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8 Elements of a Successful Hotel Investment Strategy

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Jordan Hollander in Operations

Last updated January 23, 2024

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Thinking about investing in hotels? Or perhaps you’re looking to take your investing strategy to the next level. Hotels are unique assets, and achieving a strong return on your investment isn’t as simple as buying any property, doing a light renovation, and selling it. Successful hotel investors are disciplined and won’t consider a deal unless it meets their high standards. In this article, we’ll share 8 key elements of a successful hotel investment strategy, giving you insight into the minds of the investors who can spot an asset with serious potential.

Investment discipline

The first rule of any kind of investing – from the stock market to real estate – is to leave your emotions at the door. Using cold, hard data to make decisions allows you to free yourself from any emotional connection or bias that could cloud your judgment. In the case of a market disruption or any range of macroeconomic factors (pandemics, politics, etc.), your hotel’s performance could drop, and it’s a normal human reaction to feel scared or anxious. But don’t let those feelings get in the way of your investment strategy.

Valuation rigor

A hotel’s fair market value is one of the most important metrics for hotel investors and owners. But calculating that fair market value isn’t always straightforward. Taking the time and spending the money necessary to calculate an accurate valuation is worth it, and many investors choose to hire third-party appraisers or consultants for this purpose. Appraisers use a couple different methods to arrive at a hotel’s valuation, but regardless of which method they use, as an investor, you’ll want to ask plenty of questions and poke holes in their calculations to get as close to an accurate valuation as possible.

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High ROI value-add opportunities

When you’re considering potential assets to invest in, look for assets that have value-add opportunities that will increase your return on investment. Hotel rooms aren’t the only revenue-generating part of a hotel box; restaurants, meeting space, parking, fitness, and retail can all add incremental value. The key is to find opportunities where you can spend $2 and turn it into $4 of value. For instance, maybe you can carve out some of the back office space and turn it into a beautiful conference room that you can monetize.

Favorable demand trends in the local market

Although you can change many aspects of the physical, larger demand trends in the market are beyond your control. When considering a potential hotel investment, it’s important to study the local demand drivers to ensure the market has a positive outlook. If a market is seasonal, these demand trends are even more important. How will you fill rooms during the slow season? What happens if weather impacts your peak season? A market with a healthy mix of demand drivers will contribute positively to your hotel investment.

Built-in demand

In addition to macro trends in the market, it’s advantageous to have strong built-in demand in the microlocation surrounding your hotel. For example, a hotel that’s situated in close proximity to hospitals, universities, stadiums, airports, and convention centers can always count on demand from those attractions. Not only can those well-located hotels benefit from steady occupancy, but guests who are willing to pay more for convenience will book high ADRs.

Unique assets

A standardized big-box hotel might be a compelling investment, but guests can be quick to switch to the hot new property that opens down the street. You want to avoid being in this position – a new hotel comes up and eats your lunch – and a great way to future-proof your investment is to invest in a hotel with a unique competitive advantage. Some good competitive advantages include location (for example, the only hotel attached to an airport), history (oldest hotel in the city or boasting a notable story), and architecture (designed by a famous architect or having some especially memorable features).

Operational inefficiencies

It’s hard to take a hotel that’s running at 95% efficiency and dial it up to 100%. It’s much easier to take a hotel that’s running at 50% and bring it up to 90%. These are the assets you want to look for: poorly run hotels that have plenty of opportunity for improvement. Hotels that are using outdated technology, for instance, offer a nice opportunity because you can upgrade to new technology and nearly instantly see a boost in revenue and profits.

Building relationships

The world of hotel investing is a small one, and sometimes the best deals come down to who you know. Building and nurturing relationships with key players like brokers and local business owners will help increase your proprietary deal flow and perhaps lead you to more deals in the future. Building a strong team can also contribute to your success; working with the same asset manager or team of consultants time and time again can lead to synergy and efficiency.

What makes having an investment strategy crucial for individuals investing in hotels?

Having a well-defined investment strategy is indispensable for hotel investors due to several key factors within the hotel investment landscape.

Firstly, the intricacies of hotel investment, being a subset of real estate, demand a strategic approach to navigate through dynamic market conditions. Effective pricing strategies, considering metrics like Average Daily Rate (ADR), Revenue Per Available Room (RevPAR), and occupancy rates, are integral components of a successful investment strategy in the hotel industry.

Furthermore, a comprehensive investment strategy takes into account various aspects of hotel operations, such as revenue management and asset management. This approach ensures that the cash flow from the hotel business is optimized, contributing positively to the bottom line.

The type of hotel and its market positioning are crucial considerations. Whether it's a boutique hotel, a full-service establishment, or one associated with a well-known hotel brand like Hilton, aligning the investment strategy with the specific characteristics of the property enhances the likelihood of success.

Understanding the hospitality industry's trends and guest preferences is vital for creating a guest experience that attracts bookings and, consequently, maximizes returns on investment. Additionally, keeping an eye on market conditions helps identify investment opportunities, whether it involves developing a new hotel or adding value to an existing one.

For hotel investors, collaborating with a reputable hotel management company can be part of a sound investment strategy. This partnership ensures effective day-to-day hotel operations, contributing to sustained profitability.

In the broader context of real estate investment, hotels represent a unique asset class. Therefore, tailoring the investment strategy to the distinctive features of hotel real estate assets, including considerations for business travelers, types of hotels, and market demand, is crucial for long-term success.

A well-crafted investment strategy in the hotel industry considers a spectrum of factors ranging from market conditions and real estate assets to guest experience and revenue management. By addressing these elements, hotel investors can position themselves to make informed decisions and capitalize on the diverse opportunities within the dynamic hotel investment landscape.

Whether you’re a first-time investor or you’ve seen it all, there’s always room to up your game and become a more disciplined and strategic hotel investor. 

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Jordan Hollander
Jordan is the co-founder of Hotel Tech Report, the hotel industry's app store where millions of professionals discover tech tools to transform their businesses. He was previously on the Global Partnerships team at Starwood Hotels & Resorts. Prior to his work with SPG, Jordan was Director of Business Development at MWT Hospitality and an equity analyst at Wells Capital Management. Jordan received his MBA from Northwestern’s Kellogg School of Management where he was a Zell Global Entrepreneurship Scholar and a Pritzker Group Venture Fellow.