081 Buying and running a hotel in Costa Rica

[Richard Bexon]

Good afternoon, Gary. How are you doing? Good. Thank you.

[Garry Wallace] 

How are you, Richard? 

[Richard Bexon] 

Very, very, very good. I'm taking a few days off before I go off to Guanacaste next week for the week. 

[Garry Wallace]

So it doesn't look like you're taking a day off at all.

[Richard Bexon]

Well, I mean, I'm taking a day off tomorrow and then Friday and then Saturday. I say I'm taking a day off. It's very difficult for me to take a day off just because I love what I do.

So sometimes, you know, I make myself available for people that I work with and I mean, I'm very fortunate. I love what it is that I do. 

[Garry Wallace] 

very fortunate.

[Richard Bexon]

Exactly. Well, Gary, I gave you a bit of an intro there explaining to everybody kind of what it is that you do, how long you've been here in Costa Rica. But I really always like to kind of start the podcast to kind of get an idea of what people were like. 

I mean, I suppose what's really surprised people over the past few months and also kind of what trends you may be seeing out there in Manuel Antonio, Gary.

[Garry Wallace]

Well, I mean, the biggest surprise for everybody was covid. It disrupted everything, everything you can imagine, life, business, even relationships. 

It's been a tough couple of years. So that was a big surprise. But in terms of the business, the surprises for me when I started working with the hotel after we bought it was, you know, it's like the crazy uncle that comes to Christmas dinner that comes every year. 

He kind of he's a little schizophrenic and dealing with the Costa Rican government is like that in that there are certain aspects of dealing with them that they're very anal retentive, trying to get a business license, trying to get a bank account, moving money into the country, large sums of money into the country. To give you an example, opening a bank account in Canada would probably take me 30 minutes if it took if there was a lineup. In Costa Rica, when I had to open a bank account after we bought the hotel, it took six weeks and a trip back to Canada because there were certain things that had to be brought in. 

Originals couldn't be copied, couldn't be emailed. And I mean, this isn't the whole picture, but there are certain things about the way the government operates that are very time consuming, somewhat frustrating. And I think that if you look back to the root cause of these certain areas that are very tight, it goes back to the fact that Costa Rica does not want to be seen as supporting the drug industry or illegal drug industry.

So a lot of the bank laws and the government laws are to protect the country from bringing money in, laundering money, et cetera. And once you understand that, you can accept it a little bit better. 

[Richard Bexon]

Yeah. I mean, it's funny you say that, Gary, just because, again, I spend a lot of time working with escrow companies. And the reason that we do that is just because trying to get money into the country sometimes can be a bit of a nightmare. So by using an escrow company for whatever it may be, they kind of somewhat clean is not the word, but like they approve the money coming through because they're registered. 

They're with Sugef, like our SEC here, so that they have done their due diligence on any money that they're accepting. So that makes things easier. But I mean, you've been in the hotel industry and especially in Manuel Antonio, but I mean, what trends have you seen after COVID that really kind of was like, wow, I didn't expect that to happen? 

[Garry Wallace]

Well, just before we go into that, let me say there's been things that have surprised me in the easy sense, too.

In some ways, after you get started, once you get established, once you get the money here and you get going, things are easy to do. I mean, I decided to put it, I decided to add a deli to the bar I had here when it was COVID and only restaurants were allowed to open three weeks from beginning to end, finding somebody to do it, finding the materials, talking to the government people, getting my license. I was open three weeks later, never happened, never happened anywhere else.

So, you know, you've got two sides of that coin in terms of trends. What I've seen, Richard, is remote working, more and more demand for people, whether they be nationals that are coming from San Jose to the coast for a weekend or they're Canadians or Europeans. They're taking longer vacations, so that's another trend, but they're combining that with working on the road.

So for example, to meet that demand nine months ago, we put in a co-working space that's isolated from the hotels, has its own air conditioning, has its own Wi-Fi, has a beautiful view over the pool, quiet, isolated, its own TV, everything. And it's getting used more and more. So that's one of the trends that I've seen. 

