To Rent or Own?
Thinking of starting a hostel or expanding into a new location? Then this question should be one of the first that comes to mind. However, the answer doesn't come fast. There are a few more factors to consider before you can reach your final decision.
What’s your core business?
Do you rent hostel beds or square footage to a hostel? Many businesses, at one time or another, go through a period of self-reflection where they determine what is called their core competency. The main focus of a hostel is to rent a bed. You can offer this service regardless of whether you are renting or owning the property, but neither is essential or more hostel-friendly than the other. You should consider both options equally, especially since the same approach may not work for every location. If you find yourself fixated on one option over the other, then perhaps you should consider a career in commercial real estate rather than hostels.
What size do you want to be?
Sorry, guys, but when it comes to hostels, size does matter. Smaller hostels would find it easier to finance and purchase property, offering a light at the end of the tunnel. They can use the cash flow to build equity for retirement in their golden years or to borrow against for expansion into new locations. Larger hostels may struggle to raise the necessary funds, but they will have more revenue to set aside and invest for the nest egg later in life. If you do choose to own, make sure your property is held by a separate company that rents to the business. This protects you from losing the asset if any unfortunate court cases arise. If you choose to rent, look for mixed-use commercial properties that have yet to be built. You can negotiate a purpose-built hostel with a pre-lease. It would be safe to assume that most leases will be triple-net, meaning there is more to consider than just the rent.
If you find yourself fixated on one option over the other, then perhaps you should consider a career in commercial real estate rather than hostels.
What are the projected values?
This is where you need to do your homework and dig deep into the regional and local level. The real estate game is constantly changing. What was a good deal yesterday may not be a good deal today, but it could be again tomorrow. You have to do your research. Buying a property in San Francisco isn't worth it today, but it sure was 15-20 years ago. If you assume that real estate values will continue to rise, how did you survive 2008? They will always fluctuate. Compare your city with other similar cities. There are plenty of ways to learn about the real estate market, like the information here. As a guideline, I’d say anything less than 8% isn't worth the hassle of owning assets in the long run, and I wouldn't consider it until it is higher than 15% for short-term gains. There’s a reason major hotel companies pride themselves on asset-light strategies (see Hyatt, Starwood, LaQuinta, Accor, or IHG) for years now. Do they know something we don't? Certain cities could see their real estate values grow higher and faster than 8% year-over-year. Additionally, while a city might have a low growth rate overall, gentrification could mean that some areas within that city could still thrive. Keep tourism factors in mind as well. HVS offers European and US hotel valuation indices that incorporate many tourism factors, indicating potential market growth. And yes, this applies to the hostel industry too. Lastly, if you notice a new low-cost airline entering your market or a festival coming to town, pay attention to those factors as well.