Hotel Investment Properties – A Complete Guide

IN THIS GUIDE

Hotel properties are properties that are used for temporary occupancy. They include hotels, motels, inns, and related transient accommodation housing.

As a landlord, hotel properties present unique property management opportunities and requirements based on the type of hotel (luxury, full service, and limited service).

In this article, we’ll explore the different types of hotel properties, why they present quality investment opportunities, financing options, FAQs, and more.

Let’s dive in.

Types of Hotel Properties

Let’s first look at 3 different types of hotel properties and how they operate.

  • Luxury

What makes a hotel property “luxury?”

Essentially, a luxury hotel property hosts high-quality amenities and guest services. These hotels are typically rated 4.5-5 stars.

From the decor of the lobby to the quality of the bedsheets, luxury hotel properties are well-maintained and give their guests the “best of the best.”

Think of these hotels as “full service +” hotels (we’ll define full-service hotels later on).

More often than not, these hotels are located in resorts or the most populated areas of major cities. They are typically the most expensive type of hotel for guests.

The grand experience associated with luxury hotels increases the amount that customers are willing to pay to enjoy their services.

The revenue potential for luxury hotels is the largest of all the hotel types; however, these types of hotels are also the most difficult and expensive to manage and maintain.

  • Full Service

Full-service hotels offer various different services to their guests, including restaurants, spas, gyms, room service, and entertainment areas.

They’re found close to airports, casinos, or busy areas of cities or towns.

Full-service hotel rooms are spacious and possess high-quality comfort accessories for their guests.

Full-service guests enjoy high-speed wifi, access to pay-per-view or movie channels on the available television, and room service options with their stay.

Physically, full-service hotels are quite large. Not only do they house guests, but they also house various services which require space, such as restaurants and fitness facilities.

Regarding revenue, like all hotels, full-service hotels generate large amounts of money for their stakeholders.

Full-service hotels also make a significant amount of their revenue stream through the extra services and facilities they provide—often through their restaurants and bars.

These strengths can also be a huge weakness, however.

Remember that these facilities also require staff, maintenance, and inventory management.

Without a well-communicating management team, and an eye for cost-benefit analysis, these facilities can eat into profit margins.

However, if these challenges are managed, full-service hotels can be an extremely strong investment option!

  • Limited Service

Limited-service hotels are often regarded as a budget-friendly option for those looking for overnight accommodation.

The primary source of revenue for limited-service hotels is guests booking rooms, as these hotels do not provide many of the services that full-service hotels do, such as restaurants or bars.

These properties are smaller than the other two types of hotels, and they do not require the immense staff numbers that full service or luxury hotels require to operate.

The smaller form factor makes them easier to manage. Landlords will find that there aren’t many immense expenses associated with limited service hotel properties.

Despite being the “cheap hotel option” for guests, limited-service hotels still provide internet access, televisions. They may even include a small kitchen or food prep area in their guest rooms.

Cheap does not mean poor quality. Guests will be impressed with modern decor, up-to-date appliances, and high-speed internet for a moderately low price.

Nowadays, limited-service hotels often have gyms, pools, public cooking areas, and more for guests to enjoy.

These properties are often found on the outskirts of busy cities or in smaller cities or towns.

Why Invest in Hotels

Hotel properties are an amazing choice for property investors.

Unlike any other type of commercial property, hotels can adjust the prices of their services, as they see fit.

Prices change overnight to match the demand of the market.

This increased amount of control allows investors and landlords to stay competitive with other hotel properties.

It also allows for-profit, unhindered by many leasing or renting regulations that affect other commercial and residential properties.

Here are some more reasons to invest in hotel property:

  • Depreciation Tax on Hotel Property

While real estate value appreciates in relation to the cost of owning land and property, the property itself will depreciate over time due to wear and tear.

US tax laws let property owners reduce the amount of taxable income by providing a depreciation schedule on the property—essentially, this is an outline explaining the costs of your property depreciating over a set time period.

Hotels can maximize the benefits of these laws by creating depreciation schedules for their real, personal, and intangible property.

These forms of the property include building and FF&E, physical assets, and goodwill—the intangible property associated with customer loyalty and staff relations.

Depreciation schedules can be applied to all of these assets.

The various tax regulations that cut taxable income can be utilized most efficiently with hotel properties.

  • Multiple avenues to increase the value of a property

Overseeing and managing hotel properties involves constant changes.

By proactively tackling avenues that hold value in the hotel property, the value of your hotel will not only be maintained, but it will also increase over time!

