I was recently a guest on a real estate podcast and the host asked about hotels. He had always been intrigued by the industry but had never had an opportunity to invest in one. He wanted to know why I like this particular niche? And, wasn't I worried about Airbnb?

Side note here for a second… Isn't it interesting how Airbnb is like the "Kleenex" of short-term rentals? Airbnb is a booking platform…. not the rental itself. No one says “I own an Expedia” (which also books short-term rentals) but you’ll often hear “I own an Airbnb”.

OK, now back to the question from my fellow podcaster… here’s 3 terrific money reasons:

Higher Cash Return Per Unit
Creative Revenue Opportunities
Credit Cards!!!!

I'll get to Airbnb in a bit. But first, let's take a look at the 3 areas I just mentioned.

More Income

For this article, we'll compare to apartment complexes because that's the niche we've been in for years. It's also a space that has been very hot in many markets across the country. During the past 7+ years in the Phoenix metro market, investment into apartment complexes has driven up the purchase cost and placed downward pressure on investor returns. And, there are currently 90 active large apartment complex development projects in process in the greater Phoenix metro area. But even before the higher purchase price for an apartment complex, our conservative numbers were that each apartment would give you $100 in cash per month after all expenses and mortgage payment. Can you do better than this with some properties? Yes, perhaps up to even $200 per unit per month…... but $100 is a consistent number that we saw across a wide range of long-term rental properties.

In the hotel space, our conservative cash on cash return is $400 per room per month.

Let me ask you…. If you are buying a $5M property… do you want the one that gives you $100 per unit per month in cash or the one that generates $400 per unit per month?

Bringing Airbnb into this, if you talk with anyone who has a short-term rental (in the right location) compared to a long-term rental. You'll find a similar large delta. A hotel is essentially a short-term rental at scale.

Creative Thinking Outside the Hotel Room

A Note About Clientele

Assuming we are comparing a $5M apartment complex to a $5M hotel…... an apartment complex in this purchase price range in the Phoenix metro area is going to be in either "C" or perhaps "D" class. This means the building will be older and amenities may or may not include a pool and laundry room. That's it. You will not find a clubhouse. There will not be a fitness room. Those type of amenities are found in "A" or "B" class properties not “C” or “D” properties.

A $5M hotel in the same market would be in the limited-service or budget market niche. This type of hotel would have a nice lobby, a breakfast area, a pool, a fitness room and perhaps a conference room.

Right away you'll see that we are talking about a different clientele. The person who lives in a "C" or "D" class apartment complex is a different client than one who stays in a limited-service hotel.

Levers

What are the levers that you have to increase net profit in this type of limited-service hotel?

Dynamic pricing. Pricing on a per night basis is automatically adjusted to align with market rates. In apartment complexes with longer-term lease agreements, you could be below market rents until the next renewal which is a lost revenue opportunity.
Opportunities to further monetize the space. Rent out the hotel breakfast area or conference room, sell inexpensive memberships to the fitness center for those who live locally, sell blocks of time after a room has been cleaned but before the next guest checks in.
Create corporate packages and memberships.
Renegotiate contracts. Yes, you'll have some expense contracts in the apartment complex such as maintenance and property management but there are more contracts & opportunities in hotels. Examples include food, cleaning supplies, and marketing.
Add food & beverage quick options or create partnerships with local restaurants.

Power of Plastic

This might be my favorite thing about owning hotels…. we have the guest's credit card on file!!! So, unlike some of the things we have experienced in the apartment business, with hotels, we are not:

Tracking down residents to pay their rent. We already have secured pre-payment.
Dealing with the eviction process. Most people had set dates for their stay but if they keep staying, we'll keep charging them.
Cleaning up hoarder messes. The room may be messy but the guest wasn't living there long enough to create a dumpster hoarder situation.😜
Absorbing the cost of damages to the unit. We charge the guest for any damages.

But wait you say….” what about Airbnb?”

At the most basic level, what is Airbnb? It's a booking platform. Similar to Expedia, Travelocity or Booking.com. Check out any of those three sites and you'll see that you can book a hotel room…. Or you can also book a short-term home rental.

Since these platforms give you the same options, what makes you choose one type of stay over the other? Your choices reflected the experience you want for the type of trip. For example:

Are you going somewhere on vacation with your family and need a larger space?
Are you trying to save costs while on a small trip?
Are you on a business trip for just a few days?
Are you looking for convenience?
Do you need to be close to a specific location?
Do you want to know exactly what you'll be getting in the place you'll be staying in?
Are there key amenities you are looking for?
Do you have loyalty points at a certain brand that gives you access to upgrades?

If you think about a short-term home rental versus a limited-service hotel -- we are actually in different market segments and we are catering to different customers. Our typical hotel customer is traveling for business or passing through the area and needs a quick place to stay. Our corporate customers want a large block of rooms close to facilities with easy transportation for employees. These use cases don't fit into the same demographic as short-term home rental.

What Matters?

There will always be pros/cons of any business or real estate niche. But whether we are talking about apartment complexes, hotels or short-term home rentals, any successful real estate investment has these qualities:

The property is in a good location. What is "good" depends on the use case but location should always be your number one criteria.
Purchase on value so that you have upside but also so that you have a hedge against economic uncertainty which impacts every niche.
Work with experienced management that can find ways to maximize your profit.

Want to hear more about our experience with hotels and multi-family? Check out my podcast, The Richer Geek.

3 Terrific Ways Hotels Make You More Money