Buying a hotel is not like buying empty office space. You are purchasing a living, ideally thriving, property with an existing business model, clientele, and an environment that shapes the guest’s experience. Your first hotel will be an adventure filled with business models, renovation, hospitality management, and of course, financial strategy.
If you want to see profits and taste the delight of a successful hotelier, it’s important to avoid the common pitfalls of a first-time hotel owner. Going into hospitality isn’t an automatic “I Win” in real estate. You need a plan, a financial vision, and a team of experts backing up your play to create a profit-generating venue that guests will adore. So today, let’s shine a spotlight on the five biggest mistakes of first-time hotel buyers and how you can avoid them.
#1: Underestimating Renovations
Never underestimate the cost of renovations when buying a hospitality venue of any type. Not only are there high standards to meet and necessary repairs to complete, but you will also want to plan to rebrand.
Replacing the carpets to match your brand colors and aesthetic, replacing every wall sconce with a new cover, redesigning the lobby, and replacing the outdoor sign; these things take a considerable budget that needs to be ready to go as soon as your hotel purchase is complete.
In order to avoid messing up renovations, bring your contractor to building tours. From their calculations, you can build your entire investment plan and ensure everything will go smoothly. This will allow you to both envision your new brand renovations early and closely estimate your likely renovation costs in time and money before reopening a newly branded hotel experience.
#2: Ineffective Revenue Management
First-time hotel buyers also tend to overestimate their potential for high-value profits. It’s important to remember that not all nights will be fully booked, and not all rooms will be full-priced as most hotels have an off-season.
Many first-time hoteliers use a flat number to calculate their potential profitability in the coming years. However, hotels experience a natural ebb and flow with seasonal travel. In most locations, you can expect to have an off-season where rooms are under-booked, and prices drop balanced by a rush season where rooms may be filled and prices rise to meet travel demand.
Many first-time hoteliers use a flat number to calculate their potential profitability in the coming years. However, hotels experience a natural ebb and flow with seasonal travel. In most locations, you can expect to have an off-season where rooms are under-booked, and prices drop balanced by a rush season where rooms may be filled and prices rise to meet travel demand.
Looking realistically at the year-round and monthly numbers can give a more realistic perspective. This allows you to see how much your hotel has traditionally earned each July compared to each January and make more accurately mapped predictions of both your reasonable room rates in each season and your likely occupancy rates based on local travel and traffic.
#3: Miscalculating Operational Expenses
There will be many costs involved in taking over the operation of your new hotel. Renovating, polishing, online booking, and delighting customers after the purchase also need to be budgeted before making a on the property.
Don’t forget advertising, hiring, and supplies as your hotel prepares for a grand opening or re-opening. Every department requires its own operational budget, from the kitchen to grounds maintenance. Even deciding whether your hotel will be owner operated or if a general manager will be running the property is important to incorporate within your operational expenses.
If you plan to redecorate, it is vital that you bring your contractor to the sites you are considering for purchase. Rebranding will involve considerable operational costs and renovation investment. Let your contractor give you a rough estimate on the costs of updating and renovating each property so that you can consider both your before and after costs.
#4: Accounting for Expenses
If you are buying a franchise location or looking to convert to a franchise, don’t forget the franchise fees. Your franchise licensing fee is the initial investment, but you will also typically pay a marketing fee percentage and royalties to the parent franchise. Royalties are a percentage of your revenue that is considered owed to the franchise for use of their brand, assets, and marketing package.
Additional franchise costs can also vary depending on the brand and design you license. You may be required to buy your supplies from an approved franchise vendor or buy certain equipment to meet specific franchise standards. You may have to pay for your employees to take branded training programs, and you may need to buy uniforms from the parent brand, as well.
The value of a franchise’s reputation and resources should be weighed against the potential cost of license, supplies, and enforced vendor partnerships.
#5: Going In Without a Plan
Lastly, the biggest source of disaster for first-time hotel buyers is going in without a plan. You may find the perfect high-rise shell waiting to be renovated or a beautiful bed and breakfast that just needs a little tender loving care to shine – but without a plan, you will soon see your vision of success fall through. Successful hotel purchase and ownership depends on having your business model locked down from the start.
You go in with your contractor because you already know the hotel experience you want to create. You get your estimates and stick to them to ensure your purchase and renovations are on-budget and help the hotel reach occupied profitability. Lacking focus, direction, or concrete written-down goals can allow your budget, your timeline, and your profitability to go out the window.
Prepare for a Successful Hotel Purchase with NewGen Advisory
If you are getting ready to purchase your first hotel, you don’t have to tackle the big picture or all the important details on your own. NewGen Advisory has the hospitality real estate expertise you need to help build the right business and financial model for your next investment. Let us help take you from investor to hotelier while skipping all the typical pitfalls of someone new to this glamorous investment industry. Contact us today to learn more.