Hotel investments can provide an exciting opportunity for first-time property investors to buy into a great industry with excellent earning potential or for established property investors to diversify their portfolios and capitalize on all the service industry offers. In this article, you can learn about hotel investments, their various forms, advantages, and the best approaches to ensure long-term success with minimal risk.

Table of Contents:

What is the Hotel Industry?

It is important for anyone with plans for hotel investments to have a basic hotel meaning and understand the hotel industry. Broadly, hotels provide short-term accommodation for guests in exchange for money. Meanwhile, the hotel industry is involved in providing lodgings and associated services.

The hotel industry is a sub-division of both the tourism and hospitality industries. While the name suggests it is solely focused on hotels, most definitions of the hotel industry include all temporary guest lodgings, with examples including hostels, inns, serviced apartments, holiday cottages, and bed and breakfasts.

In the article “Hotel Industry: Everything You Need to Know About Hotels”, you can explore the hotel industry in greater depth, read definitions, learn hotel strategies, and build a picture of the industry’s value.

What Are Hotel Investments?

A hotel investor is a property investor who invests in hotels or properties that fall within the hotel industry. Hotel investors often seek investments that will deliver both short-term and long-term benefits.

Some hotel investors focus solely on their hotel investments, and hotels can generate income quickly, mainly if the hotel in question is strategically located and managed carefully. However, other investors turn to hotel investments to diversify a property portfolio.

The nature of hotel operations means that hotel investment will differ significantly from other property investments. Success and failure can depend heavily on the strategic decisions being made. Still, there is less dependency on market trends and sudden fluctuations than on many other property types, which can appeal to some.

Why Invest in Hotels?

Next, it is worth exploring some key reasons why hotel investments are worthwhile. On a basic level, a hotel can provide a long-term income, which can help expand wealth, diversify a business portfolio, and/or offer a reliable income for the foreseeable future beyond the typical retirement age.

One of the most exciting qualities hotels offer, which other property investments do not, is the ability to adjust room rates anytime. As demand within the hotel industry can hugely rely on local factors, hotel owners and investors can fully capitalize on periods of high demand and mitigate the damage caused by low-demand periods. Hotels can also be strategically targeted toward specific guest types.

In the article “Hotel Investors: Pros and Cons of Investing in Hotels”, you can explore the topic of hotel investments in more depth and learn about the pros and cons of investing in this area.

Types of Hotel Investments

Those interested in hotel investments will also need to know about the various types of investments available. Below, you can read about some of the main ways investments of this kind are categorized.

Hotel Real Estate Investment Trusts (REITs)

Investment trusts invest in real estate and return profits to company shareholders. A hotel real estate investment trust will invest in hotels to make a profit. However, while profits can be delivered through strategic buying and selling of hotels, most profit is generated through effective hotel management.

This means that hotel REITs will make the majority of their money by selling hotel rooms to guests and providing additional services. As with the wider hotel industry, most definitions will include hotels and other similar properties, including resorts, motels, and other guest lodgings. Successful hotel real estate investment trusts carefully select the hotels to invest in based on a clear business strategy.

Shares in a Hotel Operating Company

Another option for hotel investments involves purchasing shares in a publicly-trading hotel operating company. This is an excellent solution for investors looking for more modest investments in the hotel industry, or investors with a particular interest in investing in an established hotel brand.

This approach allows you to receive dividends for shares, analyze stock over time, and see how the stock performs while also exploring metrics like the price-to-earnings ratio and the dividend yield. It is also worth mentioning that shares in hotel operators trading publicly can be sold, providing the potential to make smart investments and a quick profit.

Crowdfunded Hotel Investments

Crowdfunding hotel investments allow real estate firms to purchase the property by dividing up shares into affordable amounts. From there, the proposal can be posted on a crowdfunding platform, where other investors can explore the various opportunities available and select the suitable crowdfunded hotel investment for their needs.

Crowdfunding provides more people with opportunities to invest in hotels and similar real estate. In many cases, investment opportunities can be found for as little as $10 or $10, with much larger investments also possible. This can be ideal for those hoping to limit the risk associated with hotel investments.

Purchasing Property or Building a New Hotel

Finally, the most substantial and least passive hotel investments are those where the investor buys a hotel outright. The entry requirements to investing in this way are significantly tougher to clear, and it is a high-risk, high-reward approach, which will ensure you can take full responsibility for managing the hotel.

This option can also be broadly separated into two main categories: hotel purchasing is an investment where you purchase a hotel from another owner. By contrast, construction is a hotel investment where you plan and execute a hotel construction project and then own the resulting property. Either way, this is the biggest financial commitment and will require an understanding hotel strategy, hotel technology, and major trends.

