3. Buy a hospitality REIT
Real estate investment trusts, or REITs, are similar to mutual funds, but for properties instead of stocks, bonds, or commodities. Specifically, a REIT is a special type of company that pools investor money and invests in a portfolio of real estate assets. REITs must pay at least 90% of their taxable income to shareholders, and many REITs trade on major stock exchanges, making them easy, as well as highly liquid, investments.
You can find REITs that specialize in almost any type of commercial property, including hotels. And there's significant variety within the hotel REIT market, as most specialize in a specific type of hotel, a specific type of area, or both.
Just to name a few of my favorite examples, Ryman Hospitality Properties (NYSE: RHP) and Xenia Hotels and Resorts (NYSE: XHR) both specialize in large-scale luxury resorts. Apple Hospitality Properties (NYSE: APLE) specializes in mid-level hotels, which it calls “select-service” properties. Hospitality Properties Trust (NYSE: HPT) also invests in mid-range hotels but diversifies its holdings by also owning a portfolio of travel centers and retail properties.
There are several good reasons to invest in REITs. Since they pay out most of their income, REITs they tend to be great for income-seeking investors. And because many REITs trade on major stock exchanges, they're easy to buy and sell whenever you want.
4. Invest in a hotel brand's stock
There’s a common misconception that hotel brands own their properties. In other words, many investors assume that companies like Hilton and Marriott own massive real estate portfolios.
However, this is generally not the case. Most hotels that bear these companies’ brand names are actually owned by REITs like those I discussed in the last section. A REIT or other owner will build or acquire a hotel, sign a management agreement, and maintain the property according to the brand’s standards.
Although hotel operators may own a few properties, their primary business is management and franchising. Take Marriott International as an example. The company has more than 7,000 hotels that carry one of its 30 brand names. Of these, only 63 are owned or leased directly by the company, 2,035 are only managed by Marriott, and the rest are either franchised or licensed to third parties.
Even though these aren't exactly real estate investments, these companies can be great ways to invest in hotels, as their income is typically dependent on how well their properties are performing.
Hotel investments can be very cyclical
As a final point, it’s important to mention that while hotels can be great investments during strong economies, the other side of the equation is that they tend to be the most economically sensitive type of real estate during recessions and other tough times.
Because they set their "rent" on a daily basis, vacancy tends to spike faster than with most other property types when demand falls. And pricing power usually erodes in down markets, so hotels end up making less money from their occupied space during these times. With other types of properties -- say apartments -- even if vacancies increase during a recession, the tenants who choose to remain still pay the same rent they had been paying.
Because of this, diversification becomes much more important when investing in hotels. It’s important to complement them with investments that aren’t especially recession-prone. As an example, office and healthcare real estate are some of the least sensitive property types, so these could be good ways to help offset the risk of hotel REITs.
The bottom line is that hotel REITs and other hotel investments can be great ways to put your money to work. Just be aware of the risks and invest accordingly.