Are Hotels a Good Investment?

Post pandemic, the hospitality industry is finally back to full strength, with many families making up for lost vacation opportunities by booking extra travel! With more people working off-site, they also need hotel rooms when attending on-site meetings and events. Things are looking great for hotels right across the country! Investor confidence in the hospitality sector is rising. Is now your time to invest in hotels? If so, you can get started with the information in this guide, where we’ll discuss whether a hotel investment is right for you and how you can invest in this exciting segment of commercial real estate.

Advantages of Hotel Investment

Like any investment, hotel properties have upsides and downsides. The advantages include:

Multiple Income Streams

Hotel revenue doesn’t just come from room rentals; depending on the facility itself, you can make money on the dining rooms, bars, event spaces, spas, and day passes for your pool area.

Commercial Real Estate Diversification

If you hold other commercial real estate, a hotel investment is a great way of spreading your risk across sectors.

Daily Revenue Stream

Compared to monthly rental spaces like apartments, factories, and office buildings, a hotel investment gives you daily cash flow that you can use to cover expenses on an ongoing basis. Hotels can also adjust their rates to reflect seasonal demands and increased occupancy during special events, giving these investments more flexibility and earning potential.

Tax Benefits

Hotel investment has numerous tax benefits. In addition to regular write-offs such as operating expenses and mortgage interest, recent changes to tax rules allow hotels to deduct the full cost of some property or equipment purchases in the year they’re purchased rather than depreciating them over several years.

Special tax benefits include tax credits for renovating and preserving historic hotel buildings, energy-efficient tax deductions for new construction and renovations, and exit strategies to help you reduce your capital gains tax when you sell the hotel investment.

Appreciation Potential

Upgrades and renovations can increase a hotel’s market value. You can use the increased value as leverage for additional borrowing and investment, and of course, you’ll benefit from higher value when it’s time to sell your hotel investment.

Franchise Support

Many hotels are part of branded chains that do a lot of the marketing and promotional work for you. You get the benefit of a good brand name that’s been established over time and the increased traffic you get from the brand’s loyalty programs. The brand will also support your hotel by setting operating standards, giving you access to a trusted reservation system, and assisting with training.

Disadvantages of Hotel Investment

A hotel investment has downsides that set it apart from other commercial real estate.

Variable Revenue

Hotels generate higher revenues during particular seasons and local events. During slow times, hotels may be forced to lower booking rates.

Economic Downturns

Although a slow economy can affect all sorts of businesses, travel is a common discretionary expense that families cut when during difficult times. Hotel investments suffer as a result.

High Operating Costs

Hotels have to pay for a lot of staff, and maintenance always needs to be top-notch; you can’t, for example, afford to close your restaurants or your pool for maintenance without a blow to your revenue. Compared to other real estate, such as factories and retail stores, the operating expenses for a hotel investment can be quite high.

Types of Hotels for Investment

In the hotel category, there are numerous types of properties to choose from, including:

• Luxury and upscale hotels that cater to wealthier guests and have higher operating costs.
• Midscale establishments that are ideal for families and business travelers.
• Extended stay facilities that serve business travelers and digital nomads who need a home base for a longer period.
• Economy hotels and motels are for budget-conscious travelers who are not fussy about amenities.
• Boutique hotels for trendy travelers who prefer something unique.
• Capsule hotels that are ideal for people who want low-cost accommodations or just need a place to sleep.

How to Invest in Hotels

Buying an entire building is not the only way to get the benefits of a hotel investment. Here are some additional investment models:

Real Estate Investment Trusts (REIT)

REITs are publicly traded trusts that are based on properties in the hotel sector. Similar to mutual funds, you benefit by pooling your money with others and leaving the management of the investment to experts.

Hotel Investment Companies

Hotel investment companies are organizations that buy, develop, manage and/or finance hotels. They offer different ways for individuals and other companies to invest in hotels without having to buy and operate a hotel investment themselves.

Crowdfunding Platforms

You can crowdfund your hotel investment on digital platforms that allow you to invest smaller amounts in a property.

While these alternatives to direct ownership spread out the risk of a hotel investment over many other people, they don’t give you the same level of control over the business and its outcomes.

Evaluating a Hotel for Investment

The hotel industry uses these key metrics to evaluate properties:

• Occupancy Rate: the % of rooms that are booked.
• Average Daily Rate: the average rate charged for room bookings.
• RevPAR: average daily rate × occupancy
• Gross Operating Profit: total revenue minus operating costs
• Return on Investment: total return / initial investment and capital investments

Is a Hotel Investment Right for You?

Investing in a hotel offers unique opportunities for long-term investment growth and ongoing passive income. There are plenty of investment models to choose from, so you can invest in a hotel regardless of your experience level and risk tolerance.

Now that the sector has fully recovered from the pandemic downturn, it’s a great time to take advantage of the renewed interest in travel. Could a hotel investment be right for you? Now that you’ve got more information, reach out to a commercial real estate agent to get started!