Measure Success for Hotel Investment Opportunities

Regardless of the type of hotel investments you are interested in, it will be worthwhile taking some time to measure the success of a hotel, and this requires using key performance indicators. Several KPIs are commonly used in the hotel industry to monitor performance over time.

Some great examples of this are the occupancy rate, which is a measure of the percentage of available rooms that are occupied, and revenue per available room (RevPAR), which is a measurement of the average amount of revenue generated by each room that is available, regardless of whether it is occupied or not.

In the article “The Most Used Revenue Management KPI’s for Hotels”, you can explore these and many other key performance indicators and learn how each of these metrics is calculated and used to analyze performance.

Video: Key Performance Indicators (KPIs) for Hotel Investments

Tips For Successful Hotel Investments

Several steps can be taken to increase the chances of a successful hotel investment. Below, you can access four key tips that can assist you in maximizing your return on investment.

1. Research the Environment and Location

A sensible first step when investing in a hotel or similar property is to research its location and surrounding environment. After all, you will want to invest in a hotel that will appeal to guests, has the right facilities and amenities nearby, and has the potential for future growth.

For example, demand for a hotel is likely to be higher if it is situated in a major city or tourist destination or close to an attraction or place of interest. Future growth potential, meanwhile, can be influenced by the presence of shops, restaurants, leisure facilities, sports and entertainment venues, and local transportation hubs.

Some hotels may be ideally situated to appeal to families, while others could be in areas that may attract many business travelers. You should also take the time to explore environmental issues, such as the range of temperatures experienced in the region, the amount of rainfall, and the size of the local population.

2. Research the Hotel’s Finances

For hotel investments based around investing in established properties, it is essential to research the financial health and performance of the hotel before making any commitments. Poor performance does not necessarily make a hotel a poor long-term investment, but long-term financial issues should be treated as a red flag.

It is also essential to look at profit margins and growth potential and find a hotel that fits your needs. Many investors will likely be better suited to purchasing a small hotel than a high-end resort, but this will not be true for everyone. For instance, it may be that a large hotel still has significant potential for further growth, or it could be the case that a larger hotel can be turned into a chain of successful hotels.

Beyond this, it is essential to understand some factors influencing demand levels. For instance, are specific events or circumstances leading to an uptick in guests? Are there specific demand drivers that can potentially be controlled? What factors negatively influence levels of demand? Can these be avoided?

3. Assess the Value of the Hotel

The amount you commit to hotel investments will depend entirely on the hotel’s value or the hotels you plan to invest in. This makes it vital to spend some time assessing the value of a hotel before taking further action.

In general, value is determined by the amount of money the hotel can generate, the potential scope for future improvements and the risk associated with acquiring or investing in the property. Estimating future cash flow and understanding any maintenance or technology needs can also be important.

There are many different hotel departments within a specific property, and each will have its financial results. Analyzing the value of a hotel can require understanding how each department is functioning.

4. Consider Employees and Management

Finally, hotel investment is not just about investing in the bricks and mortar of the hotel property. Hotel investors need to understand that they are investing in a business within the service industry, including all hotel employees and, in many cases, an established hotel management team.

The existing employees and hotel management will influence the overall value of a hotel and the quality of the hotel investment itself. After all, staff can make or break a hotel, and they have a huge bearing on what customers take away from their experience when staying in a property.

Hotel investors need to be wary of situations where a hotel appears on paper to be a good investment but where the existing team of employees and managers are a detriment to performance. Likewise, there can also be situations where an investment is much better than it first appears because the existing staff is an excellent performer.

Hotel Investments and Revenue Management

Anyone interested in hotel investments should also try to understand hotel revenue management. This discipline draws upon data analytics to forecast demand levels and make strategic pricing and distribution adjustments to maximize revenue and minimize costs.

In the article “Revenue Management; the Basics of Revenue Management Explained!” you can explore what revenue management means, how it differs from yield management, why forecasting is so important and more.

Hotel Investments and Optimizing a Revenue Management Strategy

Aside from understanding what hotel revenue management is, hotel investors need to know what effective revenue management looks like. For example, the best strategies will focus on creating a revenue management culture, paying attention to the latest hotel trends and customer habits, and embracing helpful technology.

In the “10 Revenue Management Tips for Hotels” article, you can read about ten of the best revenue management approaches to optimize your strategy and improve your hotel’s financial outcomes.

Hotel investments can take many forms, from crowdfunding opportunities to the outright acquisition of an existing hotel. Regardless, it is essential for investors to understand the benefits and potential drawbacks associated with investments of this kind and to take the proper steps to ensure their investment succeeds.

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This article is written by:

Martijn Barten

Hi, I am Martijn Barten, founder of Revfine.com. With 20 years of experience in the hospitality industry, I specialize in optimizing revenue by combining revenue management with marketing strategies. I have successfully developed, implemented, and managed revenue management and marketing strategies for individual properties and multi-property portfolios.