18 - ⁠Raising Capital and Structuring Boutique Hotel Deals with Isaac

In this episode, Isaac Oswaltshares his journey into boutique hotel investing and breaks down how capital, deal structure, and team alignment come together to close successful hotel acquisitions. He explains how investors and banks evaluate deals, why equity can be easier than debt, and the key metrics—like NOI, IRR, and equity multiples—that matter when scaling boutique hotels responsibly.

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Transcript

SPEAKER_00 0:00

Regardless of a limited partner, you still want everyone to be in sync. The most important word I believe in, there's a lot of important words, but in business is alignment. I don't want to ask the right questions where your head's at or what you're looking for. If I think this is right for you, if I don't think it's right for you, I'm not going to take money.

SPEAKER_02 0:13

Hey everybody, I'm Adam Watson, and I'm here with my co-host Micah Thomas.

SPEAKER_03 0:18

We're short-term rental operators who made the jump into boutique hotels.

SPEAKER_02 0:22

And we're in it right now. Raising capital, renovating a 50-room property. We're figuring it out as we go.

SPEAKER_01 0:28

This is the Boutique Hotel Secrets Podcast, and these are secrets.

SPEAKER_02 0:33

Welcome in, everyone, to another episode of the official Boutique Hotel Podcast. My name is Adam Walls. I'm your host. And again, this podcast is dedicated for talking to folks in the short-term rental space, moving over to that boutique hotel space. We think prime for great opportunity. It's not me, just solo me. I am joined with my mister from another sister, Micah Thomas. Micah, how are you doing, brother?

SPEAKER_03 0:57

Doing good, doing good. Can't complain. Just heavy into all the monotony of what it takes to buy a hotel. I got off the phone with at least three different banks today. So love to tell you more about that later. But doing good overall, can't complain.

SPEAKER_02 1:13

Mr. Bank Man, I love it. Thank you. Thank you for your service. You're doing the world of service over there, keeping bankers busy. Shaking the hands. I don't know how much service, but I'm definitely calling around a lot. I love it, man. And we're learning a ton, right? This has been talk about a new insight that like equity is turning out to be easier to raise than debt. And that's been a crazy revelation, but that's maybe even a good segue to bring in today's guest. So Isaac Oswald joining us here. Just pulled up your Instagram, by the way. I'm ashamed I'm not following you. Dude, conscious capitalist, burrito lover. I am so into this. Again, I know you through the boutique hotel mastermind as just the capital raising expert, the renovation construction guy. 20, 25 years of ground up stuff, but can we talk about burritos for a second?

SPEAKER_00 2:02

Yeah. I gotta correct you. I haven't had that long experience. I've been in the building industry for a long time, but developmentary and that kind of stuff is shorter than that. But thank you. I'll tell you a quick story that kind of show you my commitment that I call effectually. Beautiful phone. My daughter did not sleep, comic, just and the only time we could get her a nap, this was definitely during COVID too, was I get her in the car like lunchtime working out of the house, and I'd drive around and she finally falls asleep after crying. I had my local establishment of Chipotle set up, designed. I ordered it from my phone, and they came out and delivered it to my car and allowed me to eat my burrito and continue to drive around. Now, most of the time they're burrito bowls and that kind of stuff like that. Every now and then I indulge with the show. I try to keep it together so I can fit through the doorway, but thank you. Yeah.

SPEAKER_02 2:51

Oh my God. And did you? I think I met you when you're 12, 15%. You look slim, trim, handsome, all the thins. Was there a world where you didn't fit through doorways? I just don't know how big of a transformation this was.

SPEAKER_00 3:03

I got poke fun of early mid-childhood for sure. Fair.

SPEAKER_02 3:07

Okay. So we're I appreciate 2.0 today. Okay. I like your information.

