If you’ve got experience in the hospitality industry or are studying hospitality, you might be considering investing in hotels.
This can be a lucrative and interesting route to take, but there is a great deal that you should know before making investments in the hotel industry. This includes the different kinds of hotels there are, how to pick solid investments and information about hotel management.
In this article, we will go over some of the main things to consider before you start investing in hotels or get involved with the hotel investment industry.
This includes types of hospitality financing and hotel asset management.
Introduction to hotel investment
If you’re new to the idea of hotel investments, it can be important to look at the basics, including a definition and the reasons why people invest in hotels.
Here’s our introduction to the subject for anyone who isn’t yet familiar with it:
Definition of hotel investment
Hotel investment is the process of investing in hotel property or a hotel business.
However, this can be done in a number of different ways. For example:
- Shares: You could purchase shares in a hotel operations company, such as a large hotel group. There are lots of hotel management companies that welcome investors.
- Hotel real estate investment trusts (Hotel REITs): In this case, people will group together to form Hotel REITs that will invest in real estate assets such as a hotel. This group of hotel investors will often include real estate investors and other experiences investors.
- Purchasing or building a hotel: If you have access to a significant pool of investment capital, you could look at owning a hotel outright, either through buying an existing hotel or building one from scratch. Hotel ownership lets you have a say in everything that the hotel does. This type of investment in hotel is usually done with independent hotels rather than chains.
While buying shares will only give you limited control over a hotel, if you intend to purchase a hotel then you will often get the best returns by taking an active part in the management of your hotel.
This means that it is important to have a thorough knowledge of the operational side of the hospitality industry and how to manage this type of business.
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The benefits of investing in hotels
There are many benefits to investing in hotels, such as:
- Providing a long-term income
- Diversifying your portfolio
- Being a hands-on investor if you enjoy the management side.
Of course, there are also risks with hotel investment, which is why it’s so important to have good knowledge of the industry.
Understanding the hotel industry
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Whether you intend to take an active role in the management of your hotel investment – or not – it is important to become familiar with the hotel investment industry as well as hotels in general before starting your investment in hotel properties.
Overview of the hotel industry
There is a wide range of services that hotels can offer.
The hotel business includes renting rooms, hosting conferences and events, serving food and drink, and offering optional services like spa treatments, laundry, or even butlers.
These all contribute to a hotel’s income, so a hotel investor should consider all of these, not just room rates.
The outgoings are mostly comprised of building costs, staff costs, and consumables such as cleaning supplies.
Types of hotels and their characteristics
Some of the most common types of hotels where you can find hotel investment opportunities are:
- Chain hotels: Multiple locations, using name recognition to encourage customers
- Resorts: Hotels with a wider range of additional options including entertainment, shopping, and restaurants in tempting locations
- Boutique hotels: Smaller hotels that often have an emphasis on distinctive design and service
- Extended stay hotels: Hotels with additional amenities like kitchens, designed for longer stays.
All of these can provide good real estate investment opportunities.
Market trends and opportunities
One of the main things to consider about the hotel industry is that there are often significant fluctuations in demand for services.
For example, many hotels will have quieter times in winter and busier seasons in summer. There might also be busier times during special events.
This means that your income from a hotel will vary a lot from month to month, and hotels can use busy times to mitigate losses during quiet times.
You will often find this fluctuation is higher for independent hotels, but these can still be good investments as long as their hotel asset management is good.
Factors to consider when investing in hotels
Ready to invest as a real estate investor? Or want ot look into hospitality financing? Here are some of the important aspects to consider when looking at hotel investment opportunities.
Location and demographics
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Depending on the location and target audience of the hotel, you might be looking at different levels of income, but also different outgoings.
For example, a hostel for younger people might have lower running costs but also brings in more modest room revenue and doesn’t often offer extra services to get additional income.
You also need to consider the general prices of the nearby area and the amount that people are likely to spend, as with any other real estate investment opportunities.
Market demand and supply
You should always consider the demand and supply in the hotel’s area.
Small towns can support fewer hotels than large cities or popular holiday destinations, but many popular destinations are oversaturated and there are too many hotels for newcomers to make a decent profit.
Competition and market positioning
If there are too many other hotels in the area, this might affect a hotel’s revenue. However, you should also consider the price point and market position.
If you’re investing in a luxury hotel where all other hotels nearby are budget options, this could still provide good returns.
Property characteristics and amenities
All hotels need to have a distinctive selling point to ensure long-term income.
This could be characteristics such as a certain style or location, or it could be additional amenities the hotel offers.
If a hotel does not offer anything different from other local options, this could limit your income, meaning that unique hotels are often better real estate assets.
Management and operations
It’s always worth looking at how hotels are managed as you might want to choose an establishment where you can have a more hands-on role.
Or you might want to pick a place where experienced management staff is already in situ.
Hotel management strategies and techniques
If you’re looking at investing in a hotel and managing it, there are plenty of things to consider on the management side as well, especially if you are looking at hotel ownership.
Alternatively, you could look at hotel management companies for your hotel property investment.
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Hotel revenue management strategies are needed as one of the key things to ensure a hotel makes a profit.
This includes trying to make sure that you sell each room for the best price possible, as well as having additional services that make the maximum profit with the least outgoings.
Marketing and sales
Marketing is vital, especially in this day and age, but you need to ensure that you are using the correct channels to market the hotel, with the highest cost efficiency possible.
This means making sure that the right people see the right adverts at the right times.
Human resource management
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To manage a hotel properly, you need to make sure that you get the right employees for the right roles, including people with the correct expertise in managing individual sections.
Property maintenance and upkeep
Upkeep is vital to make sure that the hotel continues to attract customers, but it can be expensive and handling upkeep badly can mean that rooms or whole floors are unavailable, which should be avoided.
Cost control and budgeting
You need to try to reduce costs to ensure the best profits possible. This can be a challenging task, especially during low seasons, but this can be overcome with careful budgeting.
Building a successful hotel investment portfolio
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If you are looking to invest in one or more hotels, some good steps include the following.
Diversification and risk management
Having a diverse portfolio with multiple different businesses means that you are protected from the risk of one investment dropping in value or producing bad returns.
This could mean investing in different hotels in different areas, or hotels that are at different positions in the market.
Due diligence and research
You should always thoroughly research any business before you invest. This includes looking at past results and projected future returns.
Hotel investors may not be able to get all of this information until you register an interest in investing, but you should always take the time to properly review it.
Professional advisors and consultants
If you are unsure what to invest in, getting advice from a professional consultant can help you avoid large risks. Though there is an upfront cost involved with getting professional advice, it could save you from significant losses in the future.
Monitoring and evaluating performance
Once you’ve chosen a business to invest in, you still need to check its performance regularly. If there are any unexpected dips or problems, you need to be aware of them as soon as possible to rectify them.
Monitoring performance can also help show you additional places where you could improve the revenue.
Continual improvement and adaptation
Businesses are always trying to improve and adapt to an ever-changing customer environment. This means that you will have to ensure your hotel investments adapt and improve as well in order to keep their market share.
With the right improvements, you can even look at boosting a hotel’s market share, which of course will increase the value of your investment. This could involve changing what the hotel offers, changing the marketing, and more.
Investing in hotels: summary
Investing in hotels can be a lucrative field for people who are familiar with the hospitality business. However, you should always make sure that you conduct proper research before you choose an investment.
There are many different hotel types and a range of factors to consider, whether you want to start hotel investing through an investment group or hotel buying to have a business you can manage yourself.
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