Real estate investments are considered to be among the most profitable and least volatile assets. When it comes to investing in hotel properties, there are a few nuances to keep in mind. Here are a few factors to consider when looking to invest within the hospitality industry.
Unique Aspects of Hotel Real Estate
Unlike other real estate properties, hotels are unique in regards to their flexibility and high operational demands. Hotels are able to adjust their rates on a daily basis depending on external circumstances such as local events or market factors. They can benefit from capital and operational improvements immediately, and hotel investments often yield higher cash returns than other real estate investments.
On the other hand, when the market experiences disruption, the hospitality industry is among the first to feel the effects. The industry is highly competitive, so new hotels and economic shifts tend to prompt hotel owners to drastically reduce room rates and make quick improvements to what they’re offering. Like all investments, hotel properties present some risk, but investors who are able to weather some uncertainty and make quick decisions stand to do well.
Real estate in the hospitality industry uses some specific metrics to assess performance and success. The two primary metrics include Average Daily Rate (ADR) and Revenue Per Available Room (RevPar). Calculating the ADR entails dividing the total revenue by the number of rooms booked over a set period of time. RevPar is calculated by taking the ADR and multiplying it by the occupancy rate; alternatively, you can calculate the RevPar by dividing the revenue of sold rooms by the total number of rooms available. These metrics can help investors determine how well the hotel is performing and give them insight into what they should focus on improving.
Local Demand and Occupancy Rates
Before investing in a hotel property, it is crucial to assess the local market as well as existing data to determine if the property will serve you well. Locals may not be looking to stay in the hotel, but many hotels offer amenities that can benefit the local population, promoting additional revenue even without booking rooms. When it comes to occupancy rates, look for properties that have an average rate of 60% or higher. In order to achieve a decent ROI, the hotel needs to serve its purpose, attract guests, and maintain high rates whenever possible.