Hotel investments thrive when they are thoughtfully crafted to align with the shared but sometimes differing interests of key stakeholders. This strategic approach enables investment managers to reach a fair compromise that benefits everyone involved.
Hotel asset management firms such as Bay Street Capital Holdings help investors achieve this goal through their expertise in the art of hotel investing. From purchase and development of land or property to legal paperwork and government approvals, hotel asset managers are best suited to oversee the entire project to ensure investors achieve their aims, whether it's holding period returns or brand propagation.
The contents of this article are for educational purposes only. They are not intended to be a source of professional financial advice. You will find experts on financial planning and financial management here.
Bay Street Capital is currently developing boutique hotels in strong tourist markets such as Portugal and the Bahamas. With four (4) approved hotel projects in Portugal backed with grants and cash incentives from the Portuguese government, these boutique hotels are estimated to generate 18.87% IRR over their holding period of three years.
As a hotel investor, investing in these assets gives you equity in a quality hotel property and product, located in an appropriate market, managed by an appropriate operator, and with an appropriate brand.
In addition to a significant ROI, participating in these investment projects with capital of approximately €500,000 EUR ( $ 545,000) grants you eligibility for the Portugal Golden Visa, which provides a number of supra-economic benefits. Schedule a meeting to learn more.
Seamless Exploration: It's a gateway to limitless exploration as it offers business travelers visa-free access to Europe's Schengen Area.
Holistic Residency: For those who have pursuits for personal growth, it offers the right to live, work, and study in Portugal.
Pathway to Citizenship: It also provides eligibility to apply for citizenship after five years, which allows you to build roots while preserving your global identity.
Flexible Presence: The visa requires low physical presence requirements and supports a balanced commitment for a life of possibilities.
Educational Excellence: One great advantage of the visa is its access to world class learning, from renowned international institutions to the vibrant local academic scene.
Quality of Life Beyond Compare: You also get access to a high quality of life, delectable cuisine, exquisite wines, and a climate that feels like home.
Cultural Riches and Security: Portugal being a nation with a rich history, this visa grants you the opportunity to immerse yourself in a rich cultural tapestry, complemented by a mild climate and a reassuringly high level of security.
Well-being in Every Aspect: As an investor, you would appreciate access to world class healthcare that also comes with this visa.
Bay Street Capital Holdings being more than an asset management firm, offers services such as general investment and wealth management services, and provides investors with a couple of Golden Visa eligibility pathways.
Learn more about golden visas here.
In recent years, the hospitality industry has witnessed a remarkable resurgence, with hotels becoming increasingly popular, particularly in areas with consistent visitor traffic. The key to a successful hotel investment lies in understanding and modeling development based on tourism and visitor demand.
For instance, a 30-room hotel in the Midwest, with an investment of $1.2-1.5 million, has the potential to generate a substantial annual revenue ranging from $300k-400k. This highlights the profitability of mid-tier hotels and many other attractive prospects for potential investors.
However, with great opportunities come significant challenges. And widespread confusion regarding hotel assets has prompted numerous individuals to question the profitability of these investments.
Common misconceptions involve viewing hotel properties merely as conventional real estate holdings. Even for those who recognize the larger business aspect of hotels, poor knowledge of running a hotel leads them to bad conclusions.
For example, staffing costs in the hotel industry, especially for smaller establishments, can be overwhelming. Some seasoned operators have noted that staffing for a 32-room hotel can be comparable to a 100-room hotel, yet the income is substantially lower. The need for consistent high occupancy adds complexity. The key to success in the industry is meticulous management.
On the flip side, the notion that hotel properties are not genuine property investments is also challenged by individuals who have successfully ventured into and out of hotel ownership. With portfolios ranging from small motels to multi-story buildings, successful exits by these entrepreneurs emphasize that hotels are indeed a unique and rewarding form of real estate investment.
One key point that requires repeating is the symbiotic relationship between the hotel building and the hotel business. Unlike the residential real estate model, where the property can be leased independently of the business, hotels require both elements to be viable. This dynamic integration leads to a more hands-on approach to management but also opens the door to unique advantages.
The financial landscape of hotel investments is both enticing and demanding. Achieving 12-15% cap rates (= net operating income/current market value of the hotel asset), reported by some investors, reflects the potential for high returns.
However, hotels being a unique blend of business and real estate, the challenges specific to the hospitality industry are multivariate. These include:
Hence, financing hotel projects is more demanding than traditional real estate investments. Investors can consider creative approaches to acquiring hotels, including purchasing distressed properties and structuring owner financing deals. This way, hotel owners can balance the financial hurdles and opportunities inherent in hotel investments.
Also the impact of local laws should be considered, and potential investors need to understand the regulatory environment they would operate in.
When considering hotel investments, the decision between building a new hotel and acquiring an existing hotel is crucial. Securing funding for a new build can be challenging, especially in today's expensive construction landscape.
However, if in a good location, a new build can be a lucrative venture over the long term. Boutique hotels, in particular, offer a unique appeal, and by going the boutique route, investors can potentially position themselves favorably in high-demand or seasonal markets.
For those wishing to explore the commercial lending route, being prepared for a 20% down payment on a 15-20 year note is essential. Moreover, experience in the industry is a key factor, because it makes it easier to secure funding. Alternatively, investing in something already built, such as full-service hotels or luxury hotels, could be a prudent approach.
