Best Hotel Sectors for Reliable Profits in 2024 and Beyond

by | Mar 7, 2024 | Real Estate Syndications

With the consistent rise of hospitality industry, hotel investment now stands as a compelling prospect for many investors. These days, travel is on the rebound, and both leisure and business travel are more robust than ever. With all this demand for travel, it will definitely make anyone wonder how they might be able to get in on the action and potentially invest.  

This is where hotel investment comes in, where hotel investors can reap the benefits of the strong wave of travel demand while also diversifying their 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. 

Understanding Hotel Investment Opportunities 

Investing into hotel investments parallels other forms of commercial real estate ventures, such as multifamily apartment communities, self-storage units, 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: 

  • Cash flow 
  • Equity 
  • Appreciation 
  • Tax benefits 

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. 

Is Investing in Hotels a Good Real Estate Strategy? 

Allow me to clarify upfront that not every hotel property qualifies as a prudent investment. In essence, not all hotels align with your investment objectives or risk tolerance.

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. 

Travel Surge After the Pandemic 

First and foremost, let’s address the prominent issue impacting the hotel industry – COVID-19. During the peak of the pandemic, airports resembled deserted locales as individuals refrained from travel for extended periods. Hotels, during the summer of 2020, were often the least desired destinations, leading the industry into a precarious situation. 

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. 

Vacationing versus Business Trips 

When considering the hotel sector, the typical image conjured involves family getaways and recreational journeys, a scenario that could appear vulnerable in the event of another pandemic or economic downturn. In such circumstances, individuals might opt to forgo their planned family beach vacations, choosing instead to camp at nearby state parks. 

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. 

GrowAbility Equity Hotel Investment Example 

As an example, our hotel partner GoodEgg currently owns and manages 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), our partner GoodEgg was able to over-deliver on projected returns, distributing to their 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. 

Check out more of the assets in the GrowAbility Portfolio here. 

The Significance of Effective Hotel Operations 

An essential factor to contemplate in hotel investments, akin to other forms of commercial real estate, is the competency of the operator—the proficient team overseeing 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. 

Variations Among Hotels 

Reflect on your most recent hotel stay. Was there a welcoming attendant providing valet service upon arrival, or did you utilize self-parking with automated access? Did the hotel feature a comprehensive restaurant and souvenir shop, or was there merely a self-service convenience store in the lobby? Did it include amenities such as a pool, fitness center, or event ballrooms? 

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. 

Luxury Accommodations / Full-Service Hotels 

The initial category encompasses full-service hotels, exemplified by luxury establishments such as Ritz-Carlton, Four Seasons, and Waldorf Astoria, as well as renowned chains like Hilton, Marriott, and Hyatt. These hotels provide a comprehensive array of amenities and on-site services. Whether you desire a massage at the spa or a delightful dinner at the hotel restaurant, everything is conveniently accessible within the premises. 

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. 

Limited and Select-Service Accommodations 

Moving away from the lavish amenities typical of full-service hotels, you encounter more modest establishments that still cater to your essential requirements. These establishments fall into the categories of 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 Accommodations 

An excellent choice for business travelers, especially those embarking on lengthy assignments, are extended stay hotels such as 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. 

Economy Lodgings 

The last classification within the hotel industry comprises budget hotels. These lodgings provide the most affordable rates and offer minimal amenities and services. Examples include Days Inn, Travelodge, and Motel 6. 

Essential Vocabulary for Hotel Investments 

As you venture into real estate investment, familiarizing yourself with various terms and jargon becomes imperative to comprehend the intricacies of your investment and assess the asset’s performance effectively. 

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) 

Another crucial metric for hotels is RevPAR, short for revenue per available room. Like ADR, RevPAR serves as another valuable data point 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. 

Hospitality Vs. Short-Term Rentals 

Another aspect frequently considered in hotel real estate is the rivalry posed by Airbnb, VRBO, and other short-term rental platforms.

It’s fairly typical that short-term rentals are sought out on family vacations, especially when traveling with kids where an extra bedroom or two can be a game changer.

However when traveling for business, hotels are typically the top choice due to both 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. 

Consistency in Occupancy 

In numerous Airbnbs, especially those tailored for leisure guests, seasonal patterns can influence overall returns. For instance, a beachfront property may experience full bookings at peak rates throughout the summer but remain unoccupied for extended periods during the winter.

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 and Security 

As a solo traveler, whether for business or leisure, I typically find greater peace of mind in a hotel setting. The assurance of lobby security, the requirement of a key card for floor access, and the knowledge that assistance is readily available if needed, all contribute significantly to my preference for hotels over 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 Legislation and Regulations 

There’s a growing trend of cities making headlines for banning new Airbnbs or short-term rentals. This is largely due to the disruption these rentals can bring to residential neighborhoods. Therefore, it’s crucial to carefully consider such factors when contemplating investments 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. 

Size & Variety 

When considering investments in the broader hospitality industry and weighing the options between short-term rentals and hotel investments, the scale becomes another pivotal aspect to ponder. 

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 Properties Versus Multifamily 

When deliberating between investing in a hotel or a multifamily property, why limit yourself to just one? Each investment type offers distinct advantages, and diversifying across asset classes can effectively balance 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! 

Our Preferred Hotel Investments 

We prioritize select-service, limited-service, and extended stay hotels due to their ability to yield healthy returns with relatively low risk. These types of hotels are particularly favored by business travelers, who typically require fewer amenities and often travel solo, making them our main focus for investment opportunities. 

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. 

Investment Options in Hotels 

There are various avenues to consider when adding a hotel investment to your portfolio, contingent upon factors such as your risk tolerance, eagerness to engage hands-on, and specific objectives regarding returns, tax advantages, managerial control, and portfolio diversification. 

Purchase Your Own Hotel 

One straightforward method of investing in a hotel is to acquire one outright. Nonetheless, this option may not be suitable for most investors, considering factors such as available capital, desired level of involvement in hotel asset management, and the desired scale of the hotel property. 

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 managing a hotel isn’t your preference, another excellent approach to enter the hotel investment arena is through 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 that accelerated depreciation benefits will phase out in 2027 unless a new bill just approved by the House is approved by the Senate). 

Further, if you were to invest in a hotel fund, you could diversify into multiple hotels with a single investment. 

Just keep in mind that many real estate syndications are open to accredited investors only and tend to have minimum investments of $50k, $100k, or more.  

Note: Being an accredited investor means that you have an income of at least $200,000 as a single person or at least $300,000 as a couple, or have net worth above $1 million, excluding your principal residence. 

Crowdfunding 

Another form of collective investment is crowdfunding, which can be particularly suitable if you’re aiming to invest a smaller sum or haven’t attained accredited investor status yet. 

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. 

REITs 

Lastly, one of the simplest methods to invest in hotels is through a hotel REIT (real estate investment trust). Comparable to investing in the stock market, you can allocate any desired amount. However, it’s important to note that REITs often mirror the fluctuations of the stock market, so if you seek diversification beyond stock market dynamics, this option may not be optimal. 

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. 

Next Steps 

If you are looking to invest in a hotel or other real esate investment and are looking to do so either via a real estate syndication, we invite you to invest alongside us.  Check out our latest offering here. 

Join Our Community 

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 by joining the GrowAbility Equity Club 

If there’s ever anything we can do to help you on your journey, feel free to schedule a call with us or send us an email at admin@growabilityequity.com.

Thanks for being a part of our community. Until next time, keep growing your ability to accelerate your wealth and legacy building—we’re thrilled to be a part of this journey!

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