Inside the “Hotel Guru’s” Mind: Robots, Hot Markets, and Making Millions | Bob Rauch E51

Michael Russell 0:03

Welcome to the Hotel Investor Playbook, your guide to building wealth and freedom through boutique hotel ownership, hosted by Mike and Nate.

Bob Rauch 0:13

Get in the game.

Michael Russell 0:20

Welcome to the Hotel Investor Playbook. We're Mike and Nate, founders of Malama Capital, and your host. On this podcast, we talk story about everything you need to know to make money investing in hotels and hospitality assets. Today's guest is someone who's been in the trenches of hospitality for over 45 years. He's built, owned, operated, and probably advised on more hotels than most people will ever set foot on in their life. He's known as the hotel guru. Bob Rauch is the founder of Brick Hospitality. And he's also a professor, a mentor, and a futurist when it comes to tech and AI in our industry. So, Bob, I'd like to get practical insights that matter to anyone looking to be successful in hospitality and especially independent hotel owners and operators. But before we dive in, welcome to the show.

Bob Rauch 1:15

Well, thanks, Mike. I appreciate it. Nate, good to meet both of you.

Nathan St Cyr 1:19

Yeah, welcome to the show. We're we're excited to dig in and have this conversation. That's for sure.

Bob Rauch 1:24

It'll be fun.

Michael Russell 1:26

Yeah. So as I said, most people know you today as the hotel guru. But before that, I want to go back to the beginning. You were a dishwasher. That's where you started your career at the Hilton, I believe. And I'd like you to walk us through that journey from washing dishes to eventually running a management company with over 20 plus hotels.

Bob Rauch 1:47

Right. Well, I was a really good dishwasher. So I did get promoted to bus boy, and now I'm head busboy, and I'm very proud to be in that position. Yeah, actually, it was a time where I was a student at the University of Illinois. I saw an ad for banquet dishwasher. I answered the ad and they said you're overqualified. I said, Well, I don't get it. Well, what do you mean I'm overqualified? I'm looking for a job. I'm I'm a student. And I said, I'm bilingual. I speak Spanish. They said, Oh, oh, you're hired. So they put me in the kitchen and I got along with all the dishwashers back there. And because I was bilingual and also interested in a career, I got promoted more quickly than some of the others back there. And here I am today. It did take a few years to get from banquet dishwasher to owner. But in the middle, I think I did every single job in a hotel except to be a housekeeper. But to this day, I will challenge my housekeepers to what we'll call contests, uh, making beds. And I always I'm always finishing last and they laugh at me, but we have fun.

Nathan St Cyr 2:55

Well, I'm pumped because we share something in common, Bob. Although I did start way ahead of you. I um didn't get promoted from dishwasher. I went straight in as a bus boy, and that's where I started in hospitality to let's go.

Bob Rauch 3:10

I'll tell you what's interesting is Chris Naseda, who's CEO of Hilton, also started as the dishwasher. He's certainly done well for himself.

Michael Russell 3:18

Well, we're gonna unpack exactly how you got to where you're at now, but you've had over four decades of hospitality experience. So why don't you tell us a little bit about your current endeavor? What is Brick Hospitality? What do you guys do?

Bob Rauch 3:30

Well, we had a company called RAR Hospitality, and we sold it on February 20th, 2020. It had 20 existing properties and four hotels under development at the time, and we sold it to Hostmark, who since then has sold their company to First Hospitality. And we had a three-year period that we had non-compute clauses. So we formed Brick Hospitality three years after we sold the company and have a half dozen hotels then growing, and it is largely in Southern California, but we have one asset in Arizona, one in LA, one in the desert, several in San Diego.

Michael Russell 4:11

Okay, so are you managing these properties? Do you own these properties? Walk us through the scenario.

Bob Rauch 4:16

Sure. Well, I am not necessarily the majority owner. I have an investment in each of the hotels. We so we're owner operators, but we also do third party. If somebody does not want us to invest, we're okay with that as long as we like the asset and the fee structure and relationship is good, we'll we'll manage.

Michael Russell 4:38

All right, cool. You know, that that brings up something I wanted to ask you. So there's a very specific property. It's the Boardwalk Hotel in Mission Beach. And I noticed I was browsing your website, one of our past guests, Adam Daly, he's involved with that property. And I I I saw it listed under your management, so I was curious. Well, what's the relationship between you and Adam?

Bob Rauch 4:59

Yeah. Adam hired us to help him start that hotel. It's more of a, I'll call it a uh SRO, single room occupancy operator, and he wanted to upgrade. And he was building this beautiful, beautiful hotel and said, Hey, can you guys help us? And so we did. We helped them set the rates. We did a comparative analysis among around seven hotels in Mission Bay. It's the boardwalk, you might know, is one block from the Pacific Ocean and probably a half a block from Bay, Mission Bay. So it's a phenomenal location, it's a gorgeous property. Adam is he's very creative. So we enjoyed that project, but it was a short-term project where we will do some consulting for him if he needs us for anything. But we started it, we put our general manager in, jump started it, and he always wanted to be owner operator, but I think he just wanted that little jump start to go from SRO, which is not as sophisticated as a luxury hotel. And now he's running a luxury hotel. And I think he he should be very pleased with the position it's in right now.

Michael Russell 6:12

Yeah, I'm a big fan of leaning on consultants, experts, paying for advice because when you can pool the collective intelligence, especially for from someone like yourself, it's been in the business for so long, you can avoid a lot of the mistakes that you have to learn along the way. You pay to avoid those mistakes. So, in the end, in my opinion, it oftentimes can save you money. So I was curious, I saw that that was an independent property, and it just stood out a little bit because many of the other properties in your portfolio are branded, they're flagged. Well, why don't you walk us through what some of the properties are that you have in your portfolio now?

