How to Open a Hotel from Scratch?

In our practice, Fantalis specialists constantly encounter numerous questions from clients who are just thinking about opening a hotel, mini-hotel, or country resort. There are always many questions, and each project is unique in its own way, even if it is based on a successfully implemented scheme. As in any other industry, finding a universal solution for all situations is impossible.

In this article, Fantalis specialists will discuss "how to open a hotel from scratch," answering the most frequently asked questions and providing insight into the challenges of starting a hotel business.

How do you open a hotel from scratch?
What do you need to know about opening a hotel?
How much does it cost to open a hotel?
Is opening a hotel profitable?
Have you decided to open a hotel? Where do you start?
What kind of hotel should you build: a hotel complex or a mini-hotel with 10-30 rooms?
Where and how should you build a hotel?
Is it possible to open a mini-hotel in a residential building (or apartment)?
How can you open a hotel in a private house or apartment?
What documents are required to build a hotel?
What rooms should a hotel have?
What are the premises and their purpose?
What are the requirements for opening a hotel?
What permits and their types are required to open a hotel?
How do you launch a hotel from scratch?

Opening a hotel isn't just a way to expand your investment portfolio with a prestigious business; it's also a real opportunity to influence the region where the hotel is located, improve the environment, and clearly express your personal views, interests, and principles. Most often, people looking to invest in the hotel business have a general idea of what their future project should look like, even several options. However, those with little previous experience in the industry often have difficulty choosing a specific option.

Before launching a project, you first need to decide on the type of hotel, the investment volume, and the desired profit. Then, develop a business plan to guide decision-making. Next, work begins on design, documentation, construction, procurement, staffing, and marketing.

Experienced third-party organizations are often hired to handle these tasks, helping with everything from design and procurement to drafting regulations and management. When choosing a contractor, it's crucial to consider their experience with completed projects specifically in the hotel industry.

What do you need to know about opening a hotel?

Opening a hotel is a complex, comprehensive business, where not only various technical aspects but also the human factor play a significant role.

Accommodating guests is the primary, but not the only, responsibility. All associated infrastructure and processes must be considered: food service, entertainment, grounds maintenance, personnel management, procurement (procurement, transport, and warehouse logistics), equipment repair and upgrades, marketing, sales, and reservations.

The hotel has yet to be built, and the design and all necessary infrastructure must be developed at the initial stage. Launching the hotel requires the work of a team of professionals from various fields.

Often, the project participants' specialization has never been specifically related to the hotel industry. For example, an investor doesn't develop a business plan thoroughly, leaving "minor details" for later, resulting in underestimated projected costs. With this plan, they approach designers from a regular firm, who create a project based on residential solutions. Unavoidable flaws arise during construction without designer supervision. When purchasing items, cheaper alternatives are chosen over those selected by the designers. Staff is hired at the last minute, and advertising begins only when everything is ready. As a result, if sufficiently competent specialists were hired, the result is a seemingly decent hotel, which, albeit slowly, begins to attract customers.

However, this approach inevitably presents certain problems:

• low occupancy rates during the first few months,
• insufficient equipment for the required occupancy,
• and entertainment and maintenance costs not accounted for in the "rough" business plan.

There are also less obvious issues:

• lost savings when installing utility lines,
• savings on utility bills,
• poorly thought-out logistics for guest and staff movement,
• and equipping rooms with non-specialized equipment—for example, using portable household hair dryers instead of wall-mounted ones, and the subsequent loss of the former.

Thus, the improper selection of third-party specialists reduces the hotel's profitability and payback period. In other words, cutting corners at the very first stage leads to a huge number of shortcomings, directly impacting the owner's pocket.

A carefully crafted plan in such a complex business is primarily necessary for the investor. However, since developing such a plan requires an understanding of hotel technologies and market conditions, it is best to turn to professionals in this field, if not for a full business plan with all the necessary research, then at least for a consultation.

The next phase, in which it is also highly desirable to have staff knowledgeable in the hotel industry, is design and planning. The attractiveness, ergonomics, and ease of service of the hotel complex depend on their work. And although a competent team of designers and architects who do not specialize in the hotel business will create a beautiful project, during the development process they will have to apply their own judgment and spend more time, potentially overlooking aspects that are unique to this industry. This will lead to certain financial losses.

In addition to the rational implementation of various hotel functions, the project team must take into account the landscape and regional features in a way that will save the client money both during the construction phase and during the subsequent operation of the hotel. That is, within the budget specified in the business plan, they will create a project that is more attractive to clients, more convenient for employees, and less expensive to maintain, thereby achieving a faster payback.

