Investments That Help You Sleep

My mom once shared a piece of wisdom that I will never forget: "The best investments in the world are the ones that let you sleep peacefully at night." Today, I find myself chuckling at the irony because I invest in branded hotels where thousands of others do the peaceful sleeping. The familiar signs you pass on the highway - DoubleTree, Courtyard, Holiday Inn Express, etc - are not just hotel rooms. These are branded hotel investments with predictable and stable cash flow, backed by billion-dollar companies like Marriott and Hilton.

Hello, everyone. My name is Aarya, and I, along with my business partner, Ronak, manage five branded hotels worth approximately $ 40 million. Here is why you may want to consider investing in branded hotels.

My real estate journey, surprisingly, did not begin in the hospitality industry. As a newbie investor, I wanted to buy single-family homes and apartments. So, I started searching for residential real estate deals. I would spend hours every day looking for deals that would help me achieve my simple investment goal: to create wealth by acquiring resilient, cash-flow-producing properties. After years of underwriting thousands of deals, I realized that residential real estate was inadequate for my investment goals. I still remember that the best deals I could find, worth buying, would pencil out to a 6% to 8% cash-on-cash return, but most didn't even break even in terms of cash flow. (And I understand that this would satisfy some investors, but I wanted more.)

During this phase of setbacks, my partner Ronak (being the real estate nerd he is) started analyzing different asset classes on the side for fun. That's when he stumbled upon something interesting: hotels. He dove into a couple of deals and found the equivalent of gold. The cash flows that we so deeply desired - real estate investments that could produce 12% - 20% cash-on-cash returns.

Crexi Intelligence Insights tells an even more compelling story than ours about hotel cash flows. In the last year, hospitality investments delivered an unlevered cash-on-cash return of 9.7%, significantly outperforming multifamily properties at 5.7%.

As much as I would like to say hotels are a better investment than any other type of real estate, this is not entirely true. Every investor, including you, has different goals. You have to understand those objectives and then choose an investment strategy, not the other way around.

Use our residential investing journey as an example. We tried to turn single-family homes and apartments into high-cash-flow real estate when they were not. However, if we were seeking investments that would preserve wealth and generate substantial equity gains, residential real estate would have been the ideal investment.

With that being said, let's explore whether hotel investments are a good fit for you. Hotels offer better cash flows than traditional real estate due to the simple supply and demand dynamics. There is less demand from investors to buy hospitality real estate than other property types for two main reasons:

1. Operational Complexity - Operating hotels is very different from managing traditional real estate. Hotels are much more hands-on. In the hospitality real estate industry, profits are generated by serving different guests every day. Cleaning rooms, serving hot meals, and solving guest problems require a large staff and a dedicated organization. The demanding operational requirements in hospitality deter seasoned real estate investors, as hotels are never as simple as leasing a building.

   High Barrier to Entry: Another challenge in hotel operations is the strict requirements imposed by major brands on their owners. Hotel giants like IHG (InterContinental Hotels Group), Hilton, and Marriott require management experience for their most prominent brands. If you're new to hospitality, they will require you to hire an approved management company—and trust me, these companies don't come cheap. Management fees will quickly erode those attractive hotel cash flows. However, there are ways around management fees.

   
   

2. Riskier Revenue - Unlike traditional real estate, hotel revenue fluctuates daily. This uncertainty turns off many investors. Note that revenue changes can also present opportunities. Because income is not locked in like leases, hotels can manipulate prices to optimize revenues. For instance, if there is an event like a concert, hotel owners can raise prices accordingly.

Operational complexity and riskier revenues are definitely factors to consider when deciding whether to invest in hotels. Many investors question whether the high cash flows are worth the effort and sacrifice. However, there is a solution to make hotel investments simpler and less risky: Investing in Branded Hotels.

Investing in Branded Hotels

Buying a branded hotel is more difficult than traditional real estate or unbranded hotels. However, it is possible to do so. Investing in a Courtyard or Hampton Inn simplifies complex hotel operations and provides predictable revenues.

Solving Operational Complexity

When you invest in a franchised hotel, you are purchasing a proven business model for delivering exceptional guest satisfaction and service. Hotel franchisors lay out a proven strategy and offer corporate support to help maintain their brand excellence. Through staff training, brand standards, and a proven business model, Hotel franchises have created a map to operational success. All we have to do is follow it, making operational complexity not so complex.

De-Risking Hotels

Hotel franchises spend hundreds of millions to billions of dollars a year on advertising and marketing. Money that you or I could never dream of spending if we ran an independent hotel. The biggest hotel brands utilize economies of scale to our advantage, making our investments more recognizable. Think about the last time you stayed in a hotel. Did you stay in a random independent hotel, or did you book with a brand that you trust - maybe even one you are loyal to?

The substantial sums of money and effort that franchises invest in marketing lead to increased public trust. Guests know what to expect when they stay at a DoubleTree or Holiday Inn. That guest trust and reliability are the secret sauce that yields stable revenues for branded hotel investors.

The constant influx of guests from franchise advertising, combined with investments in markets with inelastic demand drivers, alters the dynamics of hotel investing. The risk and reward start to become asymmetrical, favoring the investor. Here is another way to think about it: Would you invest in healthcare giants like St. Jude or Methodist Le Bonheur? Most likely yes. When their employees and patients' families become your hotel guests, that's precisely what you're doing, but with outsized returns.

Outsized Equity Returns in Hotels?

Branded hotels are more valuable than independent hotels. While I don't have industry-wide statistics, I can share what we are seeing in the market right now (as of February 2025). Here's the breakdown:

Branded hotels are trading at 3- 5 times revenue, while independent properties are only fetching 2- 3 times. What does this mean in real dollars? Let's look at an example:

Take a hotel generating $3 million in annual revenue:

A branded property would be valued between $9 and $15 million

An independent property? Only $6-9 million

Put another way: every additional dollar of revenue you generate translates to $3-5 in added value for branded hotels, versus just $2-3 for independent properties. That's a significant difference in value creation.