Bob Rauch 6:44

Well, we have a Homewood Suites by Hilton, a Hilton Garden Inn, Hampton Inn, a Fairfield Inn by Marriott. We have a really cool Cambria Hotel by Choice Hotels. And most people don't know Cambria, and I would put it up against the Marriott Courtyard and a Hilton Garden Inn head to head, and we would win every time, which is pretty cool. For I don't want to knock choice hotels, but a lot of their other brands are not hotels that we're comfortable operating, but we're very comfortable operating the Cambria.

Nathan St Cyr 7:18

Why do you feel that way? What it to what what differentiates Cambria?

Bob Rauch 7:22

Yeah, that's a good question. Well, it's very light, bright, and airy when you walk in. It just feels really cool. The name Cambria is not well known, so it feels like an independent hotel, even if you know that it's a branded hotel. And it's got a really, really cool restaurant and bar, which is kind of unique in that brands are not good at running restaurants. We have arguably the top chef in the deserts of California and do a lot of business in food and beverage, almost as much as we do in rooms, which is unusual for what I'd call a limited service hotel. We do have meeting space, so we're doing a really cool wine tasting next month that I'll be doing with the chef. That is something that most branded hotels don't do. I just enjoy doing it. I I studied wine. I'm not a master sommelier, but a but a sommelier. We have some really cool wine events. And that's again very unusual for branded hotels.

Nathan St Cyr 8:26

And it's funny because when you send Cambria, I'm like, oh, it reminds me of a it reminds me of the wine company.

Bob Rauch 8:32

Well, and that's the wine that we use as our house wine. Because there we go. It happens to be good wine. It's not super high-end. It's actually very approachable wine. And then we have a pretty substantial wine list, which again is unusual for any branded hotel.

Michael Russell 8:49

So how many branded, or actually, how many hotels in general do you own currently? And what's the key count?

Bob Rauch 8:54

Owner of five and maybe three others that we do not own.

Michael Russell 9:00

Okay. And these are bigger hotels. So the key count, I mean, these are over probably 200 unit.

Bob Rauch 9:05

Well, Double Tree Hotel in Phoenix is 284 rooms. And then the homewood suites in the Hilton Garden Inn is a campus of two hotels on one site, almost a dual brand. We tried to do the first dual brand Hilton. They turned us down, and the next person who came along got approved for a dual brand hotel. So we have two hotels side by side that feel like a dual brand, but I have to deal with two lobbies, two pools, and a walkway in between. So we have 205 rooms there, 108 rooms at our Cambria, and 45 rooms at one of our independent hotels. And the Fairfield is 116 rooms, and the Hampton is 69 rooms. So just under a thousand rooms in total.

Michael Russell 9:54

That's a lot. That's a lot. Now, and just to be clear, I want to make sure certain. So all of these hotels are all they're all branded. You don't manage or own any independents. Is that correct?

Bob Rauch 10:01

I do not have an investment of any kind in any non-branded hotel.

Michael Russell 10:07

So this is the crux of where I'm going. I want to know, well, why is that? Why do you gravitate towards the branded hotels versus the independents?

Bob Rauch 10:16

It is a really good question. And it's all about my partners. They feel more comfortable. It's like an insurance policy. So you know that in the event of a recession, a Hilton or a Marriott in particular, those two brands are very dominant, they will do well through the recessions because of the number of people 200 million plus in their honors awards program. Hilton Honors and Marriott Awards blow everybody else away, at least two to one, to this to the next tier, which would be IHG and I. It's easier to get alone, easier to make comfortable your partners, and easier to get through the rough patches of recessions, which do occur every eight to ten years.

Michael Russell 11:05

Yeah. I've got a lot of questions, but I'm distracted here because I'm having this thought right now where I'm looking at you, Bob, and I'm going, all right, what he just said is he had a company of 20 properties, he sold it, had a non-compete, took a few years off, and then went and built another thousand room portfolio in a matter of a few years. And I'm like, dang, that's that's that's serious progress. But you don't look like the kind of guy that is on Instagram right now flaunting your success. You don't look like the kind of guy that is necessarily like trying to raise money from individuals and trying to sell them on like you just seem like you carry this authority, like you know what you're doing, and people buy into you. I'm curious, like, where do you get the capital to go and build, rebuild a thousand key or so portfolio?

Bob Rauch 11:54

Most people who are developers don't use their own money. And if I were to tell you how much of each hotel I have an investment in, I know the amounts, but it varies by hotel. And it's certainly never a majority of ownership.

Michael Russell 12:12

I I get that, but I'm I'm we're in this position now where we're raising capital, where we're out there. How how do you raise the capital? Is this through joint venture? Is this through partners? Who's providing the capital to buy these properties?

