Top 8 Things to Consider for Hotel Investments

Interested in things to consider before making an investment in a hotel?  Pierside Capital has experience in investing in hotel assets.  Here are eight things to consider before making an investment in a hotel.

• Site Selection – Investors must understand the location and what types of revenue generators it will pull from.  Like any real estate deal, the better located the hotel, the higher probability of success.
• Revenue Generators – There are three main types of revenue generators for a hotel: transient, business, and leisure.  Each hotel caters to one or a combination of all three; depending on the hotel.  The more diverse the revenue generators, the better.
• Seasonality – Some hotels have more occupancy and revenue during certain parts of the year than others.  It’s important to understand a hotel’s seasonal revenue.
• Franchise vs. Non-Franchise (independent) – franchised hotels have the benefit of the marketing from the brand behind their operations.  However, being a franchisee means sharing in revenue moving forward via the franchise fee.  Non-franchised hotels can produce better margins but they need to have a strong marketing strategy to reach their target customers.
• Expense Management – hotels are operating companies so expense management is key to driving value and results.  An experienced manager with a concrete plan to control expenses is key to understanding a hotel investment.
• Hotel Type – Extended stay, limited service, full service, resort.  Each hotel type caters to a different group of customers.  It’s important to know what types of hotels are currently in the market you are thinking of investing in.  Too much competition from similar types of hotels can be a red flag.  Often, investors get access to a STR report during due diligence which shows how the competitive set of hotels is performing.  It’s wise to get a hold of this when reviewing an investment, if available.
• Property Improvement Plan – Every 7-10 years a hotel must undergo an updating of the furniture, fixtures and equipment through a Property Improvement Plan or PIP.  Hotels do this to stay within brand standards of appearance.  Each brand has its own set of standards that they update periodically.  This can be a costly upgrade so it’s important to ask what is being set aside each month for this eventuality.
• Value Add vs. Stabilized – Value add means the business plan is being tweaked or the sponsor is changing something with the asset to improve its value.  Value-add assets can have more upside but can have more risk too.  Stabilized assets tend to be less risky but offer lower returns.  It’s critical to analyze the amount of risk you are willing to take on before you make an investment.