One of my favorite things to do when I travel, particularly when I travel alone, is to check into my hotel and walk into my hotel room for the first time. There’s something about the surprise of the layout, the view, and the little shampoos that gets me every time.
These days, travel is on the rebound, and both leisure and business travel are more robust than ever. With all this demand for travel, you might be wondering how you might be able to get in on the action and potentially invest in hospitality.
Enter hotel real estate. Hotel investors can reap the benefits of the strong wave of travel demand while also diversifying your portfolio.
However, not every hotel business is created equal. In this article, we’ll discuss what real estate investors should consider before investing in hotels, whether a hotel makes for a good real estate investment, how to get started investing in hotels, different types of hotels, key metrics to watch for, and much more.
What Are Hotel Investments?
Investing in hotels is similar to other types of commercial real estate investments, including multifamily apartment communities, self-storage facilities, and industrial warehouses.
When you invest in a hotel business, whether purchasing the hotel yourself or investing alongside a group of investors via a private equity syndication or through real estate crowdfunding, you get all the benefits of investing in real estate, including:
One huge difference between hotels investments and, say, self-storage investments, is that the success of hotels is highly dependent on the strength of the operations. After all, a hotel is a full-blown business and requires a sizable team, tight operations, strong customer service, and strategic management.
Given that, unless hotel management is your specialty, the best fit is likely to find a strong operator to invest with, via a real estate syndication, rather than trying to purchase and operate hotel properties on your own. More on that in a moment.
Are Hotels Good Real Estate Investments?
Let me start by saying that, no, not all hotel real estate makes for good investments. Or at least, not all hotels will be a good fit for your investing goals and your appetite for risk.
For example, investing in a Ritz-Carlton in a luxury coastal location might come with a different risk and return profile than, say, a Holiday Inn in the suburban midwest.
That being said, let’s take a look at a few key things you should consider as you think about potentially investing in hotels.
Post-Pandemic Surge In Travel
First, let’s talk about the elephant in the hotel room – COVID-19. At the height of the pandemic, airports became ghost towns as everyone stayed home for months on end. Hotels were the last place that most people wanted to be in, say, the summer of 2020, and the hotel industry as a whole was skating on very thin ice.
As for the travel and tourism industry overall, the impact was unprecedented, with the hotel industry surpassing 1 billion unsold hotel rooms for the first time ever, as the occupancy rate across the industry dropped to 44%, down from the mid 60s where it sits in a typical year.
However, many experts have been predicting a huge rebound in travel in the coming years, which is exactly what we’re seeing now, with occupancy and other key metrics already reaching and surpassing 2019 pre-pandemic rates.
The forecast for travel demand and the hotel industry over the next 3 years is very strong, both for leisure and business travel.
Leisure Vs. Business Travel
When most people think of the hotel industry, they think of family vacations and leisure travel, which can seem precarious if another pandemic or recession were to hit. After all, if you don’t need to take that family beach vacation, you might just decide to cancel it and go camping at a local state park instead.
Leisure travel, while predicted to be quite robust in the coming years, can also seem like a risky proposition when it comes to hotels, since leisure travel tends to be more seasonal and discretionary.
Thus, when investing in a hotel property primarily geared toward leisure travelers, that seasonality and potential variability in leisure travel must be factored in and accounted for.
On the other side of the coin in the hotel industry is business travel, which has a completely different profile from leisure travel. Business travel tends to be year-round and can bring travelers to locations near offices that are in non-touristy locations.
Further, many companies book and prepay hotel stays on behalf of their employees (thus decreasing the risk for hotels), and many of these business stays tend to extend far longer than typical leisure trips, sometimes lasting several weeks or months.
Goodegg Hotel Investment Example
As an example, we currently own and manage two hotels – Hampton Inn and Homewood Suites – in the suburbs just outside of Chicago.
Due to the many steel and other industrial plants in the area, business travel has remained consistent and strong, even through the pandemic, as businesses brought their employees to the area for months at a time to set up new lines and automations – things you just can’t do over Zoom.
