Hotel room investment – success is about location and management
When it comes to making money and finding new investment opportunities, I love what Robert Kiyosaki (author of Rich Dad Poor Dad) has to say: “You make money in business, you keep it in real estate.” Property investment opportunities in hotels offer the best of both worlds, providing you do it right.
Doing it right is the subject of this article. I’m going to look at the structure of hotel management, and how it dovetails with hotel ownership. You’ll also discover how getting on board with a great hotel management company will help you do hotel room investment right. It’s this that could ensure you own a slice of investment property with exposure to a booming industry.
Owner managed hotels
Lots of people own by lots of hotels. A lot of these owners shouldn’t be owners.
A real owner managed hotel can offer something that big brand, corporate hotels can’t: a friendlier, more individual, personalised guest experience. Home-cooked menus, personal recommendations of places to visit, I’m sure you’ve had the experience. What many new hotel owners don’t realise is that the hospitality business is just that: a business. Property investment in a hotel, as an owner-manager, is not a passive investment − it’s commitment to work hard for long hours.
There are a lot of dentists, doctors and lawyers who have made a stack of money and decided to live an easier life by owning and managing a hotel. Many of these investors end up with poor hotel investment ventures. The ones where the rooms are never quite clean, service, is never slick, and the facilities simply aren’t up to scratch. These are the hotels that fail.
Owner managed hotels allow the investor owner to keep all the profit, but the cost is a lot of hard work. And if the investor goes into it blind, then the time it takes to learn the business could be the time it takes to lose the investment.
Corporate hotel ownership
You may not realise it, but most the big brands don't own most of those big brand hotels. Most hotels are either managed by big brands or independent operators. Take Marriott as an example. The company only owns a handful of properties. It franchises its brand name to the majority of Marriott hotels and manages them for owners.
Chains like Marriott have certain benefits for guests, who know what they’re getting from one hotel to another. The rooms are the same, the menus are the same, and they might benefit from a gym or business centre. They are probably close to other amenities and facilities, restaurants, and tourist and business areas. However, they can also be more expensive, with unadaptable services, and impersonal in nature.
It might be tempting to invest in a hotel and operate it under a brand franchise arrangement, but doing so is an expensive business. A franchise agreement typically runs for 10 to 20 years, during which time the investor (owner) will pay around 8% or so of revenues for the use of the brand name. The operation of the hotel has to conform to the brand, and maintenance and repairs have to be approved. Some brands will also manage the hotel for the franchise – with management fees paid on top of the existing franchise fees.
Investor owned, independently managed
Investing in a franchised hotel with the ‘benefit’ of brand management can be an expensive undertaking. The investor puts up all the money while the brand takes a big slice of the revenues. The investor’s profit takes a pretty big hit.
That’s why I’d recommend investor-owned, independently managed hotels. What the hotel owner gets is a kind of halfway house, sitting neatly between the advantages of owner managed and corporate branded hotels. It’s a model into which hotel room investment fits perfectly.
Instead of taking the risk of having to learn the business and put in 20-hour days, as the hotel investor you put up the money and pay a management company to operate the hotel for you. The costs are lower, and the benefit is a well-managed, independent hotel that gives you a passive income stream from a property investment in one of the UK’s fastest-growing business sectors.
Contracts for this type of property management also tend to be shorter and more flexible than hotel franchise contracts. Management fees are commonly in the range of 2% to 5% of revenues, and contract term periods are usually 5 to 10 years, not 10 to 20.
How do you know the management team will do a good job?
As the investor in the hotel, you’ll want to know that it’s being managed as well as it can. Within the management contract, there will, of course, be clauses that penalise poor performance and allow the owner to back out. However, it’s far better to hire a great management company from the outset and incentivise them to perform. That’s why hotel management fees might also include some (or all) of the following:
- Base fees – a percentage of the hotel’s revenue
- Available cash flow after owner’s priority – a percentage of profits over and above the owner’s return
- Operating cash flow – a percentage of the hotel’s cash flow after the owner’s return and an amount retained for the business (e.g. deposited into a reserve fund)
- Gross operating profit share – a percentage of the gross operating profit over a ‘hurdle’ amount
- Positive variance from budget – a percentage of any profit (or revenue) over the budgeted number
- Positive variance over previous operator profit – incentivising the management company to increase performance from the previous state of affairs
These types of incentives should ensure that the interests of owners and operators become common goals: minimising costs, increasing the average daily rate (ADR), and maximising profits.
