How to Buy a Hotel: From Airbnb Investor to $20M Hospitality Portfolio

I sat down with Michael Russell, co-founder of Malama Capital, on the podcast recently, and his story is one that I think a lot of real estate investors need to hear. Michael built a portfolio of 15+ Airbnbs in Maui, hit a wall, pivoted into commercial hospitality, bought a hostel during COVID at literally zero percent occupancy, and turned it into the number one rated hostel in North America. Today he's sitting on a $20 million portfolio that he built without a single dollar of outside capital.

In This Article

Why Airbnb Investing Has a Ceiling

How to Buy a Hotel: The Hostel Advantage

Buying a Hotel During COVID at Zero Occupancy

The Financial Case: Hostel vs Hotel vs Short-Term Rental

Hospitality Is a Business and a Real Estate Investment

What to Look for When Buying a Hotel or Hostel

Key Takeaways

If you've ever thought about how to buy a hotel or wondered whether there's a smarter path than traditional hotel investment, this is the conversation that'll change how you think about hospitality real estate.

Michael Russell: By the Numbers

$20M

Portfolio Value

#1

Rated Hostel in N. America

15+

Former Airbnb Units

$0

Outside Capital Used

Why Airbnb Investing Has a Ceiling

Michael got into short-term rentals the way a lot of people do. He was living in Maui, saw an opportunity, and started building out Airbnb units. At one point he had 15 to 17 properties running, and they were doing well from a cash flow standpoint. But here's the problem he ran into that most Airbnb investors eventually face: the model doesn't scale.

With Airbnbs, every guest wants a bigger, better experience. They want nicer furniture, better amenities, a more "exclusive" feel. And every improvement you make costs more money, but you can only charge so much per night for a single unit. You're also stuck with comp-based valuations. Your property is worth what the house next door sold for, regardless of how much revenue you're generating.

That's a fundamentally different game than commercial real estate, where your property value is driven by net operating income. If you can increase revenue or cut costs, you directly increase what the property is worth. Michael realized this when he took a course on buying apartment buildings, and it clicked for him. He thought, "What if I took the revenue potential of short-term rentals and combined it with the value-add mechanics of commercial real estate?" That's essentially the hospitality investing model.

How to Buy a Hotel: The Hostel Advantage

So here's where it gets really interesting from an investment standpoint. When Michael was looking at the hostel vs hotel comparison, the math was overwhelming.

Same 400 Square Feet, Two Very Different Outcomes

$200

per night as a hotel room

$480

per night as a hostel (8 beds x $60)

2.4x more revenue per square foot

Revenue per square foot is the metric that matters in hospitality investing. Not RevPAR, not ADR in isolation. It's about how much income you can generate from every square foot of space you're paying a mortgage on. And that's where the hostel model absolutely crushes traditional hotels.

Now, I know what you're thinking. "A hostel? Isn't that just a cheap, dingy backpacker spot?" That's exactly what I thought too before I started looking at modern hospitality concepts. But what Michael built in Maui is nothing like the hostels you're picturing. Think more along the lines of a boutique social hotel. Beautiful common areas, curated experiences, community focused. The kind of place where people actually want to hang out, not just crash for the night.

Buying a Hotel During COVID at Zero Occupancy

Michael's first hostel acquisition is a masterclass in buying when everyone else is running scared. He found a property in Maui that had been a hostel for 25 years under a single owner who had basically let the place fall apart. Deferred maintenance everywhere. And then COVID hit.

The property was at literally zero percent occupancy when Michael bought it. Nobody was traveling to Hawaii. The previous owner wanted out. And Michael saw what most people couldn't see through the panic: a fundamentally sound real estate asset in one of the most desirable travel destinations in the world, available at a steep discount because of temporary circumstances.

The best time to buy hospitality real estate is when nobody wants it. COVID created once-in-a-generation buying opportunities for investors who had the vision and the stomach to move forward.

- Tyler Cauble

He completely renovated the property, repositioned it as a boutique social hostel, and within a relatively short period of time, it became the number one rated hostel in North America. That's not luck. That's understanding how to add value to a commercial property through operational improvements and strategic repositioning.

