Buying a small hotel abroad

A small hotel is typically a hotel with fewer than 30 rooms. Usually, such establishments offer basic accommodation and breakfast, with limited amenities and services. As such, these facilities often cater to a specific demographic of tourists – those that that seek “no frills” accommodation, for which reason they firmly occupy a niche in the hotel industry.

A small hotel is not a passive investment but a business

Before deciding to buy a small hotel, investors should ask themselves if they want to run a hotel business. If the investor is unwilling to relocate abroad to manage the property independently, purchasing several rental apartments would be better. The reality is that a professional management company would not work with a hotel with less than 100 rooms. Hiring a manager is certainly an option, but this takes up a large share of the profits.

Take for example a Russian family that purchased a small hotel in Austria through one of Tranio’s partners three years ago. The future hoteliers initially considered buying real estate in the Alps, but eventually opted for a property in a picturesque town in Lower Austria. The property they purchased is located near the town centre and its local landmarks. It is popular with tourists, evidenced by its high rating on Booking.com. The hotel is profitable, but delegating its management to a professional company does not make business sense. As such, the owners plan to renovate the hotel to convert its rooms into apartments to sell to investors under a buy-to-let scheme. This way, they do not need to stop their main business in Russia.

Choosing a small hotel

When buying a small hotel, several factors important for this type of this business need to be considered.

Location

The occupancy rates of small seaside or ski resort hotels largely depend on seasonality. They bring in the lion's share of their revenue during the vacation months. However, these properties continue to incur expenses and must be maintained throughout the year. Buying small hotels in places popular throughout the year, such as large cities, is recommended. In this case, the business would not depend on the tourist season (although it may face strong competition).

Well-developed tourist infrastructure is also important. It is an added benefit if guests can easily access the main landmarks, entertainment venues, railway stations and airports. Small German hotels are worth looking at, as the domestic travel market is huge. If your budget allows, small hotels at Alpine ski resorts can be considered. Many opportunities can also be found in countries typically popular with Russian and European tourists, such as Spain, Italy and Montenegro.

Building

After choosing the location, it is important to find a hotel in good condition. People will pay more to stay in new or beautiful buildings. An old building would bring you lower revenues, and comes with higher maintenance costs.

There are many examples of successful small hotel refurbishment projects. For instance, Spanish investors renovated and converted a 16th-century house into a small hotel with two spacious apartments. Tourists love the combination of the ancient mansion's appearance and the high-tech amenities. Renting an apartment there costs €300 per night. It has a favourable location, situated in the picturesque city of Girona, Catalonia, with easy access to ski resorts. Buying similar properties is beneficial if the price is lower than the market value and the buyer can afford a full renovation. Successful redevelopment projects yield 10–15% on average.

Financial standing

When buying such properties, the hotel’s financial statements and business accounts must be examined. To access this information, the buyer needs to write a Letter of Intent (LOI) to the seller expressing interest in purchasing the property.

The key hotel business performance indicator is RevPAR (revenue per available room per day) or the average room rate by its occupancy rate. For instance, according to the 2017 data from consulting company CBRE, Hamburg hoteliers have higher returns than those from Frankfurt, thanks to higher occupancy rates (80% vs. 70%), despite the average daily room rate in Hamburg being lower than in Frankfurt (€118 vs. €123). In the first case, RevPAR is €95, compared to €85 in the latter.

Staff

Regardless of whether you decide to open a boutique hotel or an inexpensive boarding house, the most important factor determining the success of a small hotel is the attention you pay to each and every client. Many guests return to the same small hotels precisely because they feel welcome there. Therefore, employees who communicate with guests must be knowledgeable and polite. English-language proficiency is a must, even if it is not officially spoken in the country where the hotel is located. The hotel’s image depends on these people, so cutting labour costs is not recommended. Having a good manager whose income is pegged to the hotel's total revenue is important. At many small hotels, wages, particularly the manager’s salary, constitute a significant share of their operating cost, though this is justifiable.

Sample prices asked for small hotels in Europe

Types of small hotels

Guest houses are typically smaller than hotels, with 10–12 rooms. In the United Kingdom, the owners of guest houses can choose their guests, unlike hotels, which provide accommodation to anyone ready to pay for it.

Coastal hotels often are small family businesses in popular resort areas near the sea. Their occupancy rates depend on the season.

Suburban club hotels offer their guests not only upscale rooms but also an entertainment infrastructure such as restaurants, swimming pools, spas, gyms and racecourses.

Business hotels are usually located on the outskirts of large cities. Such hotels attract business tourists, for whom proximity to the city's key transportation hubs and exhibition centres are important.

Hybrid hotels combine the characteristics of the two aforementioned types. As a rule, they are located in the unique areas where both holidaymakers and business tourists stay, depending on the season.

Boutique hotels are characterised by their luxurious interior decor and unconventional designs, and are typically located in the city centre.

Hostels target young solo tourists with small budgets. The average daily rate for a bed or room in a hostel ranges between €30 and €60. They typically only provide beds, with a shared bathroom and kitchen. Hostels are usually located in large cities with big tourist flows.

Tranio recommends investing in small hotels only to those who plan on relocating abroad as they are profitable only if the owner personally manages the property and focuses on optimising taxes, contacting regulatory authorities and tour operators.