Selecting the hotel management company
Managing and operating a hotel takes specific skills, knowledge, and expertise. I couldn’t do it. That’s not to say that you shouldn’t invest in hotels, but that the property investment should be seen as separate to managing and operating a hotel.
It is where choosing the right management company can make the difference between a great property investment opportunity and an underperforming mistake.
You don’t need to use a complicated approach to select the best hotel management company for a hotel investment. When we started the search for a hotel management company, we wanted to make sure that whoever we chose could give us the answers we wanted to a number of specific questions. These included:
What type of hotels does the management company have experience with?
We wanted a company that understands the types of hotels that the investors are putting their money into. Different hotel management companies have different spheres of expertise – and different types of hotels require different operational capabilities. A hotel in a rural area is different to a city centre hotel; one that offers a full service needs a different approach to one that offers a limited service.
Does the management company have an experience where the hotel investment is?
We wanted a company with the local knowledge, but also one that can offer that local knowledge on a national level. The management company had to understand the type of customer attracted to the area of investment, the strengths and weaknesses of the area, the competition, and how to market any hotel in which the investment is made.
Is the management company successful with its other hotels?
When answering this question, we want to see that the management company:
- Has a history of making money at the hotels it manages, and with good profit margins
- Runs its hotels efficiently
- Manages its staff well, and instinctively knows how many staff will be needed at a location
Does senior management get involved in the business?
We also wanted a hotel management company that has senior management who care about the business and the hotels it operates. It means looking for a company whose senior managers oversee their mid-level managers and hotels actively.
After considering a host of companies, we discovered that different hotel management companies deliver different levels of hotel revenue. The value of a hotel and the profits that underpin investment returns rely on using an excellent management team. And boy did we find one!
Welcome Mitchells & Butlers
Mitchells & Butlers is one of those companies that people think they’ve never heard of, but have probably all used. It is Britain’s leading pub and restaurant company. Through its brands that include Harvester, Toby Carvery, Browns, Vintage Inns, and All Bar One, Mitchells & Butlers:
- Have more than 1,700 locations around the UK
- Serve customers in all geographies, across diverse locations ranging from inner city to ‘in the sticks’
- Employ around 44,000 staff
- Have annual sales of almost £2 billion
- Serve more than 140 million meals a year
- Pour more than 430 million drinks a year
The company has won awards for its businesses, management, and employee training. Its businesses average around £23,000 sales every week, and make an average of around £180,000 profit each year: that’s among the highest in the industry.
Mitchells & Butlers offer hotel management and operational experience through a brand I’m sure you have heard of: Innkeeper’s Lodge. It currently manages hotels in more than 50 locations around the UK and is seeking to expand its operations. Food sales per pub across the group have increased by 60% over the last five years, with three-quarters of sales generated from guests who dine at their pubs and restaurants.
The sheer size of Mitchells & Butlers’ operations means that hotel room investors in the hotels that it manages to benefit from that scale. Costs of purchasing and ability in marketing are second to none. It translates into better-than-industry-average returns on investment.
When it comes to staffing, Mitchells & Butlers have a progressive policy, employing people that are committed to their careers, and offering some of the best training in the business.
Their forward-looking strategy includes:
- Investment in brands and sites
- Building a sales culture to deliver growth and sustainability
- Resolving any complaints within 24 hours
- Increasing innovation in customer reach and online activities, including digital marketing
Your success in hotel room investment depends on investing in the best locations and getting those locations managed by the best hotel management team.
Our clients will benefit from two compelling factors: our experience and expertise in property investment, and Mitchells & Butlers’ experience and expertise in hotel management and operations.
Read our investment guide – Hotel room investment for investors who want yield, or watch my video series introducing hotel room investment as a property investment strategy. Alternatively, speak to the team on +44 207 923 6100 to discover how hotel room investment could transform your property investment portfolio.
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