How to Invest in Hotels - For Real Estate Investors

 Hotels have been around for a long time and will likely continue to be around. Even with all the Airbnb / short-term rental hype, there is still plenty of demand to stay at a hotel when traveling / vacationing. Below is some insight into what it takes to invest in hotels and a bit of history. I think knowing the history of an industry is important to understanding it and understanding something you are investing in is important.

If you are looking for an underwriting template, check out this hotel deal analyzer.

There are several ways to invest in hotels, including:

  • Direct ownership: Purchase a hotel property outright and manage it yourself, or hire a management company to operate it on your behalf.
  • REITs: Invest in a Real Estate Investment Trust (REIT) that specializes in hotel properties. REITs allow investors to buy shares in a trust that owns and manages a portfolio of properties.
  • Hotel funds: Invest in a hotel-focused fund, which pools money from multiple investors to purchase and manage hotel properties. These will typically have a waterfall return structure.
  • Hotel-related stocks: Invest in publicly traded companies that own and operate hotels, such as Marriott International, Hilton Worldwide Holdings, or InterContinental Hotels Group.

Before investing, it's important to do your own research and consult with a financial advisor to determine the best investment strategy for your individual needs and risk tolerance.

Evaluating a Hotel for Investment

  • Location: The hotel's location is one of the most important factors to consider. Look for hotels in popular tourist destinations, near major transportation hubs, or in areas with strong economic growth.
  • Market demand: Research the local market to understand the demand for hotel rooms. Look at the occupancy rate, the average daily rate (ADR), and the revenue per available room (RevPAR).
  • Property condition: Conduct a thorough physical inspection of the property to ensure that it is well-maintained and in good condition. Look for any potential repairs or renovations that may be needed and consider the costs associated with them.
  • Operating expenses: Review the hotel's financial statements to understand the property's operating expenses. This will give you a better understanding of the property's profitability and cash flow.
  • Management: Investigate the hotel's management team to ensure that they are experienced and professional. Look for a management team with a track record of successfully operating hotels.
  • Competition: Understand the competitive landscape of the area. Look at the number of competitors, their occupancy rates, and their pricing strategies.
  • Financials: Review the hotel's financial statements, including its income statement, balance sheet, and cash flow statement. This will give you an idea of the property's profitability, debt level and liquidity.
  • Legal and regulatory compliance: Ensure that the hotel is in compliance with all relevant laws, regulations, and zoning requirements.

History of the Hotel Industry

The hotel industry has a long and storied history that dates back to ancient times. The earliest hotels were inns, which provided travelers with a place to rest and eat on their journeys. These inns were typically located along major trade routes and were often run by the government.

In the 18th century, the Industrial Revolution led to an increase in travel for both leisure and business. This led to the development of privately-owned hotels, which were designed to cater to a more affluent clientele. These early hotels were typically located in urban areas and offered amenities such as private bathrooms and room service.

The 19th century saw the rise of grand hotels, which were often built in popular tourist destinations and offered luxurious amenities such as ballrooms, spas, and salons. These hotels were popular among the upper classes and were often used as venues for social events.

The 20th century saw the rise of chain hotels, which were owned and operated by large corporations. These hotels standardized the amenities and services offered and made it possible for travelers to have a consistent experience regardless of where they stayed. The advent of air travel in the mid-20th century further increased the popularity of hotels, as more people were able to travel further and more frequently.

The hotel industry has continued to evolve and adapt to changing consumer demand and technological advancements. Today, hotels are available in a wide variety of price points, styles, and locations, catering to a diverse range of travelers.

Best Hotels to Invest In

The best hotels to invest in depend on your individual investment goals and risk tolerance. Some factors to consider when evaluating a hotel investment include:

  • Location: Hotels in popular tourist destinations, such as major cities or near popular attractions, are likely to have higher occupancy rates and generate more revenue.
  • Brand: Investing in hotels that are part of a well-known and reputable chain can provide a level of security and a strong reputation to attract customers.
  • Occupancy rates: Look for hotels with a history of high occupancy rates, as this can indicate a strong demand for rooms.
  • Revenue per available room (RevPAR): This metric is a measure of a hotel's financial performance and is calculated by dividing total room revenue by the number of available rooms.
  • Management: Investing in hotels with experienced and professional management teams can ensure that the property is well-maintained and operated efficiently.
  • Investment vehicle: As mentioned earlier, there are different ways to invest in hotels, it's important to evaluate the investment vehicle and the risk/return profile associated with it.

It's also important to do your own research and consult with a financial advisor to determine the best investment strategy for your individual needs and risk tolerance.