Investing in hotels is a very unique venture. If you invest in commercial real estate such as an office building or warehouse, you own the building and the land the building sits on, but you don’t have a vested interest in the companies that inhabit it. If a company makes a profit, you don’t generally share in it, but conversely, if a company goes bankrupt, you also don’t take much – if any – of a financial hit.
A hotel is a very different proposition, however, because you are not simply buying a building and the land it sits on, you are also buying a business. If a company that is housed in a property that you own goes bankrupt, you are free to simply evict the company and install a new tenant. If the business housed in your hotel fails to make a profit, however, you can’t just simply evict them and install a new one because you own not only the property but the business housed in the property as well.
Therefore, before buying a hotel it’s important to not only have the financing in place to do so, but also a solid plan for what you want to do with the business that comes with the property once you purchase it.
Here are three reasons you want to have a solid business plan in place before buying a hotel.
1) It will help you clarify what you want to do with the business and what you need to do that
When you buy a hotel, one of two things is going to be true: you are either going to also be buying a profitable business or you are going to be buying an unprofitable or non-functioning business. You might actually be buying a non-functioning hotel or a building you plan on turning into a hotel. Regardless of whether the business is up and functioning well, not functioning well or non-existent at the time, you need to know how to either make or keep it profitable and that requires a plan. If it is currently profitable, it’s important to look at why it is profitable. Is it profitable due to good business practices and a keen understanding of the hospitality industry or is it profitable due to cutting corners and shoddy business practices? If it is the former, you want to learn as much as you can so you can maintain its profitability, if it’s the latter, you want to learn as much as you can so you can fix what has been broken.
All in all, you need to have a strong grasp of where the business is now, where you want to take it and have a strong plan in place for getting it there. Even more importantly, however, is to make sure that your plan is realistic among the unique constraints of the hospitality industry.
2) Having a plan will help you attract co-investors
While you may have the means to purchase a hotel on your own, purchasing with other investors spreads both the risk and the wealth. Getting others to invest in a venture with you, however, depends on your ability to not only convince them that you know where you want to go and where you want to take the business itself, but also that you have a solid plan for getting there.
3) It will keep you on track when things start moving quickly
It’s fairly easy to sit at a distance and evaluate a property and what it will take to make or keep it running profitably. It’s an entirely different matter when the ball actually starts rolling and you have a thousand different small decisions to make on a daily basis that will determine your eventual destination. Deciding on a thread sheet count seems like a small, insignificant thing, until you multiply that single decision by 100, 500 or 1,000 beds.
A business plan is like a road map that you check each decision against to determine if it is in keeping with the overarching vision you have for the business and and the eventual destination you want to reach. If you decided when making your business plan that you wanted to end up with a family and budget friendly hotel, you might want to opt for the durable 500 thread count sheets rather than the more luxurious 1,000 count sheets. A good business plan will help you keep the bigger picture in mind when making the eventual myriad of small, daily decisions that will inevitably come your way.