Are you a hotel management student, a recent graduate, or even a keen entrepreneur with an interest in investing in the travel and tourism industry? If so, you may wonder whether hotels are a good investment.
The travel and hospitality industry is thriving, with millions of hotels once again welcoming travelers following the global pandemic. As the number of people looking to visit far and wide destinations shows no sign of slowing, it could be said that there’s never been a better time to see that hotels are a good investment.
In this article, we answer the question, “Are hotels a good investment?”, and share everything you need to know to determine whether investing in hotels is right for you.
Introduction to hotel investment
Before we get started on sharing the benefits of hotel investing and whether owning a hotel is profitable, reviewing the definition of hotel investment and the current state of the hotel industry is a good place to start. After all, you wouldn’t want to invest in a hotel before learning more about tourism market trends and whether you’re likely to see financial gains.
Definition of hotel investment
Simply put, hotel investment is defined as investing in a hotel to make a return on investment (ROI).
When considering hotel investment, you could invest in – or fund – shares, assets, part of a hotel, or an entire property. Investing in a hotel could also see you investing in renovations to increase customer interest or providing the finance needed to build new hotels to increase your income.
Overview of the hotel industry
Top hotel brands, including Hilton Worldwide, Marriott International, Hyatt Hotels & Resorts, and IHG Hotels and Resorts, have been welcoming guests since the early 1900s.
Leading the way in the lodging industry, hotels offer numerous services, including spas, luxury suites, fine dining restaurants, and resorts encompassing many activities to suit all needs and desires.
In recent years, the hotel industry has been significantly affected by Covid-19. As travel was restricted, the hotel market experienced a considerable contraction and sales decreased.
However, the hotel industry has bounced back vigorously since the pandemic. With more than 900 million people visiting new destinations in 2022 alone, the industry is expected to generate $1.21 trillion this year – meaning there’s plenty of income potential.
Benefits of investing in hotels
From a stable cash flow to a diverse investment portfolio, investing in hotels has many benefits. Below, we share some of the top benefits to help you consider ‘are hotels a good investment?’.
High demand for hospitality services
With approximately one in eight people hiring vacation rentals, demand for hotels and hospitality services is soaring. Hospitality services don’t just include hotel rooms, rentals, and other types of accommodation, though. Services also include restaurants, spas, fitness facilities, and even transportation.
Considering that demand for these services is ongoing, investing in hotels could mean generating a considerable profit now and in the future.
Stable cash flow from hotel operations
It’s normal to ask ‘is owning a hotel profitable?’. If you are considering such a step, knowing that investing in hotels provides a stable cash flow as well as being a valuable real estate asset may help your decision.
While many factors can impact cash flow, current demand and projected demand for hotels are high. For anyone looking to invest, this can mean a steady income stream.
Potential for appreciation of property value
When you invest in a hotel, you may want to make several changes to the property. These changes could include enhancing the hotel’s external appearance or improving hotel features.
As you make these changes, the popularity and desirability of your hotel may rise, leading to more reservations and higher investment return. And in turn, that can increase the property’s investment value.
Tax benefits for hotel owners
Investing in a hotel will see you eligible for tax benefits designed especially for hotel ownership. These benefits reduce the cost of taxable income as well as how much tax you’ll need to pay for fittings, fixtures, and furniture.
Some tax incentives include:
- Capital investment allowances
- Capital gains tax relief
- Structures and buildings allowance
- Annual investment allowance.
Diversification of investment portfolio
Resorts, boutique hotels, budget hotels, hostels, extended stay hotels, inns, and suites: the types of hotels available to customers range from high-priced to budget and low-cost. Rather than settling on one kind of hotel, you can develop a diversified investment portfolio.
Factors to consider when investing in hotels
With many benefits associated with starting a hotel investment business, you may be ready to get started. But there are factors to consider before jumping in.
Whether you’re curious about income properties, hotel development, or vacation rentals, investing in hospitality real estate can be extremely rewarding. So, what are the factors to think about when asking are hotels a good investment? We share a few below.
Importance of location in hotel investment
Did you know that the location of a hotel can greatly impact its popularity and profit?
For example, hotels with close proximity to city centers, landmarks, and conference centers are more likely to generate higher turnover than remote hotels. But this largely depends on industry trends.
Management and operations of hotel properties
Hospitality management can affect ROI for investors, as can hotel operations. This is because the management and operations of departments, such as food and beverage and housekeeping, influence customer satisfaction.
Lower satisfaction scores and ratings can lead to fewer reservations and reduced profits. Meanwhile, high-scoring hotels are likely to see more bookings and ROI.
Market demand and competition in the hotel industry
Customer needs frequently change, driving market demand and competition in the hotel industry.
Before investing in a hotel, reviewing real estate market analysis and tourism market trends can help you make informed decisions about where to invest.
