Hotel Valuation Basics

Hotel Finance Course

Module 9: Hotel Valuation Basics

Module 9: Hotel Valuation Basics

Hotel valuation determines what a property is worth---essential for acquisitions, sales, refinancing, and investment decisions. While full appraisal requires expertise, understanding basic valuation methods helps you assess property value and make informed strategic decisions.

Three Approaches to Valuation

1. Income Approach (Most Common for Hotels)

Values property based on income-generating ability. Uses capitalization rate (cap rate) applied to Net Operating Income (NOI).

Formula: Value = NOI ÷ Cap Rate

Example: NOI = $2,000,000, Cap Rate = 8%

Value = $2,000,000 ÷ 0.08 = $25,000,000

2. Sales Comparison Approach

Compares to recent sales of similar properties. Often expressed as price per room.

Example: Comparable hotels sold for $150,000-$180,000 per room

Your 200-room hotel: 200 × $165,000 = $33,000,000 indicated value

3. Cost Approach

Estimates replacement cost minus depreciation. Less common for operating hotels but useful for new construction or insurance.

Key Valuation Metrics

• Cap Rate: Return expected by investors. Lower cap rate = higher value. Full-service hotels: 7-10%, Limited service: 6-9%

• Price Per Room: Total price ÷ number of rooms. Quick comparison metric.

• RevPAR Multiple: Some investors value at multiple of RevPAR (10-15× annual RevPAR)

CRITICAL: Valuation is part art, part science. Multiple factors affect value---location, condition, brand, market trends, capital structure. Never rely on a single method---triangulate using all three approaches.

Summary

Understanding hotel valuation helps you make better investment decisions, negotiate effectively, and assess property performance strategically. The income approach dominates hotel valuation, but cross-checking with sales comparisons and understanding market cap rates is essential.

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