Hotel Investment Opportunities – Ultimate Strategy Guide
February 25, 2020
In this article, we demystify the types of hotel investment opportunities and explain the current state of the hospitality market. We also elucidate how to find great hotel investment opportunities, especially in the USA. Read on to learn about your options when considering hotel investments.
The decade-long bull market has created an almost insatiable desire to invest in real estate. This drive to invest certainly extends to the hotel sector. While there are several ways to accomplish hotel investing, hotel acquisition is the most direct.
If you find this article helpful, check out our Success Guide to Investing in Apartments and How to Own a Hotel – 12 Tips for Explosive Success.
Are Hotels a Smart Investment?
Hotels can deliver long-term income that can build wealth. When purchased and financed correctly, hotel investing is an extremely smart investment. Unlike other types of real estate, hotels can adjust room rates every day. For that reason, they can instantly account for fluctuations in supply and demand. When it comes to hotel investments, there are several possibilities.
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How Assets America® Can Help
Assets America® can provide hotel acquisition, refinances and retrofit financing starting at a minimum of $10 million, with virtually no upper limit. We work with a powerful network of private money lenders and institutional funding sources that can deliver financing quickly and affordably. Before you settle for franchisor financing, you owe it to yourself to see what we can offer you. Contact us today at (206) 622-3000 to schedule a confidential conference about your hotel investment opportunity, or simply fill out the below form to receive a prompt response!
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Types of Hotel Investment Opportunities
1. Hotel REITs
Real estate investment trusts are a way for investors to gain exposure to real estate investments. Typically, REITs specialize in one property sector. You can purchase shares of lodging and resort (L/R) REITs that pay handsome dividends and offer capital appreciation opportunities.
These are passive real estate investments in which the REIT company actively manages its portfolio of properties. In fact, L/R REITs returned 15.65% in 2019 and currently yield 7.74%.
Hospitality crowdfunding is becoming a hot investment. You can find many hotel investment opportunities on crowdfunding platforms such as Crowdstreet and Fundrise.
At one time, only accredited investors could participate in hospitality crowdfunding. However, now you can be an unaccredited investor and participate in some of these private investments. That’s because Regulation A+ allows small private companies to place shares with the general public.
Note that these are non-diversified, passive investments. You should carefully read and understand the Offering Circular before investing in crowdfunded shares. Here are current Crowdstreet hotel investment opportunities and Fundrise hotel investment opportunities.
3. Hotel Operator Shares
You can also buy publicly traded shares of hotel operating companies. These are liquid investments that you can buy and sell instantly whenever the markets are open.
Unless you purchase a substantial number of shares, these are passive hotel investments. Common shares allow you to receive dividends and potentially reap capital gains. Many hotel companies also offer preferred shares that have high dividend yields.
4. Hotel Purchasing and Construction
The most direct way to invest in the hospitality industry is to buy a hotel. You will need equity capital and debt financing to proceed. This is an active investment in which you are ultimately responsible for managing daily operations.
For many investors, part of the allure of hotel ownership is the hospitality lifestyle. However, it is important to prevent romantic notions about running a hotel from clouding your financial judgment.
Clearly, a well-conceived and properly executed hotel construction or acquisition project should provide a competitive return on investment. Moreover, required returns should account for a project’s risks.
The Current State of the Hospitality Market
The 2020 outlook for the hospitality industry should continue to be strong. The strength of the economy and consumer confidence undergird continued growth. Even though hotel demand will remain strong, supply greatly increased in 2019. Therefore, returns for new investors in 2020 may decelerate slightly, although RevPAR changes should remain positive.
Until demand catches up to the newest supply, expect hotel occupancy rates to modestly drop this year. Investors must also closely monitor the state of the alternative lodging sector (Airbnb, VRBO, etc.).
With the economy at full employment, many companies will have trouble expanding. This depresses hotel demand, as expansion activities drive the need for room nights. Likely, hotel construction may suffer from a shortage of skilled labor.
National hotel occupancy should drop from 66.0% in 2019 to 65.6% to 65.8% in 2020, about a 0.3 percentage point drop (not a substantial decline in the big scheme of things).
