Updated: Apr 1, 2020
The hotel market has been in a boom faze over the last few years. I can remember a time when banks were selling off the glutton of hotels at a rapid rate just to get the debt off the books. The economy has changed and now everyone wants a Hilton, Marriott, or Holiday Inn. In a sellers market, so many hoteliers have been able to get a premium on their hotels. They walk away and invest in a higher brand or go from exterior properties to interior properties. That is if they are lucky enough to get a contract and close before the 1031 exchange expires.
Then cost segregation really helped. It freed up funds on depreciation and allowed hoteliers to buy up speculative properties. It also allowed others to do renovations to their hotels. This seems like a good strategy.
Over the years of watching the bubble build, it appears that all is fine. That may be true, for a while.
Lets take a moment to make an observation about the potential for a down market and what that would mean for those ready to thrive and those of whom are over-leveraged.
If you own a Hampton inn on a typical highway exit and there are 6 other hotels as your neighbors in competition, your occupancy rate may be decent and your ADR may be as well. But, lets say that another hotelier builds a Marriott on the same exit. With the same amount of potential customers being the constant, occupancy rates will most likely drop. Because of the surplus supply side on rooms available the ADR will drop as well. We have seen a drop across the country according to hotel owners we work with at 10-15%. This is happening! Hoteliers keep building though.
When the bubble bursts banks will be doing the same things as they were doing years ago. Selling off defunct hotels. Equities will drop, the sellers market will end, and the buyers market will begin. This is where our strategy plays an important role. Be ready, be smart, and as many CPA’s that we work with say “Put the tax savings you get away”. If the bulk of your assets are wrapped up in the equity of your hotel and your prospect for the future rely on speculative returns, consider the Legacy Advantage Plan. Be ready it is coming!