Before investing in a hotel, conducting thorough due diligence is essential. For first-time hotel owners, identifying hidden risks and costs upfront, while investing in real estate with strong potential for appreciation, is key to building a successful hospitality business. Below are a few important factors to keep in mind during your due diligence process.

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Physical Condition 

The first thing to do when assessing a property is to check its physical condition. This can often give you clues about how much work is needed and whether there are any red flags that should concern you.

• Mold issues: Mold can be a sign of underlying issues in wood-framed buildings, but it’s usually less problematic in concrete structures, such as those commonly found in Portugal and Spain. In many cases, mold indicates poor insulation or ventilation, which can be addressed fairly easily. However, ascending humidity, where moisture rises from the ground into the walls, is a more serious concern which can be difficult to fix permanently.
• Structural issues: Small cracks in plaster are common and usually not a concern. However, larger, wider cracks, especially in the foundation or load-bearing walls, could point to serious structural issues. Pay attention to these, as they may require extensive repair.
• Insulation issues: Look for signs of damage to the roof and windows, such as warping or leaks. Inadequate insulation can lead to energy inefficiency, moisture problems, and discomfort for guests, particularly on the top floors. Ensuring proper thermal protection is key to maintaining guest comfort and preventing costly repairs.

It’s always best to consult with a professional to properly assess these issues and determine the best approach. Renovation costs can vary significantly based on location and the scope of work, so it’s important to have an estimate before diving into the project. For example, in the Lisbon area, a full renovation typically costs around €600 per square meter, while more basic updates range from €400 per square meter.

At Buythathotel.com, we use AI to analyze public reviews of the hotel across platforms like Booking, Airbnb, and Google Maps. This allows you to identify common guest complaints, from minor issues like poor Wi-Fi (easy to fix) to more serious concerns like frequent water outages (which could be costly for the new owner). These insights can highlight potential challenges to address during the due diligence process.

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Paperwork and Documentation

Even if a property appears flawless at first glance, the paperwork can reveal hidden legal or financial issues that may complicate or even derail your purchase. It’s essential to thoroughly verify the property’s status to ensure there are no surprises down the line.

• Floor plans: Make sure all renovations or alterations were properly authorized, as unpermitted changes can cause issues when seeking accommodation licenses or selling the property. For example, if an 8-room villa was expanded to a 12-room B&B without the required permits, it could result in legal problems.
• Property ownership: Reviewing ownership documents is essential as they provide insight into the property’s history, debts, and legal disputes. These documents can reveal unresolved debts that might prevent a sale or cause future issues. 
• Company ownership: Since most hotels are owned by business entities, its possible to assess the financial health of the owning company. This is especially insightful if the company was created specifically to acquire the hotel, as it provides clarity on the purchase price, financial status, liabilities, and any ongoing legal or financial challenges of the owner.

In Portugal, for example, the CRP outlines the ownership history and any debts tied to the property, while the CPU, issued by the tax authority, provides details about the property’s tax status. Tools like Racius can help you find detailed information about Portuguese companies, including financial reports which can significantly aid in your due diligence process.

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Surrounding Area

The property’s surrounding area plays a significant role in determining whether your investment will succeed. Understanding the environmental and natural risks in the area is essential, especially if you plan to hold the property for a long time.

• Climate change risks: Consider the long-term impact of climate change on your property. Coastal properties may face risks such as erosion, flooding, or rising sea levels, while inland properties could be more vulnerable to extreme weather events like heatwaves or wildfires. These factors can increase the difficulty of insuring the property while making it less appealing to tourists over time.
• Natural disaster risks: Assess specific environmental risks like seismic activity and earthquakes. For instance, properties in southern Portugal are more prone to earthquakes due to the region’s proximity to seismic faults.‍
• Local development: Investigate the area’s planning laws and upcoming developments. Changes in local infrastructure, such as new hotel projects, infrastructure projects and urban development, can affect property values and competitiveness. Be aware of upcoming projects that may impact the area’s attractiveness to tourists or introduce new competition, which could influence the property’s long-term appeal.

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With Buythathotel.com’s interactive map, you can easily compare properties and perform initial due diligence based on environmental factors. The map includes data layers such as wildfire risk, average precipitation, drought index, and earthquake risk. These insights help you assess environmental risks and evaluate the long-term sustainability of potential properties before making an investment. 

Additionally, Buythathotel.com provides a competitive analysis of the area you’re interested in, giving you valuable insights into the local market and helping you make more informed investment decisions.

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We recorded a podcast episode about due diligence and off-market opportunities in Portugal with João Grilo of Five Ducks.

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Conclusion

Due diligence is a comprehensive process that goes beyond a simple in-person property inspection. By thoroughly assessing the physical condition of the property, reviewing legal and financial documents, and evaluating environmental risks, you can minimize potential pitfalls when purchasing your first hotel. It is highly recommended to consult with experts, such as contractors or legal advisors, to guide you through the process and provide a more detailed analysis when needed, ensuring you are fully informed before making any commitments.

With Buythathotel.com, you can easily compare properties from a curated selection of small hotel listings across multiple real estate platforms. Our interactive map (currently available in Portugal) enables you to perform initial due diligence by evaluating over 20 data layers, including environmental risks, points of interest, competitive landscape, and more—all within minutes.