Purchasing a hotel property is a strategic investment decision. Hotels combine the benefits of a business and real estate asset. As a business owner, one has access to many cash streams from multiple hotel services. Then a hotel as a real estate property has a high resale value due to long-term appreciation. Buying a hotel requires careful consideration. Here are the key things to keep in mind when purchasing a hotel property.
It is important to conduct a business valuation when buying a hotel. Typically, a valuation helps to determine the actual price of a business on sale. In this case, you should hire a professional business appraiser. The appraiser will factor in the cost of the land, building structures, and contents. In addition to the assets, the appraiser also considers the hotel's market dynamics and income aspects. Thus, conducting a standard business valuation will help you determine the property's realistic price.
Room Revenue Potential
A hotel property generates revenue mainly through leasing rooms to guests. Thus, one should consider the number of rooms available on hotel property. More rooms provide a higher potential of generating accommodation rental. However, having many rooms does not automatically translate into rental incomes. Therefore, one should be more realistic when calculating the room occupancy potential. As such, assess the average occupancy rates of other hotels in the area for a more accurate projection.
Non-Room Revenue Potential
An ideal hotel property should have multiple streams of revenue generation. Typically, room rentals are subject to fluctuations resulting from changing market dynamics. For instance, hotels mainly depend on tourist bookings. However, tourism is a seasonal product leading to low hotel bookings in off-seasons. Having alternative sources of revenues helps to maintain cash-flow stability during the off-season. For example, hotels can make cash from conferencing, sports, and restaurant services. Thus, consider whether a hotel has facilities to generate alternative revenue other than room rentals.
The return on investment for hotel properties depends on the quality of management. Many operational areas in a hotel require professional supervision. Such functions include housekeeping, front desk, marketing, maintenance, food, and beverages. Therefore, ask yourself how you intend to manage these aspects. You may decide to buy a hotel and maintain the existing management. Conversely, you can hire a new management team to run the hotel.
Purchasing a hotel without doing due diligence increases risks and uncertainties associated with operational aspects. Only buy a hotel property after a professional business valuation. More so, consider the potential for maximizing income through quality management, accommodation, and value-added services. When looking at hotel properties, see what other hotels, like Monte Carlo OC are doing