. 1-305-766-2642.
The information on this site is for discussion purposes only. Under no circumstances does this information constitute a recommendation to buy or sell securities, assets, real estate, or otherwise. Information has not been verified, is not guaranteed, and is subject to change.
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Gary Thomas in a Nutshell
- Gary Thomas
- Key West, Florida, United States
- I first read about Key West in a magazine called "After Dark" sometime in the mid 1970's. But it wasn't until March 1984 that I made my first visit to the island that would become my home. I had two weeks for a vacation and reserved a room at Colours Guesthouse (now Marrero's Guest House) for one week. I thought that if I didn't like Key West, I could always go back to Miami or Ft. Lauderdale for the rest of my trip. But after a couple of days in Key West, that was no longer a consideration. But when I wanted to extend my stay for the extra week I found there was no room at the inn. The guesthouse owner did find me a room at LaTeDa, the infamous guesthouse/restaurant. That's a story I'll write another day. But those two weeks in Key West gave me the realization that I had found Paradise. Key West has been my home since 1993 and my only regret is that it took me so long to get here. I am a full time Realtor at Preferred Properties CRI. Let me help you find your new home or business in Paradise. Living in Paradise is not a slogan, it's a way of life.