Hotel Valuation Methods Tutorial | How to Investment in the Hospitality Industry (2024)

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Hotel Valuation Methods Tutorial | How to Investment in the Hospitality Industry? ›

Three Approaches to Hotel Valuation

In valuing hotels, there are three approaches from which to select: the income capitalization, sales comparison, and cost approach.

Three Approaches to Hotel Valuation

In valuing hotels, there are three approaches from which to select: the income capitalization, sales comparison, and cost approach.

The income approach calculates a hotel's value based on its potential income. Assess revenue streams including room rates, occupancy, and ancillary services. Deduct operating expenses like payroll and maintenance. Apply a capitalization rate to determine the property's present value based on its income stream.

Hotel investors use the ADR rule of thumb because it's simple-a hotel should generate one dollar in ADR per every $1,000 in value per guest room; but that rule is not without its problems.

Typical ways to estimate business value are multiples of gross rental income and net operating income. You need to factor in both the property rental income as well as earnings from the other profit centers, such as the restaurant or on-the-premises gift shop.

This approach involves projecting a hotel's future cash flows and discounting them back to their present value. The DCF formula considers cash flows for each year and the discount rate, providing a comprehensive view of a hotel's worth over time.

Usually, you can split your costs into two categories: fixed and variable. Fixed hotel costs remain the same, no matter how many guests you have. For example, rent payments or property taxes. Variable hotel costs ebb and flow with how busy your hotel is.

Rather, hotel pricing is determined by any combination of the following factors: location, seasonality, demand, star rating, amenities, value of services and other hotel competition. Even things like increases in flight searches to a particular destination or good and bad weather can have an impact on hotel prices.

(Net Profit / Amount Invested) X 100 = Hotel ROI

The hotel made 50% more than it invested. The same formula may be used to calculate the return on a single investment, like purchasing a new CRM or upgrading guest bedding, or to gauge the hotel's general profitability.

What is the 80 20 rule in hotels? ›

For hospitality businesses, here's what the 80/20 rule means: 80% of your profits come from your most valuable customers (the top 20% of your customer base). The other 80% of your customers only contribute around 20% of your total profits.

The 15/5 rule at Marriott teaches employees to make eye contact and smile at customers when they are within 15 feet and to give a verbal greeting when customers are within 5 feet.

Consider factors such as acquisition costs, ongoing operational expenses, marketing budgets, and expected revenue streams. Analyze historical financial performance, including occupancy rates, average daily rates, and operating expenses, to estimate future revenue and profitability.

Average EBITDA Multiple range: 1.57x – 3.34x

Hotels and motels transact at an average EBITDA multiple range of 1.57x – 3.34x. Valuation analysts apply this multiple to a hotel or motel's EBITDA to determine its fair market value.

According to Peak's data, hotels and motels transact at an SDE multiple range of 1.14x – 2.54x. Business appraisers can determine an implied value of a hotel or motel by applying an SDE multiple to its seller's discretionary earnings.

Occupancy-based pricing: This dynamic pricing strategy aims to maximize occupancy in your hotel. When occupancy on a given date is low, your rates drop to capture additional reservations. As occupancy increases, so do your rates.