When investors think about property investments, especially commercial real estate, hotels are likely not the first asset class that comes to mind. While there are other potentially lucrative forms of property investment available, some assets, such as multi-family buildings, may require a long-term commitment in order to provide substantial income. This does not account for the possibility of market fluctuations and other risks associated with long-term investments. Those wanting shorter-term investments may consider hotels.
Many investors may not realize that choosing to invest in the hotel industry can be a potentially advantageous and profitable decision. There are numerous options available that may help diversify your portfolio, all while potentially making a profit for you. Whether you choose to invest through a private equity firm, REIT, or publicly traded stock, there are some important factors to consider before you begin your hotel investment journey.
The hospitality industry, like many others, has been in the process of recovery since the beginning of the pandemic in 2020. Due to economic uncertainty, many banks withdrew finances from this sector, allowing private investors to step in to fill many of the gaps left behind by the banks’ withdrawals.
All commercial real estate investments are subject to shifts in supply and demand, which may have a noticeable impact on net operating income (NOI), profitability and yield. Hospitality is one of a handful of property types where these shifts are felt almost immediately. Other asset classes, such as office, tend to utilize medium to long-term leases to deliver stable and targetable income streams. Tenants commit to occupying a space and paying a set rate for three to ten years, which allows income to remain relatively stable.
Meanwhile, hotels have no such agreements. Guests may be subjected to a non-refundable period as the booking date approaches, but that is not always a given. In exchange for a customer base that constantly changes, hotels have the ability to adjust room rates daily based on the market. An upside to this flexibility is that hotels can react more quickly to heightened demand and improving economic conditions. This means they can increase room rates as quickly as the market allows. This fluidity goes both ways, however, as hotels tend to be more susceptible to operating fluctuations when compared to other asset classes.
Still, for many investors, hotels have proven to be profitable assets to include in their portfolio. Due to their aforementioned adaptability, there are ample opportunities for savvy investors to grow hotel revenue stream through changes in how they manage the asset and its operations, along with renovations. There are also opportunities for negotiations regarding the price of supplies and wages.
When income is high, investors may use these advantages to include value-adds to the property. They can potentially increase the value of their hotel through upgraded amenities, renovations, or new features meant to benefit guests. Hotel operators may also be able to improve asset performance by repositioning efforts or making capital improvements more quickly than they might be able to in other asset classes.
These are only some of the reasons to invest in hotels that may offer profitable investment opportunities. Depending on an individual investor’s needs, they may find other aspects of the hospitality business appealing and choose to invest.
Hotels are typically defined by the amenities and services that they offer. Another key distinction included in this is the difference between flags and operating brands, such as the Hampton Inn & Suites and the brand that owns it, Hilton. Other brands include Marriott, Hyatt, Wyndham and IHG among others.
The four most common hotel types include:
Full Service: This type is loaded with guest services and amenities, such as on-site restaurants, banquet and meeting rooms, concierge service, spas, and retail shops. Some examples include properties such as Hyatt, Ritz-Carlton, St. Regis, and Westin. For full-service hotels, the success of the property is highly dependent on the quality of onsite amenities and services, especially food and beverage revenues.
Select Service: These properties are a step down in terms of service and amenities, but still tend to offer meeting rooms, fitness centers, and swimming pools. The operations of these assets also tend to be more predictable than full-service hotels. Examples include properties such as Hampton Inn & Suites, Courtyard by Marriott, and Holiday Inn Express.
Budget: These are basic, “no frills” hotels. They may offer one or two guest services or amenities, but they tend to focus on providing basic necessities at a low rate. Examples include Travelodge, Days Inn, and Super 8, all of which fall under parent company Wyndham Hotel Group.
Extended Stay Hotels: These are usually aimed at business travelers on extended assignments or others in need of temporary housing. As a result, they tend to offer discounts for stays of five days or more and provide home-like features that are typically unavailable in standard hotels, such as self-serve laundry facilities and kitchens. While the quality and available amenities and services tend to vary, most of this class specialize in the mid-range to budget segments of the market. Days Inn by Wyndham, Extended Stay America, and Hilton’s Homewood Suites are all examples within this category.
These are only some of the types of hotels that exist. Boutique, casino, and resort-style hotels also offer opportunities for investors looking to enter the hospitality industry.