Contrary to the perception that hotel management is inherently more challenging than owning a large number of rental units, experienced hoteliers argue that the difference lies in the structure of in-house management.
With dedicated staff for maintenance, general management, and other day-to-day operations, the workload becomes manageable, even when overseeing hotels at different locations.
While day-to-day operations present challenges, such as marketing budgets, daily expenses for toiletries and linens, and payroll, these are considered part of the active business model rather than detractions from the real estate aspect. Hotels are a unique blend of both real estate and business, with intricacies that need to be understood and navigated for success.
Moving beyond traditional hotel ownership, the concept of investing in hotel rooms is gaining traction. Some hotels sell their rooms, creating a pool where the revenue is split among the owners. This approach, reminiscent of time-shares, comes with its own set of risks and concerns.
Scams, foreign legal complexities, and unexpected management decisions pose significant risks. The viability of such investments hinges on the reliability and transparency of the developers and sellers involved.
Likewise it's crucial to distinguish between a genuine opportunity and what might be termed a "condo-hotel." These are relatively uncommon but exist, often combining residential and hotel aspects. Understanding the contractual details and management structures is vital to avoiding potential pitfalls.
These factors that impact hotel assets revenue and cash flow:
Demand Analysis: Assess the current and future demand for hotel accommodations in the target location. Consider factors such as tourism trends, business activities, and events that may influence the number of visitors.
Supply Dynamics: Examine the existing supply of hotels in the area. An oversaturated market can lead to intense competition and lower room rates, affecting profitability. Conversely, a high demand with limited supply could present a promising investment opportunity.
Economic Indicators: Stay informed about economic indicators that may impact the hospitality industry, such as GDP growth, employment rates, and consumer spending.
Technological Advancements: Embrace technological trends, such as online booking platforms and smart hotel features, to enhance guest experience and stay competitive.
Sustainability: Consider the growing trend towards eco-friendly practices in the hospitality sector. Sustainable hotels may attract environmentally conscious travelers and contribute to long-term profitability.
Competitor Analysis: Understand the strengths and weaknesses of existing competitors. Identify unique selling points that can set your hotel apart, whether it's through pricing, service quality, or innovative amenities.
Market Positioning: Determine your hotel's positioning in the market. Are you targeting budget travelers, luxury seekers, or a niche market? Tailor your investment strategy accordingly.
Location: Assess the location's accessibility, proximity to attractions, and overall appeal. A prime location can significantly impact occupancy rates.
Property Condition: Evaluate the physical condition of the hotel. Renovations and maintenance costs should be factored into your investment plan.
Amenities and Services: Consider the range of amenities and services offered. This includes Wi-Fi, dining options, recreational facilities, and conference spaces. These factors influence the overall guest experience and satisfaction.
Average Daily Rate (ADR): Analyze the Average Daily Rate, which represents the average revenue earned per occupied room in a given time period. A higher ADR can positively impact revenue, but it's crucial to balance it with market competitiveness and demand to ensure optimal occupancy.
Hotel Operations Costs: Evaluate the various operational costs associated with running the hotel, including staffing, utilities, maintenance, and marketing. Maintaining a clear understanding of these costs is essential for budgeting, pricing strategies, and overall financial sustainability.
Being able to secure the services of a hotel management company or branded operator who can drive revenue and manage expenses is also a key consideration before investing in any hotel property.
Here are some key considerations for hotel owners:
Obsolete property can be a bad asset to purchase, since it may lead to spending beyond budget for capital expenditures.
Location! Location!! Location!!! Location is key since it affects property types. Developing a 4-star hotel (or repositioning a 3-star hotel into a 4-star hotel) at a location that appeals to visitors who can afford only 2-star hotel services is the wrong sort of hotel investing.
The success of hotel investments hinges on selecting property locations near local attractions, ensuring convenient access to public transportation while prioritizing safety.
Being able to control the horizon is important, else a project that is expected to generate positive cash flow within 2 years may extend the period of negative cash flow to 5 years.
Securing partnerships with brands that provide effective and efficient booking and reservation systems, and increase occupancy rates and guest loyalty is also a major consideration for hotel investors.
From identifying strong markets and suitable locations to identifying the best brand and hotel operators, these tasks are best undertaken by a hotel asset manager. As a result, the most important factor investors should consider is the asset manager handling the investment for them.
The hotel investment landscape offers promising opportunities for those willing to (or can find the right asset manager to) manage its complexities. The key is to approach hotel investments with a clear understanding of the market, careful consideration of the location, and a strategic business model.
Portugal, with its stunning landscapes and thriving tourism market, stands out as a particularly attractive destination for potential investors.
Seizing opportunities in Portugal, or any other promising market, requires a blend of vision, strategic planning, and a willingness to adapt to the evolving dynamics of the hotel industry.
Investors should explore both traditional and alternative investment models, keeping a keen eye on potential risks and leveraging the experiences of industry experts.
More importantly, it is always in a hotel investor's best interest to work with expert hotel managers. Reach out to industry experts, and partner with those who have navigated these waters successfully.
Investing in Bay Street's Alt Path Fund, is an easy way not only to take advantage of the team's hotel asset management expertise and tap into the lucrative hospitality sector but also position yourself for the unique benefits offered by the Golden Visa program.
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