Top 10 reasons why hotel investments fail
August 17, 2020|Hotel Marketing
Business failure in the hotel sector is almost always avoidable. Arm yourself with the right knowledge so you can avoid the top 10 reasons why hotel investments fail.
1. A lack of investment into people and property
It is easy to think that the less you have to spend on paying staff and maintaining your hotel, the more you will gain in profits. On the contrary, it can end up losing you more money in the long term.
If you do not maintain your property to a high enough standard, guests are less likely to give you good online reviews, which can then impact your future sales. Additionally, if you do not regularly maintain your hotel, the working environment would be less appealing to staff, which means it would be harder to employ and retain the right people.
2. Inflexible management
The crucial thing to be mindful of is that the hotel industry is always changing. You cannot afford to stand still. You have to take a flexible approach to manage your hotel business. It involves keeping yourself educated about the latest technologies, products, and market trends and implementing them into your hotel business.
The benefits of keeping up with change will likely trickle down to your staff teams, too. It can end up making their work more efficient and productive.
3. Not enough working capital reserves
It is a fundamental but critical truth. If your cash flow turns negative, your hotel must go into liquidation. You can risk losing your hotel business.
The obvious way to avoid this is with proper financial planning. Have back-up plans and stress test these plans under multiple worst-case scenarios. For example, hotels that operate heavily as seasonal businesses need to have market cycle plans. As a rule of thumb, have an adequate working capital to cover the next 12 months' worth of liabilities.
4. New competition disrupting the market
Development in the hotel industry tends to happen in steady waves. Sometimes major developers come in and invest in large projects. It creates an influx in hotel rooms, which can offset the balance between demand and supply. Ultimately, this will lead to a reduction in hotel room value across the market.
The solution here is to be ready for when these new hotels open. Your hotel's pricing strategy should likely reflect a reduced room rate based on the changes in the market. In some cases, this may cause a hotel to become unprofitable. If this is the case, the only option is to sell the property. Be decisive and make quick decisions to avoid losing more money over time as newer properties open.
5. Getting overwhelmed by your costs
Large-scale scale construction and renovation projects carry high costs, which can make or break the success of a hotel. The trick here is to use the people around you to your advantage. Get your team members to review your plans and specifications.
If your hotel is a franchise, ensure that your franchisor has the opportunity to review the final budget before you start construction work. Another tip is to make timelines your best friend. Ensure that you follow timelines for each contract because if a project overruns its deadline, it will almost certainly end up costing you more money than planned.
6. They are over leveraged with expensive capital
When investing money into your hotel business, it might be tempting to borrow as much money as you can to maximize long-term returns. Generally, the more money you borrow, the higher the interest rates you pay. It leads to a higher cost. Be sensible and have a disciplined approach to borrowing and investing. Remember, a lower return on investment is better than no investment at all.
7. Making poor underwriting assumptions
When presented with sales contracts, you must read them. Do not ever assume anything and always ask the right questions if you are ever not sure of something.
It seems obvious, but you would be surprised about the number of investors who do make this mistake. It is not just contracts that you should avoid making assumptions on; it is on every aspect of your hotel investment.
Never assume that the hospitality market will stay the same. Skilled investors make decisions based on their knowledge of the market and how they think it will change over time.
Hotels fail if they are in a weak location. It can change over time depending on its proximity to transport networks, tourist destinations, entertainment values, and a range of other factors.
Whether you are selling a property or looking to make a new investment, a hotel's location has a significant impact on its market value.
Carefully consider location in the construction process as many aspects of the hotel can be changed after it has been built but not its location. Avoid barriers to entry where possible. A lack of development land may also pose a barrier to expansion. For example, a hotel surrounded by undeveloped land has an opportunity to expand and offer value-added services over time.
9. Being victim to the market cycles
Average values go up and down over time based on a range of market factors. It can be frustrating because these factors are out of your control. Hotels, however, have a track record of rebounding back up in value after they have fallen. In some cases, the rebound value can end up exceeding the original value, too.
A great way to look at this is to compare it to stock market trading. There are good and bad times to buy and sell. The hotel market is no different. It is easy to spot the signs of where you are along the hotel market cycle. For example, if construction projects are frozen and borrowing becomes more difficult, this typically means you are nearing the bottom of a market dip.
10. Not having the right people in your business
The hotel business is largely people-driven. That is why employing staff is costlier for any hotel business. It is tempting to keep costs down as much as possible, but you risk not having the right people working for you.
Take the time to recruit the right people for the job. Make sure you have a thorough recruitment process. The important things to consider in hiring are experience in delivering similar projects, a strong track record of success, readiness for any challenge, and awareness of how their role fits into the bigger business context.
If you want to know more about hotel investment, or if you need help in making investment and management decisions, call us at 888-999-8086 or email us at firstname.lastname@example.org.
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