Existing Hotel vs New Construction Hotel – Which is the Better Investment?

Existing Hotel vs New Construction Hotel - Which is the Better Investment

 

Hospitality entrepreneurs usually enter a dilemma when it is time to expand their portfolio of assets, particularly hotels. They are confused whether to invest in a newly constructed hotel or to invest into the renovation of an existing one; investments should be made after measuring the pros and cons of each situation. Sometimes looking at the bigger picture is more relevant than the current performance of an existing asset, so it’s better to evaluate each option thoroughly.

There are two types of investments available for hotel entrepreneurs; either investing in an existing hotel or laying down the groundwork for a newly constructed one. Your choice should ultimately depend on the cost basis, time, quality, and potential disposition value of each deal.


Existing Hotel

 

Whenever you decide to undertake the renovation of an existing hotel, two things are always considered; the cost basis of your acquisition and the cost benefit of changing flags, or renovating the property into a different brand. This is especially true if the hotel is located in an extremely busy market, center-city location, or in market where vacant land is scarce.

How will you benefit from investing and renovating an existing hotel over constructing a new one? Here are the reasons:

-If you purchase an existing hotel with operating history, you’ll have a very accurate look of what’s going on today, or what the return on your investment currently looks like.

-Due to the rising costs of construction and scarcity of land in reputable markets, the feasibility of building a new hotel is harder said than done.

-Assuming the property is cash flow positive, you can recognize income 12-24 months sooner compared to new construction hotel investments.

-When buying an existing hotel, you can safely skip the entitlement, design, and development process.

-Sometimes acquisition cost can be significantly below new construction replacement cost.

-Existing hotels often have financing that you can assume. It’s convenient not having to go searching or negotiating for a loan when you can readily assume a good loan.

As far as the risks are concerned, you will have to think about the following:

-Many older hotel buildings do not have adequate electrical, plumbing, or mechanical functions to keep up with the demand of today’s corporate traveler. You’ll end up spending just as much money replacing these systems as you would installing brand new ones.

-The price of acquisition with the cost of renovation must not be greater than the cost of constructing a new hotel.

-You might have less branding options as opposed to building a new hotel.

-Selling renovated or repositioned hotels will most likely sell for a drastically smaller premium than newly constructed assets.

-Your maintenance costs will never be as low as new construction hotels.


New Construction Hotel

 

Investing in a new development project can also be a risky but rewarding investment. It’s important to invest in reliable markets and cater to the business traveler.

New development & new construction investments have the following benefits:

-The guest experience and floorplans of today’s hotel prototypes are more efficient and modern than older hotels. Guest are satisfied and leave great travel reviews. Everything is new!

-New construction hotels typically become market leaders with rate and occupancy because business travelers don’t mind spending more money to stay in newer hotels.

-Operating profits are very lean because the property manager isn’t always spending money on maintenance and repairs.

-Disposition is often very rewarding. REITS and institutional buyers demand the best performing assets and often pay the highest value to new or newer hotels.

However, new construction and new development hotels have their own risks:

-The development process often takes 6-18 months of hard work with engineers, attorneys, architects, and City Officials with another 16-24 months of physical construction.

-No income during the development and construction process.

-Building codes and zoning laws are different everywhere and subject to government review

-Construction financing is generally tighter and more expensive than existing hotel acquisition loans. There are plenty of lenders for existing hotels, not so much for new-construction loans.

 

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Conclusion

 

Both options come with their own set of pros and cons. Whatever investment you end up making, you should take into account whether you’re making these investments to supplement your cash flow or to maximize your long term gain. Both of these objectives can be rewarding, but take a look at the bigger picture which can often be found in a metric called “equity multiples”.

equityroots.com is website owned and operated by Equityroots, Inc., a Delaware Corporation and real-estate developer specializing in select service and full service hotel development. Equityroots found value in partnering with Intercontinental Hotel Group (IHG), recently licensing two of their most iconic brands, Holiday Inn and Holiday Inn Express in a dynamic dual brand design. The development was able to identify Class-A vacant site in a market with barriers to entry, it was an easy decision to pursue new development given the circumstances.  New development projects and investments often require a higher degree of patience compared to existing hotel acquisitions, but the added layer of patience is often rewarded during the exit strategy.

For more information on hotel investments, visit us at www.equityroots.com or sign up for our monthly newsletter at the bottom of our homepage.