Bob Rauch 12:24

It's it started with friends and family, and the friends included some of my clients that I was consulting for because I started consulting. And then my wife said to me one day, why are you making so many millions of dollars for everybody else? She says, I think we should buy a hotel. I said, Okay, with what money that I don't know about that you have that we can buy a hotel. And she says, Well, people would would follow you if you said that you were raising capital, they they would I said, You really think so? She says, Well, it's worth a try. So we did. We went and found eight partners to put in fifty thousand dollars each, raise four hundred thousand dollars, and w we put in fifty thousand also. And because if you don't, I guess back then fifty thousand dollars was a ton to me. But we we did it. Yeah, so it was four hundred thousand of equity that we raised, and then we went to the owner of a hotel, and he says, Okay, so you have four hundred thousand dollars and you're offering me two million for this property. Where's the other 1.6? I said, You're gonna loan it to us. And he said, Oh yeah, right. I said, I'll give you 10% interest. He said, Deal. And so that that was our first deal. We bought this little motel. It had all the the guests were all prostitutes and drug users and or drug salesmen. And so we threw them all out on day one, raised the rate from $29 to $79 on the first day we bought it, and the guests all left, and new guests came in, and we sold that hotel unsolicited offer we got to make some money, and we'd start, we bought some land, and then we got more partners and more money from our partners because they saw the success from the first product, and then we made a profit on each of the first two hotels that we built. Ran into another potential client who asked me to do a feasibility study for him. I did the study. He said, Would you invest in this? I said, I would. He said, Would you join me on this now? I said, I will. And we did that deal.

Michael Russell 14:39

So when was that first acquisition? More or less. 1997. Okay. Fast forward now. You're gonna be speaking at the lodging conference. Is that the name of the conference you're going to the lodging conference in Phoenix?

Bob Rauch 14:54

And and my topic is hotel development.

Michael Russell 14:56

But what you had mentioned before we hopped online here was let deals happen at this conference. They do and I'm curious. Like now we're in present time. Let's just say Bob's got a deal, he's gonna go buy another one of these Marriott hotels, a home to Hilton Home To Hotel. What does Bob do to get money to go take this deal down?

Bob Rauch 15:19

There are millions of dollars sitting on the sidelines. They have been sitting on the sidelines for a long time. And like right now, if you were to say to me, where would you buy a hotel if you wanted to really ramp up a company? I would tell you to go into San Francisco because it's bottomed out. And so now that it's in the toilet, take it out. It's gonna, it's gonna move out of the toilet very soon.

Michael Russell 15:44

Yeah, there's a lot of hotels with prostitutes and low budgets right now that you could go and replicate what you just did from years ago.

Bob Rauch 15:51

It's a shame because I love San Francisco. I think it's a wonderful city that fell apart. And now that it's fallen apart, it's really time to take advantage of that opportunity to take a city that's down and help rebuild it and make money at the same time.

Michael Russell 16:08

Okay, so step one, go find a location that has upside.

Bob Rauch 16:13

That was my point, is you have to have a story. And the story is the market was here, it's now here, down really low, and it will come back, just like New York came back. And San Francisco, I think you're gonna see it really jump up. First, there'll be acquisitions, and then there'll be new developments again in San Francisco. So I think you look for a market that's troubled for whatever reason, but has upside. And history will tell you most of the time where the upside is. In other words, you don't have to be a genius to figure out what goes up must come down, and what went down will come up if it was up once to begin with, especially. So I look for opportunities there. For instance, the Phoenix market, which I I love the city and the area, but investing there, you could build a hotel as quickly as you can go out and get a gun permit. So too much competition. As soon as the market seems like it's strong, everybody builds on the same corner and all of a sudden it's overbuilt. That doesn't occur in California because of the regulations. It's the only thing that's good about regulations is it keeps supply under control.

Michael Russell 17:33

Yeah, there's a strong barrier to entry. There's like a moat.

Bob Rauch 17:35

Once you have it, you've got this built-in moat where it's too painful to where we we never made any money in any of our hotels in Arizona. I mean, we we'd make a million on this one, lose a million on that one, make two million on this one, lose two million on that one. I could swear that we barely made money. We have had hotels that we have had in the okay.

Michael Russell 17:58

So step one, Bob, we figured out the market. We got the perfect hypothetical opportunity, let's say in San Francisco, and we're jazzed, we're pumped, we want to go to our friends, our family, but hey, we're not Bob, so let's go back to being Bob. What does Bob do?

Bob Rauch 18:14

Well, I think you know, there are a lot of ways to find equity. And originally I used the Wall Street Journal to put together a luncheon. I said, if you want to have lunch with me in Del Mar, California, I'm buying and I'm looking for investors. I got 12 people to come to lunch. And if you have a story and there's money sitting on the sidelines, like there is, keep in mind right now, if you invest in a bank, you're probably, I'm talking about uh in a savings account, you're maybe, maybe gonna get four percent. And if you go in the stock market, you might make a lot more than that, but you're not likely to make double digits right now. Maybe I'm wrong, but I would say that a good hotel deal will provide double digit returns. So I think there's a compelling story if you find the right deal.

Michael Russell 19:14

Okay, so let's keep going with this. We've got the right deal. We know that connecting with people, there's a lot of money sitting on the sidelines that wants to invest. You mentioned, hey, I could throw lunch in in Del Mar or in San Diego, and people would come and we could raise money that way. But you're going to this conference, and we're just using this as an example. It doesn't have to be the lodging conference in Phoenix. But when you go there and you've got this deal and people are making deals, making things happen, how do you get people to say, all right, I'll invest with you?

