A Basic Guide To Investing In Hotel Real Estate

Hospitality is an industry that feels the effect of supply and demand immediately.  This does not mean that it is a bad industry to invest in.  To overcome the impact hotels can face, there is greater flexibility when it comes to the prices charged for services and hotels are able to change pricing to match the market on a daily basis.  Hotel real estate might be an investment option that you look into if you wish to diversify your portfolio, but you need to know what to look for.  It is important to know the types of hotel classes there are, what the key metrics you should look at are and the demand drivers for the industry which will ensure that you make an informed decision about your investment.

The Types Of Hotel Real Estate You Can Invest In

The hotels that you can invest in will be defined by the services and amenities that the offer.  There are 4 main types of hotels and you need to consider each of them carefully.  They will each come with their pros and cons that you should take into account when you invest.

The full-service hotel is one that offers a range of services and amenities to their guests including concierge services, restaurants, meeting rooms and shops.  These hotels are often the ones that investors consider because of the luxury that is associated with them.  However, their success is very sensitive and linked to the quality of the services that are offered particularly the restaurants.  These hotels will also have a large staff that needs to be managed and paid.

Limited-service hotels will be a step down from the full-service ones and offer only certain amenities.  These amenities will generally include a swimming pool, meeting rooms and a fitness center.  This will provide you with more predictable costs in terms of running the hotel and the success will not be linked as closely to the services.

Budget hotels are a no frill option which is good for a new investor as you will not have to worry as much about the services and amenities.  These hotels may offer guests one or two services, but they generally focus on covering the basic necessities for the guest’s stay at a low rate.  These hotels have a predictable operating cost and will have a smaller staff Business To Mark.

Extended stay hotels are aimed at families who are relocating, business people who are on an extended assignment and other people who need to find temporary housing.  This type of hotel will generally offer discounts when guests stay for more than 5 days and provide a range of home features that are missing from other hotels.  The services provided will include full kitchens and self-service laundry.  The quality and the range of amenities on offer vary between these hotels, but most of them will target a mid-range to budget market.

The Key Metrics To Look At

Knowing the different types of hotel real estate that you can invest in is important, but you need to know what the key metrics are so you can determine if you should invest.  Hotels actually have unique metrics that they use to determine performance and growth, both factors that you need to look into before you invest.  These metrics can be used to determine the past performance of the hotel and compare it to others in the same market.

 

The average daily rates or ADR is the measurement of the average rate paid for the rooms which are sold on a particular day.  This is calculated by dividing the revenue from all the booked rooms by the number of rooms which have been booked.

The other metric that you need to know is the revenue per available room or the RevPar.  Unlike the ADR, the RevPar looks at the total number of available rooms and will divide that by the total revenue of the available rooms.  The number of unoccupied rooms in the hotel will impact this metric while the ADR will only show how much is being made with the booked rooms.  It is also possible to calculate this metric when you know the ADR of the hotel and the occupancy rate.

These metrics are important because they can help you determine how well a hotel does when compared to similar establishments.  When you know the RevPar and ADR of a hotel, you can use it to see if the hotel is competitive and understand the overall performance of the hotel.  If a hotel is underperforming, you will need to investigate this further before you invest.

The Demand Drivers

When it comes to demand, there are 2 consumer groups that drive hotels and they are tourist and business travelers.  The local market that the hotel finds itself in, will also impact the demand drivers.  If the hotel is located in a city with a lot of students or major events, this can also drive demand.

When looking at investing, you need to consider the demand drivers of the hotel and how the hotel meets the needs of the customers.  There is no point in having a hotel that caters primarily to business travelers in a small town that mostly gets tourists.  You should also consider how the hotel handles the demand that comes from local attractions or events.  If there is an event which happens each year, is the hotel making the most of this?

How To Invest

If you want to invest in hotel real estate, you need to carefully consider the hotel.  While you might feel that the 5-star hotel is the best option because of the higher room rates, you need to look at the metrics and the running costs.  These hotels will charge more, but they have larger overheads and staffing costs than budget hotels.

It is also recommended that you speak with an investment advisor that know about hotels for sale in Cincinnati Ohio before you look at hotels.  They will be able to gather all the information that you need to make a decision and they can help you with the due diligence that is required when investing in commercial real estate.

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