Longer vacations. I mean, when I was a kid, which was way before when you were a kid, one week vacation, two weeks max, where they're like, nobody took longer than that. Now people are taking a month, six weeks, two months, and they're finding a way to make it work in other countries, sometimes because they don't have a job that ties them down, sometimes because they're retired. I'm seeing longer and longer stays as a theme.

[Richard Bexon]

I wonder if that's here to stay, Gary. My perspective is, yes, it is, and I'm just seeing more and more of it, the more communications that I have, the more I, again, have conversations with people, they're looking to come down for a month, two months. 

Sometimes really as an exploratory mission, just because they want to move out of their country, whether that be from wherever it is, and Costa Rica is a great destination to do that. And to get residency here is not really, really difficult. Yeah, that's true.

[Garry Wallace]

I have residency here. It takes time, but it's not difficult. Correct.

[Richard Bexon]

You just need to have, again, you just need to have your paperwork in order. 

[Garry Wallace]

And sometimes that's a little difficult to put together, but they don't make it onerous. They just make it time consuming more than anything.

The other trend I'm seeing, Richard, is more purpose-driven holidays, which I would call, that's what I call it. People that come here to do something, whether it's to see a Kitzel in the mountains and go birdwatching, or it's to hike the El Camino, or it's to do volunteering in the interior. There still is that core of taking your family away, sitting on a beach, relaxing, and unwind, and that'll always be there.

But there's more and more people that hook a purpose into their time away. Yeah. And, you know, acknowledging that and catering to those people is a key to success, I think.

[Richard Bexon]

Definitely, definitely. Well, I mean, you own and manage a hotel in Manuel Antonio, which, you know, Manuel Antonio I know very, very well. I haven't been in the travel industry for 17 years.

You know, it's one of Costa Rica's top destinations, and I believe that Manuel Antonio is the number one visited national park. But if you had a time machine, Gary, to tell yourself something beforehand, you know, before you bought the hotel and invested in the hotel, what would you have told yourself or what would you have liked to have known? 

[Garry Wallace]

Well, I would have liked to have had a better handle on the laws and the taxes and how they work. But I don't think anyone goes into this, you know, reading up on the laws and the taxes. 

The other thing would have been I have a customer service background. I had it for 35 years, but I've never been in the hotel business per se. So there was a learning curve that was associated with that.

So I would have liked to have known those things. But neither one of those is insurmountable. If you're willing to listen to people and learn, you'll pick it up. 

[Richard Bexon]

Well, I mean, what advice would you give anyone looking to purchase a hotel or investing in a hotel, Gary? 

[Garry Wallace]

Well, you hit on one already, Richard. We bought a hotel and I have a partner. We bought a hotel in Manuel Antonio. 

I mean, when somebody has a dream about this, their dream is they put together some money, they find a beautiful piece of a beach in some remote area, they build this luxurious place and they open and people beat a path to their door. It's a great dream and some people pull it off. But the reality is location, location, location is a cliche in this industry for good reason. 

Manuel Antonio and Quepos have probably, maybe I'm even underestimating Richard, maybe 50 hotels if you count them from top to bottom. And you may say, oh my God, all that competition, how can you compete? It's actually the opposite. You have 50 hotels marketing the area. 

So you bring in a large flow and volume of people. And then you have to find your piece of that volume and bring them to you. You don't have to spend millions on marketing, which you might have to do if you're in a piece of the jungle that's beautiful, but nobody knows about it. 

But location, location, location is a big deal. And we specifically chose this location because we knew we wouldn't have to start from scratch. We built a hotel that was already built and it's well known as being one of the places to come in the country.

So now we just had to find our niche within that existing market rather than trying to create a market. 

[Richard Bexon]

Yeah, I mean, I think that that's great. You know, I'm doing a feasibility study for a client at the moment between building a beachfront home in Playa Grande or a beachfront home in Tamarindo. 

And I'm like, look, guys, just because Tamarindo is and I can see the demand, I mean, I'm even showing them the demand data. I'm just like, look, the demand is 10 times more, you know, and your ADR is going to be higher. Your average daily rate, your occupancy is going to be higher.

It may be more expensive to build, but your return is going to be quicker just because, again, it's location, location, location, which means you're just riding on the coattails of everybody else marketing in the area as well. 

[Garry Wallace]

You know, security of numbers, right? Safety of numbers. 

