Why Invest in a Hotel or Motel Property?By Sydni Miller
July 13, 2021
There are many perks to investing in a hotel like tax breaks, big returns, community involvement and more.
- Nightly Leases
Hotels and resorts sell their rooms and spaces by each night, so every day is an opportunity to make money and increase revenue. Sales and marketing make a hotel successful from a technical perspective. It’s obvious that to sell to the right audiences, you have to place advertisements in all the right places and target mainstream sites. However, the intangibles, like loyalty and property culture and neighboring tourist attractions, are most important when building up a reliable and consistent revenue stream.
2. Sweet and Sticky Expenses
According to Hotel Investors Toolbox, the USALI standard hotel financial statement separates expenses into three categories: departmental, undistributed, and fixed. The profit lines that follow each of these represent varying levels of control over these expenses depending on outside influence and resources.
Departmental expenses are the cost of goods sold. For example, this is what it takes to service the rooms, food & beverage, provide breakfast and other departmental goods. Much of these expenses are related to labor and a good portion is goods and services.
Undistributed expenses are related to the cost of operating the hotel. Management, maintenance, and sales-related expenses fall into this category. These expenses relate to outside goods and services more than labor.
Fixed expenses are exactly as the name implies; the hotel incurs these charges regardless of occupancy and revenue.
Noticeably, these expenses become more fixed and can change as you move down the financial statement. Some expenses are very sticky and set by outside market forces, like wages and utilities, but most are open for negotiation, which is the sweetener side of things. This is one of the greatest reasons to invest in hotels or resort properties.
3. Community Involvement
If you are someone looking to get involved in your community, this is a great way to set a positive impact on your city or town. This can also be used as a stepping stone to generate great recognition for you, your family and your loved ones. Many opportunities investing in a hotel or resort property offer include: generating new jobs,; being able to become a far-reaching social impact; hosting social events and neighborhood gatherings in the event spaces (become a meeting point for the community); added business meeting spaces, meeting new people from different areas, cultures, and ways of life; bringing in business for local shops in the close surrounding locations and your community benefits from it.
4. Tax Benefits
According to Hotel Investor Toolbox, direct real estate ownership is among the most tax efficient investments in your portfolio. Depreciation, equity growth and tax-free exchange are the three biggest benefits that come from real estate investment. This applies to all direct real estate investment, but hotels take each of these to another level.
Real estate loses value over time through wear and tear and functional obsolescence. United States tax law allows you to reduce your taxable income by applying a depreciation expense schedule over a defined timeframe. Hotel investments have a variety of real, personal and intangible property. Therefore, they benefit from more tax laws that may accelerate the depreciation.
Equity growth is important for a variety of reasons, but the most significant tax benefit comes in recapitalizing your investment. Cash equity pulled out from a debt refinance is not subject to federal income tax. Small tweaks to a hotel’s operations can boost cash flow and add tremendous value, which is accessible tax-free in this way.
5. In it for the Challenge
Money is not the biggest reason for investing in real estate like hotels or resorts. Most investors do it because they love a good challenge.
Hotels represent one of the most challenging asset classes for real estate investors.
Every level of investment in hotels – passive to active – requires tremendous due diligence and understanding of the industry. Investors must scrutinize and scrub all factors that impact the operation, especially external, market-related factors.
As big as the hotel investment industry is, it still represents less than three percent of the total CRE square footage in the United States, according to Hotel Investors Toolbox. The major players all know and respect each other because they understand how difficult it is to consistently perform at the top of their game.
Most investors or entrepreneurs look to build something of value in their lifetime that later generations can continue to build and grow. Hotels are a great way to envision your goals of building a business entirely up to your own preferences and ideas (as long as they are built around a target audience).
Having something unique built personally without much external influence or restrictions that traditionally come with other investments. It offers great motivation for many investors to make something truly great out of a hotel or resort business. You can create something more beneficial towards certain audiences, or spice it up in a way that will suit a different variety of factors.
7. High Returns
According to Vojo Ventures, hotel investments are typically associated with a higher risk in comparison to other commercial real estate (further referred to as CRE) asset classes. This is where the right hotel and asset management expertise comes into play, where knowledge of both the hospitality industry and asset management are determining factors in the success or failure of a hotel.
When involving hotel investment experts, the risk can be greatly minimized while at the same time working on optimizing the upside. This is where the real difference is made by strong asset managers. If you are strong minded and have a passion for managing people and business, investing in a hotel or resort property is for you.
8. People Travel, it’s that Simple
Every individual in the world travels. Some travel for passion, some for the profession, others for vacation and some are just passing through. People love to go to places and they want to spend their time and money somewhere reputable. In order to spend their time comfortably, they need accommodations, so they look for hotels. Hotels are the places where travelers turn for shelter in an unknown city. Many people are willing to pay for great hotels who offer amazing customer service, are clean, have a good reputation and offer nice amenities. If an individual invests in a hotel located in the prime area, earning capabilities are unlimited, which makes hotel investment a fantastic venture.
9. Economic Gain
According to Vojo Ventures, financial returns rank high among reasons for hotel investment. That may be high income from the hotel’s operating cash flow, especially if they have long-term ownership intentions. Many independent hotels and resorts prioritize getting cash returns – especially family run hotels with their ‘heirloom’ assets. On average, owners can achieve cash flow returns of 6 percent to 12 percent per year or higher based on their hotel business plan. Some owners favor returns by increasing the hotel’s capital value. They might have short or medium-term holding period intentions. Naturally, by increasing the cash-flow level from operations along with land value increases, an owner can make substantial capital gains and grow personal equity.
Investing in a hotel or resort property allows freedom for the individual managing and running it. During times like this, many people are looking for different, unique places to spend their time and money. If you invest, you can create something that is special to you, but also important and beneficial to your travelers. This will build up your name, your company, social media sites, wealth, and reputation among your community. This also reaches far from your own city because word travels. If you provide an excellent experience, many times people will tell their friends or family about their time at your business and want to come back, or spread the information to a wider audience. It gives many investors the opportunity to have a positive impact on their community, as well as reaching far beyond that. If you are looking for freedom, a challenge, a pay increase and something that could become a family business, investing in hotel or resort properties is just for you.
United Country Real Estate offers beautiful, eccentric, unique hotel and resort properties for sale across the nation and abroad. Find your freedom at United Country Real Estate and make your dreams a reality today. We have realtors, agents and brokers nationwide helping investors find their ideal properties. Learn more at www.UnitedCountry.com.