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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