[Richard Bexon]

Well, plus also Expedia, TripAdvisor, all these other guys that are advertising the destinations, you know

So, I mean, it really is like a snowball effect once you want to get in a location. And I mean, I know hoteliers like Jim Damalis from Cicomono in Manuel Antonio who opened Via Blanca and like he's taking his arrows in Via Blanca trying to create that destination. You know, and even the guys down in Lapa Rios, you know, down in the Osa Peninsula did when they first started.

I mean, there are numerous, you know, Punta Islita. I mean, there are numerous hotels in this country where they've tried to create a destination. And you just need to have time and money. 

[Garry Wallace]

There's a saying, and it applies here as it does in many other things, the pioneers get the arrows, the settlers get the land. 

[Richard Bexon]

Yep. Yep.

[Garry Wallace]

The other thing, the other, you asked me what advice I would give, get a good professional team around you, especially if this isn't your native country. Get, you know, get a good real estate broker. And when I say get a good one, look for references, start by talking to you, if that's your area of expertise.  

Talk to somebody who knows the country and knows the lay of the land. Do not get a group of professionals around you that you don't know that well. They have to be spoken for.

So I would say get a good real estate broker, get a very good lawyer, and they'll keep you out of trouble. The real estate broker will keep you out of trouble. And if you can afford it, I would, I would say get an advisor, somebody like yourself.

“Here you go, Richard. Free plug.”

[Richard Bexon]

Thank you, Gary.

[Garry Wallace]

Somebody like yourself that's made the mistakes or learned through making mistakes or maybe not making mistakes because mistakes when you're buying a hotel or buying commercial real estate can be very, very expensive. And although the cost of getting good professionals around the temptation is, you know, I'll save 20% by taking this lawyer over that lawyer. You may pay 10 times that if there's a mistake made.

So you really have to be careful about that. Yeah. The other thing, the other two things I'd mentioned, determine early what your corporate structure is going to be.

And sort of have that known by the team so they can build the solution that you're trying to put together around the corporate, the corporate solution. Is it solely owned? Is it a corporation known by a corporation? Is there a Costa Rican corporation? Is it owned offshore? It sounds like the mundane part of the deal, but it becomes very important in the end. And if you change your direction at the end, it can be very costly. 

[Richard Bexon]

Yeah, I agree. I mean, I agree. My advice for people is always hold the asset in one company as well and then have the management company in the other, you know, just separate concerns.

I mean, it's very simple. But again, unless you've, as I always like to say, unless you've you've tread on that landmine, you don't really know. So but no, I mean, I think that corporate structure and also the structure for tax as well, you know, not so much today, but also at some point in the future, if you exit. 

[Garry Wallace]

Yes, capital gains, you have to think about the whole lifecycle of the investment, not just, oh, great, I bought a hotel. This is going to be so amazing.””  Unfortunately, to do it well, you have to think it through.

And that's why that's where an advisor or a good lawyer can help you think about these things, questions you may not think of yourself. 

[Richard Bexon]

Yeah. I mean, there's just so many facets to, you know, to running a hotel from operations to inventory to like if you have a restaurant, like there's a lot more moving parts there, you know, to sales and marketing, to your tax structures, to, you know, customer service front that I mean, it's just you know, there's a lot of moving parts. 

But I mean, I think the one thing I always say to people is this. Look, it's a great industry. Why? Because you get to see people at their best.

And when I say their best, they're most relaxed. You know, they don't have their business hats on. There's no facade they're putting on.

Like they're just relaxed. They're like they're just real. Totally agree.

[Garry Wallace]

I mean. Lifestyle choice, this is the best choice I've made in my life, so I love it here, I love what I'm doing, I love the country, my home base now is Costa Rica. Used to be Canada.

Now I am visiting Canada. I am on vacation in Canada. I live in Costa Rica and that's fine by me. 

Yeah. Hey, I'm the same. You know, I vacation back to the UK, but I like Costa Rica's home. I'm getting my citizenship here now. You know, someone's like someone asked me today in an Uber that was just like, why did it take you 17 years to get citizenship? And I was like, well, it wasn't till I really was like, you know what, I should probably start voting for a country, you know, now, you know, haven't been here so long and have a say in kind of somewhat its future. I was like, I'm probably going to need citizenship. 

