At Avestor, we prioritize preparing you and refining your due diligence processes to set you up for success.
This is imperative, especially in the competitive realm of hotel operations. Effective risk management is essential for maintaining stability and fostering long-term success.
Hotel operators face a myriad of challenges, from economic downturns to operational inefficiencies, that can impact profitability and performance. Navigating these obstacles requires adopting proactive strategies to identify potential red flags, mitigate risks, and keep properties resilient in a dynamic market.
To get deeper insights into the industry, we asked Sunny Dronawat, a seasoned hotel operator and fund manager of the customizable Triple Crown Holdings fund at Avestor to share his insights on his tried and tested risk management strategies for hotel operators.
Sunny is a seasoned hotel operator and a visionary leader dedicated to creating an exceptional guest experience by focusing on positive service culture, high-quality products, and a relentless drive to outperform competitors. With a mission to deliver superior guest satisfaction, develop strong leaders, and foster teamwork, Sunny is also committed to maximizing returns for investors, ensuring success across every aspect of the business.
Identifying Major Deal Breakers
When acquiring a hotel, several red flags can signal potential risks that may influence the decision-making process. One of the most critical indicators is the condition of the property’s mechanical systems and overall building structure, as poor conditions can lead to significant repair costs.
“The first thing we look for is… full mechanical and building inspections… to make sure they're sound,” shares Sunny.
Another major concern is inconsistent financial records. When key industry reports, such as STAR reports, don’t match the property's financial statements, it raises serious questions about the property’s performance and transparency.
Location also plays a pivotal role; properties in declining or unsafe neighborhoods may not meet the operational or guest expectations required for success. Additional red flags include environmental issues identified during phase studies and unclear property titles, which can complicate ownership and lead to unexpected legal disputes.
Identifying these deal breakers early helps operators avoid costly investments and ensures that the property meets operational standards and aligns with market expectations.
Risks Hotel Operators Face
Before diving into risk management strategies, Sunny highlighted the primary risks that hotel operators must navigate.
Economic Downturns
Economic fluctuations can drastically affect hotel revenue, particularly for high-end properties. During downturns, travelers tend to choose more affordable options, decreasing demand for luxury accommodations.
Operational Inefficiencies
Inefficient operations can drive up costs and hurt profitability. Relying on third-party management companies often means losing direct control over key operational decisions, making it harder to respond quickly to market changes.
Financial Stability
Unreliable financial records or undisclosed property issues can jeopardize an operator’s financial stability. This underscores the importance of thorough due diligence to ensure accurate and transparent financials.
Market Adaptability
The hotel market is dynamic, and conditions can change rapidly. Successful operators must be agile, adjusting pricing and promotional strategies to match market demands. Failing to adapt can lead to missed revenue opportunities and lower occupancy rates.
Local Market Changes
Local events, shifts in market dynamics, and neighborhood developments can significantly impact hotel performance. A deep understanding of the local market is crucial for operators to anticipate and respond to these changes effectively.
Read More: Should You Start A Hotel Fund?
Risk Management Strategies
Understanding the risks is just the beginning; here’s how you can effectively manage them.
Focus on Mid-Range Properties
Investing in mid-range properties helps mitigate the impact of economic downturns. These hotels appeal to a broader audience and tend to be more resilient during market shifts, offering stability when high-end properties struggle.
In-House Management
Managing hotels internally gives operators the flexibility to control costs, implement dynamic pricing, and swiftly adjust sales strategies. This hands-on approach enhances operational efficiency and allows for quick responses to market changes.
Rigorous Due Diligence
Thorough inspections, financial verification, and ensuring clean titles are critical for maintaining financial stability. Rigorous due diligence ensures that properties align with industry standards and helps operators avoid unforeseen challenges.
Leveraging Economies of Scale
Centralizing back-office functions like accounting and reservations for multiple properties helps reduce costs and improve efficiency, enhancing overall performance.
Flexible Pricing and Sales Tactics
Adopting flexible pricing strategies, such as offering special rates during low demand and adjusting rates upward during peak periods, helps maximize occupancy and revenue, keeping the business agile.
Technology Integration
Invest in facility management software and AI-driven systems to streamline operations, enhance customer service, and adapt to market trends. Integrating technology provides critical insights, supports decision-making, and helps operators stay ahead of market trends.
Local Market Insight
Staying informed about local market trends, events, and developments allows operators to make strategic adjustments in marketing, pricing, and operations, optimizing performance and mitigating risks.
Ready To Start Your Hotel Fund?
If you’re ready to start your hotel fund, we want to help you scale your hotel investing.
To learn more about how an Avestor Customizable Fund can work for a hotel asset class, schedule a free strategy call with our team at www.avestorinc.com/demo