Providing the facility with specialized equipment is also worth paying special attention to. Intermediaries may have preferred suppliers whose products they will actively promote. Some companies specialize in hotel procurement, searching for everything needed from manufacturers and dealers. Hotel hypermarket websites are also emerging, offering online ordering and delivery options throughout Russia.

The organizational work leading up to the opening also has its own specifics. This is most evident in the preparation of internal documentation, staff selection, and marketing campaign. It is important to select management personnel who can handle their responsibilities, recruit subordinates, and collaborate well. Instructions and regulations should already be in place. Therefore, preparation for the opening begins a year or at least six months in advance.

A management company is usually established for management, consisting of selected executives. Their job is to recruit junior staff and handle some of the paperwork. Additionally, consulting with an existing management company or commissioning some of their work may be helpful. A full management agreement with such a company can be entered into.

A marketing campaign is being conducted in parallel: a website is being created, the property is registered with online services, contracts with tour operators are being drawn up, and so on.

How much does it cost to open a hotel? Initial investment.

The cost of a hotel is most significantly affected by its category (star rating) and the number of rooms. The larger these are, the higher the income and expenses. Of course, each case has its own specifics, so we will be using approximate amounts.

Let's consider the average cost of one room, which also includes the cost of common areas. Globally, this is approximately $40,000-$80,000 for an economy hotel, $80,000-$120,000 for a three-star hotel, $120,000-$200,000 for a four-star hotel, and over $200,000 for a five-star hotel. These costs can also be used as a guide in Russia, so to get an approximate idea of the cost of building a hotel from scratch, multiply them by the desired number of rooms.

1. Staged costs:
2. Planning and initial design - 0.5-10 million rubles.
3. Detailed design - 1,000-4,000 rubles per sq. m.
4. Construction costs are roughly the same as other commercial buildings, but utilities (up to half the total construction cost) and finishing are highly dependent on the hotel's star rating.
5. Facilities and equipment (FF&E) cost 0.25-2 million rubles per room, depending on the category; at least 12,500 rubles per square meter.
6. Opening preparations include advertising (2-3 million rubles), developing regulations for each position (up to several million rubles), recruiting staff, managing their payroll, and purchasing consumables (OS&E) for the first months of operation, and the opening ceremony.
7. It's also important to budget for unexpected expenses that may arise before the project breaks even.

Let's look at the equipment separately. Skimping on furniture and equipment—buying generic equipment rather than specialized hotel equipment—will lead to unforeseen breakdowns and the rapid replacement of worn-out equipment. This is typically not factored into the budget at all, or is factored in only with the hope of an optimistic timeframe for breaking even and replacing everything out of profit. Specialized hotel, restaurant, and commercial furniture and equipment are significantly more expensive than mass-market options.

Entering with less is possible. However, the following principle applies: small properties also have low revenues. This is due to the minimum required staffing level, comparable to that of small and medium-sized hotels. Payroll is a significant expense, and it will be roughly the same for these two hotels. However, the first, due to its smaller number of rooms, will have lower revenues than the second. And if the room inventory is insufficient, operating at break-even or even in the red is possible.

On the other hand, the simpler the property, the faster it will pay for itself. For example, instead of a traditional hotel, an investor might choose a seasonal tourist resort with low-cost residential buildings and minimal services (a dock, barbecues, and houses with a mini-kitchen where guests can prepare their own meals). The room rate will also be low, but high occupancy rates and reduced winter maintenance costs will allow the company to quickly turn a profit. It's important to balance your capabilities with your desired profit. Even with a few million rubles, you can set up a simple recreation center (camping, sauna, minimal services) and quickly break even. However, the profit margins won't allow you to outsource the business to hired labor; there simply won't be enough money. In this case, we're not talking about a traditional business, but rather self-employment, where development, management, and many other additional responsibilities fall on the shoulders of the owner and, potentially, their family.

Therefore, the cost of a country recreation center typically ranges from 60-80 million rubles, while a full-fledged hotel with 100-150 rooms starts at 200 million.

Is opening a hotel profitable?

Hotel properties are less profitable than most other types of commercial real estate. EBITDA is approximately 25-30%, although it can reach 35%.

Revenue depends on RevPAR (average room rate and average occupancy) and the sale of additional services (which contribute up to 70% of profit).