SPEAKER_00 3:12

Just trying to keep it together, man. But actually, and I married a personal trainer. Oh, yeah. Keeps her on your toes. Certain expectations just by signing that contract. But yeah, of course. Thank you for inviting me here. I sorry to interrupt, but thank you for inviting me. Iedola. Um been working with you guys for a little while and super impressed by your discipline, your energy, and your just tenacity to go into a new space to you guys, but then you're quickly learning, and most importantly, you're getting the right team and structure around you.

SPEAKER_03 3:39

Absolutely. Yeah, I appreciate that. Absolutely. And I think this is the perfect segue to speak to maybe one of your strengths. And I think that's deal structure and how to manage capital. If you could give us a little bit of what it looks like to take down a boutique hotel or a hotel in general and well, size of the spectrum, you have equity and you have your debt or your senior debt. So could you talk a little bit about kind of the balance and how there is several parallels that go all at the same time that need to be addressed and taken care of to get the deal closed and across the finish line?

SPEAKER_00 4:15

Yeah. Yeah. So it's it's a dynamic business. You have a lot of moving parts. And that's why you'll hear any of us of it's it is a who, not how. Well it's both in that kind of way. And just stepping into a traditional structure. If you're buying a house, you come to the window with your down payment and then you have your loan. And it's suitable, it's similar in a commercial real estate aspect, but then there's just uh a little bit more creativity that can be done when it comes to looking at like capital, being steward of a capital is a privilege. I've been fortunate enough to have people believe in me. And there's time there's been such situations where I did it very well. There's situations that I didn't foresee happening and it didn't go as well as I want it to. And I think that's one of the things I've relayed to you guys and some other people like it can be a scary topic for people, but it's a badge of honor to be able to reflect and take resources and deploy it. And so you'll hear me say contingency. You'll hear me say if this and that, you'll hear me say, okay, like the bank might give you that loan, but there might be some extra money on the side that they're expecting to like interest reserve and this kind of stuff. And so a lot of this game is just it's all about structure, but it's all about just getting you have a vision and you have a plan and you have a couple devores attack a plan, and that's the abundant mindset that's going to be attracting the equity. But then when you go to the lender sim, they're capped at 7% in current market rates, they're capped and they're looking to look at the downside. So it's a completely different mindset of how they're approaching it. And so you literally have to stress test, factor test, and say if this, then that. And I don't want to be negative on that, but you want to foresee and visualize the different things that can happen along the way just for the sake of protection. And so I think that's when you guys hear that stuff. And just uh for me personally, I had to find the space to have confidence in order to do that. And as soon as I I think I shared this with you guys before, but as soon as I put myself in the mindset as a protector, it got better and just trying to solve for those things. But yeah, it's the deal structure, and then you just have more experience and just understand how things happen. You guys are stepping into a space which is very interesting to me because of what you can obtain an existing hotel that maybe is underperforming, that was built 30, 40 years ago. And you have more of a value add creation gap, at least in current structure today, based on doing something ground up where construction costs is so high and interest rates are high. And sometimes it takes a long time to get things approved. So there's a wonderful little gap in this space to be able to obtain that and get a really nice delta and change and valuation by just listening to Roshmi and some of the people of how to operate this thing and doing some just cosmetic rehab. We're not that kind of stuff. We don't need to move walls and do huge additions and this kind of stuff. But there's a wonderful opportunity and lane for that. And that's what you guys have been traveling down. But you still just it's about being thoughtful and trying to foresee some things happening both upside and downside.

SPEAKER_02 7:09

Yeah, I love that. And maybe we can even rewind the tape and hear a little bit more about your story and how you got into this. I think of didn't really think about this as my entry point to real estate. But my first job was working for my dad at 14 in an ace hardware, and I was restocking paint and nails and caulking, then graduated to the retail desk, and then I was moving lumber and concrete in the yard. And I thought as a teenager it was cool to use your muscles, but then later on, it's no use your mind, like much, much more profitable. Not that you don't want to be the 40-year-old holding the stop sign at a construction site. So, what was your entry point into the world of real estate younger days and up till now? And then we'd also love to hear the origin story of Boutique Hotel Secrets, how you joined this group, how again you've been adding a ton of value, and why you want to spend your time, your attention, your gifts with this community.

