What is a good cap rate for hotel real estate?

Hotel cap rates vary significantly by property type. Select-service hotels (Marriott Courtyard, Hilton Garden Inn) trade at 7.00–9.00% in most markets. Extended-stay (WoodSpring, Extended Stay America) trades at 7.50–9.50%. Full-service and luxury hotels trade at 6.50–8.50% in major urban markets but can reach 9–12%+ in secondary markets. Hotels are valued on trailing 12-month NOI or EBITDA and are significantly more sensitive to market conditions than NNN assets.

What IRR is targeted for hotel investments?

Hospitality private equity firms typically target levered IRRs of 15–22% for value-add hotel investments and 10–15% for stabilized core-plus hotels. The higher returns reflect the operational intensity and cyclicality of hotel income. Master lease hotel structures can lower risk and allow lower target IRRs of 10–14% since the master tenant bears operating risk.

How does a hotel master lease work?

Under a hotel master lease, an operator (the master lessee) leases the entire hotel from the property owner (master lessor) and pays a fixed base rent plus a variable component tied to revenue or operating performance. The operator bears all operating costs, staffing, brand fees, and RevPAR risk. This structure converts hospitality real estate into a more predictable income stream similar to NNN commercial real estate, though with greater downside risk if the hotel operator underperforms.

What financing is available for hotel acquisitions?

Hotel financing is more complex than other commercial real estate types. CMBS hotel loans are available at 55–65% LTV for stabilized assets. Bridge lenders provide 65–75% LTC for value-add acquisitions. SBA 504 loans can be used for owner-operated hotels. Life insurance companies seldom finance hotels due to operating risk. Interest rates typically carry a 100–200 bps premium over comparable office or industrial financing due to perceived cyclicality.

What are RevPAR and ADR in hotel underwriting?

RevPAR (Revenue Per Available Room) is calculated as ADR (Average Daily Rate) × Occupancy Rate. RevPAR is the primary operating metric for hotel investment underwriting. When underwriting a hotel acquisition, investors analyze current and projected RevPAR, its trajectory relative to the competitive set (STR comp set), and the hotel's RevPAR Index (RPI) — its RevPAR relative to competitive set RevPAR. Strong RevPAR growth and RPI >100% indicate competitive strength.

Hotel Investment Calculator | Hospitality IRR & Returns Analysis

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Hotel Type

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Property Details

Acquisition pricing and initial costs

Purchase Price

Closing Costs% of purchase

PIP / RenovationAt acquisition

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Debt Financing

CMBS, bridge, or bank loan terms

Down Payment% equity

Interest Rate

AmortizationYears

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Loan Term / Balloon

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Interest-Only Period (Bridge / Value-Add)

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Master Lease / NOI Projection

Net Operating Income paid to landlord by operator

Annual NOI / Base RentYear 1 to owner

Annual Escalation

Landlord OpExNon-reimbursed costs

CapEx Reserve% of PP / yr

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Exit / Disposition

Holding Period

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Exit Cap Rate

Selling Costs

Going-In Cap Rate

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Hotel Cap Rate Reference

Hotel Type	Cap Rate
Select-Service (Major MSA)	7.00–8.50%
Extended-Stay	7.50–9.50%
Full-Service Urban	6.50–8.50%
Lifestyle / Boutique	7.00–9.00%
Secondary Market	8.50–12.00%

Source: Market estimates, Q2 2026. Full market data →

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Hotel Underwriting Metrics

RevPAR = ADR × Occupancy Rate

NOI Margin = NOI / Total Revenue (typically 25–40%)

Price Per Key = Purchase Price / # Rooms

RevPAR Index = Hotel RevPAR / Comp Set RevPAR × 100

Hotel Investment Analysis

Levered IRR

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Internal Rate of Return

Year 1 Cash-on-Cash

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Pre-tax / equity invested

Equity Multiple

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Total distributions / equity

Going-In Cap Rate

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Yr 1 NOI / purchase price

Total Equity Required

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Loan Amount

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Annual Debt Service

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Loan-to-Value

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📊 Annual Pre-Tax Cash Flow

Year-by-Year Cash Flow Model

Year	Gross Rent	OpEx + CapEx	NOI	Debt Service	Pre-Tax CF	CoC	DSCR	Loan Balance

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Exit Analysis

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IRR Cash Flow Schedule

Sensitivity Analysis — Levered IRR

IRR across hold periods and exit cap rates, all other inputs held constant.

Hotel Investment Analysis: A Primer

Hotel real estate is a fundamentally different investment than other commercial property types because the asset generates revenue on a nightly basis rather than through long-term leases. This operational intensity creates significantly higher potential returns — and higher risks — than NNN retail, industrial, or office investments. Investors should understand that hotel value is directly tied to the business being operated within the building, not just the real estate itself.