Bob Rauch 19:47

Well, there are going to be, I think, 2,800 people at the conference. And there are deal making workshops, so to speak. Like mine is the development workshop. Workshop, I can guarantee you the people coming to the there are people who want to build hotels. And they need capital. So they'll be there. The lenders will be there because they want to be the ones to do the loans. And the only lenders that come to the lodging conference are ones who are loaning now. And that's not that many. Lending in the hotel industries, it's specialized. You just don't walk into a bank and get a hotel loan. Only certain lenders are in this market today. And the interest rates, while they were 4% plus 10 years ago, they're closer to 6% now. So the money is we really need to come down 50 basis points, get it into the fives, and I think there'll be more activity on the lender side. On the equity side, some people want to invest if they can manage the property, if that makes sense. In other words, they'll they're looking to grow both a management portfolio and a return on investment. And they may have big investors on their teams. So you you can go to a management company and find equity that way. In some cases, you can go to a brand, like we went to choice hotels and got what's called key money, which is free money. If you keep the brand for 20 years, you don't pay it back. So there are, and that now there are C-PACE loans that you can get, which is in essence a mezzanine debt, and then you need the equity. And I don't think raising the equity, frankly, is the most difficult part. I think having credibility is once you have credibility, I don't think raising debt or equity is hard right now. And and these are not the easiest times. We're kind of coming out of a very tough time during the pandemic. It was virtually impossible to get debt to build a new hotel in 2020.

Michael Russell 21:50

Yeah, this is so good. It reminds me of a conversation that we had with Brian Fish. He is a property manager, his company's reliance hospitality. He was on our uh show several episodes back. But what he said brings true with what you're talking about, where as a property manager, he manages hotels for a lot of these either investment companies or high net worth people, but people with money. And through his connections, his Rolodex, he mentioned that he could play a role if you bring him a property and it needs a property manager, their company can play a role in raising the equity because they've got the connections. Now it has to be worth their while, it has to be a big enough property, can't just be 15 unit. It's got to be a substantial property for them to do it because at scale, that's where it's profitable as a management company to do this. But those connections, that credibility, everything you're talking about, it's kind of like coming full circle here. It's like, okay, I get that. I can see how that would work.

Bob Rauch 22:46

And of course, there are brokers who broker both debt and equity. And they take a fee, but they know all the equity players.

Michael Russell 22:56

I didn't realize that. You can raise equity from a broker?

Bob Rauch 22:59

Oh, yeah, absolutely. And of course, there are MA brokers too. And they'll so, like when I had my management company when I we were scaling and we we were in conversations with MA brokers who said, hey, we could help you position your uh company, I said, no thanks. I I'm not gonna pay any fees. I know everybody in the industry, so thanks, but no thanks. And don't get me wrong, I've used brokers, but if it's my company that I'm selling, I want to be dealing with principles.

Nathan St Cyr 23:29

Hey guys, if you're excited about investing in hospitality but still have a few question marks in your mind, you're not alone. Maybe you understand the potential, but you're not quite ready to take down your own deal yet. Look, earlier in our journey, both Mike and I invested passively alongside seasoned operators, which gave us a behind-the-scenes view and showed us the playbook while our money worked for us. That's what we offer our capital partners: a chance to be a part of real deals, see how they come together, and start building the confidence to do in yourself without carrying all that risk on your first go. If you'd like to know what that might look like for you, click the link in the show notes. Now let's get back to it.

Michael Russell 24:06

Okay. I'm really enjoying this hypothetical thought process we're going down here. But when you're evaluating a site and you talked about you referenced development, you're going to be doing uh you're going to be speaking on development. What are some of the things that you notice as red flags where if you were evaluating an opportunity, you mentioned, look, Phoenix, for example, has not been a winner and you explained why. But what are some of the other things that you would evaluate when when approaching an opportunity and flag it as like, ooh, that's a deal killer, or I'm going to stay clear of that? Any advice in that regard?

Bob Rauch 24:38

Well, first of all, some of the brands will oversaturate an area. Just as an example, our Fairfield In by Marriott is in a market that is dominated by a lot of Marriott products. And I worked really hard on getting a five-mile radius where another Fairfield couldn't be built. But I saw a site that looked like Marriott was working it, and it turns out they were, and they so they made it another brand. And I'm not knocking Marriott, they're the biggest players, and we're enjoying success. But as an example, that particular five or 10 mile radius has more Marriott product than any other location that I'm aware of in the United States. And believe it or not, we're still doing well. So I'm not complaining. I'm just saying, so if I were to build another one in that market, I might not choose Marriott as my first choice. I might go to Hilton or somebody else. So I look at how much saturation does the brand have? How much saturation does the market have in terms of room count? Is there a sweet spot that is untapped in that market? So, like if they're all hotels and no extended stay properties, I'd build an extended stay in a heartbeat because there is almost always a place for an extended stay. Any project manager who has to stay one, two, three weeks on a deal, they want to have a refrigerator, a kitchen. They want to be able to be at home because they're stuck for weeks at a time. They don't want to be in a hotel room if they have a choice. And another thing I like about extended stay, they they convert if if you have a failure in the market, too many hotels or demand disappears, all of a sudden you convert it to an apartment or a senior living facility like that. The other thing is if there are no boutique or full service hotels, we saw, for instance, with our Cambria, we built that because the only hotels that are in that market are limited service. Means they don't have meeting space, they don't have a restaurant, they don't have a bar. Big disadvantage once once we were able to open. So we're dominating that market because everybody says, hey, Cambria has a really cool bar, has great food, they even have meeting space.

Michael Russell 26:58

Yeah, no, I'm I'm spinning here. I'm excited. I want to double-click on the extended stay piece because it seems like this is an opportunity that is trending a little bit. And like I don't have any of the data. I just know intuitively what I'm recognizing is there's parts of the country where for a while Airbnb was providing that long-term or mid-length term for folks that they didn't want to stay in a hotel, but they're not going to go rent a place and sign a lease. They need something for a month or two or three. And that was filling that gap. But we're seeing a pullback with regulations, particularly in parts of California. And so without the Airbnb availability as much, maybe in places like New York, you name it, right? You can pick your market. There might be opportunity for extended state to really fill that gap because we have a housing shortage, particularly, yeah, California, right? California's got this huge housing housing shortage. If you can't build the housing and Airbnb is being regulated, is that where Extended State fills that gap?

