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Buying a Hotel for Sale in Chicago

Published: 10-07-22 Category: Investing

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2022 Guide to buying Hotels for Sale in Chicago

Investing in all types of real estate, both residential and commercial, is a great way to make extra income, build your investment portfolio, and receive tax benefits.

But the benefits of investing in the hospitality industry specifically may surprise you, as it varies from other types of commercial real estate rentals: Rooms are most often rented out daily instead of annually.

Cities like Chicago, with bustling nightlife and cultural centers, can be great for those in the hospitality industry; in fact, the city made $1.13 billion in hotel revenue in 2021.

Let’s take a look at how you can go about buying a hotel for sale in Chicago in 2022.

Area Overview & Population Demographics of Chicago

Not only is Chicago’s population 2.7 million, but the city also attracts millions of tourists each year. Therefore, Chicago can definitely be described as a bustling city.

Chicago’s culture may be its biggest appeal: The city boasts 77 different neighborhoods that all provide residents and tourists with plenty of attractions and history.

Downtown Chicago is home to the most famous tourist attractions (mainly The Bean), but also provides plenty of opportunities for visitors to immerse themselves in arts and theater.

Due to the city’s location near Lake Michigan, there is also plenty of opportunity to spend a day at the beach. While Chicago does not host many of the same outdoor activities that other major cities can provide, tourists can still enjoy biking and kayaking.

Is buying a hotel a good investment?

Owning a hotel tends to differ dramatically from owning other types of commercial property: Earning money through hotel ownership is the biggest difference.

Typically, an owner of, say, a multifamily rental property would lease it out for some months or even years.

With a hotel, however, rooms are typically only booked for a few nights.

While this may not sound as lucrative, hotel investors can take advantage of certain times of the year or events in the area to make their money. Like any other investment property, slight changes to the property’s amenities and services can increase its value.

Calculating Hotel Revenue

Since there are no standard leases or rental rates to look at, hotel income is determined in a different way: The performance of a hotel is measured throughout the average daily rate (ADR). This measures the average income that is made per paid and occupied room over a set period of time.

It can also be determined by revenue per available room (RevPAR), which is determined by dividing total room revenue by the total number of rooms that are available in the hotel. A rising RevPAR means a more successful hotel.

How much money do you make owning a hotel?

An average hotel owner can expect to earn about $50,000 annually with a profit margin of about 40% to 50%. There are various types of hotels, however, and the kind of hotel that you are invested in will determine how much travelers are going to pay to room with you:

Full-service: Full-service hotels provide their guests with deluxe amenities such as restaurants, banquet or meeting rooms, spas, and more. An example of such hotels would be the Hilton or Marriott.
Limited-service: Limited-service hotels provide guests with some amenities, but not as many as a full-service hotel would. Most commonly, they have gyms, pools, or small meeting rooms. An example of a limited-service hotel would be the Holiday Inn Express.
Budget: These hotels don’t often provide their guests with much in the way of amenities since the main goal is to be inexpensive. Super 8 and Econolodge are examples of budget hotels.
Extended stay: Since extended stay hotels expect their guests to stay for longer periods of time, their rooms will likely have individual kitchens and laundry amenities.

It is crucial to ensure your guests have the best stay they possibly can, regardless of which hotel you invest in.

#1 – Decide on Your “Why”

Investing in hotels tends to be more challenging than other real estate investments. The success of a hotel relies on room affordability, value in amenities, and, most especially, location. Therefore, deciding on your "why" is the most important step here.

Are you looking to invest in commercial real estate for the first time? Are you trying to expand your existing portfolio? Has the idea of owning a hotel always excited you?

Of course, a hotel investor can see financial and tax benefits as long as they’re doing everything correctly, but it’s an investment that you should be passionate about and involved in.

#2 – Decide What You Can and Can’t Afford

As is expected, buying a hotel can be pretty expensive. You’re most likely guaranteed to need a loan, but you also need to ensure that your investment will make cash flow that can cover your loan payments and any other types of debt.

Research Financing

Sometimes, the seller of the hotel is willing to finance some of the sale. This can be extremely helpful to the buyer. Otherwise, the buyer may need to take out a much larger loan to cover the cost of the hotel.

The higher the price of the loan, the less likely a buyer can obtain it.

An interesting factor to consider about hotels is that many countries, including the United States, allow hotel investors to partake in cost segregation.

This cost segregation is available for property owners or real estate developers who meet certain criteria. It splits up different parts of the property (such as land, structure, decor, plumbing, etc.) to benefit from accelerated depreciation for these areas.

Therefore, investors use cost segregation to benefit from federal and state tax savings.

#3 – Assemble the Right Team

Other real estate or financial professionals are often very useful for real estate investors. Assembling the right team to work alongside you stops you from wearing too many hats and making costly, long-term mistakes.

Working with Commercial Real Estate Brokers

It won’t be difficult for you to find a commercial real estate broker willing to work with you if you’re interested in purchasing a hotel.

Compared to regular real estate agents, brokers have more years of experience, training, and specialize in a specific asset class and investment geography.

A broker will help you locate the right property, negotiate a solid deal, and keep your best investment interests in mind.

Working with Commercial Real Estate Attorneys

Certain aspects of commercial real estate investment may be too legal for a regular investor’s eye. That’s why having an experienced attorney on your side will save you legal trouble in the long run.

An experienced commercial real estate attorney will help you avoid unnecessary legal headaches throughout your hotel buying journey.

#4 – Decide on the Right Time to Buy

The hospitality industry bouncing back from the peak of the pandemic in 2020 means that more people are feeling comfortable traveling again, a good sign for those who are interested in investing in the hotel industry in Chicago.

While complete recovery is still a while away, more post-pandemic data now exists to help new and experienced hotel investors make the best possible decisions moving forward.