The most popular institutional strategy for hotel real estate investment is the select-service segment (branded flags like Marriott Courtyard, Hilton Garden Inn, Hyatt Place), which offers a compelling balance of limited operating complexity, strong brand reservation systems, and attractive risk-adjusted returns. Extended-stay hotels (WoodSpring, Extended Stay America, Candlewood Suites) offer even more predictable revenue due to weekly or monthly guest patterns.

Hotel Master Lease Structures Explained

A hotel master lease separates the real estate ownership from the hotel operations. The property owner (typically a REIT, family office, or private equity fund) leases the hotel to an operator under a long-term master lease. The operator takes on all operating risk — staffing, RevPAR management, brand fees, FF&E reserves — in exchange for the net profit after paying the master lease rent to the owner.

This structure allows real estate investors to participate in hotel economics without managing the hospitality business directly. It's particularly common in the select-service and extended-stay segments where operators have sufficient scale and systems to manage efficiently. The result for the real estate investor is a predictable income stream that can be underwritten more like commercial real estate than a hotel operating business.

Hotel Cap Rates vs. Other Commercial Real Estate (2026)

Hotel cap rates are significantly wider than industrial, office, or retail NNN assets because hotels are considered operating businesses with cyclical risk. The COVID-19 pandemic illustrated this risk starkly — hotel NOI collapsed 40–80% in 2020 while NNN industrial assets barely missed a payment. This volatility justifies the cap rate premium investors require to allocate to hospitality.

Select-service hotels in major MSAs trade at 7.00–8.50% cap rates as of mid-2026. The spread over comparable NNN industrial (4.50–5.50%) reflects the operational complexity, cyclicality, and transaction friction (fewer buyers) in the hotel sector. Investors who accept this premium cap rate alongside active management can generate IRRs of 15–22%+ in value-add hotel plays.

Financing Hotel Acquisitions: What You Need to Know

Hotel financing is more complex and conservative than other commercial real estate loans. Life insurance companies rarely lend on hotels due to the operating business risk. Most hotel transactions use CMBS conduit loans (55–65% LTV) for stabilized assets or bridge loans (65–75% LTC) for value-add acquisitions requiring PIP renovations and operational repositioning.

Key lender underwriting metrics for hotels include: trailing 12-month ADR and RevPAR, occupancy stabilization history (typically 12–24 months of performance), DSCR with a minimum of 1.25x–1.40x, and STR competitive set penetration above 100%. SBA 504 loans are available for owner-operators purchasing boutique or limited-service hotels with owner occupancy requirements.

Frequently Asked Questions — Hotel Investment Calculator

What is a good cash-on-cash return for a hotel investment?

Institutional hotel investors typically target Year 1 cash-on-cash returns of 6–10% for stabilized select-service assets and 3–7% for assets requiring value-add repositioning (PIP renovations, brand conversion, operational improvement). The lower initial cash-on-cash on value-add deals is compensated by expected NOI growth and cap rate compression post-stabilization.

How is hotel NOI calculated?

Hotel NOI = Total Revenue − Departmental Expenses − Undistributed Operating Expenses − Fixed Charges (excluding debt service). Total revenue includes rooms, F&B, meeting space, parking, and ancillary revenue. Major expense categories include rooms expense (cleaning, supplies), food and beverage costs, administrative expenses, marketing, franchise/management fees, utilities, insurance, property taxes, and FF&E reserve (typically 4–5% of revenue). After all these deductions, the remainder is NOI (or hotel EBITDA, before capex and reserves).

How much CapEx reserve should I underwrite for a hotel?

Hotel FF&E (furniture, fixtures and equipment) reserves should be underwritten at 4–5% of gross revenue annually for select-service hotels, and 5–6% for full-service. Additionally, PIP (Property Improvement Plan) renovations required by franchise agreements can cost $10,000–$30,000 per key depending on scope. Underwriting insufficient CapEx reserve is a common mistake that erodes actual returns versus underwritten projections.

What is a PIP in hotel investing?

A PIP (Property Improvement Plan) is a renovation requirement mandated by the hotel brand (Marriott, Hilton, Hyatt, etc.) when a property changes ownership or approaches the end of its license agreement term. PIPs can range from cosmetic soft-goods replacements ($5,000–$10,000/key) to full gut renovations ($30,000–$60,000/key). At acquisition, buyers typically negotiate with the seller to receive a price credit for pending PIP work, or the seller completes the PIP before closing.

Should I use a hotel master lease or traditional hotel ownership?

A hotel master lease is appropriate for investors who want to participate in hospitality real estate without managing the hotel business. It's particularly attractive for family offices, private equity funds, and REITs that want a predictable income stream. Traditional ownership (operating the hotel directly or through a third-party management agreement) offers higher potential upside but requires more active oversight and exposes the owner to direct RevPAR and operational risk.