Hotel investment is increasingly becoming a popular option for investors to diversify their portfolios. Many are employing it as a viable alternative to traditional buy-to-let residential market. Taking this route allows investors to leverage the “hands off” investment model since professional companies manage the portfolio. The hotel management firms are incentivized to maximize room rates and occupancy levels. This is aimed at generating the best possible yield for the investors.
However, securing hotel portfolio opportunities may seem daunting since there are plenty of units from which to choose. The majority of buyers are interested in business sector and budget rooms, which offer good returns. It is important to note that location of the hotel plays a key role in determining higher returns.
Identifying great opportunities
When planning to add rooms to your hotel investment portfolio, it is vital to opt for established brands. Doing so allows you to benefit from optimal market positioning and global recognition. Well, known brands usually invest a lot of money in international marketing campaigns. This makes it easier to boost room occupancy levels.
The majority of established brands have longstanding partnerships with prominent personalities or celebrities. This allows them to attract more guests.
Some of the best options include hotels with superb facilities, such as fitness centers, premium quality golf courses, spas, and stunning views. Establishments that are ideally positioned next to exhibition and business centers make it easier to earn a good yield. The moderate price range of business hotel rooms has the capacity to generate yields of about six to eight percent. Professional hotel management firms can help achieve this objective.
Making a good choice enables you to earn a decent passive income. The return is typically cash positive from the first year. This applies even when fully mortgaged. This type of investment can offer a number of key benefits, including tax efficiency, hands-off investment and lifestyle benefits. Free personal usage is one of the perks of adding a hotel to your portfolio unless you purchased via a pension.
To make the right call, you should consider the hotel’s operational model. There are two major business models in this industry: chains and independents. Each model comes with a distinct set of strengths and weaknesses. Privately owned establishments are usually run by a single person or company.
The owner makes all the operational decisions; however, this business model does not enjoy the cost benefits of bulk buying like large hotel chains. Profits may be low if the owner lacks expertise in hotel management.
On the other hand, franchised hotels like AccorHotels, Marriot and Best Western benefit from the chain’s supply volume discounts. However, the operators cannot consider other supply opportunities.
A significant number of management decisions may be filtered on a top-down basis. This means the chain dictates procedures and protocols. The downside to this business model is that any operational problems experienced by the chain affect franchised hotels.
When it comes to privately owned, independently managed hotels, investing in this model can be likened to purchasing a buy-to-let investment property. A hotel management firm takes over all the day-to-day work for a payment.