I mean, let's speak to quite a few people who are looking to buy properties here, either build a hotel or buy one. I mean, I think the preference is always just to buy one, because again, with all that, as you mentioned there, you know, the bureaucracy to go through. 

But what questions do you think people should be asking, you know, potentially a current owner of a hotel if they're looking to buy one? 

[Garry Wallace]

Well, some of this is pretty obvious, but I'll run down a few questions that I would think of. You want to have a really good building inspection. You want what we call good bones. 

I mean, there's always going to be some superficial things that are going to be a problem or haven't been looked after. They can be dealt with as long as the bones of the hotel are good. The septic is good. 

The integrity of the structure itself is good. Your infrastructure inside your plumbing is good because those are expensive things to address. But, you know, get that looked at and if you can't do it yourself, get it looked at by a professional. 

Obviously, how is the hotel today getting their guests? How are they locating them? Are they just going booking and Airbnb and that's the full extent? Well, that's an opportunity for you as a buyer if that's all they're doing, because there's so many more options to be able to get guests into your hotel. If they're just using the easy way, then with a little bit of work, you can add all the elements to that and increase your occupancy easily. So you want to know how effective they've been in getting their guests. 

I would ask to review the books. That can be an interesting exercise in Costa Rica. But yeah, you need to look at the books and then try to determine how real they are and what's real inside of them, especially the expense side. 

How well have they been controlling the expenses? I mean, if they're still in business, they're probably controlling the cash flow. But how well have they been controlling the expenses? If you see things in there that are easily taken out, then there's another opportunity for it to make profit easily. Taking expenses drops right to the bottom line. 

So look at the books, look at the expense side especially well. And financing. I'd ask around financing if you're an offshore person trying to buy a hotel.

In-country financing is going to be, if not difficult, impossible. Financial institutions within Costa Rica very rarely lend money to somebody who doesn't have a life here and have his assets here. So you have to understand how you're going to do your financing. 

One of the most effective ways to do it is to let a vendor take back mortgage from the existing owner. So that'd be one of the things I would investigate right up front. And you may feel you have enough money to buy it, but it may be more cost effective to borrow some of it back from the vendor and leave some money as a rainy day fund. 

Tell you, there's a lot of people that wish they did that in March 2020. 

[Richard Bexon]

Yes. Yeah.

[Garry Wallace]

So those are the things that I would look at. Those are the questions I would go at. 

[Richard Bexon]

Well, I mean, you mentioned expenses there about expenses, but I mean, what about how you value a hotel? Because, you know, we had a conversation a while back with Joshua Whitman.

He works for Remax and we discussed it a little bit. But like there are so many options to value a hotel. And I always say ultimately, the value of anything is what someone's willing to pay for it.

But like how do you go by getting a benchmark or how would you go about getting a benchmark? 

[Garry Wallace]

Well, I mean, traditionally, whether it's residential real estate or commercial real estate, the first thing you look at is the comparables. How does this compare with the hotel down the street? How does it compare with the hotel in the next town that you're looking at? And there's a number of standard ways that are usually looked at that you can do the comparables on. EBITDA, a multiple of the profit.

Take the profit times some multiple. And that's what the value should be. Percentage return on investment.

Another way you can value the hotel is making 50,000 a year. Ten times means it's worth half a million, that type of thing. And then there's the room key exercise, which says standard comparables in this area is a hotel should be worth ninety thousand dollars per key, which is per rentable room.

And now of all those, most of them don't work today because we've gone through two horrible years. Most hotels. Cannot show you a track record that's more than two years old.

That's anything that you can actually use as a measuring stick. So we have our hotel up for sale right now, Serenity, and we're going through that life cycle and we've done a room key exercise to value it. It allows somebody with a financial background or without even a financial background, very easy to understand the room key per dollar.

And they can compare that to the hotel down the street or something else. If they want to get into other measurements, we can support those measurements and get into it afterwards. But to get them interested and to show them that you're right where you should be in the market, a dollar value per room key is usually the easiest way to get into it. 

And that's what we've chosen on this particular exercise. 