Given the strong performance of the assets, as well as the strength of our partners in the assets (who take on the role of the hotel management company), we were able to over-deliver on projected returns, distributing to our investors over 11% cash-on-cash returns in year 1 alone, making for one heckuva real estate investment.
As travel continues to rebound, and as you consider riding this wave by investing in hotels, it’s important to consider whether hotels geared more toward leisure or business travel are better suited for your investment goals.
The Importance Of Strong Hotel Operations
Another major consideration when it comes to a hotel investment, as with other types of commercial real estate, is the strength of the operator – the team managing the hotel asset.
Hotels have many moving parts, including rotating and seasonal staff in various roles, constantly shifting average daily rates (ADR), franchise requirements, and more.
That’s why it’s so important to invest with hotel operators with a strong track record and who have successfully owned and operated hotels for many years.
For example, one of our key partners in the hotel space has been successfully acquiring, managing, and operating hotels for over 60 years, and their hotels average around a 4.5-star rating due to their strong customer service and the efficiency of their hotel operations.
I mean, when was the last time you saw a Holiday Inn with a 4.5-star rating? It’s rare, right? But that’s the power of a strong operator. They are able to transform a hotel from a place no one expects to dazzle them into an experience guests will remember forever.
Different Types Of Hotels
Think about the last hotel you stayed in. Was there someone to greet you at the door and offer valet parking, or was there self-parking with automatic doors? Did the hotel have a full restaurant and gift shop, or just a self-serve mini market in the lobby? Was there a pool? Gym? Ballrooms for events?
If you’re new to the world of hotels, these can be great clues for you to figure out the type of hotels you’re staying in and that might be right for your investing goals. Let’s take a moment to walk through the main types of hotels.
The first type of hotel is a full-service hotel, which are your luxury hotels. Think Ritz-Carlton, Four Seasons, and Waldorf, as well as Hilton, Marriott, and Hyatt hotels. A full-service hotel is one that offers all the amenities and on-site services. Want to get a massage? Go to the hotel spa. Want to grab dinner? Take the elevator to floor 3 for the hotel restaurant.
These hotels can range from luxury brands to upscale and midscale brands. The distinguishing factor is that these hotels offer everything you need in-house, including restaurants, gift shops, spas, meeting rooms, gyms, pools, and more.
If you’re considering a full-service hotel investment, you should think about the potential risks, in addition to the potential rewards (which can be substantial). A full-service hotel generally requires a large staff and can see significant dips during recessions, as travelers choose to scale back on accommodations and stay at more modest hotels.
Select-Service & Limited Service Hotels
As you remove some of the luxurious amenities you might find at a full-service hotel, you get a more modest hotel that still serves all your needs. These are select-service and limited-service hotels.
At a select-service or limited-service hotel, you likely won’t find a full on-site restaurant or spa, but it’s very possible the hotel could have a pool, gym, meeting rooms, or even a complimentary continental breakfast. I’m coming for you, waffle maker!
The benefit of this is that the hotels can operate on a smaller staff and more conservative budget than a full-service hotel. Many businesses tend to book select-service or limited-service hotels for their employees.
Typical select-service and limited-service brands include Hilton Garden Inn, Hampton Inn, Holiday Inn, Courtyard, Fairfield Inn, and Aloft.
Extended Stay Hotels
Another great option for business travelers, particularly those on long assignments, are extended stay hotels like Embassy Suites or Homewood Suites.
Similar to select-service and limited-service hotels, extended stay hotels may not offer the full host of on-site amenities that you would find at a full-service hotel, but the larger suite-style rooms often offer more amenities – kitchens, access to laundry, etc. – that may make for a more comfortable stay for those traveling for longer periods of time.
The final category of hotels are budget hotels. A budget hotel is one that offers the lowest rates and fewest amenities and services. Think Days Inn, Travelodge, and Motel 6.
Key Terms For Hotels
When you get started investing in any type of real estate, there are different terms and lingo you’ll need to learn to fully understand what you’re investing in and how to evaluate the performance of the asset.
With hotel investment, there are two main terms that you should familiarize yourself with: ADR and RevPAR.
