If you have ever rented a hotel room for the night, gone to a restaurant or visited an amusement park, then you have stayed in a “hospitality property”. These properties primarily serve travelers and leisure seekers, which include various types of properties such as hotels, motels, bars, restaurants, golf courses, and more. While these types of properties are great places to unwind and relax, behind the scenes they are actually rental properties generating financial returns for investors. Below we take a deep dive into everything you need to know about hospitality properties.
Table of contents
- Hospitality Real Estate Definition
- What is Hospitality Real Estate?
- 5 Categories of Hospitality Properties
- Types of Hospitality Properties
- 5 Types of Hotels
- Hospitality Rental Property News
- Pros and Cons of Hospitality Investing
- Hospitality Property Management
- How to Invest in Hospitality Properties
- Explore Other Types of Rental Real Estate
Hospitality Real Estate Definition
Hospitality real estate refers to properties that are specifically designed to offer a leisure service or interim lodging. They usually fall into one of four categories: Food & Beverage, Travel & Tourism, Lodging, and Recreation, in which they can be a destination or a stop on the path of their customer’s journey.
What is Hospitality Real Estate?
The hospitality industry covers a wide swathe of businesses providing customer service, lodging, and other services to guests and visitors. This can include everything from hotels and restaurants, to event planning and transportation. The common thread that ties all businesses in the hospitality industry together is the focus on providing a positive experience for the customer. In recent years, it has become one of the fastest-growing sectors, resulting in countless businesses and jobs being created. It is expected to continue growing in the coming years as more and more people seek to enjoy life outside of their homes; making it a prime target for real estate investors of all stripes.
Many different types of entities make up the hospitality real estate industry. Hotels are perhaps the most obvious, but there are also resorts, bed and breakfasts, vacation rentals, and more. Restaurants, bars, and nightclubs are also key parts of the hospitality industry, with event planners, transportation companies, and tour operators playing important roles too. The hospitality industry is integral to modern society and to the way we live our lives. It provides jobs for millions of people and generates billions of dollars in revenue each year. Every time you travel, eat out, or attend a special event, you are supporting the hospitality industry and hospitality real estate.
5 Categories of Hospitality Properties
If you’re thinking of investing in a hospitality rental property, you might be wondering what types of properties fall into this category of rental real estate. Hospitality properties can broadly be divided into five main categories: Food and Beverage properties, Travel and Tourism properties, Lodging properties, Recreation properties, and Event & Meeting properties. We take a look at each category below:
1. Food and Beverage Properties
2. Travel and Tourism Properties
3. Lodging Properties
4. Recreation Properties
Recreation properties are those that support businesses that give customers the ability to entertain themselves for typically a short period such as a few hours to a few days or weeks. In urban settings, recreation properties are usually developed to support a recreational business (e.g. Movie Theater), but in more rural settings recreational properties can be developed to support more outdoor-friendly activities (e.g. Camping). Examples of recreational properties can range from water parks, campgrounds, zoos, parks, swimming pools, hunting grounds, and more. Most recreation businesses generate revenue via admission tickets, concession sales, food and beverage sales, and merchandise sales.
5. Event and Meeting Properties
Types of Hospitality Properties
Within the 5 categories of hospitality properties are different types with each having its own set of investment considerations. Below we’ll explore the different types of hospitality properties and what you need to know before investing in one since each offers different amenities and services to its guests.
This is the most common type of hospitality property. Hotels range in size from small, independently-owned properties to large, international chain hotels. Most hotels offer a variety of room types, including standard rooms, suites, and executive-level rooms. Services typically offered by hotels include room service, laundry service, concierge service, and valet parking.
Motels are typically smaller than hotels and offer fewer amenities. However, motels are often less expensive than hotels and are a good option for travelers looking for a place to stay for a night or two. Motels typically offer standard rooms focused on both business and leisure travelers.
These properties are typically located in a rural setting. They are often owned and operated by a family or small group of individuals. Lodges typically offer a variety of room types, including standard rooms, suites, and cottages.
Cabins are also usually located in a rural setting. They are often small and rustic (though not always!) and provide guests with a feeling of being away from the hustle and bustle of everyday life. They tend to be more sparse on services when compared to other hospitality property types and are decidedly more rural in nature.
Hostels are often located in dense urban areas and cater to younger or more budget-conscious travelers. They are often less expensive than hotels and motels and are a good option for travelers who are looking for a place to stay for a night or two. Hostels typically offer dormitory-style rooms with a shared bathroom.
Travel centers offer a variety of services to travelers, including a place to stay for the night, a restaurant, a gift shop, and a gas station. They generate revenue from services to travelers, like truck and auto services, showers, gas, food, and convenience items.
Have you ever been to Waterworld, Raging Waters, Six Flags Hurricane Harbor, or any other waterpark in the US? If so, you know what a water park is. If not, they offer a variety of water-based activities for guests, including swimming, slides, and wave pools. They generate revenue via food and merchandise sales and ticket and season pass sales.
Amusement Facilities are a type of hospitality property that includes businesses such as amusement parks, water parks, arcades, bowling alleys, and other recreational businesses. These facilities typically have high startup and operating costs, but they also generate a lot of revenue from ticket sales, beverage and food sales, and other disparate income sources like merchandise, season passes, etc.