Looking at what competitors in the industry are offering is also essential. Doing so offers insight into what they’re doing well, which can help you identify any gaps in the market when investing in a hotel.
Financing options for hotel investments
Another factor to consider before investing in hotels is the financing options available for hotel investors. This is especially important if you’re a first-time real estate investor or you’re considering investing in a hotel that requires refurbishing.
Loans are available for hotel investors to support hotel development, but you’ll need to think about meeting the repayment schedule.
Industry trends and changes impacting hotel investment
Just as market demand affects hotel demand, so do industry trends. Some industry trends that impact hotel business investment include:
- Solo travel
- Vacation rentals
- Remote working.
Types of hotel investments
Types of hotel investments are varied, so as you consider ‘are hotels a good investment?’, it’s worth learning more. We set out some of the common hotel investments below.
Owner-operator model of hotel investment
If you have a hospitality degree and are hoping to be a hands-on, active hotel investor, an owner-operator model of hotel investment is for you.
Owner-operator hotel investors own the hotel they invest in and play a large role in the hotel’s day-to-day operations.
Management contracts in the hotel industry
A management contract is ideal if you’re hoping to invest in a hotel without being involved in daily operations.
More like a hotel asset management partnership, you’ll hire someone with experience in hospitality management to run the hotel for you.
Franchise agreements in hotel investment
If you have experience managing teams, a franchise agreement may appeal to you. Investing in a hotel franchise would see you become a franchisee. As a franchisee, you’ll hire a team to manage the hotel on your behalf, as you would in a management contract.
Real estate investment trusts (REITs) in the hotel industry
Rather than investing in a hotel as a sole trader, real estate investment trusts (REITs) own multiple-income properties within the hotel industry. This type of investment is perfect if you’re investing in more than one property and have set up your own business.
Risks and challenges of hotel investment
Although investing in hotels has many benefits and advantages, there are some risks and challenges that hotel investors need to bear in mind.
Seasonality and occupancy rates in the hotel industry
Seasons have a major impact on occupancy rates in the hotel industry. High and peak seasons are those when the hotel industry is busiest and makes the most money. In contrast, off-peak seasons can be quiet in the tourism industry. During off-peak seasons, hotels receive fewer bookings, meaning turnover and ROI can be lower.
Economic downturns and their impact on hotel investment
During a recession or time of economic uncertainty, tourism can contract and dramatically reduce the number of people traveling and booking hotels. When there’s less hotel demand, there’s lower ROI.
Competition and market changes in the hotel industry
As with any industry, competitors and market changes are among the risks and challenges of hotel investments. Competitor hotels may open new chains on your territory, offer rooms at lower rates, or increase services for a competitive advantage.
Market changes additionally influence traveler choices. The number of people traveling solo has increased, so hotels offering single rooms may see more bookings in this sector than hotels offering rooms for two or more people.
For hotel investors, market changes and competition can lead to questions, including is owning a hotel profitable.
Labor costs and management issues in hotel investment
From funding wages to resolving conflicts in the workplace, other challenges for hotel investors include labor costs and property management issues in hotels.
These challenges can impact ROI. Some investors also prefer hotel investments that don’t require them to become involved in day-to-day operations.
Maintenance and upkeep costs in hotel investment
When you invest in a hotel, maintenance and upkeep costs will fall on you. Covering these costs may seem fine when your hotel makes a good profit. However, profit is likely to be lower during off-peak periods, which could pose a problem.
Remember, even if there are no maintenance needs when you invest in a hotel, you’ll likely need to invest funding in the upkeep of the hotel over a number of years.
Conclusion and final thoughts
If you’re interested in investing in hotels, it’s normal to question are hotels a good investment. Hotels can certainly be a great investment, especially if you are passionate about the travel industry. But before you invest, it’s best to consider all your options, review the challenges you may face, and ensure you’re able to meet them.
Summary of key points
Throughout this blog, we’ve shared some important information for you to consider before investing in hotels. Here’s a summary of our key points.
- There are several types of hotels available for you to invest in. You could opt for a resort, boutique, or budget hotel.
- Consider the hotel’s location, management and operations, and market demand before selecting a hotel to invest in.
- Ensure that the type of hotel investment is suited to your needs.
- There are risks and challenges of hotel investment. External challenges often can’t be anticipated, but with the correct management, they can be navigated.
Final recommendations for graduate hotel management students
If you’re a graduate hotel management student looking to invest in hotels, studying for a master’s in hotel management will equip you with the knowledge you need to invest in and learn how to manage a hotel.
At Les Roches, we offer sought-after courses that support students in achieving their dreams and ambitions of owning a hotel management company and becoming hotel investors.
Main Image: benedek/ iStock / Getty Images Plus] via Getty Images
Immerse yourself in every aspect of managing and investing in luxury hotels with priceless hands-on experience and knowledge from industry leaders