Owning a hotel is no joke, especially when so much investment is on the line. As such, you might be wondering if owning a hotel profitable.
We feel you, and that’s why we have compiled all the essential details that you must know before building your hotel, including the investment breakdown, profits, pros, and cons, etc.
So make sure you do not skip anything!
What Does it Mean to Own a Hotel?
Investment Required To Own a Hotel
The cost to start a hotel varies depending on many factors, but there are the three most important ones:
- Location: Building a hotel right in the center of New York City or a more crowded location would cost more as compared to building it somewhere far off or in some other city.
- Size: The size of your hotel, including the number of rooms, meeting spaces, etc., will impact the investment greatly.
- Quality: If you are aiming to build a five-star hotel, then that would obviously cost more as compared to a roadside motel.
Although the investment for your hotel can vary greatly, we can still estimate the price of a “typical” hotel by factoring in some key points.
As per the hospitality consulting firm, the cost of a full-service hotel is $323,500 per room on average. This figure can be broken down into the following:
|Type of cost||Cost||Percentage|
|Soft Costs (non-construction related costs)||$41,800||12%|
|Building & Construction||$221,500||66%|
|Pre-Opening & Working Capital||$10,700||3%|
Is Owning A Hotel Profitable?
Is owning a hotel profitable? Well, the answer is that it depends. The revenue of your hotel is directly affected by a number of factors, including your location, number of rooms, and number of staff, among others.
Let’s take an example to see if owning a hotel is profitable.
Suppose you want to build a five-star hotel with 500 rooms, then an all-inclusive cost for this would be $300,000 per key or per room.
So with this, your capital cost comes down to $150,000 000. I know it’s a lot of money, and as such most people build a hotel with a combination of loans and investment money.
Let us assume you managed half of the money from investments and half from a financier. Now financing for such a huge amount of money is usually done over 20-30 years.
So if your debt is spread over 30 years, then your annual capital repayments would be $2,500,000. And if you assume an interest rate of 5%, then your interest on the capital will be $3,750,000 or $125,000 per year. So the total repayment for the year would come down to $2,650,000.
This means with 70% occupancy throughout the year, you need to generate $7,572 per year, or around $20 per night, in order to cover the interest and construction cost.
And it is very common for five-star hotels to charge $220 per night and even more. This means that by pricing your hotel slightly more, you can cover the cost of taxes, operational expenditures, and more.
Now after this, whatever is left goes into the pockets of investors as dividends, along with a huge portion going into the savings account for future maintenance, upgrades, etc.
After all this, you get to keep 10% of profits on average, which is, even though less, not bad.
Owning a hotel is a profitable venture, but only if executed and managed properly.
How Much Do Hotel Owners Make Per Year?
A hotel owner’s salary varies greatly depending on the hotel type, its day-to-day occupancy, operating expenses, the number of staff, etc.
However, according to Shmoop, hotel owners in the United States make between $40,000-$60,000 on average.
If you ace the skill and expertise required to run a hotel, then honestly, the sky is the limit for you in this industry.
The owner of Marriott Hotels, Bill Marriott, has a net worth of $2.2 billion and is one of the most successful moguls in the hotel industry, and you even you can achieve this level.
What is the Profit Margin in the Hotel Industry?
The hotel industry is one of the sectors with the lowest profit margins. And this is because owning a hotel incurs a lot of expenses, including fixed-cost expenses, maintenance, and operating expenses, rent, utility, stock, etc.
Additionally, the average profit margin of the hotel industry may fluctuate from year to year. However, on average, the profit margin in the hotel industry lies around 10%.
In the year 2016, this margin went as high as 16.4% and went really low during the pandemic year.
What is a Healthy Profit Margin For Owning a Hotel?
A healthy profit margin for owning a hotel is 10%, whereas a 5% profit margin is considered low, and 20% is considered high.
A great tip for hotel owners to cover their low-profit margin is by making a higher revenue from pre-booking through upselling or ancillary revenue.
As a hotel owner, it is important for you to know the standard profit margin so that you know where you stand and how you can cover the gap in case you are making less money.
Steps to Forecast Profits For a Hotel
To calculate profit for your hotel, you need to find out expenses and sales first. Here’s how you can do this:
Profits = Sales – Expenses
Forecasting sales for a hotel
To forecast sales for a hotel, you need the following:
- number of available rooms.
- revenue per available room or (RevPAR)
Now use this formula to forecast sales:
Revenue = # available rooms x RevPAR
For example: suppose you own a hotel of 100 rooms and a RevPAR of $250.
then your monthly revenue will be: 100 x $250 x 30 = $750,000.