[Richard Bexon]

OK, well, I mean, I think it's good for us to understand that, again, you know, it's that you're you are for sale because anyone that is looking to buy a hotel should definitely look at, as you said, their location, location, location, and Manuel Antonio has all of that. You know, and it's, you know, our travel business sends a lot of money to Manuel Antonio, a lot of money. 

And it's not slowing down. You know, it's going quite the opposite. And I think what's going to happen in Manuel Antonio is it's going to see another renaissance.

And I mean, from the area of people coming in and buying hotels and doing them up, you know, you've got Jungle Vista just down the road there that was, you know, bought by the guys at Los Altos has been doing up. You know, I know that the guys at Arenas del Mar are redoing some of their beachfront stuff. You know, Cicomono has a new management team. 

I mean, you know, there's a lot of stuff happening in the area. And I think Manuel Antonio has a very strong and prosperous future. 

[Garry Wallace]

Yeah, and there's lots of selection and lots of lots of peers that you can look at and learn from. 

And I mean, you mentioned Jim from Cicomono. He's become a personal friend of mine through your interview. I watched his interview and reached out to him. And we get together probably every month, compare notes, compare frustrations, look at possible solutions to problems. So it's part of it's part of the whole plan that you should look at. And yes, you're right. I think Manuel Antonio is going to see another renaissance. And there's not there's not an abundance of land to build on here. 

[Richard Bexon]

No, there's not.

[Garry Wallace]

It's very vertical land off the water. And when you go in a little bit, so you know what they say, you know, they're investing in land they're not making anymore. 

[Richard Bexon]

Very, very true.

Very true. Well, I mean, I'm going to put all your contact details in the description. So I think anybody that wants to reach out to you to discuss, you know, the hotel can do.

But I mean, what other sources of revenue do you think people should look at when running a hotel beyond just, you know, the room revenue? 

[Garry Wallace]

Well, I can only speak to what we've done. And we had some ground floor space that wasn't being used very effectively. So we turned that into a bar.

Yeah. And thank God for the bar, because in the depths of COVID-19, the bar was making a lot more than the hotel was. Yeah. Because people may be afraid of a pandemic, but they still like to have a drink once or twice a week. And then when they shut down the bars, if you recall, they said, well, restaurants can still stay open, so they have to eat. That's when I put a deli in in three weeks and up where we're at the restaurant now.

So those have done really well for us. The other thing that is maybe a little bit different for a revenue stream is. I understand my clientele, the people that live in the area, there's a high concentration of expats, retirees, people that live here that needed and wanted something to break the routine. 

So what we started doing is events. We would do cooking events, a cook off, a chili cook off, a Bloody Mary Sunday morning who can make the best Bloody Mary, a cornhole tournament for charity. One month ago, we did a poker run and brought in some motorcycle folks from all around the country. 

And surprisingly, they can be pretty nice revenue generators, because even if you do it for charity, you've got to place people in your location. They're going to eat. They're going to drink and it's going to be a good day, you know, all around.

So I think those are the types of things. Know your customer, leverage your location and look at what potential you have within the building or within the grounds to make more money out of it. That would be my advice in that regard.

[Richard Bexon]

Garry, what's your favorite place to go in Costa Rica? That's a little bit off the beaten track. I always like to ask people this because it's, you know, people that live here, you know, you have some peculiar ones sometimes. 

[Garry Wallace]

Well, I don't think this is very peculiar, and I don't know how off the beaten track it really is, but I've been even before we bought the hotel. 

I've been here a dozen times. And there's one place in particular I've been to probably 20 times, and that's Montezuma, the very tip of the Nicoya Peninsula. And the first time I went there was.

I'm going to guess it was 30 years ago, Richard. I don't think it's changed that much in 30 years, which for me is part of the beauty of it.

There's no room for a hotel. There's there's no traffic lights. Everyone walks around barefoot.

It's just the most bohemian laid back atmosphere that I think I found in the country so that when my partner and I want to get away for a weekend or a week or something, we just motor up to Punta Arenas, take the ferry across and disappear into Montezuma. We love it there. 

[Richard Bexon]

It's a beautiful part of the country. 

