Getting in the hotel business is actually easier than you think. Here are a few ways you can start investing in hotels.
A Guide for Investing in Hotels: 5 Ways Find Hotel Investment Opportunities
Having a passive source of income is one of the biggest dreams of many people. Everyone wants to have some degree of certainty when it comes to matters of finances.
Investing in hotels is one sure way that can help you achieve financial freedom when done wisely.
One of the biggest investment myths is that you need a lot of money to start investing. That is very false. The same applies for hotels. You don’t need a lot of money to get involved.
It’s a no-brainer that if you’re thinking of how to invest your hard earned money, you want to get something that will guarantee you a regular flow of income and at the minimal level of risks.
Hotel investment opportunities are a lot more common than you think. There are several ways that you can gain exposure to the hotel industry.
Hotel investors are definitely wanted. And needed.
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Why invest in hotels?
Because people need a place to sleep. No really, the United States is very spread out geographically and people LOVE to work. A number of jobs across the country require people to meet in-person, which entails traveling. Hotels are a crucial part of the American economy.
Despite the rise of home-sharing, hotels are still an attractive investment opportunity because remote locations simply don’t have the opportunity for home-sharing. The meaning of investing in hotels has a number of different considerations, including direct ownership, partial, corporate participation and more. I’ll highlight how you can get involved.
With hotels, you have the benefits of the following that aren’t found in residential real estate:
- Tenant duration diversification (tenants stay at varying levels)
- Tenant demographic diversification (people staying at hotels come from all jobs, income and risk profiles)
- Locational risk mitigation through multi-location hotels
- Benefits of scale in certain instances
Investing in hotels is definitely market specific, so do what you can to conduct your own due diligence on each type of investment opportunity that I will outline within here.
There are plenty of risks associated with investing in real estate and income properties. Market risk is just one of them.
Here are several other real estate risks to consider before investing.
5 Ways Anyone Can Invest in Hotels
Hotel investment opportunities come large and small. The best part is that you can find opportunities to invest in hotels nearly in every market.
Although investing in a hotel was in the past considered a thing for the rich, with new laws and investment structures, it is possible for most people today to invest in them even without necessarily building or buying a hotel. In this article, we will focus on the five major ways of investing in hotels.
Invest in Hotel REITs
Hotel REITs are significant players in the hotel industry, and they participate in various ways either as buyers, sellers, hotel owners and can also hold hotel debt.
REITs (Real Estate Investment Trust) are real estate companies that resemble mutual funds. REIT form was created by Congress in 1960 to enable the average Americans to invest in real estates without the need to buy or finance any property.
It gives people a chance to invest in a variety of companies without buying the stock of every company. One can purchase hotel REITs just the same way you can buy mutual funds, stocks or and bonds.
Hotel REITs pay their clients some of the most attractive dividend yields as compared to other companies in the stock market.
Although these yields are mostly affected by the booms and recessions in the economy, individuals can still make good money from these investments.
Their recent dividend payment is a representation of yields ranging from 3.8% -7.8% which is way higher than the common stocks.
The major disadvantage of this kind of investment is that REIT dividends are treated as ordinary income. It means that instead of enjoying the lower dividend tax rates, they are taxed as normal income to the individual.
They do not fall under the “qualified dividends.”
Start investing in Hotel REITs by opening a brokerage account with M1 Finance (a completely free investing platform).
You can read about it in my M1 Finance Review.
Otherwise, these apps will give you free shares of stock just for signing up (and depositing). There’s no excuses to not start investing now.
Examples of Lodging REITs include Ashford Hospitality Trust, MGM Growth Properties, Sothera Hotels Inc., and more.
These Lodging REITs can be a great way to start earning some additional dividend income.
Crowdfunded Real Estate
Crowdfunding is yet another way to participate in hotel investing. It is the process of acquiring funding for a project by getting a large number of people, primarily through online platforms to contribute small amounts towards the project.
The practice enables the entrepreneur to acquire funding easily and the investors to get an easy way of becoming part of the project.
By using a crowdfunding platform to raise capital, you are given a broader reach to accesses investors who can share your capital raising campaigns. If you wish to become a hotel owner through crowdfunding, you can do this either as; the entrepreneur or as an investor in a crowdfunding site. Crowdfunding sites use different social media platforms like Facebook, LinkedIn, and Twitter to get potential investors.
Through the 2012 Act of Jumpstart Our Business Startups that modified some Regulation D rules, real estate entrepreneurs can now do more direct marketing to acquire funding. Crowdfunding can come through two ways which include:
- Rewards crowdfunding in which the entrepreneurs will presell their product/service to launch their business idea without having to incur any debt or giving out shares.
- Equity crowdfunding in which the investor receives some shares of the project depending on the amount of money they have contributed towards the project.
A great platform to use for accredited investors is CrowdStreet. I love how they offer diversified options for investing in real estate. The returns are far above what you’d see in anything else out there with IRRs in the 20+%.
CrowdStreet is for only accredited investors. If you are looking for other options, Fundrise and RealtyMogul are great options for real estate crowdfunding for non-accredited investors.