Bob Rauch 27:55

Well, I'd be I'd be remiss if I didn't mention the idiots that that we have in San Diego also. We actually bought extended stay hotels, we being the city, bought them way overpriced for the homeless. I don't have any problem taking care of the homeless, but you can't just put them in hotel rooms. I mean, they need everything from drug counseling to mental health counseling to job training. And they just stuck them in these hotels, paid at least double what they were worth. I wish they bought my hotel. I haven't had them on the market, but at those prices, I'd sell. I mean, ridiculous prices. I guess where I'm going with that is extended stay is is hot for many, many reasons. If you can build it uh efficiently, because they are larger rooms, so they cost more. You have to make sure you're you're being efficient. And one of the things that the brands have done, which separates them from the Airbnbs or other short-term rentals, is they've built something that is feels like home, has 20 pubridge at the front desk, and is new and fresh, and has full kitchens and free breakfast. So that there are some benefits to the extended stay, and they compete favorably with non-extended stay hotels, they compete favorably, in my opinion, with Airbnbs and other short-term rentals, and they're very desirable by leisure travelers as well as business travelers.

Michael Russell 29:27

Okay. So, in theory, yeah, makes sense. Go develop extended stays where you see opportunity, but we've also heard from very reliable sources that the development costs right now are so astronomical that the play is not to build ground up, it's to renovate existing. What are your thoughts on that as it applies to extended stays?

Bob Rauch 29:46

Yeah, well, I certainly wouldn't disagree with that. Conceptually, I think it's still buy versus build for many, many reasons. In California, the regulations are on top of anywhere else. But the construction costs are high because labor costs are so high. You've probably heard that wood prices are high. So supplies are high. And it's not just the tariffs. Getting things shipped in the supply chain is has been a mess since the uh days of the lockdowns five years ago. So building is not easy. Land costs are are also still high. So if you can find something for less than replacement cost and is in good condition, here's a good idea. Take an apartment complex, or a better idea might be an office building that's empty. And that's more expensive because there's no bathrooms in the rooms, whereas the apartments all have bathrooms. So you can convert apartments to extended stay quickly. You can apart you can take an office building, and it's not cheap, but office buildings are cheaper right now because they're 50% or less occupied right now. So I think I I buy before I build today, but I'm still looking. We own a piece of land in the LA, you can call it the LA airport market, but it's actually across from SoFi. So take that piece of land, we've been sitting on it because of timing, but it just hasn't been right to get the numbers to work. The combination of construction costs and the other related expenses makes development pricey, including interest rates, which were over six percent until recently. We're seeing them dip just under six now. Okay, so who owns that piece of land? I have two two partners, so three of us own the land.

Nathan St Cyr 31:48

Okay. And with that just sitting there, isn't that a substantial cost of money not realized? It is on the one hand. On the other hand, it continues to go up in value. Just based on the appreciation of the land.

Bob Rauch 32:02

Well, yeah, let's put it this way if you buy it in the right price, you don't have to worry about holding it. Makes sense. So you bought it for the right price. That's right.

Michael Russell 32:11

I want to zoom out a little bit here because you've mentioned it directly and indirectly a few times, just referencing things going on in the economy, whether it's tariffs, whether it's just markets being down. I want to get your current outlook on hotel investing right now and what we can expect throughout 2026.

Bob Rauch 32:33

Okay. Well, first of all, most people disagree with me on this. And I say most people, the pundits who get paid to prognosticate on the industry, all think that the market is flat or down right now. And I would agree if you think short term, like this past summer, it was down in some markets as much as 10%. But the tariffs created uncertainty in the market. And in addition to that, the Canadians stayed away, other international travelers stayed away. A lot of wealthy Americans went abroad and didn't travel here in the United States. The government was completely forbidden government workers by the Trump administration, no travel. I mean, they called it essential travel only by permission, and the permission is very high up. So in markets where we have a lot of government business, we're completely revamping how we go after business because there is no government business right now. So if you take all of that aside and assume, I don't like to assume much. And I don't I don't want to make this political about Biden versus Trump. But Trump is the kind of guy who does unexpected things and may cause disruption. So I believe he has caused disruption, but I believe the disruption is short-lived, meaning 2025. I think 2026, I don't think it'll be a gangbusters year, but I think it'll be back to where it was in 2024, which is pretty good. So I think we're fine. It's not a robust period of growth where I would say, hey, put your money in now because it's it's gonna be gangbusters for the entire hotel industry. No, you gotta pick your locations, pick your type of product, pick your management team, pick your construction team. It's all about your team. Timing is important, but most important is having the whole team. And again, it's the sponsor. Say one of the three of us might be a sponsor, a management entity, whether it's my company or another, a lender who knows what's going on, maybe a big bank, it may be a regional bank, and it might be a non-traditional lender. And and figure out a way to put the team together, get a strong contractor, make sure you have a good site, good brand. And I've done a lot of that type of work over the last decades, plural. So I'd like to say that I have a pretty good idea of how it works. And this is not, I'm not gonna say as good a time as any, but it is not a bad time.

Michael Russell 35:24

Well, I mean, look, you've got the the history of life experience to be able to reference. You've you've lived through 9-11, the Great Recession, COVID, all these areas in hospitality where it was painful. And so what I hear you saying is okay, this is not optimal. There was uncertainty in the market. We saw some softening in demand, but you're optimistic moving forward, we're gonna be okay.

