Buying a Hotel Property? 11 Top Things to Have in Mind
What does it take to become a hotel owner?
Money. Of course.
Hotel investment properties are an excellent source of income for investors. Though they’re lucrative and offer a great return on investment, it can be difficult to find your footing if you’re just getting started.
The hospitality industry is highly competitive, with many large and established brands dominating the market. Then again, buying a hotel, or selling one for that matter, is not on your average investor’s to-do list.
Here’s what you need to know:
1. Hotel Real Estate Investment Is Unlike Any Other
Although there is considerable diversity in the Big Four CRE asset classes – multi-family, retail, office, and industrial real estate – none approaches the complexity of investing in hotels. The operational nature of a hotel is the primary differentiator. For one, you have nightly leases instead of monthly, quarterly or annual leases. Hotels reprice rooms on a daily basis based on perceived demand, making hotels highly responsive to changes in the market.
The operational nature adds risk and uncertainty. But this doesn’t mean you should shy away from hotels as a real estate investor. Hotels provide ample opportunities to grow and diversify your revenue sources precisely because the industry is so dynamic and adaptable.
2. Location is Everything
Now, this is a factor when buying any commercial real estate property, but the impacts are more pronounced when it comes to hotel purchases. Your analysis should include proximity to recreational areas and venues like hospitals, sports arenas, and office buildings.
The main drivers for hotels are business travel, tourism, and group demand; it’s, therefore, important to position yourself accordingly.
3. Consider Local Market Conditions
The market that already exists in the area where you intend to buy the hotel should also factor into the decision. Find a gap in the market and exploit it. For example, you might find that many of the hotels in an area cater to high-income clientele, leaving middle-income travelers a little worse for wear.
Market factors also impact nightly leases – a standard motel in Los Angeles will attract much higher prices than one in, let’s say, Madison, Wisconsin.
4. What Are the Different Types of Hotel Assets?
Hotels can be categorized according to their services and amenities. For instance, full-service hotels that offer everything from on-site retail to meeting rooms and restaurants and extended stay hotels that provide temporary housing to business travelers on vacation.
It’s important to know what kind of asset you want and the risks associated with each.
5. Operations-Oriented Asset Management
Hotel investments evolved over time to divide the risk and specialization among a variety of stakeholders. As such, a modern hotel deal involves 3 major stakeholders:
- Owner – the deal sponsor making the bulk of the investment
- Operator – may be an affiliate of the deal sponsor or a third party and is responsible for managing the day-to-day hotel operations
- Brand – adds value through sales, marketing, and quality standards and determines the hotel’s positioning in the market
6. Buying a Hotel or Motel Franchise
Owning a hotel or motel franchise allows you to start your hotel investment journey without starting from scratch. What’s more, you’ll be working with an established brand that will provide you with guidance and support. On the flip side, you’ll be beholden to the franchisor and will have to run your business according to brand standards.
7. Becoming an Independent Hotel Owner
Going the independent route means having more say in how you operate and expand your business. Location and marketing will be paramount in this case as you can’t rely on the name of a major hotel brand to keep guests flowing in.
Having the right hotel operator can also make being an independent hotel owner easier. Well-managed hotels typically have a stronger cash flow and lower operating costs.
8. Gather the Ultimate Dream Team
Want to have better results? Bring in the experts! Your team should include the following professionals:
- Appraiser – Make sure they have extensive experience in the commercial real estate industry, particularly in hotel properties.
- Lender – You’ll want to work with a seasoned hotel lender. One that can help you assemble the ultimate bid package.
- Real estate broker – a professional agent has profound knowledge of the local market and can help you make the right decision.
9. Consider Working with a Hotel Management Company
Hotel management takes a great deal of work. You’ll have to focus on the individual character of each property when marketing, delivering high-quality personal service, and creating unique guest experiences. The job of a management company is to run day-to-day hotel operations and to keep the business profitable.
If you’ve bought a hotel with a great reputation for guest satisfaction, you may want to consider keeping the existing hotel manager. If not, partner with a management company with a history of creating high-performing hotels.
10. But Before Partnering With a Hotel Management Company…
Here’s what you need to know about hotel management agreements:
Some hotel operators are also brand owners. In this case, the management company is responsible for upholding brand standards. That said, you’ll still retain the majority of the risk and reward as the hotel owner. A balanced hotel management contract requires robust negotiation, which is yet another reason to bring an experienced real estate broker on board.
11. Financing a Hotel or Motel
There’s one part of investing that hotel buyers can never focus on enough: financing.
In addition to your initial purchase, buying a hotel or motel comes with additional expenses. An existing property might also require renovations and redecorating. A property improvement plan can help you make necessary adjustments while staying within budget.
Chances are, the whole endeavor will cost more than you think, and the last thing you want to be is undercapitalized. It’s advisable to obtain some working capital to cover early expenses. Fortunately, there are several types of hotel loans available to you, including conventional loans and USDA B&I (U.S. Department of Agriculture Business and Industry) loans.