The Financial Case: Hostel vs Hotel vs Short-Term Rental

Let's talk numbers, because this is where the hostel model really shines compared to both traditional hotels and Airbnb-style short-term rentals.

With a traditional Airbnb, you're capped. You can optimize your listing, improve your amenities, and maybe charge a premium, but at the end of the day you're renting one unit to one guest (or group). Your revenue ceiling is fixed by the nightly rate for a single booking.

With a hotel, you get more rooms, but each room takes up significant square footage and you're still limited to one booking per room per night. The overhead is massive: front desk staff, housekeeping for every room, higher furniture costs per unit.

The hostel model flips all of that. You're putting 6 to 8 beds in the same square footage that would hold one hotel room, and you're charging $50 to $80 per bed per night. The revenue density is dramatically higher. You need less housekeeping per guest, your common areas do double duty as amenities, and your per-guest acquisition cost is lower because hostels attract travelers who book based on community and experience, not just location.

And here's the kicker: because hospitality properties are valued on income (just like commercial real estate), every dollar of NOI you add directly increases your property value. There's much more room for error, and a much stronger value-add play.

Hospitality Is a Business and a Real Estate Investment

Here's the thing that Michael said that really stuck with me, and it's something I've experienced firsthand with Salt Ranch Hotel here in Nashville. Hospitality investing isn't just a real estate play. It's a real estate investment and a business investment wrapped into one.

When you buy an apartment building or an office complex, you're mostly managing a real estate asset. Collect rent, maintain the building, manage the tenants. Hospitality is a completely different animal. You're running a business every single day. You're managing staff, curating guest experiences, handling reviews, marketing to travelers, adjusting pricing in real time. It never stops.

Find a partner or mentor who has done it before. I would have given them an equity stake to help provide experience from the renovation to operational efficiency.

- Michael Russell, Malama Capital

That's Michael's biggest piece of advice for anyone looking at how to buy a hotel or hostel. Don't try to figure it all out yourself. The operational side of hospitality is complex, and having someone who's been through it before can save you hundreds of thousands of dollars in mistakes. I've lived this reality myself. Running a hotel is essentially two businesses at once.

What to Look for When Buying a Hotel or Hostel

Based on Michael's experience and what I've learned through my own commercial real estate career, here's what matters most when evaluating a hospitality acquisition. If you're still working through how to buy your first commercial property, this same checklist applies regardless of asset class:

Location fundamentals: Is the market driven by tourism, business travel, or both? Maui works because of consistent tourism demand year-round.

Revenue per square foot potential: Don't just look at room count. Calculate how much revenue each square foot can generate under different operating models.

Value-add opportunity: Deferred maintenance and outdated operations are your friends. They create the discount you need to make the numbers work.

Operational complexity: Be honest about whether you have (or can hire) the operational expertise to run a hospitality business.

Exit strategy: Hospitality properties are valued on income. Every operational improvement you make directly increases the value of the asset.

Key Takeaways

Airbnbs have a scaling ceiling. The model relies on comp-based valuations and doesn't reward operational improvements the way commercial real estate does.

The hostel model generates 2x+ revenue per square foot compared to traditional hotel rooms. 400 sq ft with 8 beds at $60/bed = $480/night vs $200/night as a single hotel room.

Buying distressed hospitality assets during downturns is where the biggest returns come from. Michael bought at zero occupancy during COVID and built the #1 rated hostel in North America.

Hospitality is a business AND a real estate investment. You need operational expertise, not just capital. Find a mentor or partner with experience before jumping in.

Revenue per square foot is the metric that matters. Focus on income density, not room count, when evaluating hospitality investments.

---

This article is adapted from a conversation on the Tyler Cauble YouTube channel. If you want to hear Michael's full story, including the details of his renovation process, his thoughts on scaling a hospitality portfolio, and how he built a $20 million business with zero outside capital, watch the full episode above.

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How to Value Commercial Property When It's Completely Vacant

Most people look at a vacant commercial building and freeze. No tenants, no income, no idea what it's worth. So they either lowball and lose the deal, or they overpay because some broker convinced them to pay tomorrow's value at today's price.