Bob Rauch 35:50

Absolutely. And keep in mind, uh, we'll have new supply now. We went a long time with no new supply. And when that occurs, demand creeps up and occupancy levels get more robust, and then average rates can grow. So we're at a period now where average rates are generally elevated, occupancy levels are very normalized or above normal, and you just pick your team and pick your place, and you can do just fine. So, again, it's not the best time, not the worst time. I call it probably a typical time for us right now.

Michael Russell 36:29

Let's talk financing. So you mentioned hey, rates are in the 6% range, and that sounds pleasant to me because previously we've been finding that rates are higher than that. Is that because you're looking at more larger scale investments? Maybe institutional capital is willing to provide a lower rate? Like what, you know, for someone that's not buying a huge behemoth, what are rates at?

Bob Rauch 36:54

Just so you know, the average hotel in the United States is just under 100 rooms. So let's just assume it's 100. It's actually about 95. And to build it costs about a quarter of a million dollars. And that's this is a three-star, not a one-star, not a five-star. So three-star. And a three-star would be a Marriott Courtyard, a Hilton Garden Inn. Pretty typical. There are thousands of them around. And you look at those brands and you say, okay, if it's a quarter of a million a room, and and you have a hundred rooms, you know it's going to cost you $25 million to build a hotel. So if you can buy a hotel for $15, 17, 18, I'd probably buy the hotel as long as you get it studied by an expert who will tell you you don't need to put $5 million into it immediately. Because that's the biggest trick that a seller will use, is they'll tell you, oh yeah, I've renovated it. And then they can make it pretty, they can paint it, but you look at the back of the house and you have $2 million worth of work to fix the plumbing and the uh electrical.

Michael Russell 38:02

What do these loans look like then for something in that scenario where you're gonna hold on to this thing presumably for seven to ten years? Currently, what are lenders offering? Are these like five-year fixed notes with adjustable thereafter?

Bob Rauch 38:16

Well, you can do that. You can get a five-year fix now. We just got a seven-year fixed. I say just meaning we just closed it last week. So, and that interest rate was 5.97%.

Michael Russell 38:29

Dang, that seems a lot lower than I was expecting.

Bob Rauch 38:33

Well, rates rates are slowly but surely coming down because we we are gonna refinance one of our hotels that we with the loan was due, I think it was two years ago, refined at 7.25. So now that our prepayment, and it was two years prepayment penalties, but after that, no prepayment penalties. Does that make sense? Yeah. The way it was structured. The first two years you can't get out of it without paying fees. And then the third year you can't. So we can get out of that loan now, and we'll probably be able to we wait another month. I would bet we can get 5.75.

Michael Russell 39:14

Okay. So I want you to negotiate for us because those terms sound pretty friendly.

Bob Rauch 39:18

Yeah. And I'm not a broker, so I I would just be a friend.

Michael Russell 39:21

I want to shift gears a little bit here because there's a lot to ask you, but I want to understand your perspective on marketing these days, especially for your hotels. Right now, there's a lot of buzz about social media and everything, and I don't see that world being something that you're necessarily focused on. I'm curious, what are your marketing channels? Like, what's producing the most measurable, measurable return on investment for your hotels right now?

Bob Rauch 39:42

It's a multi dimensional approach. So there's sales. I still believe in making sales calls. I I went out on sales calls with one of my salespeople earlier this year, and we had a lot of success. Just walking in and saying, We're With the Cambria Hotel. We just opened a few months ago, and we'd like your business. We'd like you to come over and see it.

Michael Russell 40:07

Are you talking about group bookings though? Just to be clear.

Bob Rauch 40:10

This is what I call individual corporate. Where you call in a company, they may have 100 employees, 200 employees. And if you can get past security, which is easier in our Cambria market, which is in the desert, than the high-rises that you have to navigate, I will tell you that sales calls are important. Marketing now is all digital. So I'm not trying to throw advertising agencies into the trash, but if they're not digital, they're they're out of business. So we do a lot of pay-per-click promotions, we do a lot of direct email solicitation. We do social media, we use uh quite a bit of Instagram, we use some Facebook, we use some X, and uh we find it's really good for events in particular, you know, to promote your events. What are we doing at our hotel? So you're differentiating yourselves from other hotels. So I use it for that. Beyond that, it's it's really sophisticated revenue management. And what I mean by that is if if your revenue system is has really good AI components and really look, dig deep into what the history tells you about the trends and what the trends are telling you about the longer-term trends, and and then pricing automatically, like the airlines do. People maybe don't realize that is there's nobody sitting in a room saying, okay, I'm gonna raise this flight from 179 one way to 219 right now because it looks like there's more demand. It's all algorithmic, it's all AI, and it's all in real time. So as things happen, all of a sudden the rates change, and the three of us don't have anything to do with it, it just happens, and that's the way we do hotels now, too.

Michael Russell 42:09

Yeah, dynamic pricing, it's changing the game. But now, even beyond dynamic pricing, and I guess that's a form of AI, we're seeing we're seeing AI completely change the game for a lot of industries, and hospitality has had a you know, I guess, reputation of being slow adopters. I'm curious how you are implementing AI in your operations.