The hotel industry has its own set of unique, industry-standard metrics to track performance and growth. These include average daily rates (ADR) and revenue per available room (RevPAR). This data can be used as benchmarks to gauge performance relative to competitors that are similar in size, characteristics, and location.
ADR is the measure of the average rate paid for rooms sold. It is calculated by dividing room revenue by the number of rooms sold during a given period. Meanwhile, RevPAR is defined as a metric that is the total room revenue divided by the total number of available rooms. It is affected by the number of unoccupied available rooms, unlike ADR which only shows the average rate of rooms actually sold.
To illustrate this, our example hotel has 100 rooms and an average occupancy rate of 90%. These numbers do not necessarily reflect the current state of the hotel market, but for the sake of demonstrating how to calculate RevPAR, they will suffice. If the average cost of one of those rooms is $150 per night, then the RevPAR is 0.9 x 150 = $135. This metric can be measured daily, monthly, quarterly, and yearly.
On their own, these numbers aren’t necessarily helpful, but when used to compare against previous metrics and the competitive set of hotels, an investor can get a better understanding for the performance and competitiveness of their property over a defined period.
The two key factors that fuel the demand for hotel rooms are tourism and business travel. Every hotel has its own variety of specific demand drivers that reflect their local market, such as colleges, events, and tourist attractions. Tourism tends to drive traffic during weekends or all week during high season periods. Hotels specifically suited for seasonal markets tend to fare well during those specific periods. Examples of this include winter ski resorts and hotels by the beach during the summer.
Business travel tends to affect occupancy rates from Sunday through Thursday, so hotels with amenities such as meeting and event spaces might be better positioned to appeal to the business traveler.
There are also hotels that act as destinations on their own, either for business or tourist travel, such as hotels attached to theme parks, water parks, casinos, or convention centers. Hotels can also capitalize on their proximity to transportation hubs, such as airports or major highways and interstates.
Once you’ve decided you want to invest in hotels, you have a variety of ways you can venture into the sector. This allows investors the opportunity to find the right fit for their needs and financial goals. Another advantage is that hotels are in nearly in every market, making it easier for potential investors to find what they are looking for.
Options available to those interested in hotel investments include:
Buy A Hotel Property: Out of all the options, this one tends to require the most capital upfront because hotels can be costly. On the other hand, hotels do come in different sizes, costs, and property types, so you may find one that fits your needs and budget. Investors may then be responsible for operations or setting up an hotel management team to undertake the daily operations of the business, however investors will receive all the potential cash flow and appreciation as well.
Invest In Hotel Stocks: Another way to invest in hotels is buying common equity in hotel stocks for the hospitality brand of your choice. This gives you partial ownership of the company and its holdings.
This way is mostly popular for those who do not want to be involved in the operational side of the investment and want liquidity. What common stockholders often do is determine the board of directors or vote for any mergers. Investors using this method should keep in mind that, in the event of company liquidation, they are often paid out last.
Work With A Hotel REIT or Private Equity Firm: If stocks aren’t appealing, you might consider investing in hotel properties through buying a share in a hospitality REIT or private equity fund that offers shares in various hotels. You can then diversify your real estate portfolio as well as gain potential yield and appreciation while not being responsible for the operations. For REITs, these often resemble mutual funds and are purchased much the same way as any investor would buy and sell mutual funds, stocks or bonds. Liquidity of REITs depends on the structure and can range from being very liquid to have lock up periods and restricted sale timelines.
Private equity firms allow investors to pool their capital into a fund with the goal of purchasing or investing in one-to-many hotels. Firms do this through specific funds they set up, each with their own objectives, strategies, and projected holding periods. Investors can choose the fund that best suits their own investment goals.
Avistone is a private equity firm that specializes in the acquisition and management of hotel and industrial properties. We purchase hotels in markets where brand selection, renovation and alignment with qualified operators can lead to increasing yield, inflation protection and capital appreciation.
Since our founding in 2013, we have acquired and managed 27 industrial and hospitality properties, representing more than 4.1 million square feet of space in California, Georgie, Ohio, Virginia, Texas and Florida. We have a history of success and pride ourselves on our goal to deliver yield, inflation protection and long-term capital appreciation to our clients.
Learn more about our offerings by contacting us through the form on our website or calling our office. See how your hard-earned money can work even harder for you today!