Hotel: Good investment or not?

[Matt Lyons]

I own a few rental properties and have owned a few businesses in the past... I am currently looking seriously at an undervalued hotel... anyone have an opinion good or bad about hotel investing

[Joel Owens]

I do not focus on hotels however I can share what I noticed about a decade ago on the last downcycle.
In economic boomtimes hotels tend to do very well.
The reason is lots of travelers for business and leisure. Business they like to hold conferences and business meetings. Leisure in boom times consumers tend to have lots of excess cash so will splurge on the larger trips out of state or out of the country even.

In an economic downturn the opposite tends to hold true. Businesses cut the conventions and traveling for get togethers along with conferences to save money. Consumers instead of traveling abroad or out of state tend to do staycations where they travel maybe a few hours from where they live to the beach or the mountains for a quick and cheaper getaway. So in boom times REVPAR can go up  but in downtimes it can go down along with daily occupancy rates.

The type of hotel is key also. Is it a vacation type area, business, both, or utilitarian where people stay weeks or months to live there? Once you determine what type of hotel you CURRENTLY have then you need to decide if that is it's highest and best use for that area. You might find the kind it currently is has oversaturation for your local market but one that caters to the other categories is in short supply and high demand.

Once you decide on hotel type you want to operate at ( make sure it will comply with the flag agreement or you might want to switch flags or going independent) then go research the other properties. Keep a score chart of how well they are located, how new the property is, what amenities there are, what they charge for week nights and weekends. You have to KNOW your competition to beat them and outperform them. If you do not complete extensive research then you are just guessing what might make an impact implementing into your property and business instead of having a high likelihood of knowing and stacking odds into your favor.

Hotels are a more intensive asset class that can require daily management versus other commercial asset classes so you have to make sure the reward far outweighs the downside risk. An example is one of my clients is buying a NNN lease single tenant property. A franchisee as example that owns dozens of stores and with many tens of millions in annual sales might generate a 9% net profit return. So on almost 40 million in sales might generate 3,600,000 annually. That is A LOT of headache for such a return. I won't touch a restaurant for yields less than 20% or more because I know the work that goes into creating that yield. Lot's of restaurant operators are stuck working in the business instead of on it unless they achieve scale with lots of properties. It can be the same way with hotels. You have to decide if you are on owner operator or an investor? I don't touch anything which would require me to be a daily operator instead of a more passive investor. I can't have one potential investment taking all of my time night and day. That is working a job for yield instead of being an investor. With restaurants as an example if that food costs goes up, labor goes up, store needs reimaging, etc. all of these really eat in potential profits.

I can own retail centers for example as a landlord and have the businesses do the intensive work with employees for sales and make a higher return with them paying me the rent each month.

I am all about smart yield that is less intensive these days for returns.