Investing in Hotels: How We Forecast ROI on Hotel Room Investments

Hotel investments are gaining popularity as property investments, and for good reason. Many investors are curious about this sector due to its unique characteristics and promising returns.

Several factors contribute to the profitability of hotel investments. The booming tourism industry drives consistent demand for hotel accommodations in prime locations. Hotels typically have lower entry costs compared to residential properties, making them accessible to a wider range of investors. Additionally, hotels often yield higher returns due to professional management, efficient marketing, and higher occupancy rates. They benefit from economies of scale, strong brand reputation, and multiple revenue streams, including room service, events, and amenities.

To forecast ROI and provide transparency, we go through our steps to estimate ROI in hotel investments. Our step-by-step model explains how to calculate ROI and maximise returns, showcasing how our hotel investments can generate income and build long-term wealth.

To forecast ROI, we begin with the unit's purchase price, including all associated costs such as taxes and insurance. At GPFG, our listed prices are comprehensive, ensuring transparency from the beginning.

Two factors to consider when evaluating the prices for hotel investment:

- Lower Entry Point: Hotel rooms are typically priced below $100,000, making them accessible to small-scale investors who want to diversify their portfolios or those lacking sufficient capital to purchase a villa or apartment. For example, our smallest investments are with Beraban Luxury Lofts, a 1BR studio investment is AUD $155,000.

- Leasehold Investments: Bali's property prices are often lower than Australia's due to its leasehold model for foreign buyers. When buying a hotel room in Bali, the ownership structure is the same, and you can liken the purchase to a commercial class asset, rather than a single property investment.

What is Fractional Investment?

At GPFG We offer fractional investment options, enabling investors to buy property shares, making high-value investments accessible and allowing portfolio diversification. The fractions are also available on our hotel room investments, where the costs, fees and ROI are all proportional to the amount invested.

For instance, while buying a full 2-3BR villa in The Luc starts at A$890,141, you can buy a 10% fractional investment from A $89,000.

Read more:Fractional vs Timeshare – We Weigh the Differences

To estimate income for hotel investments, we start with nightly rental rates based on current market data from similar hotels. Properties in popular tourist areas usually yield higher returns when rented nightly compared to long-term leases. Rental rates vary by unit size, location, amenities, and seasonal demand.

For example, the nightly rate for a 2BR Luxury Villa, at $865 , compared to similar luxury villas in the area, accommodating 4 guests.

Next, we consider occupancy rates. While locations like Seminyak and Canggu often have 90% occupancy, we use a conservative estimate of 75% for realistic projections. We rely on industry reports and tourism statistics to ensure accuracy.

“Occupancy rates are an essential focus for maintaining high ROI, so it’s imperative to work with a trusted and experienced operator” says Mark Reed from Geonet. “We partner with developments with operators like TUI Blue, Ramada Encore, who cater to millions of tourists every year with benchmarks set for occupancy.”

And in fact, for The Luc, when we discussed occupancy with TUI Blue Artur Gerber, he mentioned that worldwide occupancy for the brand is 82%. But for our calculations, we will stick with the conservative estimate of 75%.

Watch now: The First 5-Star Hotel in Berawa, Canggu: A Special Interview with Artur Gerber – CEO of TUI Blue.

Income estimation = Average Nightly Rate x Occupancy. For our example, the 2BR Villa at The Luc:

$865 per night x (365 x 75% occupancy) = $236,794

Fractional investment returns are proportional. A 25% stake would earn $59,198 annually.

The ongoing costs for managing a property investment should always be considered when forecasting ROI. When investing in hotels, these costs can be significantly minimised because the management and maintenance of the resort or hotel is managed by the operators. For this reason, hotel room investments are often known as “hassle free” or hands-off investments. Investors simply earn revenue as the hotel operates and runs with hotel guests.

What are Sinking Funds?

Sinking Funds are a portion of the revenue that is set aside for future repairs and renovations of the room or unit, to ensure the standards and level of appeal for guests. This amount is typically between 3-5%, but it will be outlined clearly in your investment contract.

For The Luc, costs include management, maintenance, booking & marketing fees, and the sinking fund of 4% Investors enjoy luxury amenities and services, and everything else is handled by TUI Blue for marketing, maintenance and revenue generation. The profit share is 55% of net income, clearly stated and capped in the contract.

With the price, income, and costs in hand, we can calculate the ROI for the hotel room investment. For our example with The Luc:

In our example, we show how investors can achieve a first year ROI of 14.76%. And again this is with our conservative estimate of occupancy of 75%. We can also expect nightly rates to increase due to rising tourism.

The winning combination of the lower price points, steady tourism traffic for high occupancy and demand, and minimised management costs, can lead to a strong, and above average ROI when compared to typical property investments.

“This type of investment model generates guaranteed passive income,” says Reed. “When you invest with the right partner and hotel operator, the occupancy and room rates are forecasted with decades of research and due diligence, with a track record of success for generating profits and happy investors.”

- Strategic Tax Deductions: New constructions offer significant savings through depreciation schedules.

- Investment Diversification: Fractional ownership allows diversification across multiple properties, spreading risk and enhancing returns.

- Immediate Returns During Construction: Earn an 8% cash-back during the construction phase, providing early returns before regular income begins post-completion.

- 5-8 Year Payback: High returns, lower prices, and minimal costs under the leasehold model lead to a payback period of 5-8 years. Post-payback, investors enjoy pure profit, supporting long-term financial goals.

- Low-Risk with Trusted Brands: Investing with reputable hotel brands offers lower risk due to their proven track record and meticulous planning, providing reliable returns.

- Capital Appreciation: Hotels are built in high-demand areas, ensuring property values increase over time, offering high resale value.

- Flexibility of Investment Options: Various room types and investment structures cater to different capital levels and goals, offering tailored investment opportunities.

- Free or Discounted Stays: Investors often receive free or discounted stays, along with additional perks such as F&B credits and spa services, enhancing the investment's value.

- International Investor Friendly: Unlike residential properties, hotel room investments welcome international investors, providing ownership rights and income opportunities without complex regulations.

Investing in hotelsstarts with understanding your goals. We help you develop a strategy with the right property and ROI to boost your investment success and retirement income. Contact our team to explore hotel investment options tailored to your needs.