If you love to travel, you might love staying in hotels. The comfort and feeling of staying in a hotel with a cozy atmosphere may be something you greatly enjoy. As an entrepreneur, you might be interested in having your own hotel and recreating that feeling for others. At the same time, you might be inspired by the high potential profits of a business as large as a hotel.
Indeed, you might be interested in building and running your own hotel business. In doing so, you might set out to draw up your ideal hotel. You might think of the ideal location, the architecture you want to have, the theme or style of the hotel, and what kind of guests you hope to attract. As you think about becoming a hotel owner, you might also realize there can be high costs of hotel development.
There is no need to worry. You are in the right place to learn about hotel construction costs, the hospitality industry, and how to raise funds to make building your own hotel business a reality. We’ll cover the following in detail in this article:
Defining the Hotel Business You Want to Build
A hotel business might be somewhat easy to define. Simply, a hotel is where guests can rent rooms for a short period of time in a location where they are traveling.
While a hotel can be easy to define, there is a wide variety of hotel options. These become especially important when thinking about the potential costs that go into building a hotel business.
One of the first questions you should ask yourself is what kind of hotel business you want. There are a variety of hotel options to choose from, including motels, midscale hotels, boutique hotels, and luxury hotels.
Suppose you are looking for an affordable hotel to build or a location that is further out along a major highway; a motel might be for you. Motels, or similar 3-star hotels, have remained a popular option for travelers on the road looking for a quick place to stay. Motels can be a lower-cost construction and operation option for your hotel business, but it might not be what you are looking for if your dream business is something that has more luxurious amenities.
A midscale hotel is a good, middle-of-the-road option for a hotel business if you are interested in a slightly higher-quality hotel. Midscale hotels have a market nearly everywhere, with average travelers looking to stay in affordable but nice hotels. You might have higher costs in setting up these hotels, but it might be what you are looking for since they cater to a larger customer base.
Boutique hotels offer you another option as a prospective hotelier. If you are interested in having a small designer hotel, a boutique hotel can help you deliver a unique experience to your guests. This kind of hotel can allow you to express your creativity and deliver great service as part of a service hotel offering. You might be able to find success with a great reputation from your guests.
Alternatively, you might be interested in starting a 5-star hotel or luxury hotel. You might want the ability to offer your guests luxurious amenities, fantastic restaurants, great room service, and all around have a full-service offering to your guests. You might be able to make your money back by catering to a group of high-paying guests. However, the startup costs with this model are certainly higher.
Aside from the type of hotel that you are considering building, you should also determine whether you want to build your own new hotel with your own brand or build a hotel of an existing hotel brand in the hotel industry, such as Marriott, Hilton, or others. Of course, the decision to buy a franchise hotel will affect both your construction costs as well as create costs that you need to pay to a corporate hotel franchisor.
In all, the best way to start your calculations is to be cognizant of the design decisions that you are making with respect to the development costs of your hotel. These choices will further customize the overall cost it will take to build and operate your hotel business.
Costs of Building a Hotel Business
Estimating the costs of building a hotel business can generally be difficult. The costs depend on a variety of factors, including the type of hotel, number of rooms, location, size of guest rooms, staffing, and more. Regardless, however, if you are an entrepreneur, it is best to get a general idea of your costs before you get ready to build your own hotel business.
If you decide to later get funding to build your own hotel, build your hotel with your own capital, or enter into an agreement with a franchising hotel chain, it is important to have a basic estimate of your costs. As a result, in this section, we will try to keep it simple in estimating a range of shared costs by hotel enterprises and associated construction project costs.
Legal and Permitting
Beginning first with legal costs, you will need to establish your business. This means that you need to first choose a business name for the business that will run your hotel. You should consider the state that you are planning on building your hotel in, and once you have decided on the state, you can go to your state’s secretary of state website to verify that that name is available. If it is, you can file to form a business in your state. The costs of doing so will depend on the filing structure.