The four primary hotel value avenues are capitalization, renovation, operations, and contract positioning.

Capitalization refers to how you use the money you invest in your property in order to increase revenue.

Carefully allocate portions of your investment into parts of your business you think will earn you money.

For example, if your hotel’s restaurant is always busy, that means it might be a good idea to invest in the cooking staff, appliances, and restaurant space.

Your property’s appearance also matters when it comes to gaining business and maintaining a successful business. Renovations are based on current trends in interior design, so understand these trends and put money towards them.

A stylish property that enamors guests will increase your revenue stream!

One revenue stream that costs little to nothing to invest in is the hotel operations themselves.

This is simply how your guest’s perception of your business affects your success. Healthy customer and staff relations lead to more business!

The final value avenue is contract positioning.

As a business, forming strong, long-lasting connections with suppliers and maintenance companies can lead to profit.

Whether it’s ingredients for your hotel’s restaurant, weekly outsourced cleaning services, or even the availability of certain brands, form stable partner connections that will increase your profitability.

Financing Options for Hotels

There are many financing options available to help those interested in investing in hotel property!

  • SBA 504/CDC Loans

SBA type loans are one of the safest loans for established business owners.

Regardless of the size of the hotel venture, SBA 504/CDC loans provide funding for all types of hotel investment and improvement.

From purchasing property to construction and renovation, these loans are usually the first stop for future investors!

These loans provide lengthy amortization periods (10-25 years), alongside loan amounts reaching upward of $5 million USD.

  • Commercial Real Estate Loans

CRE loans are perfect for investors without large property portfolios.

With amortization periods of around 25 years, you’ll have plenty of time to pay off your loan.

Finding a lender who offers a high LTV rate lets you secure more of your own capital as the bank puts more money upfront toward your business.

The value of these loans can range from a few thousand dollars to upwards of 7 figures.

  • Hotel Bridge Loans

For short term, immediate financing, hotel bridge loans are perfect for investors. These loans are normally utilized to quickly secure highly sought-after properties. Read more about bridge loans here.

Where to Buy Hotels

Location is one of the most important considerations when investing in any form of real estate.

Hotels are no different.

  • Luxury Hotels

Since luxury hotels are often used on resort properties, look at popular vacation spots that either have large plots of land available or existing luxury hotels on the market.

  • Full-Service Hotels

Full-service hotel properties are often found in downtown city centers.

Highly populated areas and “business districts” are great spots for full-service hotels, as they often accommodate guests on business trips.

  • Limited Service Hotels

Limited-service hotels often facilitate short-term stays or stops on the way to another destination. These properties can often be found outside large cities or on popular road trip paths.

Do research on these types of activities in your region to understand where potential guests may benefit from a hotel property!

In general, you should also look to see what other hotel properties are located where you are interested in buying.

While they are competitive, looking at their success in a specific area indicates how much the area would benefit from more hotel properties.

If you plan to purchase a full-service hotel property in a city, but there are no other full-service properties around, ask yourself why this may be the case.

While you may think that you won’t get any competition, this could be a warning sign that this type of business just isn’t sought after in the area.

FAQs

Consider a variety of factors. Consider where you plan to buy your property: is it going to be in a highly-populated area? Or maybe you’re interested in properties along major highways between big cities?

Also, consider your budget and financing options. Luxury hotels may offer the highest source of revenue, but if you can’t find resorts that have vacant properties or can’t afford their heavy cost, you should consider other options.

Yes!

Revenue management partners use information from other successful businesses and apply how they spend money to your revenue stream.

When hiring staff to manage your hotel, be on the lookout for managers with experience in revenue management and allocation.

Hotel properties offer a significantly higher constant flow of revenue compared to any other business, as they deal with daily income from numerous guests.

While the costs and effort associated with overseeing hotel properties may appear daunting, once you understand how to allocate resources (or how to get help if you are having trouble on your own), you’ll soon realize the value of a hotel investment.

Final Thoughts

Purchasing hotel properties is an amazing choice for those seeking to invest in real estate.

To understand how to maximize your profits, it’s important to differentiate between the different types of hotels and to identify which ones are best for your needs.

If you’re looking to finance a hotel property, Loanbase can help you!

We allow borrowers and lenders to directly communicate with one another efficiently (and transparently) in order to provide a mutually beneficial deal.

Visit our site to learn more about how LoanBase modernizes the commercial real estate industry—and how we can help you with your next hotel investment!

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