To Rent or Own?

Thinking of starting a hostel or expanding into a new location? Then this question should be one of the first questions that comes to mind. However, the answer doesn’t come as fast. There are a few more factors to consider before you can come to 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. So the main focus of a hostel is to rent a bed. You can offer the service regardless of renting or owning the property, but neither is essential or more hostel friendly than the other. You should consider both options equally, especially considering the same thing will not work every location. If you are finding yourself fixated on one option over the other, then perhaps you should consider a career in commercial reality rather than hostels.

What size do you want to be?

Sorry guys, when it comes to hostels, size does matter. Not only would it be easier for smaller hostels to finance and buy the property, but it offers a light at the end of the tunnel. Smaller hostels can use the cash flow to build equity that can be used for retirement in the golden years, or to borrow against to expand into a new location. Larger hostels will have difficulty in raising the funds to do so, but there will be more revenue to set aside and invest for the nest egg later in life. If you do choose to own, make sure it is owned by a separate company that rents to the business anyways to protect you from loosing the asset if there any unfortunate surprise court cases lie ahead. If you choose to rent, look for mixed use commercial properties that are yet build. You can negotiate a purpose built hostel with a pre-lease. It would be safe to assume that most leases will be triple-net, so there is more than just the rent.

What are the projected values?

Here is where you need to do your homework and dig down to the regional and local level. The real estate game is constantly changing.  What was a good deal yesterday, sucks today, but yet could again be a good deal 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 are assuming real estate values continue to rise, how did you survive 2008? They will always fluctuate. Compare your city with other cities. There are plenty of ways to learn about the real estate market, like the information here.  I would say, as a guide, anything less that 8% isn’t worth the hassle of owning the assets in the long run, and I wouldn’t consider it until it is higher than 15% for the short game. There is 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?

There are cities that could grow their real estate higher and faster than 8% year over year. Also, the city might have a low rate, but gentrification could mean that some areas in the city could still boom. Finally, keep tourism factors in mind. HVS offers European and US hotel valuation index that applies many tourism factors showing that the market will grow. And yes, it does apply to the hostel industry too. Finally, if you see a new low cost airline opening up or a festival moving to town, consider that too.