The cheapest filing structure available to businesses would be a DBA or doing business as a structure. However, this provides essentially no legal protection to you and your personal assets in the event of a lawsuit. As a result, you will likely need to establish a limited liability corporation, limited liability partnership, corporation, or other relevant structure in your state to provide you with legal protection. The costs for this can range up to approximately $1,000. You can consider having lawyers or providers file for you for additional costs.
Aside from the costs concerning the legal formation of the hotel business, you will also need to get several permits for operating the hotel. The exact permits you will need will depend on state and local regulations. The requirements are not uniform. You should generally expect to need a health department license, potentially a business license, a fire department permit, and an air and water pollution control permit. Speaking with your local government, local health department, and local fire departments can help provide more clarity on the matter. The estimated cost for this permitting process is approximately $15,000. You will also need to investigate zoning permits since you are trying to build your own hotel.
In total, that brings the generally expected legal and permitting costs to around $16,000 for building a hotel. While this cost seems small, there are many more expenses left.
Insurance, especially in such a customer-facing business as a hotel, is very important to the initial operation of your hotel. Once your hotel is ready to open, you need to be sure that your business is covered from potential legal or operational expenses that occasionally happen but can pose a real challenge to the survival of your hotel business if they occur early on in your business operations.
One of the types of insurance you will want to get is general liability insurance. If an accident happens in your hotel, general liability insurance can help protect your hotel business and its assets from lawsuits.
You might also consider insurance against theft and property damage insurance for your hotel business. Insurance against theft can provide your hotel business with the assurance that if a guest steals valuable technology or furniture in your hotel, you can recover it using the insurance and without having to spend too much of your cash flow on short notice replacing it. Moreover, if furniture or a hotel room gets accidentally damaged by a guest, they can be replaced or fixed from your property insurance rather than trying to cover fixing that damage on short notice with the cash in the business. Other forms of insurance that your hotel business might consider include workers’ compensation insurance.
There are many insurance options for your hotel business. While you can customize the policies, coverage, and types of insurance that you can get, the estimates for insurance policies discussed here are estimated to have a premium of approximately $30,000.
One of the hard costs of building your hotel business is going to be the real estate that your hotel is built on. The price of real estate can be quite substantial. The price of the land that you choose to build on will be dependent on the demand for that land in a location. This might not necessarily be a bad thing. If prices are high for land in New York or Florida, for example, it could be because many people want to live or stay in the city. That could be a positive sign for future demand to stay in the hotel that you build.
There is also another problem in estimating costs. You may want to sign a lease agreement, which allows you to lease a plot of land to build on. However, you might want to permanently own the property on which your hotel is built. As a result, the land costs upfront will be higher. The average cost of this is estimated to be about $34,000 for a plot of land for a regular hotel. While this cost may seem low, this is certainly an average estimate that likely focuses on land costs across the United States.
If you are planning to have a resort on the beach, your land costs will almost certainly be higher. This might also be the case if you are looking to purchase a property with a fantastic location in New York City, Miami, or Los Angeles. If you are looking for a more specific estimate, it could benefit you to search around for properties and land that interests you online.
As you get ready to build, you might be rightly concerned about the costs of the actual construction of the hotel. The construction costs start as early as the design stage. First, you will need to hire an architect to help you design the hotel and the layout of your future hotel property. Once you have your architectural designs in place, you will need to hire a contractor to implement them. This will be the start of an expensive construction cost to build your hotel.
You will then need to purchase doors and windows for your hotel rooms. You will then need to ensure that the roof of your hotel is built well. There are also other important parts of the construction process, including the installation of plumbing, building the foundation, creating interior finishes, building kitchens and flooring, making exterior finishes and finishing the walls, putting in baths, and other features.
Put together, these construction costs for an average hotel can range from an estimated approximately $23,000,000 to $26,300,000.
While these construction costs may seem high to you, that could be because the hotel you have in mind would be much smaller. Certainly, building a small boutique hotel or a small hotel, in general, will lower the construction costs of the hotel. Alternatively, if you are hoping for a very large or extravagant luxury hotel, your expenses might be much higher.
