Securing a hotel property or fund as your next real estate investment may seem intimidating since the hospitality industry is so drastically different from multifamily asset classes or residential rental properties. As a commercial real estate investor, once you’ve learned about commercial real estate syndications, however, it’s essential to continue expanding your real estate investing horizons by learning about new asset classes, especially as the market, political environment, and the world are ever-changing.
Right now is one of those ‘seasons’ of life where you’ll want to explore commercial real estate investment options to bolster your portfolio against the possibility of an economic downturn. While that’s always a great idea, I think you’ll agree that recent global events might have you leaning more heavily toward recession-resistant commercial real estate investment options. However, if you’re only really comfortable and experienced with multifamily syndications, investing in a hotel might seem like a bit of a mystery.
Despite hotel brands being recognized by their emblem or operating brand (like Holiday Inn, Hilton), such commercial real estate investments are primarily driven by the service offerings available at each tier, location, or within each brand name. So, while certain hotel properties bring to mind a positive reputation/experience in your head, you can easily recall a negative experience at another. From a hotel-specific real estate syndication investor’s perspective, what else do you need to know about hotel property management to make an informed decision that will benefit your portfolio?
In this article, you’ll learn how to determine if a hotel investment opportunity is a hit or a miss. We’ll discuss why the commercial real estate market is ideal for hotel real estate right now and discuss four solid reasons for investing in hotel syndication opportunities. Finally, you’ll learn about specific focus points on which to perform your own due diligence as you look to expand your investment portfolio with hotel real estate.
What Types Of Hotels Are Good Investments?
There are three main categories of hotel real estate based on the level of service and luxury they provide. The three types are full service, select service, and limited service.
Full-service hotels are luxurious hotels like Sandals resorts and Mariott. They have high-quality amenities like spas, all-inclusive options, retail shops, fitness centers, large meeting rooms, bellhops, butlers, room service, and on-site restaurants. Usually, these hotels have higher rates because of the services they offer.
Limited-service hotels are more in the realm of extended stay hotels. They have self-service laundry and an in-suite kitchen, and most guests book these hotels for a long-term stay. The nightly rate is generally based on a sliding scale and depends on the length of each guests’ stay.
Limited-service hotels often have the lowest operating costs for management, which allows them to have low nightly rates due to the limited services they offer. As a result, cost-conscious travelers who are only interested in the bare minimum stay requirements are repeat customers of this particular type of hotel.
Select-service is a hybrid between a full-service hotel and a limited-service hotel, and they may provide slightly more services than the limited-service options but fewer options and amenities than full-service hotels. Business travelers who are price-sensitive, but require more amenities than the limited hotels offer, may go for a select-service option. These are hotels like Hilton Garden Inn, Courtyard By Marriott, and other classical select-service hotels.
If you’re having trouble switching from multifamily-investor mode, think about each hotel type as a multifamily real estate class. For example, class A is a full-service hotel, Class B is a light/select-service hotel, and Class C is a limited-service hotel.
Although it might not seem like it at first, investing in hotel real estate syndications is just like investing in multifamily real estate syndications.
Why Is The Real Estate Market Ideal For Hotel Investing?
In 2020 and 2021, hotels needed to reimagine customers’ entire hotel experience because of the Covid Pandemic. As a result, they had to start with their bottom line and streamline their operations. Low levels of travel meant hardly any customers during the early stages of the Pandemic, which decreased a significant portion of their revenue stream.
Every commercial asset value is derived from its net operating income, so with NOI being so low, the value of hotel real estate assets was cut drastically, making hotel real estate as if it were “on sale.” However, this move positions hotel real estate with significant economic indicators for increased cash flow and future growth.
Hotels’ business operations have made to help them rise to the challenges of the time are clean stay initiatives (more cleaning per CDC standards), strategic partnerships formed within companies to make the hotel more attractive, and revenue strategy overhauls.
Hotels also found ways to sell rooms using fresh marketing. By using words like “staycations,” they attracted medical workers and traveling nurses. Hotel owners and operators reimagined the existing spaces inside common areas to make better use of the space. During peak-pandemic months, management encouraged work-from-home employees to work instead from their top-of-the-line suites while enjoying all the benefits the hotel has to offer, including room service and health/fitness facility access.
Hotel owners took a detailed look at making social distancing possible inside their facilities and brought in helpful technology to support this endeavor. They streamlined operational strategies and analyzed their contracts with marketers, operators, lenders, service providers, and asset managers. As a result, hotels across the board were able to reduce expenses, giving them the chance to defer payments, wave fees, and skip minimum order requirements. These changes made it possible for them to survive the hotel industry’s lowest-traffic months and allowed them to make payments and help their industry partners.
