How to set a return target for your hotel
A return target is the yearly profit you want from the hotel, shown as a percent of the money you put in. It is the number an operator will bid against, so it helps to set it with care.
Step 1: know what you put in
Add up what you invested: the purchase price, renovations, furniture and any money still tied up. Use the real total. This is the base for your return.
Step 2: know what the hotel earns today
Take a year of revenue and subtract labor, supplies and guest costs, and every other cost (utilities, repairs, insurance, property taxes, franchise fees and the rest). What is left is the hotel's profit. Divide it by what you put in. That is your return today.
Step 3: look at the hotel per room
Divide revenue and profit by the number of rooms. If you know your occupancy and average nightly rate, even better. Operators will do the same, and bids that start from your real numbers are the ones you can trust.
Step 4: pick a target
A good target is one you would be glad to receive and that a skilled operator could plausibly beat. If you ask for less than you earn now, operators will see an easy win and your split may be higher than it needs to be. If you ask for far more than the hotel can earn, bids may not come.
Step 5: remember the upside
Your target is a floor, not a ceiling. Anything the hotel earns above it is shared with the operator in the split you choose. A hotel that earns well above its target is a good problem to have.
Step 6: measure it every quarter
We suggest measuring the return each quarter, so one slow month does not hide a good year and a bad quarter is noticed early. Write the rhythm into your agreement. Seasonal hotels may want to agree how the slow season is counted.