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Let’s first understand each of the variables in this calculator.
Room Revenue ($): The revenue from selling rooms for a particular period, like a year. This is to exclude the taxes collected from customers because taxes aren’t revenue; they need to be paid to the government. Pull this number from the hotel’s financials. An alternative way is by using the formula: ADR (Average Daily Rate) x Occupancy x Number of Room Nights.
Room revenue is usually the largest revenue stream for a hotel.
F&B Revenue ($): The revenue from restaurants, bars, banquets, catering, etc. for a particular period, like a year. Again, this should also exclude taxes collected from customers.
Other Revenue ($): Other revenues like parking fees, spa, event rentals, vending machines, etc. for a particular period, like a year. This should also exclude taxes collected from customers.
Note: If the hotel’s software gives an aggregate revenue number for all revenue sources, include the same in Room Revenue ($) input field and enter 0 in F&B Revenue ($) and Other Revenue ($) fields.
Operating Expenses ($): All operating costs of running a hotel during a particular period, like a year. Includes payroll, utilities (like electricity), marketing, maintenance, insurance, supplies, etc. Note: interest (on loans), income taxes, and depreciation are not to be included here. Why? Because these are financing/owner/non-cash expenses. Operating costs are usually the cash costs of running the operations.
Operating expenses may also include taxes paid by the hotel to the vendor. If these taxes are recoverable or refundable, exclude them while calculating operating expenses.
Purchase Price or Market Value ($): The purchase price or the market value of the hotel asset. If you’re buying the hotel, take the quoted purchase price as input. If you’re simply valuing the hotel, take the market value of the hotel as input.
Cap Rate (%): Cap (Capitalization) Rate measures the yield on the hotel real estate. The annual return you’d earn if you bought or invested in the hotel. The higher the cap rate, the higher the yield.
The formula to calculate cap rate is:
Cap rate = [NOI (Net Operating Income) / Purchase price (or market value)] x 100
Cap rate = [[(Room revenue + F&B revenue + other revenue) - Operating expenses] / Purchase price (or market value)] x 100
Cap rate =[ [(6000000 + 2500000 + 500000) - 7000000] / 40000000] x 100 = 5%