My Billion Dollar Idea

Recently, I have been thinking a lot about the risks of real estate and hotel investing.

As interest rates rose and revenues started declining in 2022, I saw a lot of our portfolio get their returns crushed from 25-30% to single digits.

Still, I am drawn to real estate. It's a topic that has fascinated me. Actually, “fascinated” is not the right word, I think enthused is. I like the idea that thousands of people have a phenomenal experience at one of my hotels that redefines the hospitality industry. Keep this idea in mind as I go through the rest of this blog.

For the last decade, especially after the 2008 crash, debt has been highly encouraged. I mean, rates were close to 0% or damn near it until 2022. However, my recent experiences and the insane amount of Dave Ramsey reels I’m seeing across my social media feeds are leading me to a new philosophy.

Let’s buy hotels with less debt.

Don’t get me wrong, I still want to use leverage. However, we currently only put down 15%-30% of the purchase price. Having this much debt on our deals means our fixed costs are insanely high, which inherently means more risk. Our debt service payment across all our portfolio hotels is the most significant monthly obligation. I imagine a world where my debt payment is cut in half, and the smile that brings me is the definition of joy.

Give me a chance and hear me out. Consider a more sustainable long-term approach that minimizes risk while still generating healthy returns on our investments. These are the two things we need to happen:

Put 35%-50% down on deals. Less debt means less of a loan payment, meaning more cash flow. More cash flow means:

• Higher growth potential during good times because we can reinvest this money into more deals

• Less risk during bad times, because we have more of a cushion during harsher markets.

• Focus on hotel management perfection.

The three pillars of operations are:

• Unforgettable guest experience

• Make more money

• Spending less money

If we can create a system that can implement these values on a scale of “elite status,” then we will create a tremendous amount of value. And to clarify what I mean by “elite status,” we need to transcend “Marriott and Hilton,” where people don’t choose to stay in a hotel defined by a brand, but rather if it is operated by AARO H.M.

Basically, I want to switch from a syndication/fund model to a more start-up/business model. Funds and syndications are, in my opinion, commercialized investment products that teach investors bad habits. Most syndications and funds are focused on aggressively generating investor returns by creating short-term value. By the way, I don’t think all funds or syndications are like this. But, Funds/Syndications turn hotels into a security rather than a business. The value is no longer the experience we give a guest, but rather how much we can extract from doing the bare minimum.

No matter how you slice the pie, syndicators and fund managers are inherently driven to allocate your money, not for growing your money. Consider the fees they receive that are not tied to your profits. The acquisition fees, disposition fees, hotel management fees, and asset management fees literally have nothing to do with how much money an investor makes. At that point, the carry or “the profit split” is just a cherry on top.

I want to note that syndications or funds can be beneficial, and I have seen them structured in a way that benefits the investor. I am speaking GENERALLY above.

I think that the best path forward is a “more conventional” or “start-up” business approach. We invest money in buying hotels, and instead of distributing the cash flows, we use them to grow. We use the profits to buy more hotels. Implementing the AARO H.M. philosophy to complement the addition of assets will create an unreal amount of enterprise value. If we make a real business, there is an opportunity for crazy exits. A typical deal aims to double or triple your equity. Instead, if we create a “business” rather than a “security” and go public, we can achieve a 15- 40x earnings multiple, depending on what the market deems. If we continue to roll the cash flow, we could potentially crush that 2X-3X. I don’t know the exact number, but remember that a public company typically has an earnings multiple of 15- 40x, depending on what the market deems.

I keep coming back to one conclusion… Instead of the end goal being creating wealth through distributions and bad habits, and a fund model. I want to raise money and create wealth by building a business—a business where one may not receive distributions often, but one where, over 15-25 years, we can build a billion-dollar-plus company.