Rates of Return on Hotel Investments

Abstract

A capitalization rate (CR) is a rate of return that an investor seeks when purchasing real estate, including the investment's risks and forgone returns from alternative investments. A CR, then, is the weighted cost of the capital used to acquire an investment. The quality, age, and class of a property; the strength of its operating and financial history; its historical and potential position in the market place; and any required renovation or repositioning influence the type of equity investor who will be attracted to an investment and the equity portion of the required return. CRs can be based on historical net income, forecasted first-year net income, or forecasted stabilized net income. Investors also can capitalize different levels of net income, including before or after a reserve for FF&E replacement and before or after an incentive-management fee.