Hotels come under the hospitality industry and in the past two years we have seen how that’s suffered under the impact of the pandemic and the resulting economic crisis. However, the economy will become more stable, and we will slowly return to something like normal times. Revenue per available hotel room may not return to pre-pandemic levels until 2023 according to one report. But if you’re looking to invest in real estate, and also wanting to diversify your portfolio, you should now consider investing in hotels in good time for that return to normal. The hotel investment outlook is good.
The reason is that the hospitality industry in general is a great investment option for generating income and building long-term wealth. People constantly book overnight stays and holidays. But you should carefully look at both the pros and cons of investing in hotel rooms.
Let’s see why.
Investing in Hotels: the Pros
The number one reason that most people invest in a hotel is the high yield return that’s associated with this type of real estate investment. The return mostly comes from the operating cash flow. There can be drawbacks to this fact (see below). So it’s important to have an experienced management team in place to help balance the risk that comes from operating in this hospitality industry.
Owning a hotel gives you the advantage of possibly reducing your tax burden. The top three reasons for this are depreciation, equity growth, and tax-deferred exchange in business real estate. Depreciation in hotels reduces taxable income. Other reasons that equity growth and tax deferred exchange are possible in hotels is because of investment recapitalization. This results from income derived from various physical properties inside the hotel.
Hotels are a great avenue for investors looking to diversify their real estate investment portfolio. As we already know, diversification of investments is important. It limits your risks. Besides, for most investors, investing in hotels is not their first thought, so there are relatively low barriers to entry. This is a positive fact to consider.
The core source of revenue from hotels is through the nightly stays and day-to-day operations. However, one benefit of owning hotels is the flexibility to offer value-adds to increase your income. For example, you might
- buy an older hotel and do renovations to improve quality,
- alter the way you operate to increase customer loyalty and their ensuing recommendations, or
- refine some of your major sales and service contracts.
Investing in Hotels: Possible Cons
Hotel investment differs from other traditional real estate investments such as homes, office space, and multifamily apartments. This is because the way they generate income for you is different. Some of these variations might prove to be a con for you, so you should consider these points:
The economy and your competitors
The success of your hotel venture is highly dependent on the economy. Although workers might need to stop over, in general most other people need spare money to indulge in holiday travel. In addition, your competitors will also have an impact on how many guests you receive.
The existing management of the hotel is key if you have no prior experience to operating a hotel. Look for hotels with an excellent management team and low staff turnover. Poorly operated hotels mean poor cash flow and this will affect your ROI. If you prefer a more passive investment, a hotel might be a con.
Do your due diligence on what drives up demand in relation to your intended hotel location, such as proximity to key venues like hospitals, offices, etc. Lack of demand or a degenerating neighborhood will be a con.
Whether you’re investing in an existing or a new hotel, consider the hotel’s branding. Who are they catering for or intending to serve? And is that feasible in your view? Consider the occupancy rate in different seasons, and whether it will be a full service or limited service, etc. If you’re not satisfied the brand matches your expectations, this is a definite con for you.
Ways to Invest in Hotels
There are various ways you can go about investing in your first hotel. One recommended way is to use a real estate investment partner.
Partner with a Real Estate Investment Group (REIG)
We would say that, of course! But here at Realty Capital Partners, as a real estate investment group (REIG), we make it our business to get you the best real estate investment and create value for your money. Contact us now if you’d like to take this route.
However, once you’ve identified your goals within your proposed capital spend, here are some other ways you can start investing in hotels.
Buy a hotel property
This option requires a significant amount of capital upfront because hotels are costly. On the other hand, hotels do come in different sizes, affordability, and styles. So, depending on your needs, you may be able to find a hotel property that’s right for you and aligns with your budget.
Crowdfund a hotel investment
This means you invest in a hotel by getting a number of people, mostly individual investors, to contribute the required capital in exchange for an equity interest in the project. To become a hotel owner in this (relatively new) way, you need to access different crowdfunding platforms as an entrepreneur or investor. You will then attract those who share the same goal as you. Be sure to do enough research before choosing this route.
Invest in hotel stocks
An ideal way to invest in a hotel is by buying common equity in hotel stocks of the hotel of your choice, whose performance you know. In this way, you acquire part of the ownership of the hotel. The more stocks you buy, the higher the percentage of your ownership. This is the easiest way to start investing in hotels – especially if you don’t want to deal with the operational side of the business.
Invest in a hotel REIT
One way you can invest in various hotels is through buying a share in a hospitality Real Estate Investment Trust (REIT) that holds shares in various hotels. You’re then able to diversify your real estate portfolio as well as gain attractive dividend yields.
There’s a lot more to consider and find out about investing, especially when you’re just starting to consider investing in hotels. For that reason, taking the plunge can feel like a major event! But owning a hotel or having access via part ownership brings a different reward from that of investing in an office or housing complex. It’s been called “experiencing it.”
If you’d like to consult about how to take your first step into hotel investment, we’d be delighted to become your private real estate investment partner. We have a proven track record of creating value for our clients and can help you find your first investment hotel to match your investment needs. Contact us today!