Differentiating Between Hotel Types

• Luxury: Offers top-tier amenities, services, and experiences, catering to high-end guests.

• Boutique: Smaller in scale, often with a unique theme or personalized service, targeting niche markets.

• Budget: Provides basic accommodations and services at lower prices, appealing to cost-conscious travelers.

• Resort: Located in vacation destinations, offering recreational activities and amenities beyond lodging.

• Extended Stay: Designed for longer stays, with kitchenettes and home-like amenities.

Considerations for Choosing a Hotel Type

Select a hotel type that aligns with your investment goals, market research, and target audience. Consider factors like the initial investment required, potential return on investment, and your ability to meet the operational demands of each hotel type.

Financial Considerations

Understanding the financial aspects of buying and operating a hotel is crucial to assess the viability of your investment.

Overview of Financing Options

Most hotel investors turn to loans to finance their first (and subsequent) acquisitions. While hotels don’t benefit from the wide range of financing options found in, say, the multifamily sector, there are a number of great options available.

SBA Loans

Loans backed by the Small Business Administration can be a great way to buy a hotel property — provided you’re the one running the hotel business. The SBA guarantees up to 85% of the loan, which means lenders are risking less. As a result, they’ll give you better terms.

Bank/Credit Union Loans

These are generally the most common type of loan you’ll see in hospitality investments. Are they the best? It depends on you and the institution. There are thousands of banks and credit unions — each with their own preferences on what they’ll finance — and this means no two banks or credit unions will offer the same terms. By using the Janover platform to take your loan application to a huge number of lenders, you drastically increase your odds of getting competitive financing.

CMBS Loans

CMBS, or commercial mortgage-backed securities loans, are loans issued and then pooled and sold on the secondary market. That might not mean much to you, but as a borrower you should be aware that CMBS lenders typically don’t put as much scrutiny on you as they do the asset you’re financing. One of the big downsides to CMBS loans is that refinancing out of them early can be a nightmare, thanks to defeasance clauses and other penalties.

Bridge Loans

A bridge loan is a short-term loan taken usually while an investor is getting the property into shape. They’re expensive, but if you’re converting a property into a hotel or renovating an aging property that doesn’t have the revenue to satisfy a more “standard” lender, they may be the only and best options on the table.

Understanding Key Financial Metrics

There are a whole range of metrics I could include here, but let’s focus on the most important. The three below can have a significant impact on your investment, and it’s wise to understand them before moving forward with a hotel purchase.

• Occupancy Rates: The percentage of occupied rooms, indicating demand.

• Average Daily Rate (ADR): The average rental income per occupied room, affecting revenue.

• Revenue Per Available Room (RevPAR): Combines occupancy rate and ADR to measure overall financial performance.

Arguably, RevPAR is the most commonly cited figure. In 2024, CBRE is projecting that RevPAR will grow only 1.2% during the calendar year, down from a previously anticipated (but still mild) 3%. Take that figure with a grain of salt, however, as many hotel types and markets will perform much higher (or much lower). As always, local research is key.

Budgeting for Operational Costs and Renovations

Operating a hotel incurs recurring costs such as staff salaries, utilities, maintenance, and marketing. Additionally, consider the initial and ongoing costs for renovations to maintain or improve the property's appeal and competitiveness. A detailed budget helps in planning for profitability and sustainability.

Due Diligence

Due diligence is a must in the hotel buying process. It lets you assess the value and potential of the property comprehensively.

Conducting a Thorough Property Evaluation

This involves a detailed inspection of the hotel's physical condition, including its structure, systems (HVAC, electrical, plumbing), and compliance with current building codes and safety standards. You’ll also want to check for permits, zoning, and anything else that could provide a legal hurdle to running a hotel in the asset.

Assessing the Hotel's Physical Condition, Operational Efficiency, and Financial Performance

Evaluate the hotel's operational efficiency by reviewing its management practices, employee performance, and customer satisfaction levels. Analyze financial records, including income statements, balance sheets, and cash flow statements, to understand its profitability and financial health.

Evaluating Existing Staff and Management

The success of a hotel often depends on its staff and management. Assess the competence and experience of the existing team and consider whether to retain them post acquisition.

The Acquisition Process

Successfully acquiring a hotel involves several key steps, from making an offer to transitioning ownership.

Making an Offer and Negotiating the Deal

Based on your due diligence findings, make an informed offer. Be prepared to negotiate terms, including the price, financing conditions, and any contingencies related to the sale. Understanding sales comps from your market is essential, and ensure you’re looking at the property through a realistic lens: Have a grounded strategy on how you can add value to the building or business.

Closing the Deal: Steps and Expected Timelines

Closing involves finalizing the sale agreement, securing financing, and completing any required legal paperwork. This process can take anywhere from a few weeks to several months, depending on the complexity of the deal.

If you’re stressed over your financing options, don’t be. Janover can guide you through the process so you take advantage of the best terms available for you. Just complete the form below.

Transitioning Ownership and Management

Once the deal is closed, transitioning ownership and management involves taking over operations, implementing any planned changes, and potentially rebranding. Effective communication with existing staff and guests is key to a smooth transition.

Exit Strategies

Having a clear exit strategy is crucial for maximizing your investment's value and ensuring future financial planning.

Plan Ahead: Holding Period, Renovation, Resale, or Franchising Options

• Holding Period: Determine the optimal time to hold onto your investment before selling.

• Renovation: Consider renovating to increase the property's value and appeal.

• Resale or Franchising: Decide whether selling the hotel or franchising it fits your financial goals better.

Understanding Market Timing for Selling the Hotel

It’s not easy to pull the trigger on a sale. However, with the right data and analysis the decision becomes much, much easier.

• Market Analysis: Monitor the real estate market and hospitality trends to choose the best time to sell.

• Financial Performance: Assess the hotel's financial performance to ensure it's attractive to potential buyers.

Conclusion

Investing in a hotel requires careful planning, thorough research, and ongoing management to be successful. By understanding the market, conducting due diligence, and implementing effective marketing and operational strategies, you can significantly increase your chances of success in the hospitality industry. 

More than anything, though, be sure to work with seasoned professionals that can help guide your way, whether it’s a broker to find the ideal property or a loan advisor to secure the best financing for your returns.

In this article:
1. Understanding the Market
2. Researching the Local Hotel Market
3. Assessing Location and Market Trends
4. Identifying Your Target Market
5. Types of Hotels
6. Differentiating Between Hotel Types
7. Considerations for Choosing a Hotel Type
8. Financial Considerations
9. Overview of Financing Options
10. SBA Loans
11. Bank/Credit Union Loans
12. CMBS Loans
13. Bridge Loans
14. Understanding Key Financial Metrics
15. Budgeting for Operational Costs and Renovations
16. Due Diligence
17. Conducting a Thorough Property Evaluation
18. Assessing the Hotel's Physical Condition, Operational Efficiency, and Financial Performance
19. Evaluating Existing Staff and Management
20. The Acquisition Process
21. Making an Offer and Negotiating the Deal
22. Closing the Deal: Steps and Expected Timelines
23. Transitioning Ownership and Management
24. Exit Strategies
25. Plan Ahead: Holding Period, Renovation, Resale, or Franchising Options
26. Understanding Market Timing for Selling the Hotel
27. Conclusion
28. Get Financing