You probably know what a golf course is, if not from hitting the links yourself, from seeing Caddyshack or Happy Gilmore. But for the uninitiated, a golf course is a course where people can play the sport of golf. It typically consists of a series of holes, each with a teeing ground, fairway, rough and other hazards, and a green with a flagstick and cup. Golf courses typically offer a variety of activities for guests, including golf, tennis, and swimming.
5 Types of Hotels
Hotels are the most common and widespread type of hospitality property. However, not all hotels are the same. Below we explore the 5 primary types of hotels:
Full-service hotels typically offer the most amenities, including on-site restaurants, room service, concierge service, fitness centers, and business centers. Although they offer the most amenities, they are also the most expensive type of hotel.
Select-service hotels are a step below full-service in terms of amenities and price. These properties typically have on-site restaurants and fitness centers but lack room service and concierge service.
Limited-service hotels are the most basic type of hotel, offering little more than a room and a bed. These hospitality properties are typically the least expensive but also the least convenient.
Extended Stay Hotels
Extended stay hotels are designed for guests who need to stay for longer periods, offering kitchenettes and other conveniences not typically found in traditional hotels.
Budget hotels are the most affordable option but also the most basic. These properties typically have limited amenities and little to no on-site staff.
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Hospitality Rental Property News
Pros and Cons of Hospitality Investing
There are many factors to consider when determining whether or not to invest in hospitality rental properties. The following is a comprehensive list of the pros and cons you need to know before investing in hospitality rental properties.
Hospitality Property Pros
- Strong Demand – There is always going to be a demand for accommodation, whether it’s for business or leisure travel. This means that your property is likely to be occupied most of the time, generating a healthy return on investment.
- High Standards – Hospitality properties are held to high standards, so you can be sure that your investment will be well-maintained. Well run hospitality properties usually translate into happier guests and greater profits.
- Professional Management – Hospitality properties are managed by experienced professionals who know how to maximize revenue and keep guests happy. This means that you can relax and leave the running of your property in safe hands.
Hospitality Property Cons
- Cyclical Industry – The hospitality industry is notoriously cyclical, and properties can lose significant revenue during down cycles. Factors such as weather, global events, and consumer preference can all affect a hospitality property’s favorability.
- High Entry and Operating Costs – Hospitality properties are often very expensive to purchase and maintain. High operating costs coupled with an unplanned down-cycle, and the property can be a drain on financial resources.
- Highly Competitive – The hospitality industry is highly competitive, with no guarantee that a particular property will be successful. One-upping competitor amenities, discounting prices, and marketing campaigns are all tools used by hospitality properties to gain advantages over competitors.
Hospitality Property Management
Hospitality property management is a specialized type of real estate management that deals with the oversight of day-to-day operations of hospitality-related properties such as hotels, resorts, and restaurants. As a hospitality property investor, you can choose to get hands on with the day-to-day management or outsource it to a professional company. Either way you choose, understanding the ins and outs of hospitality property management is essential for every investor.
How to Invest in Hospitality Properties
If the thought of owning a hotel or golf course sounds exciting to you, then investing in a hospitality property might be a good type of rental property to pursue for building wealth. Among the many ways to invest in rental properties, the two most common are Direct Ownership and Fractional Investing (Indirect). Direct ownership is where the property is purchased under your full-ownership. Indirect and Fractional Ownership of hospitality investment properties provide you with exposure to the sector without tying up all of your capital in a single property.
Direct Ownership Examples
Hotels – Purchasing a hotel is an excellent option for those looking to invest in hospitality real estate. They offer a steady stream of income and can be a long-term great investment. However, direct ownership of a hotel also comes with a lot of overhead which can be expensive to maintain.
Bed and Breakfasts – Starting a bed and breakfast offers guests a more intimate experience and can be a great way to earn income. They’re usually smaller and easier to maintain than hotels, but do require ongoing expenses such as guest supplies and administrative overhead.
Vacation Rentals – Vacation rental properties are a fantastic option for those looking for a more hands-on hospitality property investment. Unless you hire a property management company for your vacation rental, you’ll be responsible for maintaining the property and renting it out to guests, but you’ll also get to enjoy the property yourself when you’re not working.
* Direct ownership can also apply to many other types of hospitality properties, including amusement facilities, lodges, cabins, travel centers, and more.
Indirect and Fractional Ownership Examples
Hotel Industry Stocks – Investing in shares of a hotel company’s stock can give you a direct stake in the business and potentially allow you to participate in its success (or failure). However, you’ll be subject to the ups and downs of the stock market and the hotel business itself, so this may not be the best option if you’re looking for stability.
Hospitality REITs – Another option is to invest in a hospitality REIT (Real Estate Investment Trust). This is a type of real estate investment trust that specializes in investing in hotels, resorts, and other hospitality-related properties. REITs can offer a more stable return than stock investments, but they still come with some risk.
Hospitality Property Real Estate Crowdfunding – You could also consider investing in real estate crowdfunding. It is a relatively new way to invest in real estate and involves pooling money with other investors to finance a property. Crowdfunding can be a terrific way to get exposure to the hospitality industry without having to put up a lot of money yourself.
Fractional Vacation Rental Property Ownership – Finally, you could consider fractional ownership of vacation rental properties. Vacation rentals are a popular option for people who want to own a vacation home but don’t want to deal with the hassle (and expense) of maintaining it. With fractional ownership, you own a portion of the property and share the costs (and profits) with other owners.
Indirect and fractional ownership of hospitality properties can be a great way to get exposure to the industry without putting all of your eggs in one basket. Each option has its own pros and cons, so it’s vital to do your research before deciding which one is right for you.