Investing in a hotel can be a rewarding and profitable way to step into the business world of hospitality. The profitability of your hotel depends on how well it is designed, staffed, and run. If it attracts guests and inspires delight, then your investment will thrive. Of course, this poses a unique set of considerations for first time hotel buyers as well as the business plan that will make it a thriving source of profits.
Owning a hotel is a unique experience even if you have a background in hospitality management. However, you’re hardly alone. You have the expertise of thousands of hospitality real estate investors who have gone before.
Let’s explore the five biggest considerations for first time hotel buyers.
I. Building your team
Buying commercial real estate should always be done with a team of advisors. Investing in a hotel should begin with your broker, lender, contractor, hotel management team, and your commercial real estate lawyer.
Build Your Team of Advisors
Buying a hotel is best done with a fleet of advisors. Your realtor, lender, contractor, and management team may all have guidance to offer. Start your hotel buying strategy by building your team of advisors.
Your commercial real estate broker is often the first member of your team and oversees the sourcing properties for you to consider. They also handle negotiations with the agent or broker of the current owner. Choose a broker who understands your budget, goals, and vision for your hotel investment.
Your lender is a vital partner, and the best commercial investment lenders are those already familiar with your finances. Lending practices have been significantly tightened in recent years, and the rising interest rate has also increased the rate of rejected loans. A good lending partner can help you prepare your finances for a successful purchase without the risk of an application and rejection cycle.
Bring your most trusted commercial construction contractor with you to assess each property. Because most hotel purchases are immediately followed by renovations, this is a good way to get an early estimate of the likely costs regarding the changes you will want to make.
You may also want to prepare your property management team. A hotel is a large operation, and you will need a management staff, whether you choose to head the operations personally. The right hotel management experts can help you estimate and plan the cost of future operations in each property.
Lastly, don’t forget your legal advisor. Having a commercial real estate lawyer on your team ensures that everything is above-board as they look out for your legal best interests. They will make sure the property title is free-and-clear, as well as clarify contractual matters like contingencies, zoning, and licenses for the property.
II. Prepare for finance
Get A Head Start on Financing
Gather information that your lender and contractors will need to get started. Start putting together all the documentation on purchase, renovation, and operation prices. Create price sheets and timelines so you know how your finances should look at every step in the process.
Know your financial requirements and the budget you will apply to each stage of the hotel buying and renovating process. Determine your price point and loan terms to calculate your buying power and your flexibility when it comes to negotiations. Determine the terms you are offering or being offered, and seek the best value for your money in your hotel buying plans.
Know the Tax Situation
Local property taxes are not stable with recent heaves in the economy. Property taxes are used to cover municipal budget gaps. Like adapting schools and public facilities to new requirements and coping with inflation. Property taxes are also unique in each market. Make sure you have a local property tax expert on your team to calculate and predict your realistic costs.
Come with a Business Model
A hotel is a living business that must be run from a business model. Have the full stack of people and services in mind when choosing a hotel property to invest in to keep your budget and operations expectations realistic.
Consider the people and resources you will need for hospitality. For example facility maintenance, room cleaning, running the restaurant, and operating the amenities. You will need internal systems paired with vendors, suppliers, and a complete schedule that will predict the routine cost of it all.
III. Financial analysis
Check Your Profitability Numbers
First, conduct a Pro Forma. This is a projected income statement predicting the property’s financial performance. This is a data-backed projected business model to determine the hotel’s future profitability. Every property must be able to provide or complete a 5-10-year pro forma report.
A detailed analysis shows how well the property will perform once it’s under your control. This is an important time to look at the ADR, RevPAR, and Cash-on-Cash returns. Using these numbers, create a model that your investors can examine to strengthen your investment plans.
If lenders can see that your hotel will be profitable, they are more likely to approve the loan size you need for a complete purchase and renovation cycle.
Revenue and ROI
A hotel that is already functioning properly is a good sign if you’re looking for which hotel to buy. This shows that there is good demand, good traffic, and that the amenities very likely accommodate both guests and staff.
With the help of your contractor, calculate your ROI. How much cash investment you are putting in? How soon you will see that investment returned through revenue and profits? You will be able to determine if you will see an immediate ROI or expect a financial runway of 3-5 years before profitability.
IV. Capital Expenditure
Calculate Your Capital Expenditure
Capital expenditure is the money used to acquire, repair, update, or improve company assets. This means looking at renovations and repairs you intend to complete when the hotel becomes yours. Most hotels need a few improvements and many new hotel owners also plan to rebrand, which should be calculated as well. Be prepared from a financial and traditional standpoint.
Don’t forget to calculate for routine maintenance and upcoming big repairs, as well. The age of your “new” hotel will determine how much maintenance you can expect to put in each year, or in the upcoming ten years of operation.
Plan for Renovations Early
Almost every hotel purchase comes with renovations. The costs will depend on what is necessary to achieve your vision and create the foundation for your hotel business model. Plan ahead for renovation. Know what renovations you want to do and get a rough pre-estimate on the work.
Consider the time it will take to launch and become profitable. When there is a change in ownership, always calculate the time and costs that any updates or improvements will require.
Are You Buying a Franchised Hotel?
Make sure you are aware of the difference between buying a franchised or independent hotel and what each of them requires that the other does not. Non-franchised hotels will either pick up the previous brand or rebrand as part of taking new ownership.
If the hotel is franchised, however, the franchise license will need to be transferred, often at a penalty to the original franchisee.
To Franchise or Not to Franchise
Franchised hotels have a branding advantage and may have access to discounts or resources. However, they may also be obligated to pay marketing fees and royalties, which are calculated in revenue percentage. It’s up to you to decide whether the cost of the license and royalties is worth the advertising and resource package that you would get in trade.
When looking at branding, you need to understand reservation systems and the level of commitment you plan to make to franchise or move away from an existing franchise partnership and design.
last thoughts for first-time hotel buyers
“Budget for all expenses that occur on top of the purchase price and have money set aside for after taking possession of the property.” – Kishan Gohel
If there’s one piece of advice NewGen Advisory would broadcast to all first time hotel buyers, it’s to see every hotel purchase is a long-term business plan. Have your budget and your expectations aligned for what comes after the purchase, as well as successfully navigating the buy itself.
If you are in the market for your first hotel property, NewGen Advisory is a broker team that specializes in hospitality buying. Contact us today to learn more.