However, the average daily rate (ADR) should climb by 0.6%, from $130.50 last year to $131.00 by the end of 2020. But ADRs may weaken if unexpectedly weak occupancy rates encourage price discounting in 2020. On a positive note, many municipalities are limiting the growth of alternative lodging sources.
As the industry absorbs new supply, net operating income (NOI) should plateau and eventually increase. Doubtlessly, higher labor costs and lower RevPARs may threaten NOI. Any price softness in 2020 should dissipate in 2021 and beyond as new additional supply tapers.
Private equity funds may commit more funds to the hospitality industry after they incorrectly predicted a correction. Therefore, acquisitions may uptick in 2020. Moreover, hotel acquisition may outpace increasingly costly hotel construction.
How to Find Hotel Investment Opportunities
It takes a tremendous amount of information to acquire a hotel that will pay off as a successful investment. You can rely on commercial realtors, hotel management companies, online marketplaces, and specialized sources, etc.
In addition, some investors may simply tour a local community to scout out possible transactions. Here are some ideas to help you organize your search.
If you are going to buy and run a hotel, you’ll probably look at areas near your residence that are easy to access. Some owners even move to their hotel properties and live there full-time. You want to be very familiar with the local areas of interest, or you’ll be at a serious disadvantage.
You also need to understand how communities evolve to avoid investing in declining areas. Learn about any large infrastructure projects, zoning changes, and other external factors that can impact your investment.
After settling on a general area, you should research and analyze the area’s hotel market. Local realtors can help you determine whether local hotels are selling at, below, or above asking prices.
If prices are low, it may indicate a depressed market. That’s not necessarily a deal killer since you might be able to pick up a bargain. You might even be able to arrange favorable seller financing.
But remember, buying into a depressed market can consign you to anemic cash flows. Naturally, if you have good information pointing at an economic turnaround, you might grab a great deal.
A market analysis looks at existing and expected competition, traffic patterns, traveler attractions, infrastructure conditions, and much more. Check out local news articles to gain insight into neighborhood dynamics. For example, a new office park or entertainment venue might increase the demand for hotel rooms.
Specialized real estate brokers can help you find candidate properties. Let them know what you’re looking for and how much you’re willing to pay. They will show you existing hotels on the market and keep you advised as other ones become available.
Perhaps you’ll find a property that can be repurposed. For instance, you might be able to convert an old armory into a luxury hotel. As candidate properties appear, pull their real estate title records to identify the owner and any liens on the property.
You need to examine all quantitative aspects of a hotel that’s up for sale. These include cash flows, net operating income, ADR, RevPAR, and dozens more.
You must also assess the financial and physical condition of the property. That is, you need to know how much debt exists and how much renovation the hotel needs.
The final product is a complete spreadsheet showing all the factors necessary to forecast cash flows. Additionally, you should subject your forecast to sensitivity analysis.
Hotel Investment Opportunities in the USA
For many years, a favorite strategy was to buy dated hotels at a low price, renovate them and up-brand them. However, the stock available for renovation has fallen in most major U. S. markets. This makes it harder (more expensive) to execute this strategy.
Franchising represents a leading way to invest in hotels. The major hotel chains have franchise programs that provide a wide range of opportunities nationwide. One play is to buy an older franchise and upgrade it to a better brand. Another strategy is to buy a hotel franchise and then unflag it.
Frequently Asked Questions
How can I start a hotel business?
The process is to start with research and planning. Narrow your choices to fit your geographic preference and budget. Work with a commercial real estate agent and a lender. Perform due diligence before negotiating a deal.
How much do hotel owners make each year?
A hotel owner’s salary or draw varies across properties and markets. In round numbers, owners can expect to make between $76,000 and $140,000 per year.
How is profit calculated in the hotel business?
When you own a franchise hotel, your net profit margin equals net profit divided by total revenue. This measures your profit on a percentage basis after paying all expenses, including franchise fees.
Which regions of the USA are the best for hotel investment opportunities?
The mountain states are hot right now for hotel investment opportunities. These include Colorado, Arizona, Montana, Idaho, Nevada, Utah, New Mexico, and Wyoming. The mature markets in Brooklyn and San Francisco are awfully expensive.