I hear some version of this all the time:
“Hotels are worth about 3× room revenue.”
Like most rules of thumb, there’s some truth to it. But rely on it too heavily, and it can get you into trouble.
Consider two hotels. Each generates $1 million in annual room revenue, and both are valued using the 3× rule. That puts each hotel at $3 million.
From a distance, they look identical. But one operates at a 30% NOI margin, while the other operates at 15%.
The first hotel generates $300,000 in NOI. At a $3 million valuation, that’s a 10% cap rate.
The second generates just $150,000 in NOI. At the same valuation, that’s a 5% cap rate.
Same room revenue. Same multiple. Two very different investments.
And that gets to what we’re really talking about when we use a room-revenue multiple: an implied cap rate.
The multiple may be the shorthand, but there’s an operating-margin assumption hiding underneath it. When someone says a hotel is worth 3× room revenue, they’re also making an assumption—whether they realize it or not—about how much of that revenue will make its way to the bottom line.
That assumption matters because buyers aren’t purchasing revenue. They’re purchasing the income the hotel produces.
And lenders aren’t asking whether the property generates enough room revenue; they’re asking whether it generates enough cash flow to support the debt.
This doesn’t mean the 3× rule is useless. It can be a helpful gut check and a reasonable place to start. But it’s not the conclusion.
Before relying on the multiple, you have to ask what margin it assumes—and what cap rate that margin implies.
Otherwise, two hotels with the same room revenue can appear to have the same value even when their economics are completely different.
This is the first post in what I hope will become a regular series: Hotel Mythbusters.
I’ll be unpacking some of the assumptions I hear most often in hotel brokerage—the ones that are sometimes true, sometimes false, and almost always more nuanced than they first appear.
Have a hotel investing myth you’d like me to tackle? I’d love to hear it in the comments.
