Is there money in hotels, guesthouses and lodges?

[nmb]

I have looked into hotels, guesthouses and lodges and from what I can see the location of the property is the key to any successful investment. There seems to be a move towards self catering lodges which would cut down on a significant amount of expenditure but hotels and guesthouses seem fairly high maintenance to me.

Does anybody else have any experience of hotels, guesthouses and lodges as long-term property investments?

 

[Nicholas Wallwork]

Yes we own a number of hotels and guesthouses. We run a hybrid model like an apart-hotel and keep costs to a minimum by having an onsite manager running the place and living there. I'd recommend that route rather than managing remotely as due to the high maintenance, "tenant"/guest turnovers having onsite staff is a must. We have developed our model as hands off as possible though and haven't bought anything over 30 rooms (yet). So each building is a manageable size... it works for us!

 

[nmb]

Thanks for your very interesting comments. So the trick is to keep hotels and guesthouses small and a manageable size to maximise occupancy levels and have an onsite manager to look after everything. What kind of returns does this create?

 

[Josh Caldwell]

I own part of two hotels, and yes there is a lot of money to be made in hotels. My experience is exclusively in the US, but the two that I am involved in average a 12% return, with projected appreciation to give me better than a 50% return in the next 3 years. These are both multi million dollar commercial properties with international brands. Normal investors can get involved in these types of deals the way that I did, by way of a syndication. It is basically just a larger partnership.

 

[Longterminvestor]

I have looked at guesthouses and hotels in the past and came to the conclusion it was difficult to “make more then a living” from the rental income but there was potential for capital appreciation when selling the entire property in the longer term.

 

[Josh Caldwell]

I have looked at guesthouses and hotels in the past and came to the conclusion it was difficult to “make more then a living” from the rental income but there was potential for capital appreciation when selling the entire property in the longer term.

This might be a size issue. How big are these guest houses? I am talking about 100 room + hotels. I am not sure if it works in anything below 50 rooms.

 

[Paolo Agostinelli]

I invested in a hotel in the US through a syndication and the expected rate of return is 10%+ per year for the as long as we hold onto the property. I think the key here is to invest in areas that are not located in premium priced markets (such as, loosely speaking, major markets on the east and west coast, where those properties are priced to yield <5% on a cashflow basis). Expectation is to benefit primarily from the cashflow, with the potential of capital appreciation through improvements, lower operating costs with improved management team in place, etc.

 

[FWL]

I once read something from one of the large hotel companies that suggested it was getting tougher to make money in the industry and the main kicker was to increase brand awareness, improve services and then sell after significant capital appreciation. Not sure how true this is or whether it relates to all sized guesthouses and hotels. Seems it is all about branding for the larger players?

 

[Paolo Agostinelli]

I once read something from one of the large hotel companies that suggested it was getting tougher to make money in the industry and the main kicker was to increase brand awareness, improve services and then sell after significant capital appreciation. Not sure how true this is or whether it relates to all sized guesthouses and hotels. Seems it is all about branding for the larger players?

Brand awareness and product/service differentiation (especially) are as important as ever across most competitive industries, as consumers/investors have access to more information to make their buying/investment decisions than ever before.....My guess is that the large hotel operator that you quoted operates primarily in only the largest metropolitan cities, where competition is the highest and operating margins are the lowest. That type of competition in markets that are already operating at extremely thin margins can result in success or failure of the entire venture. Whereas investing in hospitality properties in secondary markets provides much safety where there is considerable cashflow, competition means making "only" say, 8-12%/year on my investment, as opposed to 12%+. Because of my knowledge of local and regional markets, I'm finding opportunities there to invest as opposed to cities that are popular with non-US investors such as New York, Boston LA, etc...I do recognize that it's difficult to learn about those higher performing investments in international markets that we do not reside in. One of the many reasons why I enjoy this forum - sharing knowledge and ideas, and meeting like minded colleagues outside of the US.

 

[Josh Caldwell]

I once read something from one of the large hotel companies that suggested it was getting tougher to make money in the industry and the main kicker was to increase brand awareness, improve services and then sell after significant capital appreciation. Not sure how true this is or whether it relates to all sized guesthouses and hotels. Seems it is all about branding for the larger players?

For the larger "name brand" hotels, the brand itself is very important. Along with the brand comes a franchise system and integrated reservation system that makes it hard for non franchised hotel properties to compete. There is still space for smaller non branded hotels but they need to look for areas on the fringes and niche markets where they can thrive. I have a friend who owns a smaller hotel in a small town, near an eco tourism site. He does quite well, but he needed hotel experience to be able to survive. He had already run a franchised hotel and he adapted their operating procedures to maximize his profits.

 

[Longterminvestor]

It is economies of scale which make it work for the big players - like you say, the smaller players need to think on their feet and there is no room for mistakes.