The main operating expenses are payroll (salaries), utilities, and purchases.

Staffing directly impacts any hotel's profitability. Highly qualified staff is essential for maintaining the establishment's reputation and providing related services. Seasonality adds another layer of complexity to this issue: when staffing levels are low, they become idle, while during peak periods, there may be shortages. It's important to optimize the size and composition of your staff while avoiding the loss of already trained personnel. Effective personnel management is the key to a company's flexibility, which is an undeniable advantage in today's realities.

The general principle is: the more expensive the project, the longer it takes to pay for itself. The cheaper it is, the faster the return on investment, but the overall cash flow will be smaller. Therefore, when it comes to large investments, expensive hotels are more attractive, as they offer a longer payback period and higher profits.

For most projects, a payback period of 8-12 years is typical. City hotels pay for themselves faster than similar country hotels due to the lack of major expenditures on landscaping and the creation of a new utility network.

So, if you've decided to open a hotel, where do you begin?

It all starts with defining the business concept. It's crucial to understand your audience, as this will influence the overall style of the hotel, the ratio of floor space, and the availability of additional services. To determine who will be staying and for how long, a thorough marketing research is conducted. This includes an analysis of competitive offerings, demand, and the target audience. As a result, it becomes clear what's in demand and likely to be successful, the project's expected MPI (market penetration index), and what the expected occupancy rate will be for different numbers of rooms.

If everything is clear, there's a concept and no additional investment is needed, the marketing research stage can be skipped. Once the concept is clear, the technical specifications can be drawn up.

The technical specifications should be developed by a hotel technologist who understands the business, is familiar with the operational nuances, and can therefore outline the requirements for all systems. Requirements for space, room composition, and equipment are outlined. The further removed from this area the contractors—designers and architects—are, the more detailed the specifications should be. If the firm has extensive experience in the hotel segment, a well-thought-out concept is sufficient to begin work.

Based on the information received and the technical specifications, a preliminary financial model can be created, which will help understand the need for adjustments: redistribution of room stock or the composition of additional services, allocation of rental space. A business plan is then developed with calculations: the start-up budget, expenses, and profit expectations.

Based on the technical specifications, layout solutions are developed, and the subsequent design project finally defines the hotel's style. It includes visualizations of the exterior, interiors, landscape, and design documentation required for obtaining a building permit.

A business concept, business plan, and preliminary architectural design are the documents needed for investors to decide whether to participate in the project and for obtaining bank loans.

What kind of hotel should be built: a hotel complex or a mini-hotel with 10-30 rooms?

Revenue depends on room occupancy and service sales. Expenses depend on the size of the payroll, utility costs, and purchasing expenses. There's a minimum required staffing level, and its size is virtually the same for hotels with 20-50 rooms or 100-200 rooms due to a number of mandatory requirements. This means that one of the main expenses in a mini-hotel (unless it's a family-run project like self-employment) is comparable to a full-fledged resort, but the revenue is not.

For a profitable project, it's best to aim for a minimum of 60 rooms for a tourist resort and 100-150 for a full-fledged countryside or city hotel.

Where and how to build a hotel?

The answer to this question depends on the concept you're putting into the project and the results of your marketing research. Natural centers of attraction should be nearby, which naturally attract clients.

For city hotels, everything depends on the segment: MICE, tourist, boutique, or hostel—each has its own requirements for the surrounding environment. MICE hotels require nearby business facilities, such as large office buildings and exhibition centers. Tourism businesses favor historic buildings and cultural sites, or the sea—the reason people come to the city. A hostel, whenever possible, focuses on these same areas. A boutique hotel needs a location that underscores its concept, yet it should intersect with business or tourist areas, preferably with convenient access in all directions.

For countryside hotels, a forest and a body of water are a classic choice. There are hotels in open fields without a nearby body of water, but these always entail additional costs to create something that will attract visitors. Outside the city, it's better to choose a more expensive plot of land with good views, where additional investments in landscaping won't be necessary. Utilities are also important; the cost of connecting them to the site may exceed the cost of the site itself. An access road is necessary, taking into account potential traffic and seasonality. Don't forget the site's distance from the nearest city or regional center.

The site should be close, but away from the highway. Ideally, all or at least some utilities (electricity, gas, water) are present.

The composition of the rooms and common areas, the choice of technologies and materials - all this is determined by a design project that complies with current regulations and is approved by an expert; construction is carried out according to the developed working documentation. If you hire a local contractor, it is best to use the author's supervision; this will help avoid violations and ensure the result is fully compliant with the design.

