The real concept of the hotel has existed for hundreds of years. Since the days of stage coaches, overland exploration and urban growth, entrepreneurs around the world have dived into hotel ownership. They sensed the potential, economic opportunity, purpose, growing markets and prestige. In the modern hospitality industry, not too much has changed. So what are the reasons for hotel investment?
1. Financial Reasons for Hotel Investment
Financial returns rank high among reasons for hotel investment. That may be high income from the hotel’s operating cash flow, especially if they have long-term ownership intentions. Many independent hotels, motels and resorts prioritize getting cash returns – especially family run hotels with their ‘heirloom’ assets. On average, owners can achieve cashflow returns of 6% to 10% per year, or higher based on their hotel business plan.
Some owners favor returns via increasing the hotel’s capital value. They might have short or medium term holding period intentions. Naturally, by increasing the cash-flow level from operations along with land value increases, an owner can make substantial capital gains and grow personal equity. Hotel appreciation often mirrors inflation – 2% to 5% for many countries. Returns can be volatile, with bad years cycling 10% up and down.
As you can deduct depreciation for hotel real estate and property, tax efficiency is an important reason for hotel investment. Think of the range of physical property in a hotel – buildings, engineering infrastructure, furniture, fittings and equipment. Depreciation doesn’t reduce cash flow but it’s a non-cash expense and reduces taxable income.
Real estate assets (including hotels) are excellent inflation hedges – an important reason for hotel investment. Over long periods, hotel property often appreciates with inflation.
Attracting revenues fees is another reason for hotel investment.
- Development Fees
- Hotel Management
- Asset Management
By sourcing and managing a hotel acquisition deal from start-up stages into sustainable occupancy, owners can accrue development fees. Using a propco (property company) and opco (operating company) structure, owner-operators can charge and expense management fees. If you’re managing for others, you can earn asset management fees.
These revenue reasons for hotel investment are very important to hotel developers and hotel operators. They may acquire and renovate assets, then exit with a management (or franchise) contract attached to the sale.
2. Other Reasons for Hotel Investment
While not a direct financial reason for hotel investment, diversification of investments is important. Hotel asset performance is not correlated with share market indexes. Many investors practice risk management and demand risk reduction across their portfolios using real estate, including hotels. It’s a protection based reason for hotel investment.
As buying hotel real estate allows a fast and substantial deployment of your capital, it’s another reason for hotel investment. Hotel asset values can typically push into high 7, 8 and even 9 figure sums. You’d instantly shift the market and raise prices if investing such figures in share transactions. Owners also protect via currency diversification.
Hoteliers normally demand decision-making control of their asset. They can’t, at least normally, acquire that control when investing in shares or managed funds. Holding day-to-day control and accountability, especially for independent hoteliers and family run properties, is an advantageous reason for hotel ownership. It adds ‘asset accountability’.
3. Personal Reasons for Hotel & Resort Investment
Playing the Game
Some people love the thrill of the chase and the game of business. Many stockbrokers and day-traders match this persona. A different reason for hotel investment is the rush of pursuing deals, chasing hotel development options and achieving returns – especially in top-tier aspirationnal locations. Daily operations prove equally exciting for some hoteliers.
It’s the egocentric reason for hotel investment. Owners of a small boutique may enjoy entertaining friends. At the opposite scale, the international trophy assets are popular among super high net worth individuals, sheiks and family offices. They’re willing to pay supreme prices for prestigious hotels in landmark ‘high barrier to entry’ locations.
Like other asset classes, independent hotels across the world are run by small family businesses. It’s often 100% expected that the hotel will remain in the family. While keeping the asset maybe an emotional reason for hotel investment, ROI and other factors likely exist.
Reasons for Hotel Investment: Final Word
If you are private or institutional investor thinking of buying a hotel or resort, think about your reason for hotel investment. A combination of factors will likely exist. For hoteliers, it’s important to recognize your reason for hotel ownership – as that will drive your business plan, decision making, holding period objectives, hotel branding decisions and more.
As always, we’re interested to hear your thoughts on this topic. Let us know in the comments below!
More info: www.vojo-ventures.com
Patrick Landman @ Vojo