Council Post: Seven Costly Mistakes New Hotel Investors Are Prone To Make (And How To Avoid Them)

The hotel industry can be extremely competitive. Even though it’s true that a well-established hotel can make for a stable stream of income, there are a lot of things that can go wrong before you get there. Trying to jump into this industry without an idea of what’s waiting for you is a potentially costly mistake that can even destroy an investment if not handled correctly.

To help, we asked seven members of Forbes Real Estate Council to discuss the most expensive mistakes hotel investors can make when deciding to enter the hospitality industry and how they can avoid them.

1. Not Doing Your Own Research

Do your own independent research. Many communities hire consultants to write reports that say more lodging is needed. It’s rare that the consultant comes back with a report that says no new lodging is needed. If you are going to build and develop in a market, construct mystery shopping testing, do physical drive-bys and stay at local properties to check quality and market rate pricing. – Jason Duff, Small Nation

2. Underestimating Expenditure

Considering the heavy operational aspect and required flexibility to respond to daily market changes, the hotel business requires substantial capital improvements and operational enhancements, especially during the first year. Hotels typically operate with a higher ratio of fixed costs to revenues and require careful planning for immediate-term finances. So plan for first year expenses while purchasing. – Amit Inamdar, Own Sweet Home Realty

3. Hiring The Wrong Property Management

Having the wrong team handle the job of property management for your hotel may result in a negative impact on your bottom line. Hotels thrive by providing guests with an outstanding experience. A management team that doesn’t understand that hotels are a service industry will inevitably lead to dissatisfied customers and negative reviews online. The result is a tarnished brand and lower profits. – Joe Houghton, RE/MAX Results/The Minnesota Property Group Team

4. Not Partnering With Local Developers Or Investors

When coming into a new market, it’s important to look past the math when determining a good deal, and understand the local politics/community. It’s important to have boots on the ground and partner with local investors that understand that market and the intangibles. Always walk the property, always speak to local experts to get a feel on how that town/city operates and how that can impact hotels. – Ari Rastegar, Rastegar Property Company

5. Lacking The Right Capital Structure

Properly structuring the capital stack in order to withstand the downturns and have what I call “staying power” is key. Many hoteliers go under because of overleveraging. Hotels are a great business if properly operated by an experienced manager with the right brand in place, but without the right capital structure you are a sitting duck. – Carlos Jose Rodriguez Sr., Driftwood Acquisitions & Development

6. Flawed Underwriting Assumptions

Flawed underwriting assumptions are an obvious factor that can lead to making bad investment decisions. Investors can mistakenly rely on promising and grossly optimistic broker proforma figures that are utilized to stretch the value for the seller. Failing to ask critical and strategic questions designed to reveal unstated negatives can leave assumption errors hidden until it’s too late to ask. – Garratt Hasenstab, The Mountain Life Companies™

7. Not Using OTAs Properly

Online travel agencies (OTAs) were feared when they first entered the industry, but today, they are necessary in any successful marketing strategy. Understanding these sites’ booking patterns can be advantageous and provide a great distribution channel. Always be sure that you control your inventory and pricing on all platforms. Do not offer lesser rates on third-party sites than on your own site. – Ryan Moran, Option Realty Group