Is it possible to open a mini-hotel in a residential building (apartment)? How can I open a hotel in a private home or apartment?

A hotel cannot be established in a residential building or even on land designated for individual housing construction. Only commercial properties are eligible, and the land must be designated as residential or recreational land.

Some residential properties can be rezoned as non-residential, and this is the only option for renovating an apartment or house into a hotel.

What documents are needed to build a hotel?

1. Land title deeds.
2. Design, site plan, and working documentation (drawings and texts for the construction site).
3. A building permit (obtained after the project review).
4. A contract with construction companies.

What spaces should a hotel have?

In addition to the hotel's guest rooms, it also has public areas (lobby, restaurants, administrative, utility, and technical rooms). Some of the space may be commercial or leased.

What are the spaces and what is their purpose? Residential, public, and utility (service) areas.

The residential area includes rooms of various categories, including en-suite rooms, blocks of rooms, or separate buildings (e.g., at a tourist resort).

The main public areas are the lobby, conference room, and food service areas. Other possible features include a swimming pool, fitness center, hair salon, storage lockers, dry cleaning, a library, and more. Open lobbies, a more open common area where the lobby is complemented by a bar and is not separated from the restaurant, are becoming increasingly popular. The main areas are usually located on the ground floor.

Public spaces include administrative (for administrative staff), utility (hallways, linen rooms, storage rooms, bathrooms, staff rooms), and utility (boiler room, ventilation chamber, electrical equipment room, pump rooms, etc.). They are most often located in the basement or, if necessary, are planned on each floor.

What are the requirements for opening a hotel?

1. The business must pass all inspections and have a complete set of documents. There is no special license for providing hotel services.
2. Even before construction, the project was inspected for compliance with regulations, so newly constructed buildings are checked for compliance with the design.
3. A restaurant must have a license to sell alcohol, and employees need health certificates.
4. In 2017, a law on mandatory classification was passed, so category (star) confirmation has now been added.

What permits and types are needed to open a hotel?

Before opening a hotel, you will need documents proving:

1. Ownership of the land and premises.
2. Legal entity or individual entrepreneur.
3. Certificate of category compliance. Assigning stars became mandatory in 2017. Can be obtained by 2020, depending on the type of hotel.
4. Confirmation of compliance with all regulations. Obtained after inspections.
5. Cash register.
6. Licensed activities (food establishments, alcohol, dry cleaning, hairdressing, etc.).
7. Signage and advertising.

In addition, internal documents: brand book, service instructions, charter, evacuation plan, book of reviews and suggestions, etc.

How to launch a hotel from scratch?

In preparation for the opening, work must be carried out simultaneously in several areas:

1. Procurement. Finding and ordering F&E that matches the design project, delivery, and on-site assembly. This process must begin at least 12 months before the opening date.
2. Website development. It must be fully operational six months before the hotel opens.
3. Register with OTAs (online booking systems) and begin accepting reservations. Establish relationships with travel agencies. Find corporate clients and sign contracts with them. Work in this area should begin six months before opening.
4. Create regulations and instructions, select a PMS (property management system). This will not only help establish a consistent level of service but also save time on training each employee. These processes can take up to 12 months.
5. Create F&B standards.
6. Recruit staff. The "Management Department" (Managing Director, Finance Specialist, Chief Buyer, Head of F&B, Head of Housekeeping, Marketer, Lawyer, Chief Administrator) should be recruited six months before opening. The remaining staff is usually selected by the "Management Department." All staff should be completed and trained one to two months before opening.
7. You need to purchase OS&E (operating supplies) for the first period: hotel amenities (hygiene products, towels, etc.), office supplies (dispensers, household chemicals, napkins), administrative items (stationery), and food products.

Once the complex is ready for operations, an opening ceremony must be organized. It is best to hold this in two stages: a trial run and an official opening. The pre-opening ceremony typically includes the team that prepared the complex, employees, their families, and friends. The goal is not only to celebrate a job well done but also to test the staff under "combat-like conditions." The official opening, covered in the press, is attended by corporate clients with whom contacts have been established, as well as representatives of the region's tourism industry, who are presented with the newly created hotel product in a festive atmosphere.

Both stages involve maximum utilization of the entire hotel, the staff's work "in earnest," and guests enjoy all the hotel's services (usually free of charge), staying for up to several days. The official opening may be supplemented by real clients who have pre-booked rooms as part of a promotion.