And I mean, it's amazing. It hasn't kicked off a little bit more, but I know why it hasn't, because just the water infrastructure there by Delicias and then over to Cabuya and those areas, you know, it's just not it's not really heavy there. I mean, I just helped a client. 

Basically, unfortunately, they didn't close on a piece of property because they couldn't get their water from a well that they were digging. Right. You know, I mean, it just comes down to water.

And I don't think people really understand that. Sometimes it's just like, look, if you don't have legal water, you can't do anything.

[Garry Wallace]

 Yes. 

And the rules, as you pointed out, the rules around that have changed over the years. And that's one of the reasons you have an advisor, they'll tell you before you get too deep into a potential purchase. You better check these things off.

Here's your checklist. Make sure they're there. 

[Richard Bexon]

Yeah.

I mean, the interesting thing with that was that I I structured the deal that, again, if they didn't have water, that they would be able to back out of it. So instead of losing, you know, close to a million dollars, unfortunately, they lost, you know, fifteen thousand dollars drilling a well. But better to lose 15 than, you know, a million.

[Garry Wallace]

That's right. Absolutely. And that's a great escape clause.  

But there's so many of them. There's, you know, opt outs around titling, around water, around services, around, you know, working septics and room to put in another one. If you need one, you know, I can't list them off. 

But a good advisor would take you to keep you out of trouble. 

[Richard Bexon]

Definitely. Well, my last question for you, Gary, is if you inherited five hundred thousand dollars and had to invest it into a business or real estate in Costa Rica, what would you do with it? 

[Garry Wallace]

I have to invest it,eh?  

[Richard Bexon]

Yeah. 

[Garry Wallace]

I think I would look for an opportunity. To invest in what I think is a really up and coming trend, which is fractional ownership, better known by its evil twin timeshare, which got a bad reputation probably in the 70s or 80s because of some very unscrupulous, you know, business practices around the world.

But fractional ownership, when it's done correctly, can be a great investment and a great opportunity for somebody to have a bolthole somewhere else in the world, Costa Rica, that they can go to and they know that it's not it's always going to be there for them because they're part owner of it. I think that the graying of the G7 populations, the more disposable income they have combined with the unsettled political and economic situations in some of those countries mean that people are looking for a place to go to hide out from the chaos. And Costa Rica is seen as a haven that way.

No army, you know, peaceful, safe, you know, beautiful weather. So, you know, I think fractional ownership is going to come through another renaissance as well. 

[Richard Bexon]

Well, I mean, I'm starting to see a little bit of it, Gary, in the market.

You know, I'm starting to see a little bit because, again, it's it's basically it's like a timeshare, but you own an asset and you ride that appreciation of the asset, whereas a timeshare, you don't usually it's 20 years and you pay your money and you don't, you know. It's very similar. 

When I worked, I structured a tourism bond, which was basically an investment into a bond that also gave you a timeshare at a particular property, meaning that you would get an annual return. You'd also get two weeks at the property and also at the end of the bonds lifecycle, you get your original investment back. 

You know, I mean, not to get into the complications of like legal, you know, of structuring a financial instrument there. But it was just interesting how now a lot of people are looking for that lifestyle element of an investment. 

[Garry Wallace]

Absolutely.

And I would be looking for five hundred thousand wouldn't be enough to really purchase a going thing. But in a partnership, it probably would be I'd be looking for multiple units all separate with a good common area that can be shared. And a lot of hotels don't have great common areas.

So it might be different. It might be a different layout than a standard hotel, but a hotel with good common areas or I mean, multiple units with good common areas that can be divided up and done as a fractional ownership. I think, marketed correctly, run by a smart marketing team, it could do very well. 

[Richard Bexon]

I agree. I agree.

Well Garry, I really appreciate your time in coming on here, it’s been very useful for anyone that’s looking to invest in Costa Rica, looking to buy a hotel. 

I mean as Garry mentioned his hotel is for sale and all of his contact details will be in the description down below.

But, Garry, I really appreciate taking the time to talk to us.

[Garry Wallace]

Richard, I really appreciate being on your show. I have been following you for about a year and you have the who’s who on investments in this country on your show and I respect the fact that you asked me to come on. Thank you. 

[Richard Bexon] 

Thank you very much Garry.