7 Things Investors Should Know About Hotel Real Estate Investments

Hotels can be a great opportunity for investors – but they don’t operate in quite the same way as other real estate investments. If you’re interested in investing in a hotel, you’ll need a thorough understanding of exactly how they differ from other commercial real estate. 

If you’re not sure what that entails, don’t worry – we have you covered. Keep reading for the seven more important things to know about hotel investments.

Hotels are far more dynamic than most traditional real estate. Although there are exceptions, most hotels do not have long-term tenants who sign extended leases. Instead, hotels rely on short-term tenants, often people who stay for just one night.

This is both a challenge and an opportunity. On the one hand, hotels need to constantly seek out customers. In order to stay attractive, they need to change to meet consumers’ changing needs. Hotels also require far more upkeep than most traditional real estate, since they are continually being cleaned and serviced to prepare for new tenants.

On the other hand, though, hotels are far more flexible than other real estate. Since they do not have to stick to long-term leases, hotels can change their rates to reflect changes in the market. In a slow season, hotels can easily lower their rates to attract new guests. In a busy season, hotels can increase their charges. These changes in rates don’t need to be seasonal; the price of a hotel stay can fluctuate from month to month, or even from one day to the next.

This level of volatility won’t work for everyone. That’s why it’s important to know what to expect before you invest in a hotel.

There are a number of different kinds of hotels, each with its own advantages and disadvantages Here are the main different kinds of hotel.

These hotels offer a range of amenities to their guests. The types of amenities provided will depend on the kinds of guests they cater to. If they serve a mostly business clientele, they’ll likely provide conference rooms and wi-fi. If they’re serving vacationers, they may offer spas and on-site boutiques. Most full-service hotels and resorts have at least one restaurant and bar.

Full-service hotels and resorts can range from upscale and expensive to midscale and medium-range hotels. They can be expensive to operate, because they need to employ a large staff to keep everything running smoothly. However, they can also be good revenue sources if they define themselves well in their niche.

A select-service hotel falls somewhere in the middle between a full-service and a limited-service hotel. They are designed for guests who like to have some options available to them at their hotel, but who don’t necessarily expect their hotel to provide everything they need. You might find a modest restaurant and maybe a breakfast bar at a select service hotel. You’re unlikely to find a spa or a conference room.

Boutique and independent hotels tend to be quirky and charming. They’re designed for guests who want a break from the one-size-fits-all mold of chain hotels. This kind of hotel can often charge more per night than a typical chain hotel. However, because they are independent, they sometimes struggle to attract business and can suffer more in the event of an economic downturn.

These hotels usually don’t operate their own restaurants. They may still have swimming pools and even a small gym. However, they will have less staff than a full service or select service hotel, and they may not be as responsive to guests’ needs.

From a hotel owner’s perspective, it may be easier to operate a limited service hotel. By the same token, though, the hotel may generate less revenue, since the rates are lower.

These hotels are designed to meet the needs of people who need short-term, temporary housing. In many cases, this means long-term business travelers who are living and working abroad for several months. They need a comfortable, stable place to live, but are not planning to stay long enough to rent an apartment or a house.

Extended stay hotels usually offer suites with some amenities, like a small kitchen and washing machines, so that guests can make themselves at home.

Budget hotels, also called economy hotels, provide affordable places to stay for travelers on a tight budget. They are usually no-frills establishments with no restaurants or meeting rooms. They can operate with a smaller staff than larger hotels that offer more services.

Hotel real estate uses certain metrics to track the success of hotel investments. The most important metrics are Average Daily Rate, or ADR, and Revenue per Available Room, or RevPar.

As the name suggests, ADR measures the average rate paid per night in a hotel. You can calculate ADR by taking the total revenue of the hotel by the number of rooms rented over a fixed period of time.

You can calculate RevPar, the revenue per room, by multiplying ADR by your hotel’s occupancy rate.

You can succeed in hotel real estate by cornering a large share of any particular type of hotel consumer.

There are two main groups of hotel consumers: people who travel for pleasure, and people who travel for business. Of course, those are not the only kinds of hotel consumers, but those two groups do drive most hotel real estate success.

Succeeding at hotel management means capturing a major share of either business travelers or tourists in your area.  You can do this by studying the unique needs of the travelers who come to your area. The more clearly you define your niche, the better you’ll be able to attract visitors. It’s also important to make sure that you are offering the right level of services for consumers in your target demographic.

As you’ve seen, hotels differ widely from one another, both in terms of pricing and in terms of services offered. When you get started investing, it’s wise to study your area closely to see what kinds of hotels are already on the market. Crunch the numbers and assess their success. Which kind of hotel does best in terms of ADR and RevPar? 

Once you’ve determined the most successful model, look for gaps in the market and decide how you can meet any unaddressed need in the local hotel market. 

There are a few different ways to become a hotel investor. Here are the most common options.

Owning your own hotel gives you a good deal of creative freedom. You can make your own decisions about location, size, and amenities; you can even decorate your hotel according to your own taste. 

On the other hand, as an independent hotel, you may find it harder to attract customers, since many customers prefer staying in chain hotels. You may also struggle to adjust to market shifts if you are operating on your own and lack experience in the hotel sector.

Leasing a hotel can be a good arrangement for a newcomer to the hotel sector. You lease a hotel to a corporation in return to a fixed rate; no matter what the corporation earns from the hotel, they pay you the same monthly fee. 

This can be frustrating, especially if the hotel does very well and you aren’t benefiting from the revenues. However, it does guarantee you a predictable income and it cushions you from losses in case the hotel does not succeed.

You can buy a hotel property and then hire a manager, or a management company, to take care of operations. You will still be responsible for all financial matters, but you will have the benefit of experienced managers to make the day to day decisions involved in running the hotel. 

An estimated 80% of branded hotels are franchises. Under this model, you pay a fee to a hotel chain in return for the right to operate a hotel with their name. 

This means that hotel-goers will feel confident staying at your hotel, since they know and trust the brand. Depending on the hotel, you may also receive some support from the hotel chain to help you operate the business.

At the same time, if your brand suffers, then your franchise will also suffer, and you may lose money.

Hotels typically operate with a very clear organizational structure. The hierarchy is well-defined, with a general manager at the top and several tiers of employees to run the different departments of the hotel.

Hotel investing is an exciting way to diversify your portfolio. As with any other form of investment, it’s wise to educate yourself as fully as possible, and to seek out experienced partners.

At Black Collie Capital, we specialize in working with our clients to create customized investment strategies. Visit us today to start a conversation about your investment future.