In the board game Monopoly hotels are at the top of the investment chain. The winner of the game will almost certainly have one or more hotels in his portfolio. Buying a hotel is exciting and the hospitality business can be financially lucrative and satisfying on a personal level as well. However, even for the most sophisticated investor with the temperament and skill set to run a successful hotel, there are some things to consider before making the leap into the world of hotel ownership.
Location, Location, Location
The old adage for real estate investments in general holds especially true for investments in luxury hotels. Resort properties and global gateway cities have traditionally been the destinations of choice for luxury hotel investments. For resort properties, key factors to consider include access, whether drive-to or via adequate airlift or other transportation means. For urban markets, the primary concern is to be certain the market can support the overall investment based on expected occupancies and average room rates. Some of the large brands have made the mistake of extending their brands into small or mid-size markets which cannot support the overall investment required to meet their brand standards. Location within a specific market should be evaluated in terms of key demand factors and access to attractions for both business and leisure travelers. Being on the beach versus a block from the beach can make or break a resort property.
Invest in Management
It’s a 24-hour, seven day a week business. Anything can go wrong at anytime and require your attention and effort. Your hotel will require a highly professional staff with a range of skill sets and responsibilities. Day to day oversight of housekeeping, maintenance and guest facing personnel alone can be overwhelming. Add to that, sales and marketing and increasingly complex technology requirements, it takes a sophisticated and professional management team to be successful in this business. Hotel investments are not just in the real estate, but in an operating business. In the case of luxury hotels, the operations and the quality of service are often just as important, if not more so, than the quality of the asset. This requires a well-trained management team equipped with the proper tools and systems in place to meet guest expectations.
An experienced general manager with the skills and personality to manage the team as well as provide hospitality to guests is essential. Systems and training programs to ensure consistent delivery of established service standards are critical. Post Covid the hospitality industry is facing a labor shortage and there is pressure to increase wages. Labor is, by far, the largest single expense for hotels. Effective management of labor costs must be a top priority to maintain profit margins. A hotel investor/owner may want to give some serious thought to hiring a management company or asset manager to oversee hotel operations.
Be realistic about the investment
It is a big investment. The cost of a hotel will vary depending upon category (limited service, full-service, upscale, luxury, etc.) and location. In today’s market the entrance cost for even limited-service hotels can be upwards of $200k per room. In the case of luxury hotels the price will likely be greater than $500k per room. In key urban and resort markets, luxury hotels have exceeded $1 million per key. In a few cases more than $2 million per key. Building a new hotel from ground up is likely to be more costly than buying an existing hotel as land costs, labor, materials and permits, among other expenses are on the rise. While returns on your investment can be significant, it may take time. Generally, it takes a hotel two to three years to stabilize its operations and compete effectively in any given market. So, you will need to be patient. But with proper management and capitalization, the returns, regardless of the metric (ROI, IRR, etc.) used to measure the results can be high when compared to other real estate classes.
Independent vs. Brand
Early in the process an investor should decide whether the asset will be positioned as an independent or a branded property, and, if branded which brand with which to affiliate. There are pros and cons of both approaches. Generally, a brand will provide greater customer awareness, world-wide distribution systems, brand loyalty programs and can more easily recruit staffing and provide in-house technical services and design support. However, these advantages come with a price tag in the way of rigid design standards, higher operating costs and the encumbrance of a long-term management, franchise, or license agreement.
The most desired brand may also be unavailable if they already have a property in the market or are restricted by radius clause constraints. On the other hand, independent hotels have no brand constraints on an owners’ ability to design and manage a property. Operating costs may be lower as there are no brand related fees, and there is no encumbrance in the event of a sale of the property. Independent hotels may also have greater flexibility in market positioning and rate determination.
These are just a few important considerations. There are many. The key for you as a first-time buyer is not to go it alone. Hire highly competent professionals got guide you every step of the way.