SPEAKER_00 8:01

Yeah, it's a great question. So historically, my dad was in it, but then I went into it was the building supply channel of basically all the building materials that go up maybe outside of a big box, right? And that kind of stuff. So that leads yourself into professional builder and stuff like that. So I was lucky enough to experience that, which is a traditional B2B business and kind of see what is being created and all the stuff that went from there. I left that, built the marketing company, not to the core of me as marketing, but I just quickly understood like what businesses needed and like what they were, especially like a traditional B2B company, maybe wasn't advancing in like the internet or SEO or that kind of stuff. So I just put together systems and packages to help them cross that chasm and that kind of stuff. Storically speaking in the real estate was just getting the right people together, build a team in order to do I strength would be like deal people architecture, a team standpoint. I've I have a slew of coaches' awards from my prior sporting and that kind of stuff. Travel in there and get the right people at right places and time, and then get the right people to hind you and see the spillway lodges. The thesis was there would need to be a blend between a hotel and Airbnb in the northern Michigan market, right? Um, so there's always like a strategic thesis and then getting the right team together, and then obviously the right energy, aka capital to fulfill on it.

SPEAKER_02 9:19

Real quick, what was it about that opportunity or that thesis at that moment? Because I think a lot of people like us, we're trying to do that kind of same thing our own way, but you saw it years ago. So I'm curious what data, what storylines, what trends were you seeing that emboldened you to take a swing at that?

SPEAKER_00 9:37

Good question. Just the demand in Airbnbs, right? Off the chart. And you could see the traveler, which we can step into a little bit, the traveler shifting mindset, great areas, maybe tired product, uh the millennial traveler having more desire for experiences and maybe like less inclined to just go stop at a Hilton than maybe previous generations. And statistically, in 2030, 90% of the travel here in the United States is going to be done by the millennial traveler, and there's a there's a different appetite in what they're looking for. And that's why you see Hilton doing curio and some of these other kind of boutique aspects in that stuff, which all goes in line with the thesis there. So just the special market there, and then the right team and a partner that just had created a lot multifamily from a downtown area and just saw how he addressed it in a more hospitable way. I'm like, this might be good for you to be like just seeing what I have as a team. Like, we might want you to do this based on your vision and creativity. So, but having done that, and then the opportunity to take a look at being around right people running it, we need knew we needed help to be able to run this thing. Okay, so I joined STR Secrets, the boardroom. And that's a great program, good people, a lot of talented Airbnb operators that were migrating themselves into hotels. For the last three years, I have seen so many deals, so many recommendations, pull me in. Hey, would you look at this? We were learning the management side, but this was all easy to them. They were more interested in what we had done in the past. And it's a jump. There's different things, like the same software is not going to work. And some of those things, right? And so for a couple of years talking to the team, I'm like, we need our own little track here. I'd be happy to help and assist, but there's a dedicated system and track of educational process, and we're getting into commercial real estate, and it's a little different. It's okay, but there's some more sophistication here, there's more stuff going on. And between myself, Joel, obviously Mike Shogun, a few other people, and Rashmi put together a curriculum, knowing that it was going to be curriculum, but at the same time, let's just get in a deal, go find a deal. You'll learn by doing it along the way and having a support network.

SPEAKER_03 11:39

I think that's a really good point. And I think both of us take quite the advantage of being in BHS mastermind and just soaking up a ton of knowledge on top of the didadic portion and just learning everything that there is to know about boutique hotels as we're newcomers into the field. There's one thing that you mentioned that I want to kind of circle back to, and it's just the landscape and the market of boutique hotels and Airbnbs. The stat that I throw around all the time is that every day, 10,000 baby boomers turn 65.

SPEAKER_02 12:13

If you're getting value from this, follow the show and share it with one person who's ready to move beyond short-term rentals.