Another expense that you will need to anticipate as you prepare to build and operate your own hotel is the operational costs that you will experience. Generally, it is recommended that you have three months’ worth of expenses on hand and prepared in case you have a dip in revenue. This will allow you to continue to pay your employees, utility bills, taxes, and other relevant expenses that your hotel might have.
As mentioned, an average hotel with a small number of employees might try to maintain about $120,000 to pay wages, bills, and other expenses in the first few months. Although it is more expensive to leave cash in your bank after you finish building your hotel business, it is probably necessary to avoid additional headaches and financial stress if you run into any problems.
As you get ready to run your hotel business after its construction, you need to be prepared to supply it with enough inventory to service the guests.
If you have a store near the front desk where guests can buy food, snacks, and drinks, you will need to purchase these goods and items to have them ready at the opening. Moreover, you might want a slight additional stock of inventory in case you need to restock quickly.
Of course, bed sheets, blankets, pillows, pillowcases, towels, robes, and other hotel room items are necessary for the operation of a hotel. Since you will need to run a hotel efficiently, you will need extra sets of these items to turn around hotel rooms quickly. The used items from one day can be washed for another day, but backup pairs of these goods will also be necessary. Moreover, if there are accidents and some sheets or pillows become unusable, you will need to have backup supplies on hand in case you need to meet demand.
Inventory needs do not just stop here, however. If you have kitchens in your rooms, you will need to supply guest rooms with the utensils that they need to be able to cook and eat in there. Washing machines might be important for your housekeeping staff, as well as soap to use with it. Bathroom supplies are another necessity for guest rooms. Having an ample supply of shampoos, toilet paper, and soap is critical to a smooth hotel operation.
As a whole, these sorts of inventory are likely to total an estimated $45,000 for an average hotel. Again, the exact amount of this inventory cost will depend on your hotel, the number of rooms you have, the extent of the amenities in the rooms, and so on. The best way to get an accurate estimate of these costs is to total the amount of money that you expect to need for each item.
Website and Software
As your hotel business nears its opening, you should strongly consider marketing your hotel to the public. Advertising its opening and availability, such as on social media, will be fundamental to ensuring a successful grand opening. Moreover, this can help spread word of mouth to promote your hotel business. These costs are part of the soft costs of running your hotel business.
In addition to thinking about your marketing campaign, you should consider how your guests will make their bookings. While reservations in-person and over the phone is a possibility, they will take up your employees’ time to book. Making a website with a booking function can be a great way to get your hotel operating efficiently.
At the same time that bookings can be made via a website, it is important that you have booking software capable of managing the backend of room bookings and availability. This can also help your hotel adjust prices as your occupancy increases.
These costs can range from low to high depending on the degree of customizability you are looking for. In all, these costs should not be over $1,000, on average, for the first few months. Yet, this number can still vary depending on the setup that you want to go with.
Furniture, known as FF&E, or furniture, fixtures, & equipment, is a large expense that you will need to be prepared for when building your hotel. After you complete the construction of your hotel rooms, it will be time to furnish them. You will need beds, mattresses, desks, chairs, ironing boards, and other items to help make your room comfortable for your guests.
The exact setup and layout of the rooms will depend on your hotel. A high-end hotel might have to have more furniture and higher quality furniture in a hotel room. Furniture will need to match the interior design of the hotel that you build. In all, building hotels is not a cheap process.
An estimated cost for this for the average hotel would be approximately $40,000. This cost may be on the low end, however. The cost will vary by the number of rooms that you have, the number of square feet in each room, and the type of room. Yet, costs like TVs, speakers, and other furniture can make furnishing a hotel quite expensive. This will be even more expensive if you have kitchens in the rooms, which will require appliances like refrigerators, microwaves, and more.
An additional cost that you will likely experience in the process of building and opening your hotel includes the need to purchase and implement a security system. Usually, hotels will purchase a security camera system with monitoring and recording capabilities to ensure that everything at the hotel is running smoothly.