Average Daily Rate (ADR)
The average daily rate, or ADR, measures the average revenue earned for an occupied room on a given day.
If you’re new to hotels, this might be an eye opener for you, to know that various rooms at a given hotel on a given day (even those with the exact same layout) can sell for different rates.
Hotels use the ADR to measure overall revenue performance, aiming to increase ADR as much as possible. If you see that the ADR is going up, that means that the hotel is increasing the money it’s making from renting out rooms.
When ADR dips, it’s an indicator to hotel operators to find ways to boost the prices per room to increase overall revenue. This can be based on pricing strategies like promotions, upselling, or complimentary offers.
Looking at ADR trends can help to see seasonal impact, and comparing the ADR of different hotels can be a good way to measure relative performance.
Revenue Per Available Room (RevPAR)
The other key metric for hotels is RevPAR, or revenue per available room. Similar to ADR, this is another data point that can be good for comparing one hotel to another.
RevPAR is calculated by multiplying the ADR by the occupancy rate. This assesses the hotel’s ability to fill the available rooms at the average rate. Thus, when RevPAR goes up, that means either the ADR is going up, the occupancy is improving, or both.
By comparing RevPAR trends over time, you can see seasonal impact and changes, and you can compare the relative performance of one hotel with another in a similar area.
In the hotel market, hotel investment industry, and hospital overall, hotel owners must continually compare their data and key metrics to other similar hotels in the area, since travelers are making decisions in real-time. These metrics can help hotels and hotel investors to make course corrections and projections based on seasonality and other factors, which can help to stabilize and boost your overall investment.
Hotel Investment Vs. Short-Term Rentals
Another thing that often comes up when thinking about hotel real estate is the competition with Airbnb, VRBO, and other short-term rentals.
Personally, I can tell you that for many of the family vacations I’ve taken in recent months, we’ve stayed in an Airbnb, especially given that, when traveling with kids, having an extra bedroom or two can be a game changer.
However, when traveling for business, I most often stay in hotels for both the amenities and security.
While short-term rentals can be a great investment if you’re willing to put in some upfront work to acquire and set up with property (especially if you love picking out furniture and thinking about interior design), there are some inherent downsides and risks to short-term rentals as compared to hotels.
Stability In Occupancy
With many Airbnbs, particularly those geared toward leisure travelers, you might see seasonality factor into the overall returns. For example, a beach house might be fully booked at maximum rates during summer months but sit vacant for weeks or months on end during winter months.
With hotels, particularly those geared toward business travelers, you tend to see more long-term stability in occupancy, particularly since employers will often pre-book hotel stays on behalf of their employees, so you have a stronger forecast for overall occupancy.
Safety & Security
When I travel on my own, whether for business or leisure, I tend to feel more comfortable in a hotel. As a woman traveling alone, knowing that there’s security in the lobby, that guests need a key card to access my floor, and that people will hear me if I call for help, is a major benefit to staying in hotels versus short-term rentals.
Of course, this isn’t the case for everyone, but safety and security is definitely a factor for travelers and thus something to take into consideration for your respective investments.
Local Laws And Regulations
Increasingly, you’re seeing headlines that a certain city might have just banned new Airbnbs or short-term rentals. Because of the disruption short-term rentals can cause in residential areas, this is a major consideration to take into account when thinking about investing in short-term rentals.
Because hotels have been around a lot longer than short-term rentals, the laws around hotels are pretty fixed, and thus you won’t have to worry about your hotel investment getting shut down due to a change in local regulations.
Scale & Diversification
If you are trying to invest in the hospitality industry overall and thinking about short-term rentals versus hotel investments, scale is another factor to consider.
Whereas with a short-term rental, you need to take time to find, acquire, design, set up, and maintain each property, with a passive hotel investment via a real estate syndication, you can invest in several hotels, and in different markets, with relative ease and speed.
Hotel Real Estate Vs. Multifamily
When it comes to thinking about investing in a hotel versus investing in a multifamily property, we say, why choose? There are benefits to both types of investments, and the diversification across asset classes can help to balance out your overall portfolio.
