Hotels are a cornerstone of the tourism industry, and they’ve played a major role in our economy for centuries. Their popularity only seems to be growing, as more and more travelers turn to them for accommodations. If you want to invest in the hotel industry, there are a few things you need to know.
The Different Types of Investing
Hotel investments can be broken down into two categories: primary and secondary. Primary investments involve buying a property from an owner and are typically riskier, as the property may not be performing as expected. Secondary hotel investments involve purchasing shares in a publicly traded company that owns or operates a hotel, making them less risky but also offering potential returns that can be higher than those of primary investments.
There are a number of different factors to consider when making a decision about which type of investment to make in this industry. Some important considerations include:
- The market conditions for hotels
- The region in which the property is located
- The quality of the property
- The financial stability of the company operating the hotel
Primary investors should carefully consider the market conditions before investing, as there is always risk associated with buying into a hot market and potentially overpaying for a property. Regional location is also important, as properties located in popular tourist destinations may experience greater demand and be more expensive than properties located in less traveled areas. The quality of the property is also something to consider, as high-quality facilities typically offer better service and amenities than lower-quality properties. Lastly, financial stability is important when investing in the hospitality industry, since companies that are struggling may have difficulty maintaining their properties or may not have enough money left to make significant repairs.
Understand the Industry
Investing in the hotel industry can be a lucrative venture, but it’s important to understand the different types of hotels and their respective strengths and weaknesses.
There are three main types of hotels: mainstream, luxury, and boutique. Mainstream facilities are typically less expensive than luxury or boutique hotels but offer similar amenities and services. Luxury hotels are usually more expensive than mainstream facilities and offer a wider range of amenities, including more luxurious rooms and suites. Boutique hotels are unique in that they focus on providing high-quality customer service and unique experiences like boutique hotels in Mexico.
The key to making smart investments is to know which type of business is best for your needs. For example, if you’re only looking for a place to sleep while traveling, a mainstream facility will be perfect. If you’re looking for a luxurious vacation with plenty of activities available, however, a luxury hotel may be better suited. And if you’re looking for something unique that you can’t find anywhere else, a boutique hotel is likely your best option.
Whatever type of facility you choose, make sure to do your research before investing in one. There are many variables to consider, including the location, the rates offered, and the amenities available. By understanding these factors carefully, you can make an informed decision about whether or not to invest in a particular brand or type of hotel.
What are the pros?
- Easy to get started: Many people are interested in hotel investing, so there is plenty of competition for investment dollars.
- Potential for high returns: Historically, hotels have generated high returns for investors. In some cases, returns on invested capital (ROIC) can exceed 30%.
- Limited exposure to market volatility: While stock markets are subject to periodic volatility, hotel stocks tend to be less volatile than other investments. This makes investments relatively safe and comfortable during times of economic turmoil.
- Flexible investment strategy: Many investors choose to invest small amounts of money in a variety of hotels around the country or world in order to gain broad diversification benefits and limit their risk exposure as much as possible.
What are the cons?
- Risks associated with investing in any type of property: Hotel investments are no exception, and like all types of investments, there are risks associated with them. These risks can be both financial (such as losing your entire investment) and operational (such as having to shut down a hotel because of poor performance).
- Long-term commitment: It can be a long-term investment, and it is important to consider the time frame in which you plan to make your investment. If you are looking to invest for more than a few years, it may be worth considering other types of investments that provide more immediate returns.
- Limited liquidity: While many hotels have been bought and sold over the years, some do not trade on major exchanges, limiting investors’ ability to sell their holdings quickly in times of market volatility or need cash. This can lead to longer periods of holding an investment before realizing any returns.
How to Calculate Your Return on Investment (ROI)
Calculate the initial outlay required to purchase and renovate the property. This includes both the purchase price and any renovations necessary to bring it up to current standards.
Factor in expected income from guests and other sources of revenue over the life of the property. This includes taxes, room rates, and fees charged by operators.
Compare this figure with your original investment plus any future income projections to determine whether a positive return has been achieved. If not, look for ways to increase revenue or reduce expenses in order to boost profitability.
There is no one-size-fits-all answer when it comes to calculating your return on investment for hotel investments; however, these three general principles can be used as a starting point in determining an overall ROI for any hospitality business. When making any such decision, always remember that there are many factors involved including location, size, type of property being bought or leased, projected income levels, and ongoing expenses
Conclusion
Hotel investments can be incredibly rewarding, but they also come with a lot of risk. Before you make any decisions, it’s important to understand the different types of hotels and their respective risks. By doing your research, you can make smart choices that will protect your investment while also giving you the opportunity to earn a healthy return on your investment.