Below is a summary of the best real estate crowdfunding platforms:
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Common Equity in Hotel Stocks
Another ideal way of becoming a hotel owner is through purchasing common equity in hotel stocks. If you’ve been wondering how to invest in a hotel, then you should consider getting some hotel stocks in your portfolio. When you purchase these shares, it means that you give the hotel money to acquire part ownership of the hotel. The more shares you possess, the larger the percentage of ownership you have.
Common stockholders are the ones who determine the board of directors or vote for any merger, and they also are the ones who receive high returns if the hotel is successful.
Common equity has enabled even the ordinary and average citizens to acquire ownership and participate in the worlds renowned hotels. An investor is issued with a stock certificate to signify ownership.
Stockholders get dividend payments depending on the number of their shares and also the profits that the hotels make.
The revenue of the hotel will be determined by the occupancy room rate, average room rates, food, and beverages, as well as management services among others.
Although hotels are affected by various factors such as terror attacks and natural disasters, they remain among the best real estate investment opportunities offering a lucrative return on capital for investors. Stocks do not mature, and therefore the owner is the sole determiner of when to sell it.
Some of the key things that one should look for before investing in hotel stocks include:
- The hotel’s strategy as well as the capex plans for the next 5 to 10 years
- Economic cycles and factors
- Hotel segmentation
As a common equity investor, you are lowest in the capital stack. In the event of a liquidation, you are paid out last. Some hotel stocks include Hilton, Marriott, MGM, and more.
Create Your Own Hotel with Airbnb
Airbnb is another easy and great way of investing in hotels. It is an online platform that enables individuals with free renting spaces to list them online and get clients to rent the space.
If you have a room that you can rent out and wish to offer it for lodging services to travelers, you can list it on Airbnb and easily get potentials, customers.
It enables the members to organize for homestays, hospitality services, lodging, and tourism experiences. You need to have space and list it on Airbnb to become a hotel owner.
You pay a commission of 3% to Airbnb for any booking made through the platform, and the guest pays 6% to 12%. The company acts as a broker and does not own any of the listed hotels.
The platform usually specializes in private homes renting, but to some extent, even the commercial hotels are listing on the website. It costs you nothing to start as long as you have a space to let and you also use less effort to advertise your space.
I’ve increased my income by $750-$2,000 per month by listing my home on Airbnb. Give it a try. It’s a great way to put income in your pocket that flows directly to your personal bottom line.
By using Airbnb, you are sort of investing in a hotel room rather than an entire complex. If you have multiple bedrooms and you slice them up, you are investing in multiple hotel rooms.
Just Buy a Hotel Property Outright
This is the most obvious way. Clearly.
Another way on how to invest in hotels is by purchasing a hotel property. It means that you have to have enough capital to buy the property as some of these properties can be very expensive.
By purchasing the property, you can decide to operate the hotel yourself or set a managing team to undertake the daily operations of the hotel.
When buying a hotel, you can do this by either purchasing the entire hotel, buying a part of the hotel like some of the rooms or even the reception area.
Buying the whole is the most expensive option, but it allows you to enjoy all the profits as well as having complete control of the hotel.
You will also cater for all the expenses and costs of running the business. You can also buy a freehold property in which another person runs the hotel, or you buy the management rights of a hotel that gives you the rights to manage the hotel, but the property belongs to someone else.
If you buy a hotel outright, you will likely get the most favorable cap rate.
Disadvantages of Investing in Hotels
Of course, there are definitely some cons from investing in hotels. Let’s take a look at why looking at hotel investment opportunities might not be a great fit for you.
- Short-term rental risk aka vacancy risk
- Larger upfront capital costs
- Operational risk
- If you have only one hotel, you are subject to significant market risk
Only you can determine if the risk profile fits your investment needs. However, I think everyone should at least consider if investing in hotels is suitable for their portfolio.
The hotel room return on investment has traditionally been much higher than residential real estate (flipping aside) and can certainly be much more attractive than commercial real estate.
Conclusion on Investing in Hotels
Investing in residential real estate gets a lot of press. I simply believe that hotels are a great way to get sub-sector diversification and an opportunity to build your portfolio in real estate.
Investing in hotels is a lucrative venture, and it’s no longer as expensive as it used to be due to the various ways you can use.
If you want to invest in a hotel, then consider trying one or a few of these ways. See how this fits into your investment plan by using our dividend calculator.
Will you try investing in hotels or look for hotel investment opportunities? Please let me know in the comments below. I’d love to hear from you!
Other Related Investing Money Resources:
- Use these smart investment techniques to turnaround your investment portfolio
- Our resources on how to invest money to ensure success
- A guide to living off dividends forever… What does it take?
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I have a few hotel projects in Southern California.
Been looking for the right Investors to fund them.
Please make the Connections. Thanks
714 600 9682
Thanks for stopping by Tay. Shoot me a note. I’d love to hear more.
Interesting article. I was thinking of joining a crowd funding site soon just to see if that process is legit. We have hotels and breaking ground on 2 more this year near Charlotte. Right now it’s not hard for me to find investors but I’m also eager to try one of the new sources. Do you also connect investors and developers?
I could! Feel free to message me.