In 2013, an investor from Eastern Europe purchased a small hotel business with 10 rooms and a restaurant at a mountain ski resort. Since his main business was situated in another country, he expected the hotel to work autonomously and bring residual income. However, things quickly got complicated.
First of all, he failed to save on the manager’s salary due to labor permit issues he didn’t know about. Second, the people he hired successfully managed the hotel, but had little experience in F&B business, and poor performance of the restaurant had a negative impact on the hotel.
Since the hotel was located at a winter mountain ski resort, attracting visitors during summer required active promotion and arrangements. So the investor had to do it personally.
As a result, the owner spent a lot of time, money and efforts and eventually decided to sell the mini hotel. But he couldn’t find a buyer because few investors wanted to get involved in this sort of business.
What kind of hotels are good for investing?
A lot of investors are looking for small hotel business (as described above). They expect to hand such objects over to hotel operators and do not plan to participate in management or to move abroad. However, such investments are impossible.
Hotel operators are not interested in objects with capacity of 10-30 rooms. It’s too small. Hotel service includes 24 hours reception, regular cleaning, room services, breakfasts, fitness club, dry cleaning, etc. All of these require qualified professionals, and they need to be paid. As a result, the net profit from such business will be too little. Hotel operators take the job if the object has at least 100 rooms.
The owner may hire a manager, but an experienced professional will ask for a higher salary. He or she will take most of the profit.
So investing in a mini hotel may be a good decision if you are ready to take full control of the object and turn it into a family business. But even in this case, you’ll need at least some experience in hospitality business.
Investing in hotels and serviced apartments
If your goal is to invest in a source of residual income, standard hotel rooms and serviced apartments will suit you better.
Both categories are very similar from an investor’s point view. One purchases a room which is then managed by an operator. In other words, all management issues are solved by a group of professionals, often well known brands or hotel chains.
Such companies usually take about 20-30% of the hotel’s rental pool while the remaining money is proportionally shared between room owners. In other cases, investors’ returns are fixed and do not depend on how well the hotel performs.
Serviced apartments, unlike standard hotels, offer limited services (often only cleaning) so it takes less people and less expenses.
Lastly, investing in a single room is much cheaper than buying a small hotel business. Besides, if you are planning to invest a large sum of money, you can diversify it between several investments – ideally in different hotels and resorts.
So by investing in hotel rooms and serviced apartments, you get a stable source of income which doesn’t require your participation.
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