What is the Average Return on Hotel Investment?

Have you ever wondered what kind of returns investing in hotels could bring? It’s likely that you have heard tales of investors making double-digit profits from upscale resorts or boutique hotels. However, most people find hotels to be mysterious. What is the realistic annual income that you can expect? In actuality, hotel profits differ greatly depending on the kind of property and state of the market. Industry insiders, however, say that, when all costs are taken into consideration, a “good” return on a hotel investment these days is anywhere between 6 and 12 percent yearly. Not too bad. In this post, we’ll examine the variables that affect a hotel’s return and look at some typical returns for various kinds of hotel investments.

 

Average Returns on Hotel Investments

The location, brand, occupancy rates, and other factors can all have a significant impact on the average returns on hotel investments. Experts in the field, however, often state that full service hotels see yearly returns of 10–14% and low service hotels between 8–12%.

One important factor is occupancy rates. Higher occupancy results in increased room revenue and profits. Nationwide occupancy rates average around 65%, but popular tourist destinations and business centers can see 75% or higher. If you invest in a hotel with consistently high occupancy, especially during peak season, you’ll likely get higher returns.

The brand and management also matter. Well-known hotel brands often have higher occupancy and room rates, so investments in Hilton, Marriott or similar hotels typically provide higher returns. Managed properties, where a company handles day-to-day operations, also often achieve higher returns than independent hotels.

Of course, location is key. Hotels in desirable locations, like near popular attractions, convention centers or airports, usually offer the best returns. Suburban and rural hotels generally see lower returns.

Renovations and upgrades improve returns. Major improvements like adding amenities, revamping rooms, or rebranding the hotel can significantly increase room rates and occupancy, boosting your returns.

While there’s no “guaranteed” return, following the tips here will help you make a hotel investment most likely to provide solid returns. With some luck and good management, you could see returns on the higher end of the range, and maybe even higher! The possibility of strong, long-term cash flow and asset appreciation makes hotel investments attractive for many.

 

Factors That Impact Hotel Investment Returns

Investing in hotels can be lucrative, but returns vary and depend on several factors.

The location and quality of the property are key. A luxury hotel in a premier destination like Hawaii or Paris will likely generate higher returns than a budget motel in a small town. Demand and room rates are higher, so revenues and profits are greater.

The current stage of the hotel market cycle also matters. When demand is strong and room rates are increasing, returns will be higher. During downturns, returns may decrease. Over the long run, though, hotel investments have averaged solid returns.

Management and branding play a role. Major hotel brands often have higher occupancy and room rates, boosting returns. Effective management teams that control costs and maximize room rates and ancillary spending like food and beverage also support higher returns.

Financing terms impact returns. Lower interest rates and longer loan terms reduce annual debt payments, increasing cash flow and returns for investors. Equity investments where the investor owns the property outright potentially have higher returns with no debt payments.

Expenses such as staffing, maintenance, and utilities affect the bottom line. Efficient operations with lower costs and higher profit margins mean greater returns for investors. Revenue from additional amenities like restaurants, bars, gyms or event space can also boost returns.

While hotel returns vary from year to year based on market cycles, over the long run they have averaged 6-12% annually. With the right location and property, effective management, strong branding, and solid financing, hotel investments can provide very competitive risk-adjusted returns for investors seeking income and appreciation. However, before diving into hotel investing, it’s crucial to conduct thorough research and due diligence.