One of the industries we get inquiries rather frequently here at Visa Franchise is the hotel industry. Some of our clients have prior experience, either by owning hotels personally, managing hotels, or are just simply interested in knowing more about the industry. We have reviewed the hotel industry to find investment options for our clients looking to invest in order to obtain their EB-5*, L-1, or E-2 investor visa. Through our extensive research, we were able to definitively conclude that the hotel industry is rather difficult to invest in, especially for a foreign national looking to move to the United States through an eligible EB-5, L-1, or E-2 business investment. The reasons are various, though they principally pertain to hotel franchise experience requirements, difficulty to operate, high level of investment, and a changing industry landscape.
(*Please note that for the purpose of this article, when referring to the EB-5 investment we are referring to individuals interested in investing in an eligible hotel for an owner / operator EB-5 direct investment, not an EB-5 regional center investment for which there are a number of regional center options that permit the investor to invest in a hotel.*)
During conversations with a number of the major hotel franchises, we realized that unique aspects of the hotel industry make it quite difficult for individuals to open new hotels. Unlike most franchise industries where franchisees open a new location, the hotel industry is quite different. Most hotel franchisees already own an individual hotel beforehand and rebrand the business to a bigger brand name. If they do not own a hotel yet, the potential franchisee must first locate and purchase an existing hotel before rebranding to a larger hotel brand. The issue with this last step is the process of buying an existing business investment can become arduous and time-consuming. This is even more so with hotels as there are only a limited number of existing hotels for sale that many sophisticated large hotel firms and multi-unit franchisees would also be interested in buying as well. This high level of competition for existing hotels makes it even more difficult for an individual looking to buy an existing hotel for their investor visa.
High Investment, Low Return on Investment (ROI)
The reason why most new hotel franchises are rebrands and not new construction is due to the high costs associated with the investment. Purchasing the land and construction of the hotel can easily increase the investment to $2-4 million. Adding in the purchase of equipment, initial employee costs, and reserve funds can make the total investment be well over $5 million just to be able to start the business plus the many months this entire process can take.
From a business standpoint, hotels are classified under a real estate investment. While this may make it seem like a more secure investment, operationally it has the same issues that businesses deal with. Businesses are usually a riskier investment but tend to enjoy a higher ROI if successful. Hotels on the other hand maintain a lower ROI similar to other real estate investments while having to deal with more issues. In contrast commercial or residential real estate investments do not tend to face the same problems a hotel business has. For example, unless the investor has multiple properties and needs help managing them, a real estate investor tends to not have to deal with employee issues, including high turnover or high expenses. Even with multiple properties, the investor can outsource the work to a property management company and still expect a secure ROI with little involvement in the day-to-day operations. Hotels do not enjoy the same simple operational process. A hotel requires the same level of involvement from its owner as a business does but with a lower ROI. For a foreign national that is looking for a business investment to obtain their investment visa, other business opportunities can be much more appealing from an investment standpoint than a hotel.
Difficult to Operate
Independent small hotels tend to be difficult to operate and require a hands-on owner. Small hotels can vary from 8 to 20+ rooms, leaving a very small margin for error. Smaller hotels do not enjoy the scalability that larger hotels offer. The breakeven point and profit margins are much more reduced in smaller hotels given that they have a limit on their capacity. Smaller hotels might not offer the budget to hire a full-time manager or have a marketing team to attract clients year-round. In these types of cases the owner-operator usually must handle these different facets of the business. Branding might be a possible solution for marketing purposes, but the hotel first needs to meet the franchise’s requirements, including number of rooms, type of facilities, services offered, and size. Branded or not, owners of small hotels can usually be found at various times during the day or night, overseeing the operations of the business. As an investor that is investing over $500,000, there are other business investments that are much easier to operate and that require much less of the owner’s time.
It is no secret that the hospitality industry has been affected by modernized companies, specifically the rise of AirBnB. AirBnB has quickly become a threat to hotels as an ever-increasing number of tourists prefer to book with independent hosts on the company’s app rather than to book with traditional hotels. Although travelers are aware of the issues they may encounter renting an Airbnb instead of a hotel room, the personalized service and decreased costs tend to outweigh the ‘cons.’ In 2015, the American Hotel & Lodging Association commissioned a report by HVS Consulting & Valuation on the financial effect of Airbnb on the hotel industry focusing on the effects on New York City. The report estimated that hotels lost approximately $450 million in direct revenues per year to AirBnB. Aside from losing revenue on hotel room sales, hotel owners can be further affected by the decreased demand in other revenue streams. When guests choose not to stay in a hotel, the money they would have spent on food and beverages at the hotel’s restaurant and bar is likely spent elsewhere. Therefore, the hotel loses out on the additional revenue they otherwise would have received from that guest. In total, over $108 million of food and beverage revenues ($88 million on food and $20 million for beverages) were lost because travelers choose to book with Airbnb.
While hotel investments may seem incredibly attractive and secure investments, the fact is the hotel industry has many unique challenges when compared to other franchise investments. For our clients interested in obtaining the E-2, L-1, or EB-5 through a business investment we strongly encourage them to consider other investment opportunities. Visa Franchise is here to offer advice and support foreign nationals in finding the right business in a wide range of industries.
Who Is Visa Franchise?
Visa Franchise guides investors in identifying and analyzing the best investment opportunities tailored to their specific objectives. The focus of the firm is on franchises that qualify for the E-2 (1) and EB-5 visas (2). Visa Franchise is the trusted advisor of clients from all over the world when it comes to helping them find the business opportunity that best meets their investment and immigration goals. Visa Franchise takes into consideration their capability, experience, and size of investment to ensure that they choose the best possible option for their unique, individual situation. Visa Franchise is based in Miami, Florida with offices throughout the U.S. and world.
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