The Hajari Realty team knows how to match properties with investors. While profitability is the underlying goal of all parties involved, there are more factors to consider in every transaction.
This includes how investors view the acquisition of a property. Do they plan to exercise hands-on management? Do they prefer to be major or minor investors?
Are they acquiring a property merely for its profit potential, or to suit a lifestyle need? Do they want to invest in a hotel franchise or an independent operation?
Understanding the reason for investing in a hotel is the first step. The rest follows a general process that may be summarized as follows:
Working with a trusted broker
This is very crucial for success in hotel investment. The hospitality industry is vast, complex and highly dynamic. A knowledgeable and experienced broker can guide investors to the property that best suits their needs and preferences, and help them navigate the complex analysis, documentation, and financing processes that come with hotel investing.
The right broker is someone who is highly dedicated to the success of the endeavor and has widespread experience, network, and knowledge in the hospitality industry. They must understand both the real estate and operational aspects of a hotel business.
Coming up with criteria for property selection.
The right property will largely depend on the investor’s reason for investing. Some of the factors that should be considered are:
- Location, size, and cost of the property
- Cash flow yields, both current and potential
- Potential value appreciation
- Earnings stability
- Potential risks and increase in competition
- Potential for improvements, renovation, and re-positioning
- Ability to change management or franchise
Searching for the right property
The investor’s broker will assist their client in finding potential properties that match the client’s criteria. The broker may represent some of these properties or get the word out through their network and other sources. Hotel buyers typically get offers for properties to invest in.
It’s important to conduct thorough and informed screenings so the investor can focus only on the most ideal properties without missing out on any opportunity. Screening involves a professional appraisal and an in-depth look at a property’s financial, employee, market performance and operational records.
A site inspection will further help investors determine which property is best suited for them.
Determining the buying price
Often, a “guide price” is given as base for negotiations on a property’s purchase price. However, the eventual buying price is mostly determined through a professional assessment of the property.
Unlike other types of real estate, buying a hotel is not confined to the price of the building and/or lot, but also includes operational costs, such as stocks and supplies, leases, and contracts. The buying price is also largely influenced by the hotel’s potential profitability.
To determine potential profitability, a prospective business plan must be formulated, taking into account such factors as the hotel’s physical condition, management, franchise agreement, and occupancy rate history.
Other aspects to consider include cash flow projections, potential value added from renovations, improvements, and re-purposing, management or franchise agreements, and buyer and seller contingencies. An exit strategy must also be determined.
Through a combination of these aforementioned details and factors like current market conditions, the buyer determines an offer price and presents it to the seller.
Negotiating the purchase price
With their experience and market savvy, the buyer’s broker can help their client achieve a more favorable price or win a bidding war. Various strategies, including raising the earnest money deposit, reducing the amortization period, and speeding up the due diligence period can help improve purchasing terms.
Financing the purchase
Financing a hotel purchase can be complex as lenders typically consider not just the real estate value of the property but also its operational aspects. In many cases, hotel financing is more restrictive than financing for other real estate types. Some features that are commonly weighed in hotel financing are:
- Franchise agreements
- Hotel management agreements
- A cash management system that requires the hotel’s revenues to be deposited to a clearing account and restricts borrower’s withdrawals
- Lender’s control over the hotel’s annual operating budget
- Trademarks and liquor licenses
- A system for lender’s approval to borrower’s requests
It is also common for the seller to pay part of the purchase price in a special arrangement with the buyer.
Conducting due diligence
When a purchase contract is in place, the process goes to due diligence. This is a critical stage that can affect the final transaction details. It covers all aspects of the hotel’s operations.