With all of these changes, the industry numbers for 2022 and beyond look incredible. The hotel industry has been charging forward, more profitable than ever as people are starting to feel more comfortable with tourism and traveling. An estimated 54 million tourists crossed international borders in 2021, and these have been the most robust results since before the pandemic started.
4 Reasons to Invest in Hotels is 2022
The travel industry has been picking up speed, and hotels are being seen as discounted right now because of their operating business and service numbers. However, as an industry, it’s all up from here with equity growth and more travel expected in 2022 and through 2024.
Here are four reasons you want to invest in a hotel real estate syndication right now.
1. Tax Benefits
Tax benefits are pretty unique when it comes to hotel investments, and this is because they include real property, personal property, and intangible property. You get the depreciation for real property similar to what you might see in multifamily real estate syndication, but, in addition, you get depreciation benefits for the personal and intangible property hotels bring to the table.
2. Cost Segregation
Hotels and their contents are divided into three cost categories for tax purposes, building, furnishing/equipment, and goodwill. The first two are actual items – the building plus the beds, dishwashers, etc located inside the building. The third cost category, however, includes things like customer loyalty, employee relations, and other intangible, yet valuable items considered goodwill.
3. Nightly Stays
Just like in multifamily investments, where real estate syndication passive investors get to reap the benefits of forced appreciation on the overall property plus the monthly rent collected, hotels offer forced appreciation plus daily rent collected. If any rooms are rented out for 15+ nights in a 30-day month, that value is likely much larger than the monthly rent paid by a tenant in an apartment complex. This is why investors may see nightly stays as an excellent boost in potential earnings.
Beyond that, many hotels often use predictive analytics to optimize their net earning per room sold. I bet you have even noticed price differences as you travel – it’s all based on peak travel days, hotel occupancy percentages, and even the length of your stay. As a result, every new day can maximize the hotel’s and its investors’ earnings.
1. Expense Structures
This benefit is unique to hotel investors and a compelling reason to invest in hotels. Hotel administrators can negotiate contracts with service business partners due to the volume of guests. This helps reduce operating costs and allows revenue to climb while the cost to maintain the hotel doesn’t rise, allowing for healthy cash flow.
The above four reasons are just the top few that can most clearly illuminate why investing in a hotel real estate syndication is a healthy passive income choice for you right now. There’s a chance you even felt cooped up during the Pandemic and couldn’t wait to take advantage of the discounted rates airlines, hotels, and entertainment venues have offered on the tail-end of the pandemic shut-down. This pent-up demand is being seen in markets across the US as Covid restrictions lift and people attempt to return to their normal lives.
For many, the recent world events served as a strong reminder of how much they really love to travel and how important it is to take advantage of the travel opportunities that are available. This proves that even during these uncertain times, the travel industry and its hospitality-based real estate still has untapped potential.
How Do You Quickly Evaluate Hotel Syndications?
There are three main areas you want to focus on when you are looking to evaluate whether a hotel real estate syndication is a good investment for you or not. You want to look closely at the location, type of hotel, and assess the business.
Location, location, location! This is true with every piece of real estate in any asset class, from a single-family home to multifamily apartments to a hotel. Savvy investors will look and see where the hotel is located, how that location benefits visitors, and what attractions are in the area that would feed hotel traffic. Nailing down a hotel real estate syndication in a prime location is key to booking out guest rooms consistently and being able to justify a profitable nightly rate.
2. Type Of Hotel
Remember there are three types of hotels. Explore how the type of hotel supports the attractions nearby, the general needs of the travelers visiting the area, and the amenities they would need most. We recommend commercial real estate syndications using the select-service hotel model because it is in the middle of the road and because the management team can choose to add additional amenities based on their extensive knowledge of the hotel’s cash flow, customer profile, and asset class trends.
3. Business Aspect
Analyze the business plan. Always check to make sure the projected returns make sense based on the market and that the asset manager has an excellent track record. Also, check to see how they mitigate risk and explore the sponsors’ overall management plan for the asset.
What are my next steps?
To decide if hotel investing is the right investment choice for you, you must turn back to your personal investment objectives and see if the capital stack of a hotel real estate syndication aligns with your financial freedom goals. The tax benefits, cost segregation, and advantages of nightly stays are a few reasons why hotel investments are starting to become more popular. Hotels also have made drastic adjustments to change with the times, making them more attractive to travelers. With these changes, the travel forecast will continue to rise and increase through at least 2024.
The team here at Goodegg Investments is always available to answer any and all questions you may have about commercial real estate investing. We’ll never bring a lousy deal to the table because we only present passive income opportunities to limited partners because we’re also interested in making a passive investment in the deal too! For more information about our existing and upcoming investment opportunities, join the Goodegg Investor Club.