The obvious answer is money. You need money to start a hotel, but you can have all the money in the world and still fail to have a high-quality hotel. Let’s assume that you have the requisite capital or access to capital to start a hotel. Most probably, you do not have much, if any hotel industry experience. Even if you have, starting a hotel is a very different proposition to working for someone in a hotel. Starting a hotel from scratch, meaning building a hotel, is fraught with difficulty. The easiest way forward is often to just buy a hotel and run it, rather than starting a new one. Not only is starting a new hotel hard, but the time to payoff is also longer, whereas with an acquisition, you’re looking at cash flow from Day 1. If, however, for whatever reason, you must start a new hotel, then this article is for you. So, what’s involved in starting a hotel?
Location. Location. Location.
The golden rule of real estate is often said to be, “Location. Location. Location”. The same could be said of hotels. Before you start thinking about the right street, thoroughfare, zone, etc, you need to ask yourself if you are in the right town. Before you even consider that, you must know what kind of hotel you have in mind. One way to figure out if you have the right concept for the right town, is to try and make a reservation in a hotel in the city you want to start your hotel in. So, for example, you could go to the Hampton by Hilton, Holiday Inn Express and Marriott International websites and try to make reservations in each of those hotels. This will tell you if the type of hotel you are considering has been tried in that city. Sure, you could be a trendsetter, that’s true, but everyone thinks that. Let’s play conservatively and assume that if your idea is good, someone has already tried it. This will lead you into fewer egoistic blind alleys.
If you want to build a downscale, economical hotel, such as Super 8 Hotels, my advice is not to do it. Why? The purpose of a business, at least to its owners, is to return cash at a higher rate than the cost of investment. This is known as growing economic, or shareholder value. Growing shareholder value from economic property is extremely difficult. Here’s why: your competitors will have already paid for their infrastructure and will be able to reduce their prices in response to your low prices, undercutting your appeal to budget guests and forcing you to go even lower. It’s very difficult to build a business based on cost advantages. Not impossible, but certainly very difficult. You don’t want to build a business that comes with challenges.
If you are looking to build an upscale hotel with accompanying food and beverages services, you should only do so if you have the relevant restaurant management experience. Although it’s possible to keep your costs down, there are certain things that will have to be bought and whose pricing is non-negotiable. In other words, costs will essentially be high even when you are operating efficiently. The effect of this is that you will be under pressure to ensure that you have a constant stream of guests flocking into your hotel, in order to meet the costs of running the business. Not all guests will eat in your hotel, so you must be able to keep bookings high and earn revenue from your conference facilities. Or, you must make your restaurant sufficiently popular to drive revenue and keep you afloat. Here’s the thing, even when you have many people flocking into your restaurant, restaurants are extremely difficult to run as profitable enterprises and their costs are often so high that they can eat into the rest of a hotel’s profits. This is why Drury Hotels closed its restaurant units: the costs were so high that losses in their first hotel’s restaurant ate up the hotel’s profits from room bookings.
This is why I recommend you use hotels such as Hampton by Hilton, Holiday Inn Express, Marriott International’s Courtyard and Fairfield hotels, as models, at least in the beginning. These models will serve as building blocks on top of which you can build your hotel concept.
You want to make sure that those hotels are offering rooms in your preferred city for a “Best Available rate” of at least $110 per night. The Fairfield may be a bit lower than this, but the Courtyard will be a little higher. If those hotels can’t get rooms at $110 per night, run!
Business is not about emotion, it’s about facts and it’s about money. You must make decisions that reflect the facts on the ground. You may decide you still want a hotel in that city, but if so, you should do so knowing that your returns will be lower than what they could be in another city.
The reason I say run if those hotels can’t get $110 per night is because those hotels are franchises run according to very high and very strict standards. A person used to even higher standards, say, a Beyonce, could tolerate a night in one of those hotels. A person on welfare could spend a night or two there if they wanted to and planned and saved for it. Such a hotel is known as a Class A mid-market property. What this means is that the typical person would consider this a good hotel. And every person’s idea of a good hotel should be able to command $110 per night. If you are to deviate from what these hotels do, you have to have clear reasons for that, reasons that justify the heightened investment and/or heightened risk.
Whatever city you are in, whether it’s Marlborough, Massachusetts (where a room in the Hampton by Hilton will cost you $144 per night) or Branson, Missouri (where a Hampton by Hilton room costs $89 per night), the standards are the same. That means that the Branson, Missouri hotel, for instance, has lower returns than the Marlborough, Massachusetts hotel, even though they have the same amenities and furnishings. Construction costs will be similar, along with overhead costs. Food and beverages will be similar in terms of costs and planning. Yet one hotel generates significantly higher returns than the other. If there’s just one thing that matters in the hotel business, it’s location, location, location.
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