How to Invest in Hotels

Investing in hotels can be a rewarding way to diversify your portfolio and tap into the global travel and tourism industry. From luxury resorts to budget-friendly chains, the hotel sector offers a variety of investment opportunities that generate income through nightly room rates, amenities, and long-term property value appreciation.

Whether you're an individual investor looking to buy shares in hotel REITs, partner in a hospitality syndication, or own and operate a boutique hotel, there are several paths to consider—each with its own risk, return potential, and level of involvement. In this guide, we’ll explore how to invest in hotels, the different strategies available, and the benefits and risks of investing them.

How Does Hotel Investment Work?

The hotel industry is enormous. The global hospitality industry was worth over $4.548 trillion in 2022, with at least 187,000 hotels worldwide. About 1.6 million people are employed in the U.S. hotel and accommodation industry.

While you can purchase a hotel and hire a management team, this financial opportunity requires significant capital, research, and an experienced team. A small hotel in the United States costs around $1 million, while a 115-room hotel costs an average of $22 million. But beyond the initial investment, you’ll need to hire a hotel management team to ensure profitable operations.

An alternative to purchasing a hotel is publicly traded hotel stocks that offer the opportunity to own shares in a hotel.

Top Reasons to Invest in Hotels

If you're ready to invest in hotels, here are nine reasons why hotels can be a smart investment to build wealth.

• Steady Income: Hotels can provide a consistent and steady income stream, especially if they are located in popular tourist destinations or business hubs. People need accommodation, which means there is a constant demand for hotel rooms. A well-managed hotel in a popular destination should have lower vacancies than average for steady positive cash flow.
• Long-Term Appreciation: Hotels are real estate assets that can appreciate in value over time. As the property market improves and demand for hotels increases, the value of the hotel property may rise, allowing investors to realize capital gains upon sale.
• Diversification: Investing in hotels can offer diversification benefits to a real estate portfolio. Hotels can have different revenue streams, including room bookings, food and beverage services, and conference facilities. This diversification can help reduce the risk associated with relying on a single source of income.
• Tax Benefits: Like other real estate investments, hotels can offer tax advantages such as depreciation deductions, mortgage interest deductions, and potential tax deferral strategies. These benefits can help investors reduce their overall tax liability and enhance their returns.
• Hedge Against Inflation: Hotel revenues and room rates tend to increase with inflation. As the cost of living rises, hotels can adjust their pricing accordingly, allowing investors to potentially benefit from inflation protection. Real estate investments are one of the most inflation-resistant long-term investments.

Risks of Investing in Hotels

There are significant risks associated with hotel investments that prospective investors should carefully consider. These include:

• Cyclicality: Economic downturns and fluctuations in tourism can lead to periods of low occupancy rates and revenue decline. This can have a direct impact on the profitability of the investment and make it challenging to generate returns during tough times.
• Severe Competition: With a myriad of accommodation options available to travelers, hotels constantly face pressure to differentiate themselves and attract guests. This can result in significant marketing and operational expenses, which may erode profit margins and impact the overall financial performance of the investment.
• Changing Consumer Preferences: Today's guests are increasingly looking for unique and personalized experiences, seeking out boutique hotels, homestays, and alternative lodging options over traditional hotel chains. For hotel investors, keeping up with these shifting preferences can be challenging.
• Increased Regulations: As governments implement more stringent regulations to address issues such as safety, labor practices, environmental concerns, and zoning restrictions, hotel investors may face challenges in complying with new laws and standards. This could lead to additional costs for hotel owners, especially small businesses, as they try to meet these requirements while maintaining profitability.

Steps for How to Invest in Hotels

If you're ready to invest in hotels, here are the six simple steps you need to follow.

Define Your Investment Goals

The first step is to determine your financial objectives and timeline. Consider whether you're prioritizing capital appreciation, regular income, or a combination of both. You'll also want to decide whether to invest in established hotels or development projects.

Hotel segments like luxury, boutique, or budget hotels can offer various risks and returns. As part of your initial research, identify which types of hotels align with your investment strategy.

Conduct Market Research

Evaluate potential markets and locations for hotel investment. Consider factors like tourism growth, local demand, competitive landscape, and market trends. If you're not already familiar with the hotel industry, it's crucial to understand the industry.

Research market trends, occupancy rates, average daily rates, ROI, and popular tourist destinations. Look into both global and local markets to identify potential opportunities. Consider location-specific and industry-wide risks.

Set a Budget

Determine your budget for hotel investment, including acquisition costs, property improvements, operational expenses, and contingencies. This strategy varies widely by property type, location, condition, and investment goals.

Identify Suitable Properties

Search for hotels that align with your investment criteria, considering factors like location, size, condition, amenities, and growth potential. Perform due diligence to assess the property's legal, financial, and operational aspects.

This due diligence should include a thorough financial analysis evaluating key financial metrics like revenue per available room (RevPAR), average daily rate (ADR), and occupancy rates. Review the hotel's historical financial performance, operating costs, and profit margins, as well as evaluate the competitive landscape.

In addition, perform a comprehensive due diligence that examines the property's physical condition, reviews legal documents, and assesses the hotel's reputation and customer reviews. Additionally, conduct a valuation of the hotel, considering factors such as cash flow projections, asset value, and comparable sales in the market.

Working with a financial advisor or consultant experienced in hotel investments is essential to assist in the analysis and market research.

Secure Financing and Negotiate

Once you have selected suitable investment properties, secure financing options. Financing may involve working with commercial lenders, private investors, or your own capital. For this, consider different investors or mortgage lenders and negotiate favorable terms while engaging in purchase negotiations, including price and transaction terms.

Then, finalize the purchase price, draft contracts, and conduct the necessary legal and regulatory procedures to finalize the sale.

Establish a Business Plan

Develop a comprehensive business plan outlining your investment strategy, marketing approach, operational management, and financial projections. Set goals and metrics to monitor performance. At this stage, it's important to bring on a management team to assist you in running the hotel and establishing key performance metrics.

Effective management is crucial for maximizing revenue and ensuring the property's success. As part of business planning, evaluate different management options based on their track record, expertise, and cost structure. Consider also business development courses for additional support in building a powerful business plan and management team.

Reach Your Financial Goals by Investing in Hotels

Hotel investments can be a booming business, with higher ROI than average stock market returns. However, to attain sustainable returns and prevent failure, you must perform thorough due diligence on the property, location, and financial operations before purchasing and working with an experienced management team to build a sustainable business plan. Consider investing in hotels through hotel REITs with excellent returns for a lower-risk option.

Frequently Asked Questions