SPEAKER_03 12:19

And if you want to learn more about the boutique hotel secrets community, the link is in the show notes. That's an actual fact, and probably more now because the population is aging. But with that, you have owners, managers of these hotels, motels that are looking for an exit plan and may not have a good retirement to fall back on because they've been living inside of their business instead of managing their business. So I wanted to see if you could touch a little bit on the opportunity that presents for us and maybe some strategies that we can use to get into the boutique hotel space.

SPEAKER_00 12:55

Yeah, that's a very good point. So there is a massive exodus, and there's a ton of that's already starting, but it will continue for the next five, seven, eight years. Go look at Cody Sanchez. She talks all the time of baby boomer businesses exiting. Maybe the kids don't want it, maybe that doesn't work out, that kind of stuff. And a lot of these businesses, if you know you've been running it or if you had it for 30 years and you're only three to five years from retirement, are you going to do a complete remote? Are you going to go through all that? Are you just going to write it out, sale and sunset? It is what it is. Maybe they're working in the business, they don't want to raise capital, they want to do the improvements. And it's I call a business like that or an operator like that long in the tooth, right? It's cool, whatever. Gives an opportunity for someone like you guys to say, okay, see what you got. Congratulations. You've done a great job. You fed your family. It's a nice business. I see a new vision for this. And I'm going to take what you have here and we're going to create a deal here. And I'm going to infuse the vision that I have for this asset and my understanding of what the current and future travel demographic and desires are going to be. And I'm going to give it more amenities. And I was a little laughed at initially, but we did put it in a cold plunge and hot tub in the that kind of stuff. But just some of that new stuff. And again, taking what's cool is if you have a little knowledge or experience from Airbnbs, you're actually able to take elements of what the traveler likes from the Airbnb and say, okay, how do I infuse this into a commercial asset? Into a commercial asset where I can get better valuations. I can deliver better experiences. It's not valued as a home, like a you know what the comps are, it can value it off of the NOI, which is a cap rate, valuation standpoint. So you there's ways to go find these things. Obviously, they're publicly listed. We certainly recommend getting ingrained and picking a spot and really figuring out what that end result that you want to be and what the market is and what supports it, and understanding the data around it, so on and so forth. And then as you get in the game, you're looking to become the one in that market that people would go to for a deal. And buying a business or buying something like that, you guys found yours pretty quickly. Sometimes it takes time and patience. You go through a ton of deals. Not all deals are great deals, a lot of them aren't great deals, but it's the disappointing, the consistency to actually filter through those deals, be able to evaluate them and say, okay, we got a really good value add gap here. We're going to put together the right team, structure, move forward from here. But they are popping up more and more. And lastly, I will say there is usually in these scenarios, not everything's just about purchase price when you're buying this stuff. I know that business can be math, but it's certainly art and emotions, too. So, what is the reason they want to get out there? They want their time, that kind of stuff. And so there's an opportunity in this space with an existing business to craft more creative seller financing deals, so on and so forth. When you're taking on an existing business or an existing asset, then there maybe is an other asset classes. Again, allowing you a little flexibility to structure the right deal. So, not sure if that answered completely your question, but that's how I think of it.

SPEAKER_03 15:47

Yeah, that was a totally good answer.

SPEAKER_00 15:50

That makes me you got my stamp of approval. I freaking nervous when I finished. Thank you.

SPEAKER_02 15:55

Did I get it? Let's put on coaches corner style or Professor Oswald style. You mentioned NOI. I think this is just a whole new set of metrics that you have to understand when you pivot over to the commercial space. Mentioned net operating income. Could you just really quickly talk about maybe IRR, waterfalls, equity multiples? I didn't know any of this stuff like six months ago because it was all just cash on cash, ROI. I thought it was really fancy with ROE, right? Like why we might want to put some debt back on that so we could make our cash sweat. I think IRR and equity multiples seem to be very important to understand. Do I have a good deal? And again, can I approach banks? Could I approach private lenders with something juicy to create this win-win? So, anyways, I just want to set you up just to talk a little bit about what you believe are the most important metrics and what's the right way to think about this new set of metrics as somebody who is maybe hearing this for the first time.

