These days, all hoteliers are familiar with hotel ROI (return on investment) —or at least, they should be before making any investment decisions. To put it simply, it’s the economic value generated as a result of carrying out various activities. With this data, we can measure the return we’ve obtained from an investment; in fact, there are certain variables that help us calculate the return from our hotel, so based on this calculation, we can decide how much to invest.
As we already know, hotel investment is on the rise due to the strong growth of the markets; this explains the momentum that investment has had and continues to have, even in times of crisis, when international demand has managed to keep us afloat. But by how much should we increase our investment, and what return can we expect? How important is ROI when it comes to purchasing, building, or renovating a hotel?
To get a realistic idea of the return on investment, hoteliers must assign a monetary value to each of the goals they set for themselves. Basically, there is very high investor interest—especially from international capital—in new hotel projects, where the time to maturity is longer, the potential for growth in profitability is greater, and the investor profile is undergoing some significant changes.
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What is the role of ROI in the hotel industry?
As we mentioned earlier, the importance of hotel ROI in the various management processes becomes evident from the investment stage, through construction, all the way to purchase and renovation. First and foremost, it is important for hotel investors to be able to calculate the ROI of their investments and to take the time to evaluate the various assets and their economic viability—where financial analysis projects the hotel’s ROIand profit margins—as well as to explore financial alternatives available in the market.
Process optimization
An investor who acquires a completed hotel seeks to generate a return on their investment through both the hotel’s operating profit and capital appreciation, as the hotel’s value increases over time. It’s crucial to consider the hotel’s future residual value in any return on investment calculation. Calculating ROI allows for better decision-making and optimization of the entire hotel project.
Facility improvements
On the other hand, a growing number of hotels are undertaking renovations. These changes involve much more than they initially seem: rehabilitating surroundings, rethinking the strategic model, repositioning the brand, revitalizing established destinations, and improving the customer experience are, today, the cornerstones of these renovations. In fact, renovation is a strategic decision for hotel owners located in geographical areas most favored by increased operating results, in order to reinvest a significant portion of the profits in improvements aimed at building customer loyalty.
How to calculate hotel ROI?
To calculate the ROI of our hotel, and thus calculate our investment, we must consider several parameters :
- Our hotel’s fixed costs.
- Variable costs.
- Hotel revenue.
- The hotel’s actual revenue: it is important to note any discrepancies between projected and actual revenue.
What are the objectives of ROI in the hotel industry?
The goal here is to acquire assets and create value in order to sell them after several years, and it is in this context that numerous opportunities continue to arise to convert them into hotels. The best way to do this is to increase the profitability of the assets and encourage improvements in service quality.
Ultimately, the hotel industry must keep in mind that identifying, measuring, and evaluating ROI before making an investment will create strong momentum in the market—both in the real estate sector related to the hotel industry and in hotel management. The various assets, new projects, and their development will continue to attract potential investors who have a thorough understanding of the destination and its future, the factors that may influence it, and its ability to tap into new market niches.