I've been there. And I can tell you, vacancy doesn't mean a building is worthless. It just means you have to be smarter about how you price it.

This came up on our CRE Accelerator mastermind call recently. One of our members, Ryan, was working on a deal where there were only four or five comparable sales in the last year. Not a lot to go on. So I walked the group through exactly how I back into a maximum allowable offer on a vacant commercial property. And I'm going to walk you through it right now.

Here's what we'll cover:

• Estimating realistic market rent per square foot

• Converting rent into NOI (net operating income)

• Applying a cap rate to find stabilized value

• Building in your required returns and risk margin

• Two methods for calculating your maximum allowable offer

• Budgeting for TI, lease-up commissions, and carry costs

Let's get into it.

Start With Market Rent Per Square Foot

When a property is vacant, you don't have a rent roll to work with. So you have to estimate what the building can rent for once it's stabilized.

Here's how I do it. I look at comparable properties in the area. Similar size, similar condition, similar use. I check what's listed for rent on LoopNet and Crexi. And then I call brokers. That second part is key. Asking rents and signed rents are two very different things. Most brokers, if you've built a good relationship with them, will tell you what deals are actually getting done in your market.

I also pull data from every offering memorandum I can get my hands on. Every time a property hits the market for sale in East Nashville, I grab the OM. It shows the rent rolls, the lease terms, the asking cap rate, all of it. I catalog everything because that data compounds over time. The more you have, the more accurately you can underwrite your next deal.

So let's say you've done your homework and you've determined that market rent for your building is $18 per square foot on a triple net basis.

Calculate the Net Operating Income

Now we turn that rent number into an NOI. This is where a lot of newer investors trip up, so let me break it down.

If you're not familiar with how to underwrite your first commercial deal, the basic formula is simple: your effective gross income minus your operating expenses equals your NOI.

Let's use a clean example. Say we've got a 10,000 square foot building at $18 per square foot triple net. That gives us:

$18 x 10,000 SF = $180,000 per year in gross income

Now, even on a single-tenant deal with a 10-year lease, a bank is going to apply a vacancy factor. Typically around 5%. So:

$180,000 x 5% vacancy = $9,000

That drops your effective gross income to $171,000.

From there, you need to account for operating expenses. A good rule of thumb: your operating expense ratio should land somewhere around 35% of gross income. If you're down near 20%, you're probably not maintaining the property well enough, and that'll catch up with you in deferred maintenance. If you're pushing 50%, something's off.

At 35%, your operating expenses come out to roughly $59,850, which gives you an NOI of about $111,150.

Now, the lease structure matters here. On a triple net deal, your tenants are reimbursing you for CAM, taxes, and insurance, so your P&L will show gross rent minus those expenses to arrive at base rent. On a full-service gross lease, you're eating all of those costs yourself, and the math gets more involved. For this example, we'll keep it at our $111,150 NOI.

Apply a Cap Rate to Find Stabilized Value

Here's where you determine what the property could be worth once it's leased up and producing income.

The formula is one you've probably seen before: Value = NOI / Cap Rate.

But the real question is, what cap rate do you use? And this is where all of those offering memorandums I mentioned earlier become gold. You need to understand what properties in your market are trading for. Not nationally. Not some number you pulled off the internet. Your market, your asset class, your condition level.

If you've been tracking deals in your area (and you should be), you might determine that a building like this, with these types of tenants, in this condition, would trade at roughly a 7% cap rate.

So: $111,150 / 0.07 = approximately $1,590,000

That's your stabilized value. That's what the building could be worth after you've done the work. Leased it up, stabilized the income, and gotten everything running.

But that is absolutely not what you should pay for it today.

I've seen this trap more times than I can count. A broker will say, "Hey, once you come in and lease this up, it'll be worth $1.59 million at a 7 cap. So that's the price." I know it sounds ridiculous, because it is, but brokers will try to sell you the future value today. Don't fall for it.

Two Methods to Calculate Your Maximum Allowable Offer

Now that you know the stabilized value, you need to figure out the most you can actually pay and still make the deal work. There are two ways I approach this.

