Unlike most other types of commercial real estate, hotels don’t generate income just because someone signed a lease.
You have to run the property well every day to keep revenue coming in.
So before you invest, you need to understand both sides of hotel investing: the pricing upside and the operational risk that make this asset class different from other CRE properties.
Advantages and Disadvantages of Investing in Hotels
No long-term leases, no safety nets
This is the first thing you need to understand if you’re interested in this type of CRE asset.
Unlike the revenue of an office building or a warehouse with a five-year tenant lease, a hotel’s income changes day by day because guests book rooms on a short cycle.
There’s strong upside when demand for rooms is rising, but there’s less protection when demand drops because you do not have long-term rent checks to cushion the hit.
It’s not easy to find financing for hotels
Finding funding to acquire or refinance a hotel is often more difficult than finding money for other commercial real estate assets for the simple reason that hotel income can fall quickly.
If travel activity slows for some reason or another, the hotel can lose bookings almost immediately, but you still have to pay payroll and debt service, among other costs.
Lenders have to take that risk of daily revenue volatility into account.
If you’re applying for a hotel loan, be prepared to bring more equity to the deal.
Lenders may also want stronger cash reserves and proof that the property will be run by someone with relevant hospitality experience.
If the deal is smaller, local lenders in the same area may be more receptive because they have a better understanding of the tourism base and seasonal demand patterns there compared to a larger bank.
Pro tip:
Always, always, always stress test the debt before you buy. Can the hotel still comfortably cover the loan payments if bookings stay low for several months? If the numbers only work when you assume the hotel stays nearly full and keeps charging higher room rates, the investment is too exposed.
Hotels require daily operational oversight
A hotel will need much more attention from you as an owner compared to many other CRE assets.
You’re not only collecting rent: you need to strategize on how rooms are priced, then stay close to daily operations, such as how quickly rooms get cleaned and whether guests leave satisfied enough to book again.
Payroll is often one of the highest costs in running a hotel, so you also need to check whether staffing levels match actual demand.
While you can bring in a management company to stay on top of the day-to-day work, you still need to watch performance closely.
A hotel is especially exposed to guest feedback.
If daily operations are poorly run, guests could leave unfavorable reviews, which can be extremely damaging to occupancy.
Insurance can eat into returns
In the eyes of insurers, a hotel’s risk profile increases as the property becomes more exposed to severe weather.
This is why coastal hotels and resorts exposed to storms often have to pay higher premiums to keep enough coverage in place.
Liability coverage is also likely to cost more because guests and visitors use the property every day.
More foot traffic means more chances for injury claims, especially in high-use common areas like pool decks and lobbies.
So before you commit, review current premiums and likely renewal costs.
Confirm what coverage the lender requires because those requirements can raise your annual insurance cost.
You should also review the hotel’s claims history.
Has the property had repeated guest injury or storm/water damage claims? Insurers may price the renewal higher or limit coverage.
Ever-changing guest expectations can outgrow the building
Hotels have to contend with another risk that many CRE investors underestimate: a property can remain usable without any major physical problems but still underperform because it doesn’t meet what guests expect in terms of design or service level.
So if you’re planning to invest in an older hotel, it’s not enough to look at occupancy right now.
What will the property need over the next several years to compete?
If the hotel is part of a franchise, make sure that you review the property improvement requirements before you buy.
The brand may require regular room upgrades or common-area improvements to keep the flag.
Include those costs in your financial model from the start so you do not overstate the hotel’s future cash flow.
What you should check before buying a hotel
Revenue pattern:
Look at the hotel’s income history over several years.
The recent strong period is not enough, as some hotels only look healthy during peak season.
You need to see how the hotel performs when demand weakens.
Demand source:
Does the hotel depend too heavily on one source, such as a nearby convention center, for instance?
Will the property need to cut rates quickly to keep rooms filled if demand from that source slows?
Cost structure:
When bookings fall, revenue drops fast — but the hotel still has bills to pay.
You need to know which costs can actually come down during a slow period and which costs will keep draining cash.
Can staffing be reduced without hurting the quality of service, for instance?
Review the property’s insurance history and ask whether the next renewal is likely to cost more.
Look for any repairs the seller may have delayed. Those costs may become your problem after closing.
Brand status:
Is the hotel under a franchise flag?
Be sure to ask for the franchise agreement and the property improvement plan before pricing the deal.
And if the hotel is independent, determine where bookings actually come from.
It may have less pricing power than its revenue history suggests if most guests arrive through discounted third-party sites.
Capital for hotel acquisitions and refinancing
If you need financing for a deal in the hospitality CRE sector, you need a lender that understands why a hotel loan cannot be sized like a long-lease property loan.
Private Capital Investors funds hotel acquisitions and refinancing for qualified borrowers.
We review how the property earns income and structure financing around the cash flow. Tell us about your deal.
