4 Reasons Why Hotel Investments Fail and How to Avoid Them
Hotels can provide a very profitable form of property investment. The demands of tourists and business travellers mean that even when the rest of the property market is stagnant, hotels can keep making a profit. Of course, like any investment, hotel investments can fail. Here are the biggest mistakes and the steps you can take to avoid them.
Not Understanding Your Location
The value of any property is hugely affected by its location. A poorly located hotel won’t draw the custom it needs to survive, so it’s important to do your homework.
Look at who the hotel is catering to and what the local facilities are like for them. If it’s for business travelers, are there plenty of offices and conference facilities nearby?
If it’s for tourists, are there plenty of local attractions? Does the area have a reputation for tourism or business?
Find out about the state of the local area.
What are transport links like to get guests to you? How about crime rates, which could put them off?
What local planning laws and taxes will affect your business?
Don’t just look at what the area is like now but consider future trends. Is crime going up or down? Is the local government planning any changes that could affect hotels?
What other projects are already under construction in the area?
Not Understanding the Market
As well as understanding the area your hotel will be in, you need to know how the market will affect you, both locally and globally.
Understanding the local part will come out of your locational research.
Even a good location won’t be profitable if the market is saturated; so look at other hotels in the area.
Are your customers already adequately served, or is there plenty of demand going unmet?
Are nearby hotels catering to the same market sector as you or a different one?
Are there new hotels under construction nearby? Judging your competition will give you an idea of how challenging it will be to profit from the hotel.
On a larger scale, it’s important to understand the property market and specifically the demand for hotels.
The value of hotels moves in cycles. If you invest at the top of the cycle, you’ll overpay and lose out in a big way.
For example, average values fell 35% from 2001 to 2002.
Watch for signs that the market is reaching the bottom of a downturn, such as freezes on construction and shrinking year-on-year declines in revenue per available room.
Those are the signs that it might be time to move to hotels before the market swings up again.
Poor Financial Planning
Whether you’re building a hotel or taking over an existing one, financial planning is critical. Plan poorly and you won’t just over-pay for goods and services, you’ll destroy the value of your investment.
Don’t become over-leveraged in buying into the project.
If you go all in financially, then you’ll likely end up taking out some loans at expensive rates.
Though this offers the promise of increasing income through a more significant project, it also means that you’ve got no room left to raise more finance in the face of a crisis. If that happens, then the first bump in the road could cost you everything.
Watch out for cost overruns when building or renovating.
Get your hands on fixtures and fittings to check that they’re what you’re after before they go in. Set some money aside for the inevitable unexpected costs.
Have the managerial team cast their expert eye over the plans to check that you’re building something that will work, not something that will need expensive remodelling straight away?
Once the hotel is up and running, make sure that you have enough working capital to deal with repairs and provide regular redecoration quickly.
Without these expenses, your hotel will decline in value, losing you far more than you save.
Poor Management
The people on the ground will make a massive difference to the profitability of your hotel.
The wrong staff will drive away customers and let the building fall into decline.
Pay particular attention to your top-level hires, as they’ll shape the teams below them.
You need a manager who puts customers first, motivates and trains staff and is flexible enough to change the way they work over time.
The maintenance team also need that flexibility, a willingness to try new approaches instead of doing things one way “because that’s just how it’s done.”
There’s always a better way, and continuous improvement means continuously building a better business.
Any one of the wrong location, poor market timing, bad finance, or poor management could make your project completely unprofitable.
By planning for all of them, you can build a lasting investment in a sector where there’s always demand.
Paul Connolly
Paul Connolly has been a journalist for more than 20 years, as a reporter and editor for Argus Media, Reuters, The Times, Associated Newspapers and The Guardian. He has covered Islamic Finance for Reuters in the 1990s. Paul has since helped launch three newspapers, as well as reported from Tokyo, Los Angeles and Stockholm.
