Real estate investing can be an incredibly lucrative and rewarding endeavor. However, there are many factors to consider before making a commitment, especially if you’re considering properties in the travel and hospitality markets.
Hotel properties have unique traits in their market demand and revenue structure, so it’s important to be as prepared as possible. To find out more, we asked members of the Forbes Real Estate Council what a prospective investor should consider when looking at hotel properties. Here are some important things to keep in mind during the process.
Members share a few things to remember when considering a hotel investment.
Photos courtesy of the individual members.
1. The Economy And Your Competition
Successful hotel investing depends on the tourist trade and the economy as it relates to people having money for travel. It’s important to know your market and the local impacts of vacation rentals and short-term rentals, which can act as your competition. – Beatrice de Jong, Open Listings (YC W15)
2. Zoning And Mixed-Use Building Opportunities
From the multitude of hotel investment options, choose the best. Consider zoning: M1 – light manufacturing and R – residential are excellent for hotels; others, not so much. Invest in mixed-use buildings, as they have higher potential than just hotels. Be equally open to a franchise hotel or independent brand hotel. Find the best equity partnership. – Elliot Bogod, Broadway Realty
3. Room Occupancy Rates
The first thing to learn are average occupancy rates in the area. Sixty to 65% is a solid rate in the states. A deep dive into market saturation and demand is also key and is easily ascertained through tourist bureaus, economic developers and the Chamber of Commerce. The average daily rate in similar rooms to those considered will dictate return on investment and determine amenities. – Kristin Geenty, The Geenty Group, Realtors
4. The Hotel’s Existing Management
A hotel can be a great investment if you know how to operate them. Do you know how? Well, then you need to pay attention to the flag (management) running the place. Make sure your agreement covers what is necessary to operate and grow occupancy and value. If you have a well-known brand, expect to pay a premium in the flag department. – Michael J. Polk, Polk Properties / Matrix Properties
5. Operating Performance And Valuation
Investors should consider that hotel performance and valuation can swing materially. They should appreciate that hotels are as much operating businesses as they are investments, and trade on a cap rate basis. Consequently, investors should consider their ability to improve operating performance to create value via targeted improvements, better management or marketing strategies. – Gary Beasley, Roofstock
6. Non-Room Revenue Potential
We’ve seen many hotel deals where non-room revenue potential greatly changed the economics of successful acquisitions at one year out. When valuing potential acquisitions, pay market for the room revenue, but seek out projects with low-hanging or underperforming revenue opportunities on ancillary services. – Colin Bogar, Property Passbook
7. Local Demand And Demographics
As a hotel investor, I need to have both parts of this equation: demand for rooms in the local area plus the demographic that would utilize the hotel’s property class. For example, an investor that’s purchasing a luxury hotel should seek a location that offers full-service amenities for the local population. – Ali Jamal, Stablegold Hospitality LLC
8. The Dynamic Nature Of Hotel Pricing
Hotels are a speculative asset class. Class B and C apartments perform in tough times because everyone needs a place to live. Vacations are a discretionary item on most people’s budget. In good times it outperforms many asset classes because of dynamic pricing, where the prices surge due to demand. Hotel investments have a place in a portfolio after more recession-proof assets are acquired first. – Lane Kawaoka, SimplePassiveCashflow.com