SPEAKER_00 16:57

Yeah, it's a good question. Let's start with net operating income. It's simply put, it's revenue minus expenses based on your operations. So let's say it's $100,000 a year. And based on the market and all these factors, it would be applied a certain cap rate. Let's say the cap rate is 10, it ranges between seven and 13, depending on the asset. I think nationwide for this stuff is right around nine, nine and a half, but it's market specific. And it usually correlates with the safety of the asset in some kind of way. Cap rates are going to be super low in Manhattan and then higher in more fragmented markets.

SPEAKER_02 17:33

It it has to do with the age as well, right? A brand new A lot of different stuff.

SPEAKER_00 17:37

Think about the cap rate as like a centralized number for all factors asset and market, so on and so forth. Tied into interest rates too. And if your NLI is $100,000 and someone values you at 10 cap, that is a million dollar asset based on valuations. Okay. So when we're talking to investors and we're talking to that stuff, and again, that's good for you to know these terms, but you still want to explain it in plain English. IRR is an internal rate of return. And that's basically gonna be able to calculate the given annual interest rate over a period of time. Okay. And it includes the timing of when the cash comes back as well. Okay. And it'll give you a kick out of percentage. Okay. So you guys are targeting your 18 to anywhere, these deals are gonna be 16 to 20% IRR and that kind of stuff. The really the simple way to look at it, I always go back to the rule of 72. If someone wants to double their money, use that to figure out how to double. If someone wants to double their money in three years, roughly speaking, they need a 24% return. Okay. Now there's a little bit of a calculation on the timing of when that comes back and that kind of stuff, but I'm generalizing a little bit. Equity multiple, it's I give you one dollar and I get back two, equity multiple two. Right? Those are really simple standards. So I I've had people very sophisticated, very high net worth, and they're like, just explain it to me and break it down. Simple in is simple English. I'm like, hey man, roughly based on this project, conservatively, double your money in five years. That's roughly a little bit more than the 14% rate of return. Okay. The bank is gonna look at loan to value and that kind of stuff, or development be loan to cost, we guys loan to value. And a bank is gonna be concerned about many things, but one of the things is gonna be a coverage ratio, which is only saying, are you making enough money to pay your debt payment? And then so when you guys see 1.25, 1.3, it's basically if you were if your loan, if you were making 100 grand a year and your loan payments are 100 grand a year, you're at a one. Yep. Which is why they want you to have room.

SPEAKER_02 19:41

You need to spread so $1.25 in, a dollar out, I'm at $1.25.

SPEAKER_00 19:46

Yes, and depending on the asset, depending on the stuff, affordable housing is gonna be lower, like you don't need as much because it's safer in their eyes than a hospitality product, which is why you guys will see 1.253, 1.35 sometimes, so on and so forth. It's a really simple way of doing it. ChatGPT is super helpful now. I wasn't really working for this kind of stuff like that, too. But I would actually take a look at it and be like, okay, where are key terms that a bank's gonna ask me? What a what an investor could ask me, and so you understand those facets, but then okay, give it to me in plain English and talk to me like I'm six years old, talk to me like I'm this, and so explain it because you'd be amazed. It's good to understand the sophistication a little bit, but then actually be able to articulate it in a simple fashion that is very viable.

SPEAKER_02 20:27

Yeah, I heard a quote. Uh I'm probably bastardized, but I was talking about somebody mastering a domain, and a true master of a domain is able to give you the single sentence, they can give you the paragraph, or they can give you the chapter. What's the altitude? Who am I talking to? And what do you need? The thing that I learned. Sorry, you get the paragraph, whether you wanted the sentence or the chapter. I haven't mastered the craft. I think that checks out with my own experience of going, wow, I really need a crash course in commercial financials, how to value, how to under underwrite, how to think about debt equity, etc. I can tell I'm getting more fluent. I'm still a long ways to go. But I love that I it seems to me one of your gifts is to understand the hard math, the hard science, the 62 tab spreadsheet, but then just talk to somebody plainly. And by the way, we Mike and I have had the good fortune to be on calls with you in front of investors. And something I also wanted to ask about is you ask great questions. And I don't know if other people notice that or are doing that, but it feels that's a true strength that gives you a read on where to take the conversation next. So I don't I don't know. Was that just natural? You've always done that, or have you learned that over time? How to ask great questions?

