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How to Value a Hotel

A hotel is a business that earns money every night, so most buyers value it by its profit rather than by the cost of the building. The method is simple enough to follow on one page.

1. Start with revenue

Room revenue is the number of rooms, times 365 nights, times occupancy, times your average room rate. Add anything else the hotel earns, such as food, parking or meeting rooms.

2. Subtract the cost of running it

Operating costs are payroll, utilities, supplies, brand fees, insurance, property tax and repairs. They do not include your mortgage, depreciation or income tax, because those depend on how you own the hotel, not on how it performs.

3. Count the profit the way a buyer does

What is left is your net operating income. A buyer then adjusts it. If you run the hotel yourself and pay no manager, a buyer will add a management fee, because they will not run it for free. A buyer also sets aside a share of revenue every year to replace furniture and equipment. Both come off your profit before value is worked out.

4. Divide by a yield

The adjusted profit is divided by a yield, called the cap rate. A lower yield means a higher value. Our guide to hotel cap rates explains where it comes from.

5. Take off what a buyer will have to spend

If the rooms need renovation or the franchise requires upgrades, a buyer will subtract that cost from the price, dollar for dollar.

A range, not a point

Because the yield is a range, the value is a range too. A lender or a court will want a licensed appraiser, and a real price depends on the market, the buyer and your records. Use the math to know roughly where you stand and what moves it.