Hotel Investing Pros and Cons
You may have been investing awhile perhaps or are looking for another “out of the box” opportunity even if not a seasoned real estate investor. Well, a little known yet stable investment that might be worth considering is hotel investing. For those of you seeking a passive investment via syndications, hotels might be one of the investment choices. It’s a hospitality-geared type of investment with either few or no long-term tenants.
Now this can be a challenging endeavor but if done correctly can reap good long-term financial rewards. To help you decide, here is a list of pros and cons that are worth considering before proceeding.
Pros of Investing in the Hospitality Industry:
Flexibility: Hotels overall are more adaptable than long term rentals. The tenancies are usually short term although some larger corporations do offer long term rentals that are fully furnished and complete with all appliances. However, most tenancies are a week or less, sometimes only overnight, and therefore less damages or usages of the properties occur. Hotels can also be updated more easily and more frequently without disrupting a longer-term tenant’s life. Depending upon the repairs or updates, a simple “closed for renovations temporarily” notice publicly posted offline and online will allow work to proceed quickly and without interruptions.
Adaptability: Hotels can quickly add amenities that are trending and current among guests. Extra shelving, extra chairs, fluffier pillows and bedding, etc., can be done expediently within a workday even while guests are residing within the hotel. Even extra lounge chairs by the pool if there is one, and better soaps and shampoos can truly have guests returning again and again and lead to great referrals to others. Offering refreshments or a breakfast or coffee bar has a good ROI without any real inconvenience to guests. Just a fresh coat of paint can add value and attract more bookings. Shrubbery and landscaping add significant value at little cost too.
Providing Experiences: Guests at hotels really enjoy having an experience. Gift shops within hotels are popular as are botanical gardens, playgrounds for children, Koi and other fishponds, stone walkways, verandas for sitting, as well as saunas and hot tubs. These amenities can really mean a lot to many guests and add to the experience of enjoyment at a hotel. Some large hotel chains even have “themes” by which they set their standards and provide amenities. These themes make them memorable and are a type of targeted marketing. Providing even a simple continental style breakfast can enhance experiences for guests. Wifi now is almost standard in larger franchises along with great choices in television viewing with premium channels. All this adds to the “experience” that guests seek currently.
Recognizable Branding: If buying into a large well-known franchise, the branding is already done for you! And there are many types of marketing usually already in place. You really don’t start from scratch, as this type of large-scale franchise is turnkey! There are certain requirements and standards which must be followed, however.
Extra Income: Let’s not forget either that if a hotel has a great appearance, both inside and outside, as well as a banquet room perhaps, additional income can be made by offering the premises for weddings, and other events, with or without catering! A great appearance and amenities can lend itself to income producing events such as company seminars too, and even smaller events such as graduation parties.
Guests will not only use the facility for the event, but many will perhaps book rooms also for at least a day or two before and after an event if travel is required. This is a total bonus of owning any hotel, especially a brand name and keeping up with advertising event hosting can fill rooms and add income throughout each year.
Cons of Investing in the Hospitality Industry:
Poor Location: This is a big one! If a hotel is “off the beaten path” too far, and not readily visible or accessible to passersby, the chances of obtaining and sustaining a “full house” are limited. Unless the chain has a targeted audience and is resort-like, any owner may find themselves with too many empty rooms all year long. Any hotel must generate enough income over and above the expenses needed to run and maintain it. Some owners jump into hotel acquisition because of a good, low sale price, without looking into the geographic location or other demographics. This is by no means a wise way to approach any hotel acquisition! Another type of location disadvantage is the existence of other hotels in the area that offer more for less money. Guests can and will book one hotel, see another, and then change their booking to the other more appealing hotel even if they incur a cancellation fee.
Negative Reviews: It’s sad to say, but individuals write more negative reviews than positive ones. When happy, guests tend not to leave a review, but when disappointed, even by the smallest of occurrences, they start typing wildly, especially on social media and on review sites that now are plentiful. These review sites encourage others to speak their minds unfortunately and do honestly hurt hotels enormously. Individual readers are more drawn to the negative reviews too. It’s a type of “rubbernecking” that happens way too often in the hotel industry, so living up to the highest standards possible in amenities, appearance, and customer service should always be priorities.
Hotel Age: If a hotel is older, renovations can be more extensive and therefore more expensive. There are state codes and local codes for all hotels, and the older a hotel, the less chance it has of being able to keep up with the newest code requirements. Dated plumbing can sometimes NOT be remedied, or may have dated drainage or wiring, without incurring significant debt. Curb appeal also counts, and older hotels may not have as much curb appeal as more recent ones.
Fees: Yes, the larger a hotel and more well known the brand, the higher the franchise fees unfortunately. Buying a smaller hotel on your own allows you to work around these, but you lose the branding and marketing that comes with a well-known brand. The more well-known the brand, the higher the franchise fees.
Credit Card Issues: This may not seem a big deal, but there are many, many guests that will use reward points to book rooms. They may not understand the Terms of Service and once a room is booked and used, they will go home and dispute the charge. All this must be factored into the maintenance of the hotel, as too many charge-backs can lead to cancellation of credit card privileges to a hotel.
Employee Turnover: Unless a hotel offers stellar benefit packages and flexible time to employees, the turnover can be high. It’s a stressful job dealing with strangers that come and go all day long each day, no matter what job an employee has. Having a great plan in place to encourage employee loyalty should be an eminent part of any company that is looking to retain their employees including hotels. Some larger chains offer tuition benefits, etc., in order to keep employees. There are all types of incentives being offered by larger chains.
Loss of Autonomy: A larger brand hotel has its strict requirements and standards for all owners, even if you are the one paying the bills and maintaining it. It’s never truly yours. It is the renting of their name to generate an income and become a franchise owner. If you want autonomy, then buying into a franchise is not your best option. You will have some leeway in the smaller dictates, but not in the larger ones, which have been established over the years and there is usually a board of directors to answer to or a corporate entity that will inspect the premises whenever they choose to ensure compliance. THEIR name is at stake, after all!
Insurance Concerns: The costs of overall insurance should be factored into the equation before purchase. While all property acquisition requires insurance, hotels can be subject to additional types of insurance because of the constant turnover rate of guests.
Code and Zoning Issues: Safety features might be more extensive and code requirements, along with zoning requirements need research, especially if considering adding amenities such as pools, balconies, etc. Local municipalities also differ in requirements and just buying into a large chain will not ensure that these will not exist. Even with a large chain, each location might have different requirements.
Overall, don’t let the above pros and cons deter you as hotels overall can be a good, long-term investment.
However, as with everything else, due diligence is needed and the list above can serve as a good guide, especially for new investors. All investments carry some type of risk but being knowledgeable can prevent costly mistakes and make the investment process go a lot smoother.