Forecasting expenses for a hotel
Your operating cost consists of the following:
- Variable cost: This is also known as COGS, and it increases in line with your revenue. So if your revenue increases by 20%, then your variable cost will also increase by 20%.
- Fixed expenses: This includes salaries, interest, rent, etc.
How to Calculate Profits for a Hotel?
While talking about profits, we are speaking about earnings before interests, taxes, depreciation, and amortization. To find out the final EBITDA of your Hotel use:
EBITDA = Revenue – COGS – Operating Expenses
Is Owning a Boutique Hotel Profitable?
A Boutique hotel is generally smaller and differs from a commercial hotel in the way that they can be customized highly.
When you think about big hotel chains like Hilton, Marriot, etc., you think of a uniform service that all customers receive.
However, Boutique hotels are not chains, and they can offer services as per the preference of their customers anytime.
For those interested in investing in Hotels, Boutique Hotel might seem like an interesting option. But is owning a Boutique hotel profitable?
Yes, owning a Boutique hotel is certainly profitable, and it can allow you to earn more profits as compared to a traditional hotel.
Traditional hotels have profit margins of 10% on average, while as per Hotel Management, in 2017, Boutique hotels’ operating gross profit margin was 33.8%.
Additionally, in the U.S., the market size of Boutique hotels is $23.2 billion, and the average turnover per boutique hotel is $5,125,000 per year.
So yes, owning a Boutique hotel is very profitable.
How to Start Small Hotel Business?
Factors Affecting The Profit Margin of Hotels
In case you are wondering what eats up so much of the profit margin in owning a hotel, then take a look at these points:
Operating expense is the biggest culprit of low-profit margins in hotels. Since hotels are such large properties, operating efficiently and ensuring all hurdles are taken care of requires a lot of operating costs.
Another major factor that takes up most of the money is overhead expenses. And the challenge is to maintain high customer satisfaction level while also maintaining the overhead costs.
On average, the salary of the staff is 50% of operating expenses which is a lot. Hence, it is important to avoid overstaffing while ensuring there is no gap in customer service.
Not having the right pricing strategy can affect your business profits a lot. If you set your hotel room price too low, then you will not be able to make enough profit.
So try and focus on optimizing your RevPAR so that you can earn maximum available revenue per room at any given time.
Revenue & Inventory management
Revenue in the hotel industry refers to the number of rooms you sell in a given period of time.
This is why you need to have an excellent revenue management system so that your pricing tactics and distribution methods are all aligned.
Inventory is another big factor that affects profitability directly. Hotels need to maintain inventory, including food items, bedding, cleaning materials, etc.
Not maintaining enough inventory can lead to poor customer service, and over-hoarding can result in the wastage of some items.
Pros and Cons of Owning A Hotel
Pros of Owning A Hotel
- Rewarding work
- High profit earning potential
- Pricing flexibility
- Expansion oppurtunities
- Flexibility with buy-back options
Cons of Owning A Hotel
- Requires a lot of upkeep & spending.
- Physically taxing
- Low profit margin
- High overhead expenses
- Intensive management requirements
- High repairs and maintenance cost
After looking at every minute detail of owning a hotel, its profitability, investment, etc., we have a definite answer on is owning a hotel is profitable.
So yes, owning a hotel can be very profitable, and even though traditional hotels offer a very low-profit margin of 10% on average, you can make a lot of money, but only if you do it right.
Choosing the wrong location, over or understaffing, poor management, etc., can lead you into a very poor position. So know your game before you get into this field.
What is more profitable – traditional hotel or boutique hotel?
A traditional hotel cannot exercise a lot of flexibility, and it has a low-profit margin.
While a boutique hotel has a profit margin of as much as 30-40% so, owning a boutique hotel is much more profitable.
In the U.S. how much can you make by owning a hotel?
The annual revenue of all sole proprietorship Hotel businesses in the United States was $94,464 on average.
So hotel owners in the U.S. can make this kind of money. However, the revenue varies greatly because of a number of factors.
Which are the most profitable parts of a hotel?
These are the five most profitable parts of a hotel:
- Hotel Directories
- Conference Room Products
- Banquet Supplies
- Pool Menus
- Guest Room Accessories
Amit Gupta is an experienced expert in digital marketing and co-founder of DrFranchises. With more than 11 years of knowledge in franchise digital marketing, SEO, email marketing, and social media marketing, Amit has helped many brands achieve incredible success online. As a passionate entrepreneur and owner of 7 franchises, he continues to study franchise models, looking at costs, revenue, and profitability to guide brands toward profitable growth. When he’s not working on digital marketing, Amit enjoys spending time playing with his beloved dog.