Sources

http://www.forbes.com/sites/quora/2013/02/28/what-does-it-take-to-start-a-hotel/#10ed564817e0

https://www.hotel-online.com/press_releases/release/hotel-investment-how-to-finance-the-new-supply

http://interestinginvestments.com/investing-in-hotels/

https://www.bdcnetwork.com/5-forces-driving-hotel-investment

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Hotel Crowdfunding vs. REIT Investments — Investing Tools for the 21st Century

Hotel Crowdfunding vs. REIT Investments — Investing Tools for the 21st Century

The ushering in of the 21st century has brought about quite a few new developments for the real estate industry. As with most industries, the real estate industry has seen numerous investment tools and methods . Two have jumped to the forefront within the real-estate industry: Crowdfunding and Real Estate Investment Trusts (REITs).  These two, especially crowdfunding as it relates to hotel crowdfunding, are a couple of the alternatives to the traditional methods of investing.  Hotel crowdfunding and REITs have created quite a buzz in the investment market place and have left many wondering how to best utilize these tools for their investment or capital raising needs.

What’s so special about Crowdfunding for Hotels?

With the passing of the Jumpstart Our Business Startups Act of 2012 (JOBS Act), online platforms, such as EquityRoots, Inc., can now generally solicit the sale of real estate backed securities to prospective investors by registering Form D with the SEC—the Security and Exchange Commission, or qualifying exemption. When using general solicitation, all purchasers of the public offering (in this case hotel assets) must have accredited investor status. The Jobs Act has also paved way for unaccredited investors to participate.  More recently, and under newer offering types like Regulation A+, unaccredited investors can participate under certain limitations.  This opens up the possibility for online platforms to extend investment opportunities to everyone, not just accredited investors anymore.

Under these circumstances, hotels are a great asset class to crowdfund because of its existing large and loyal customer bases associated with each of the top Hotel chains such as Marriot, IHG, Hyatt and Hilton.  In most cases, commercial real estate like hotels yield investors a greater rate of return than residential real estate investments.  Hotel transactions have a greater degree of moving variables and risks, hence the typical rate of return correlates.  Equity crowdfunding investments can easily break the status quo, often seeing a rate of return above 20% when factoring 5-year holding periods and including the disposition proceeds.  The cash flow performance of hotel assets can also impress investors, especially when the development is backed by a strong reservation system and strong Brand.  Crowdfunding is not limited to equity, you can also crowdfund a mortgage or a business loan.

 

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What’s the infatuation with REIT(s)?

Real Estate Investment Trusts (REIT) didn’t start to matriculate in the investment marketplace until the 1960s—when Congress introduced this investing tool into the U.S. economy. What is a REIT? By definition, it is a corporation that owns and operates income producing real estate. More specifically, it joins the capital of several investors and investors earn a share of the income produced, yielding a 8.8% rate of return averaged over the last 10 years.

A REIT offers investment flexibility at a reasonable entry price. REIT(s) can invest in multiple asset classes such as retail, residential, healthcare, offices. and for each of these asset classes, investors can earn a share of the income produced. Many people find REIT(s) an attractive investment because of it’s liquidity, meaning you can wake up and sell it if you need the cash.  Be weary, certain REIT’s often have restrictions on when and how much you can sell.

Conclusion & Comparison

After comparing the two investment tools, it’s clear that each has their pros and cons. A REIT’s ability to earn a reasonable rate of return and the liquid nature of the investment may be a good fit for some people. But for the savvier investor that can decipher between good/bad markets and good/bad flags, they have multiple options on what they can invest into.  It is not uncommon for online investors to yield a higher rate of return through a variety of equity and debt instruments via crowdfunding, and outperform their REIT counterparts.  Real estate and hotel crowdfunding may allow people to diversify their portfolio by personal preferences that are strategically better than a giant pool of assets accumulated over time.

The same cannot be said of REIT(s).  Essentially, a REIT is a pool of multiple properties that you are investing into.  Sometimes the REIT picks good apples and sometimes it picks bad apples, and sometimes the good ones go bad over time, you’re essentially investing into the average. REIT(s) do not allow the investor to pick and choose which investment type they would like to fund, whereas crowdfunding gives control back to the investor and allows them to choose investments that may be most suitable for them, sorting by debt, equity, brand, flag, geographic market, hold period, etc.

Remember, that all investments come with risk.  Investing is inherently taking on some form of risk for a potential reward.  And although people have 24/7 internet access to crowdfunding platforms, they should consult an attorney or financial advisor prior to investing.  Crowdfunding platforms like www.equityroots.com enables its online investors to easily share due-diligence documents and investment contracts with their attorney prior to investing.  Past performance is never a guarantee of the future.

 

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