Bob Rauch 42:31

Well, first of all, I think we were always slow technologically, our industry. But I would say as far as AI, we're we're doing pretty well. I mean, I have robots at each property. Those robots are service robots, so we program them. May take 15 seconds to load the robot's cavity, and another 10 or 15 seconds to program it to go to room 404. It goes, navigates the Wi-Fi system up the elevator, calls the room, says your delivery is here. So I have that in every hotel. And I also am going to start using chat bots and voice bots because the labor costs are going crazy. And to train somebody, and I mean this sincerely, to know everything about our hotel takes months. And then six months later, they're they're getting an offer down the street for two dollars or more, and they leave. And I've spent all that time training them about our market and what's special about it, and and how if somebody calls you, you need to sell them on this. That it you know this if you go to a fast food restaurant. I pulled up to Taco Bell yesterday. I was in a rush, I needed to have a burrito, and the chatbot took my order and tried to upsell me on everything. Did you tip the chatbot?

Michael Russell 43:50

Yeah, yeah. You tipped it. I saw us, I saw a little meme where it was like a robot was serving someone popcorn or something at the movie theater, and then it's like you could tip the robot.

Bob Rauch 44:00

But I'm serious, chat bots were voice bots, or for instance, the brands. If you called them, it used to be they'd put you onto somebody who's in India. And I'm not knocking India, but those people, in my opinion, made it difficult for some guests to understand. Now you have a voice bot who sounds like Jane Doe from next door. And clear as can be, and very real, you would have no idea that it's not a human. So I'm very big on using robotics and AI. We use it to write our business plans, for instance. We use Chat GPT for a template, it tells us everything. And then we are very specific about what we want to accomplish because Chat GPT does not know our market. And if you're if you're foolish enough to use Chat GPT for a finished product, you deserve what you'll get. So, and I'm not knocking Chat GPT, but it's not at that level yet. So I think if you know when to use it, reviews. We get a review. I can write a review, an answer to every review that I get because I only have a half dozen properties. But you have a big company, you're you're better off answering it somewhat. It won't be sounding robotic if you tell the ChatGPT or whichever one you use. I use Microsoft Copilot quite a bit as well. And if you use these AIs, you're gonna get a pretty good answer. You could still use it just to draft something and then tweak it to make it really personalized, if you don't feel that that AI has personalized it enough for you, which it usually won't. So I I don't know, there's so many different uses for it, though. And it frees up my general managers and not sit at their desk all day. I want them talking to our guests. I have what I call our secret sauce. And what AI allows me to do is it allows my management team to use AI for certain things and get out there with the guests and talk to them. And that secret sauce is actually talking to our guests.

Michael Russell 46:10

Yeah, humans are the new luxury, right? If you're not using AI, you're gonna get smoked, you're getting dusted. So it's not no longer uh uh an advantage, it's a necessity to use.

Bob Rauch 46:20

You said it exactly right. It is in if you're not using it, you're behind.

Michael Russell 46:24

But the robots, the robots are intriguing. You touched upon labor, and labor is oh, labor is so hard to predict, and labor is just challenging all the different reasons you've explained with wage increases in LA and and just we all know that when we're underwriting an opportunity, labor is a huge part of the expense item on the PL. And so robots, I want to know what kind of savings are you seeing from robots? Well, what is a saving from?

Bob Rauch 46:48

I'm gonna tell you exactly what we get. We get zero savings. What we do get is we use the robot on at the on the night shift frequently because guests may want towels, they may want room service. We send it up. I don't have to have anybody leave the front desk. I think the three of us know that a lot of limited service hotels have one employee at night from 11 p.m. to 7 a.m. And that one employee, I want them tethered to the desk. Otherwise, we have to lock the hotel, and you don't want to do that. So I send up the robot. Now I see increased sales. I don't I don't see savings of labor with the service robots yet. Although you could say I'm saving because I don't have to send up an employee when I have them then do other things. So I'd say they help with productivity, they help increase sales because you get a kid who sees the robot in the lobby and says, Ma, dad, can we order something from the robot?

Michael Russell 47:52

That's my son for sure. On my sales.

Bob Rauch 47:55

So my sales went at uh on average from $3,000 a month in my son's what I call our sundry shops, those little shops next to the front desk that they sell every, almost everything. I sell beer and wine there too. So, and the robot can deliver that.

Michael Russell 48:12

Well, what do these robots cost? How much will let's say we bought one of these?

Bob Rauch 48:16

Somewhere between, I think it's better to say $2,000 a month. So I increase my sales from $3,000 a month to $6,000 a month. That $3,000 in sales is probably $1,500 in profit. So I'm really not making money. It's actually costing me a little bit, but I get productivity savings. I see from notes.

Michael Russell 48:39

You rent these, these are something it's a robot you lease.

Bob Rauch 48:42

Oh, yeah, these are all leases. These companies don't want to sell it to you, they want repeat income forever. And and I'll admit I'm addicted.

Michael Russell 48:52

Well, it makes sense because like when you used to have to buy software and it would come on a CD and you put it in your computer and you upload it in your computer, and then you'd have this technology that was good for about a year, and then the next year it was obsolete. And now everything's like SaaS, software as a service. Maybe we pay more, but it's way more convenient. I'm thinking about these robots, and it's like, okay, you got the state-of-the-art robot year one, but by year three, you've spent how much money and capitalized expense to buy this robot. And then it's like, oh, that thing's old and to crappy. Like stuff updates so quickly that, yeah, it kind of makes sense.

Bob Rauch 49:23

But it's a part of the part of the deal with the lease, of course. Uh, first of all, they're three-year leases, but they update software all the time. So you're getting an updated product, you're getting a unique product. The guests love it. There still are not a lot of robots out there. Right now, they're selling Relay Robotics, is the company I've been using for my service robots, and they sell more to hospitals than hotels right now.

