Why invest in the Hospitality Industry?
The concept of Hospitality and hotel has existed for hundreds of years. During the days of stagecoaches, overland exploration, and urban development, entrepreneurs throughout the world have plunged into hotel ownership.
They examined the potential, purpose of economic Hospitality investment opportunities, growing markets as well as prestige. In the current hospitality industry, not too much has changed. Consequently, what are the causes for investment in Hospitality?
Financial Reasons for Hospitality Investment
Financial returns rise high among reasons for Hospitality/hotel investment.
That may be a high profit from the hotel’s operating cash flow, especially if they have long-term ownership objectives.
Numerous independent hotels & resorts earn high cash returns – especially family-run hospitality businesses/hotels including their ‘heirloom’ assets.
On average, owners can get cash flow returns of nearly 8% to 12% per year or greater based on their hotel business plan. Several owners support returns by enhancing the hotel’s capital value. They might intend to hold the properties for the medium and short terms. Assuredly, by suggesting the cash-flow level from activities along with the rise in land value, an owner can generate substantial capital profits and the development of personal equity.
Risk and High Returns
Hospitality investments are typically associated with a higher risk in contrast to other commercial real estate asset classes.
This is where the correct hotel and asset management expertise comes into play. Knowledge of both the hospitality industry and asset management is the ultimate defining factor in the success or failure of an investment.
When we hire hotel investment experts, the risk can considerably be minimized however at the same time requires working on optimizing the upside.
This is where the real differentiation is made by powerful asset managers.
The probability to subtract depreciation makes tax efficiency an essential reason for Hospitality and hotel investment. Furthermore, it will likely rank among the most important tax-efficient Hospitality investments in your portfolio.
Think of the range of physical property in engineering infrastructure, hotel buildings, furniture, fittings, and equipment doesn’t subtract cash flow however it’s a non-cash expense and subtracts taxable income. Additional reasons involve equity growth plus tax-free exchange.
For instance, think of Monopoly.
What is the answer to winning a game?
Yes, it is trading four greenhouses for one red hotel (a Principle and statement by Pete Wargent).
The same applies to building wealth in real estate. This is where tax-free replacement comes into play. Proposing and offering a fabulous way to consolidate (various) assets into the new property whilst avoiding taxations.
Another major reason is equity increase through means of purchase recapitalization. It is likely to pull out cash that in turn will not be subjected to federal income tax when debt is refinanced,
Making a large number of returns while keeping costs at a minimum comes down to operating expenses in the following three divisions:
Departmental (cost of goods sold)
Fixed - comprehensive cost unrelated to occupancy and revenue – fixed as the name suggests)
Undistributed -operating cost
Even if some expenses in the above categories are truly tough to negotiate, additional expenditures are subject to negotiation.
With the proper amount of strategic approach and negotiation, you can cut the cost down by managing one price level. In other words, the expense to run the hotel remains fixed irrespective of whether the business is making profits or not.
Here, you can leverage a healthy profit ratio when revenues go up whereas costs remain comparatively low.
Real estate assets (Like Hotels, clubs, resorts & Lounges) are superior inflation hedges – an essential idea for hotel investment. Over a Long Period, hotel property usually appreciates along with increases and inflation. The business is creating the value of a property that can rise extensively due to a renewal project converting an asset into a hotel.
Attracting revenue fees is one of the essential reasons for hotel investment. These fees can involve:
1. Development Fees
2. Asset Management
3. Hotel Management
By sourcing as well as managing a hotel acquisition deal from the Scratch levels into a continuous level of occupancy, owners can receive development fees. Utilizing opco (operating company) structure or a propco (property company), owner-operators can charge and expense management fees. If you’re performing for others, you can earn asset management fees.
These revenue reasons for hotel investment are very essential to hotel operators and developers. They may include and renovate assets, then depart with a management or franchise contract added to the sale.
As a generally used vital tax planning tool, cost segregation supports improving cash flow. There are two methods this can be attained:
1. Quickening depreciation deductions
2. Deferring state income taxes and federals
Hotels fall under multiple tax categories namely Goodwill, and buildings, which all have various depreciation schedules. Based on the typical nature of hotels ( capital intensive and operational) there are several bonus depreciation policies and plans that can be taken advantage of that are not available to different CRE asset classes.
Other Reasons to Invest in Hotels
While not a direct financial reason for hotel investment, diversification of investments is necessary. Hotel assets and their performance were initially not associated with the stock market and even other real estate investments, which is a positive trend to think of. Several investors practice risk management and demand risk deduction across their portfolios utilizing real estate, involving hotels. Importantly, it is a security-based reason and idea for hotel investment.
In addition, hotels allow the perfect platform to build developing trends that can be taken to further expand revenue streams. An excellent example of this is the co-working aims, which despite more delayed development in 2020, is supposed to see speedy growth from 2021 onwards.
Considering how to funnel your Hospitality investment is the next step, either picking for publicly traded real estate private offerings or investment trusts (REITs). Wishing for private real estate investment often produces higher returns.