Method 1: The 75-80% Rule

This one is simple. You take the stabilized value and multiply it by 75% (or 80%, depending on your risk tolerance). That builds in a margin for your profit, your risk, and all the costs associated with getting the building to stabilization.

$1,590,000 x 75% = $1,192,500 all-in maximum

That means your purchase price plus closing costs, tenant improvements, lease-up commissions, carry costs, everything, can't exceed $1,192,500.

This method is fast and gives you a solid ceiling. But it can miss some of the finer details.

Method 2: Subtract Your Required Returns

This is how I prefer to do it because it forces you to think through every dollar.

I always aim for a 2x equity multiple over five years. That means if I put $100,000 into a deal, I need $200,000 back in five years, including cash flow, sale proceeds, everything.

Let's say I'm planning to bring $300,000 down on this deal. At a 2x multiple, I need $600,000 back.

So I take the stabilized value and subtract my required profit:

$1,590,000 - $600,000 = $990,000 maximum purchase price

But we're not done. What about capital improvements? Let's say TI and renovations will cost $150,000. Now:

$1,590,000 - $600,000 - $150,000 = $840,000 maximum purchase price

At $840,000, I'm basically doubling the value of the property to make the returns work. That tells me this deal requires real value creation, and I need to be confident I can execute.

Don't Forget the Hidden Costs

Here's where a lot of investors get burned. They budget for the down payment and forget about everything else.

When I'm stress-testing a deal, I make sure I'm accounting for:

Closing costs. Typically 1-2% of the purchase price.

Leasing commissions. On our 10,000 SF example at $18/SF on a 5-year lease, that's a $900,000 total lease value. At 6% commission, you're looking at $54,000 in leasing costs.

Tenant improvements. This varies wildly. For second-generation space in decent shape, you might be able to match your rent rate ($12-16/SF in TI for $12-16/SF in rent). For a dark shell where you're building out bathrooms and HVAC from scratch, you could be looking at $24-32/SF. On 10,000 SF, that's anywhere from $120,000 to $320,000.

Carry costs. If the building sits vacant for six months while you're leasing it up, you're paying the mortgage, the utilities, the insurance. That adds up fast.

Construction contingency. Because you never know what's behind the walls. I recently tore open a wall on a deal and found electrical from the 1940s with no sleeves. Fire hazard. Cost me $180,000 to fix. That's why you always carry contingency in your construction budget.

A Smart Move on Tenant Improvements

Here's something I want you to keep in your back pocket. You can actually structure TI as a win-win by amortizing the cost into the lease.

Say a tenant wants $10/SF in improvements on a 5,000 SF space. That's $50,000. If you amortize that at 8% over the 60-month lease term, it adds roughly $1,000/month to their rent. Over 60 months, you collect about $60,000 on a $50,000 investment. That's a 20% return just on the TI dollars alone.

That's why sometimes it's actually better for you to do the improvements than not. It just depends on how you structure the lease.

Key Takeaways

Vacant doesn't mean valueless. You just have to underwrite future income and back into what you can pay today.

Start with market rent. Use comps, OM data, LoopNet, Crexi, and broker conversations to nail down realistic rent per square foot.

NOI and cap rate give you stabilized value. Value = NOI / Cap Rate. Track offering memorandums in your market so you know what realistic cap rates look like for different asset types.

Build in real margins. I target a 2x equity multiple over 5 years. Your MAO needs to leave room for both value creation and investor returns.

Use both MAO methods. The 75-80% rule is quick and clean. The subtract-your-returns method is more precise. I'd recommend running both and seeing where they land.

Budget beyond the down payment. Closing costs, TI, leasing commissions, construction, carry costs. These can push your all-in basis way higher than you planned.

Never pay tomorrow's value today. If a broker is pricing a vacant building at stabilized value, walk away.

This article is adapted from Office Hours on the Tyler Cauble YouTube channel.

Want to learn how to underwrite deals like this with confidence? Check out the CRE Accelerator, my step-by-step program for building your commercial real estate portfolio. We cover underwriting, deal analysis, and everything else you need to start investing in commercial real estate.