This might be a good idea to help protect the assets of your hotel as well as to protect your hotel from certain lawsuits. A security camera system can help capture if there is damage being done to your property and show who is responsible. This might also help in the event of theft. Moreover, if a guest claims something happened to them at your hotel, you can have the security camera footage in public places, which may come to your aid in court.
Overall, the average cost of a security camera system is estimated to be approximately $15,000. The ultimate cost of this will depend on the configuration of your hotel and the size of your property.
Estimating the Total Cost of a Building a Hotel Business
While a breakdown of the categories of costs may help you to estimate the expenses involved in building a hotel business, you might be looking for a quick, average overall number. In an estimation of all of the costs this post discusses, including legal and permitting costs, insurance, real estate, construction, construction materials, operational expenses, inventory, website and software, furniture, and security system cost estimates, the total cost for building a hotel business is approximately $24,951,000.
While this number is large, it is important to understand that this number is highly generalized. As discussed in this post, it is best to calculate the expenses you expect to have in each of the categories mentioned. That can help you provide a more accurate estimate for building a hotel business in your business plan.
Financing the Cost of Building a Hotel Business
Given the very high cost of building a hotel business, it is likely that you will need some help in financing the cost of building your hotel business. The good news is that there are a variety of loans to help. Each offers different benefits, and it is important to consider your logistical and financial situation when reading through them to determine what is right for you.
On an additional note, it is important to note that you will likely have to start with a substantial amount of capital when getting ready to build your hotel business. While you do not need to have all of the capital ready at your disposal, you should know that you will likely need to have some amount of capital ready to deploy so that you can de-risk the loan you are requesting for lenders.
As you get ready to build and launch your hotel business, there are three great loan options available for your company at a variety of stages, sizes, and reputations. Small Business Administration loans, term loans, and lines of credit may help push your hotel business construction project to the finish line.
The United States Small Business Administration (SBA) helps entrepreneurs who need help operating their small businesses. Generally, for those who are having problems finding funding, SBA loans offer a path to financing for many small business owners. Their loan program, run through lenders, offers low-interest rates to borrowers with favorable terms.
One of their more popular programs is the SBA 7(a) loan program, which gives business owners up to $5 million in their loans to use for developing their businesses. The allowed uses include acquiring real estate for your small business hotel, improving your hotel’s working capital situation, or buying things like beds and furniture for your hotel’s start and operations.
If SBA loans are not for you, there are also term loans. Term loans can provide your hotel with a bit more flexibility in the allowed uses of a loan. This alternative financing option gives your hotel a lump sum of cash to be able to use for your hotel needs, including acquiring furniture, construction, remodeling, or real estate needs. Term loans usually have fixed interest rates. They are best used for short-term investments.
You can get a term loan for your hotel from either a bank or an alternative lender (like Biz2Credit!). While banks tend to offer lower interest rates and better terms, they often have a long and inconvenient application process with stricter criteria for getting a term loan. If you anticipate needing your funding quickly or do not have a robust credit history, you might want to consider going with an alternative lender. Although the interest rates tend to be higher, these loans provide a lot of flexibility and speed that bank loans are unable to help with.
Lines of Credit
A line of credit is another financing option to help your hotel business get off the ground and ensure successful operations. A line of credit might be what you are looking for if you need something to help with your hotel’s working capital or cash flow management. A line of credit works similarly to a credit card.
A borrower is usually granted a credit maximum by a lender from which the borrower can draw down. The borrower can draw down on the line of credit as they wish and pay interest on the debt that they end up using. Lines of credit can be a great way for your hotel to help manage some of the earlier expenses after getting off the ground if there are unexpected expenses. This is because it is likely that you will be taking a lot of the cash flow to repay other debts you might have. A line of credit can help you temporarily get out of stressful financial situations that might put you in.
That is it! You have all the information you need to get planning on the costs of starting your own hotel business and the financing options you have available to you. Good luck!
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