The Hotel Investment End Game: Exit Strategy

2 min read

Exit Strategy - Hotel Investments

 

Often times, when we talk about hotel development and investments, we imagine dynamic beginnings. Plans and blueprints are drawn up for new construction hotels, and investors seek promising returns on their initial investments as the hotel begins its operation. Yet, in order to be a strategic investor or owner of a hotel, it’s important to think about the end game for your investment. Being able to keep the long-term goal for your hotel investments can ensure that you do not mismanage your hotel years down the road. Poor planning at the outset might be hidden by a strong start to your hotel or investment’s life, as your investment ages, that poor planning can really cause some serious liabilities for you later.

As with many considerations with hotel investments, there are a number of key factors you should consider before even starting an investment project in an existing or new construction hotel. Unlike bonds or stocks, your hotel investment is a physical “brick and mortar” investment. Over time, there will be expected wear and tear on your hotel, and your hotel will need to go under renovation or redesigns in order to stay competitive with newer construction hotels and changing trends in customer preferences. Investors can have different strategies – where one investor may intend to continue to invest in a specific hotel for a long period of time, other investors may view the same hotel as a short-term investment. Regardless, it is smart to think ahead to your exit strategy, or how you plan to exit your investment in a specific hotel.

Hold time

The holding period for an investor is the length of time that investor holds an investment. In other words, this is the time period between the time the investment is purchased or developed, and later sold. The hold time varies greatly based on the hotel. Existing construction hotels tend to have shorter hold periods, whereas owners who newly develop a hotel tend to have longer hold periods, especially when considering the front-loaded costs to develop the hotel in the first place. This hold time also depends on the investment strategy. Investors that are looking to generate a quick source of cash-flow typically have shorter holding periods, but investors that want a larger and more cumulative return adjusted for inflation may seek to hold onto (and continue to renovate and update) their hotels for longer.

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Sometimes hotel companies sell their hotels in timely fashion before a property improvement plan (PIP) is identified by the Brand.  In a nutshell, a PIP outlines a list of improvements, modification, and general upkeep and maintenance of a hotel in upcoming years.  Hoteliers sometimes elect to sell a hotel before its PIP because they want to avoid the inconvenience and expenses associated with renovating the hotel.  Sometimes hotel companies choose to exit or sell their hotel when their license agreement with any given Brand is coming to an end.  Other hotel companies like to develop newly constructed hotels, stabilize their performance, and then sell the property for a big premium to institutional grade investors.  An exit strategy has to be realistic with the condition and age of the property.

One must be conscious of the timeline that he or she is investing in.  The goal is to time your exit strategy in strong or peak markets, while down markets and recessions are typically more advantageous to buyers.  Being conscious of the general economy and timing your exit is an important part of the process.  One must be cognizant of credit markets, to know whether a sale can occur and get financed (unless your buyer doesn’t need financing contingencies).  Hotel investments and markets are cyclical, so there is a good and bad time to exit and therefore the disposition price is largely reflective of this cycle.  

Common strategies for hotel investors are:

  • Long term holds, aka core holdings
  • Opportunistic value-add and disposition
  • Fix and Flip

On another topic, what to do after exiting?

See our blog on 1031 exchanges to learn how hotel investors are deferring their long term capital gain tax liabilities by electing to use Internal Revenue Code, Section 1031.

 

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Hotel Investments Vs. Multi-Family & Fix-and-Flips

3 min read

Are Hotels a Better Investment Than Multi-Family or Fix-and-Flip?

There’s no shortage of opportunities to invest in real estate—so why zero in on hotels, in particular? It’s a question we get asked regularly here at EquityRoots. Truthfully, of all the myriad ways to add real estate to your investment portfolio, hotels are among the least commonly discussed. Why is it, then, that we would offer our investors the opportunity to enter so specific a niche?

Before we answer that, we’ll offer the disclaimer that yes, there are many people out there who make money off of multi-family properties, fix-and-flips, and other real estate opportunities. By no means are we suggesting that these ventures cannot be fruitful. All we are saying is that, if you put all the pros and cons on the ledger and really think it over, you just might find yourself agreeing with us that hotel investments are uniquely promising and distinctly advantageous.

Real Estate Investment 101

To understand what makes hotel investment so loaded with potential, you’ve first got to understand some of the basics of real estate investment. Let’s break it down to the simplest possible level—the most basic concept of real estate investment. When you buy a home, an apartment building, or a hotel—property of any kind, really—you have to understand that it’s not going to make any money just sitting there empty. To generate a profit, any real estate investment is going to have to have tenants. You’ve got to have warm, rent-paying bodies in the building for it to be a moneymaker.

So now, consider the rent-generating potential of a hotel versus other forms of investment. With a hotel, you’re generating rent money night by night. With most anything else, you’re talking about a month-to-month or even year-to-year lease.

It boils down to simple mathematics, then: With a multi-family unit, you may generate $1,200 per month. With a hotel, it may be $69 per room per night. Now, in some cases, the hotel may not come out on top—and there are other factors to consider, such as hotel maintenance expenses. But if the hotel’s in a good market, it’s got good management, and it’s associated with a good brand, we’re willing to suggest that much of the time, hotel investment is going to be uniquely lucrative.

EquityRoots - Hotel Real Estate Investments Platform

The Logistics of Running a Hotel

We mentioned that there are some hotel maintenance expenses to take into consideration, and indeed there are. For instance, you’ll have to have someone come in and clean the rooms and provide other upkeep services, which naturally eats into the hotel’s overall profit margin.

But even operationally, hotels offer some unique perks over other real estate projects. For example, with a hotel, there’s no concern over delinquencies or renters who simply won’t pay their fair share. You also don’t have to face the worry of your property being vacant for a long stretch of time; again, assuming the hotel has a good market, a good leadership team, and a recognizable brand, you can feel confident that there are going to be tourists and travelers paying for rooms.

Investing with EquityRoots

But all of this underscores the big reason why hotel investment is, comparatively, a fairly seamless and accessible investment: When you invest through a platform like EquityRoots, you’re not actually signing up to run the hotel. You’re investing in an experienced hotel management team with a peerless track record and a trustworthy flag on its pole. In fact, EquityRoots has sufficient clout in the hotel industry that we can gain access to The Big 3—Marriott, Hilton, and IHG.

Those brands aren’t available to just anyone—not even investors with huge wads of money or a few years of actual hotel experience. They only trust their coveted name recognition to truly seasoned, expert hoteliers—and EquityRoots is proud to be on that list.

The bottom line: An investment with EquityRoots is smart. We know the hotel business. We choose promising markets and ensure that our hotels are well-run and that they offer brand recognition. All the pieces are in place for a robust, fruitful real estate investment.

Learn more about it by contacting EquityRoots today!

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