If you want to get into real estate, investing in hotels is one of the options you may want to consider. Unlike most investment options in real estate, the hotel business involves more day-to-day operations. It is also not as straightforward as investing in apartments or commercial and residential rentals. In this article, we will discuss everything you may need to know about before investing in hotels.
Our discussion will include the benefits and risks of hotel investments. We shall also look at a few tips for investing in hotel real-estate. Let’s jump right in!
When compared to other real estate properties, hotels have the potential to generate more revenue if you can maintain a relatively good level of occupancy throughout the year. Payments for a hotel room or suite are charged per day, making it have the potential of generating 2 to 5 times more revenue than a similarly sized apartment.
In addition to accommodation, hotel investors can offer other services to their clients. Such services may include a gym and other fitness services, restaurants, bars, and more. These side businesses can generate extra revenue on top of what the hotel earns from the accommodation income.
Just like most real estate properties, hotel investors also have several tax deductions that they can take advantage of. Some of these deductions may include depreciation, maintenance costs, and more. At the end of the financial year, these deductions can significantly lower the annual taxes the investor has to pay.
With apartments and other real estate properties, their location has a huge impact on their rental income. With hotels, the target customers are usually not the people within that area. A hotel can thrive in any area as long it has good infrastructure. That means you can buy a property in a relatively cheap neighborhood and turn it into a profitable hotel business.
Hotels are about giving your clients the best experience every time they check-in. This gives the investor an opportunity to create a brand that they can market to more people. You can create brand loyalty with a hotel, which is usually hard with other real estate properties. Hotel clients are also more likely to write a review about their experience compared to apartment tenants.
The hotel business is seasonal since most of the residents usually come during specific times of the year. For instance, most hotels in Europe and the USA expect more clients during the summer as compared to other seasons. The vacancy levels during the winter, fall, and spring are usually higher. This creates unstable income throughout the year, which is usually different with other properties, such as commercial rentals.
Hotels have certain fixed operating expenses like paying staff and cleaning the facility, which doesn’t depend on whether they are occupied or not. Meeting these expenses might become harder during the off-season because revenue is usually low during these periods. Some hotels are forced to regularly lay off some workers during these seasons in order to cut expenses.
Most hotels usually have bars, which automatically creates the risk of alcohol-related damage by drunk clients. It should be noted that some of these damages are usually discovered when the clients have already checked out, so it is practically impossible to make them accountable for their actions. This can create extra expenses that the hotel will usually have to incur.
Hotels get different clients every day, which increases the risk of property damage. Remember, most of these clients will check out without reporting the damages. This creates extra expenses that the hotel investor may not have planned for ahead of time. Some of the damages are gradual, making it hard to make a single client account for them even if they are noticed before they check out.
During tough economic times like the recession, travel is one of the expenses that most people can afford to put off. Remember, the hotel business mainly relies on travelers. For instance, most hotels were totally closed during the covid19 pandemic due the restricted travel in almost every country. Other property investments, such as homes, were not as affected as hotels even during the pandemic.
The way the hotel is managed can significantly affect the revenue it generates. A beautiful hotel that is badly managed will likely generate losses. So, hotel investors have the task of hiring a good team to manage the property and ensure clients get the best experience. Your team’s goal should be to ensure that every client who checks in gets the best experience.
With hotels, you have only one day or, at most, a few days to impress your customers. Any slight mistake or fault in operations could lead to a bad review. Bad reviews can hurt your chances of getting new clients in the future. The funny thing is that most clients who write these bad reviews don’t even report any issues to the management before they check out, making it pretty hard to prevent them.
This will enable you to put in place an environment that meets their needs. While setting up the hotel, you need to first decide the class of people you want to target and make sure your services are geared towards fulfilling their needs. The pricing of the products in the other side businesses like the restaurants and the bars should be within your target customers’ budget.
Technology is always changing, so hotels must keep up with the pace. For instance, some clients today consider smart home capabilities before choosing which hotel to spend the night in. As a hotel investor, you need to ensure that the technologies in your facilities are updated as frequently as possible.
With platforms like Instagram, Facebook, and Twitter, you can easily show off your facilities and services to potential customers. You should also encourage your previous customers to leave positive reviews on platforms like Google. However, it is important to ensure the customer is satisfied with the experience before you request them to write a positive review.
You need to know why your customers choose you over other facilities in your class. This information can help you improve your services and beat your competition. Demand drivers usually change over time, so you need to frequently review them.
Those are some of the basics that we think will guide you as you get into hotel investment. Your area of focus should be finding the best solutions for dealing with the risks associated with investing in the hotel business. This will increase your chances of building a sustainable hotel investment.