Michael Russell 49:49

Um, yeah, I could see that. Cool. All right. Well, look, what I always try to take away is anytime I'm speaking with someone who's got decades of experience and has been in the trenches, started as a dishwasher, all the way up to CEO. It's always great to get some perspective on if you could go back in time and give your earlier self-advice or anyone. Like, let's say you were putting the perspective of someone that is starting out in hospitality today that wants to be a successful hotel investor. What piece of advice would you give that person?

Bob Rauch 50:22

I'd probably make it pretty simple. I'd say it's really important to have good communication skills. So if you're not born with those, and most people are not, then take a course and get better at writing, get better at speaking. So communications is pretty cool. Make sure you are technologically savvy. I don't care if you're 20, 40, 60, or 80, tech savvy is required. Make sure you're finance savvy. So if you don't understand finance and and I don't mean you have to be a CPA, that that is where I'm going with that. You just have to understand that money drives all the deals. So if you don't understand money, if you don't understand return on equity, and you don't understand the importance of debt and what it does for your leverage and and how to avoid being over-leveraged, if you don't know that kind of thing, you you can't be successful. So I think those are the critical things. Communications, I'll add up a fourth one. Communications, technology, finance, and sales. You have to be a salesperson because you're the one who's gotta sell the deal to the lender, to the equity participants, to the brand, to the guests. You gotta be a salesperson. So I've always wanted to have all those four skills. I've worked very hard to constantly improve myself. I went uh from going to school and graduate school to teaching. I taught entrepreneurship at Arizona State for 10 years, and before that for 12 years at San Diego State University on campus. So entrepreneurship is something that also you're not born an entrepreneur. But if you're going to build or buy hotels, you better be an entrepreneur. And to be an entrepreneur, I think those four skills that I mentioned are the most critical.

Michael Russell 52:28

Do you feel you gotta be a little bit crazy to be an entrepreneur?

Bob Rauch 52:31

Yeah, I don't know. I I will tell you that almost every day is fun for me. And I I say that because there are stressful moments. We had a a kid drowning in a pool, and I was sitting at dinner, and my staff calls me and says, Help! Okay, put dinner down and realize that I'm dying 911 and I'm trying to resuscitate a 16-year-old boy in our pool. So a true story 10 years ago, but these things happen. So you have good days and bad days in in hotel operations. As an entrepreneur, as soon as the economy hits the skids, you have a bad day. And the bad day could be for a year. Yeah.

Michael Russell 53:16

Ceilings falling down and rainstorms sound familiar.

Nathan St Cyr 53:19

Right the f dude. Welcome to your ownership. And now let the ceiling cave in.

Bob Rauch 53:26

Well, that's where you have to be careful buying buying a hotel that's older.

Nathan St Cyr 53:31

We knew that was coming for sure. What I wanted to say though, Bob, was you just walked us through those four things, and it's been really enjoyable having this conversation with you. You've surprised me a few times throughout the conversation, but as I reflect on our conversation, each one of those four things, you are really, really, really good at. So I and you can tell from just your your strategy with with finance and your ability to really simplify things and communicate well, your ability to ultimately with technology to be such so ahead of where I mean we we have a lot of people on the show, but you're the first person that's actually said, No, I'm using robots, not just robots are coming. So from the tech side. And then at the end of the day, Bob, you tell one hell of a good story, which I know means you're a hell of a deal maker and salesperson.

Bob Rauch 54:31

I appreciate that, Nate.

Michael Russell 54:33

Yeah, yeah, I enjoyed it. Yeah. Well, we know that I can tell from that that you're a lifelong learner and you're a lifelong contributor. Bob, you've mentioned your roles as a mentor and the mentorship that you've provided to others. I know you've got a book coming out. Can you, before we wrap this up, why don't you just tell us quickly what's the name of the book and where can our listeners purchase it if they wanted to get a hold of it?

Bob Rauch 54:57

Sure. Well, it's actually coming out October 8th, 2025. So it's right around the corner. And it's called the Hotel Guru's Journey: A Guide to Excellence in the Hotel Industry. And it's about 160 pages of a combination of real stories that actually occurred and ways to manage every single department in a hotel. Housekeeping, front office maintenance, food and beverage, sales. Every single department is has a kind of an audit of what to look for. It includes capital raising and deal making. That's all in there too. Development. I've got a chapter on development, chapter on karma, because I've had bad boys and girls in work for me in the past, and some and and they all ended up losing their jobs. I never we sent one to prison for the amount of money that he stole. But that was that was that sounds like a thriller. Yeah, that was in Colorado, and he did some time.

Michael Russell 56:03

Oh man. Well, the joys of being an entrepreneur, right? That's right. All right, Bob. Well, this has been fantastic for our listeners.

Bob Rauch 56:12

Amazon. Amazon.

Michael Russell 56:13

We'll put that in the we'll put that in the show notes. Absolutely. So he can buy his book on Amazon coming out here in just a few weeks, mid-October. So by the time this episode releases, it might actually be out. If our listeners want to stay connected with you, what's the best way to do so?

Bob Rauch 56:27

I can be followed on Meta, LinkedIn, or X. And I am Raush, R A-U-C-H at hotelguru.com. And I get back to everybody. Let me also add that my website, hotelguru.com, has reams of data. More than data, it has articles, content, a lot of content.

Michael Russell 56:50

Okay, cool. So go to the website. Listeners, if you heard that, go to the website. We'll put that in the show notes. And you can check out his book. We'll put a link in there as well. Follow him on X and all the socials. Anyway, Bob, this has been great. We are gonna sign off for the week. We are Mike and Nate is Bob Rauch, the hotel guru. And we will catch you again next week. Aloha.