Whereas a hotel investment, particularly for already strong performing hotels that require minimal renovations, the risk is fairly low while the cash flow can be quite strong. In the hotels we own, year 1 cash flow for select-service, limited-service, and extended stay hotels can be upwards of 10-12%.
On the flip side, you have multifamily investments. In most cases, you’re likely investing in multifamily with some value-add component (e.g., an opportunity to renovate the unit interiors or improve operational efficiencies in order to maximize property values).
With multifamily, you might see lower cash flow, particularly in the first couple of years, but the potential payoff is on the backend when the property is sold. Once the value-add business plan is complete and the property is generating significantly more value, the property value will also be substantially elevated, thus giving you a nice return when the property is sold or refinanced.
As you can see, there are pros and cons to both a multifamily and hotel investment, so if you don’t have to choose, we recommend investing in both!
The Types Of Hotels We Invest In
For us, given our focus on healthy returns in combination with low risk, select-service, limited-service, and extended stay hotels are our bread and butter as far as hotel investments, because these tend to be the darling for most business travelers, who may only need limited amenities and are usually not traveling with family.
Meanwhile, because these properties are clean, safe, and affordable, and they do offer some amenities, they can also be a good fit for leisure travel. Thus, we’re able to minimize our risk and maximize the potential pool of travelers, thus maintaining a more consistent occupancy and more stable rates than many full-service hotels.
Ways To Invest In Hotels
Depending on your appetite for risk, your willingness to roll up your sleeves, and your overall goals as far as returns, tax benefits, control, and diversification, there are multiple ways that you can add a hotel investment to your portfolio.
Buy Your Own Hotel
The most obvious way to invest in a hotel is to buy one for yourself. However, depending on the amount of capital you have to invest, the time you want to spend in hotel asset management, and the target size of the hotel, this is not a great fit for most investors.
However, if you are looking to buy and take over a performing business, a hotel can be a great investment, especially since there tend to be few surprises. Most people can figure out roughly how a hotel operates, so you can take on an already performing hotel asset with relative ease, assuming it meets your goals.
Private Equity / Real Estate Syndication
If you don’t want to deal with the hassles of managing a hotel, another great way to get into hotel investment is via a real estate syndication, or group investment.
This allows you to choose the amount of capital you want to invest (assuming it’s above the minimum investment amount) and invest in strong assets with strong operators across multiple markets, all without having to learn how to operate a hotel yourself.
In addition, with a real estate syndication, because you are a partial owner in the underlying real estate, you will receive a portion of the tax benefits, which can include substantial depreciation losses (though keep in mind potential changes in depreciation benefits in the coming years).
Further, if you were to invest in a hotel fund, you could diversify into multiple hotels with a single investment.
Crowdfunding is open to everyone, and you can invest for as little as a few thousand dollars, while still getting a share of the cash flow, equity growth, and tax advantages.
Just keep in mind that, for non-accredited investors, there may be a limit to the amount you’re able to invest per year, based on your income or net worth, per SEC regulations.
Finally, perhaps the easiest way to invest in hotels is via a hotel REIT (real estate investment trust). Similar to an investment in the stock market, you can invest any amount you like, but keep in mind that REITs tend to follow the ups and downs of the stock market, so if you’re looking for diversification outside the stock market, this might not be the best fit.
Further, when you invest in a REIT, you’re investing in a company that purchases the hotels, so you don’t actually own any of the underlying real estate. As such, you would not receive any of the tax advantages.
If you are looking to invest in a hotel or other real estate investment and are looking to do so either via a real estate syndication or crowdfunding, we invite you to invest alongside us. Start by checking out our open deals page to learn more about our current or upcoming opportunities.
If you’re not yet ready to invest but are curious about how all of this works, we invite you to dip your toe in the water with us through our free 7-day email course – Passive Real Estate Investing 101 – or to get a copy of our book – Investing For Good.
To learn more about us and our experience, be sure to download a copy of our track record, which shows the projected and actual returns we’ve achieved across all the deals we’ve exited to date.