SPEAKER_00 21:45

I am naturally gifted in math and I care. You know, like I I want to know do you care about this? Or is this exciting to you, or what does your world look like, or this kind of stuff like that? I do want to know because when you're looking at this, when you're Early in a deal, you need the finances in order to do, but you gotta understand the two. You gotta think about how does it play out over three years, four years. I've had scenarios that I wish I could unwind things. And I wish I would have asked different questions in advance and that kind of stuff. And so, regardless of a limited partner, you still want everyone to be in sync. The most important word I believe in, there's a lot of important words, but in business is alignment. I don't ask the right questions where your head's at or what you're looking for. If I think this is right for you, if I don't think it's right for you, I'm not gonna take your money. Because I know it's gonna just lead to problems. You're gonna be unhappy, I'm gonna be unhappy, I'm gonna be stressed out. And it's just not the right fit. So it's another reason why I always cautioned you guys on not caution, but just prepare as hey, just you want people that are gonna be longer term holders, right? You could you can exit this thing in three years if you really want to. Yep, but do you really want that pressure? What happens to the market turns on? What happens if there's another COVID? Like I went through a deal where the banks froze, right? Like the stuff happens, and usually with if you have the right amount of capital and you have the time and you have the right team, you can figure it out. So it's just setting expectations and it's all the for protection of you guys and protection for the asset. But yeah, I want to know what's interesting, what they care about, and how they view them just by asking the questions, I can actually see how they view the world based on certain things.

SPEAKER_03 23:14

Yeah, that's a great point. And I was literally thinking about this the other day. You asked one question, I observe you asked a single question, and it pretty much opened the playbook, and we were able to gain so much understanding just from a single question. I think it just also comes from experience in the industry and understanding what is needed and what's true to get to the bottom line. But I know we want to be respectful of time, and I wanted to ask you if you could talk to someone who may be on the fence about possibly joining the boutique hotel mastermind or getting into the boutique hotel industry. What advice would you give somebody that's trying to make the transition from short-term rental to boutique hotels?

SPEAKER_00 23:58

Great question. For me personally, I live for the human that desired decided to be the man arena, which is my favorite quote, it could be woman too, to help that person achieve what that original vision of being an entrepreneur is. So, like that let and the people that we have around this group are the same line. It's a great model, it's a great b business, and it is a team game, and there's certain education that can help go further, faster and put them in the right position, regardless whether it's BHS, myself, or whoever, or any of Joel or Rashmi. It's extremely healthy to be around people that desperately want you to learn from what they did right and maybe what they didn't do right in the past.

SPEAKER_02 24:41

Yeah. Beautifully said, man. Look, man, uh, we got to get you out of here, but would you come back? I will hang out with you.

SPEAKER_00 24:48

Yes, great. Thank you so much. We appreciate it, guys. This was very fun. It was a very good conversation. You guys are doing great work. You're approaching it with discipline, but then with integrity. And uh, this is the start of something special for you guys. So thank you for having me on.

SPEAKER_02 25:01

Amazing. That's the pod. Thanks again for listening. Catch you on the next one. All right, that's it for today on the official Book Eco Tel Secrets Podcast.

SPEAKER_03 25:11

If this helps, be sure to follow or subscribe and send it to someone who needs that bigger push. And if you want the community or the resource and playbook to find what we're learning, the link is in the channel. Quick note we're VHS community members sharing our own experience. And if you have questions or topics you want us to cover, reach out and let us know. We're building this channel for operators just like you at DNA.