What is hotel room investment?
The past decade has seen ever more creative and adventurous ways in which investors may invest their money. Hotel Room Investment is an interesting take on the buy-to-let market that has seen a lot of hype over the past few years. Championed in the USA by supermagnate Donald Trump, the idea of investing in a hotel room has proved attractive for many would-be property investors who want their investment to be totally managed for them.
How hotel room investment works
The principle behind hotel room investment is somewhere between a traditional buy-to-let and a timeshare. As an investor you buy a lease on a hotel room, apartment or suite, normally for 999 years. Usually you will then have the opportunity to stay in the room for 52 nights per year. For the rest of the year you receive a percentage, normally 50%, of the room revenues. Of course many investors prefer not to use the room for their 52 nights, thus increasing the chance of full occupancy. As well as investment companies offering good returns on your investment, your capital should grow at a satisfying rate too.
Why invest in hotel rooms?
Whether you invest in just a room, or a whole apartment or suite in a luxury complex, here are some of the top reasons given for investing in a hotel room:
- Hotel room investments are ‘hands off’ investments. All of the day to day operations are run by the hotel management team;
- You have the opportunity to invest in well known brands and household names, giving the security and peace of mind that comes with that;
- Hotel investment companies are advertising yields of between 6% and 10%;
- There is potential for capital growth as well as an income from your investment;
- Hotel rooms are one of the few property types that can be purchased through a SIPP and can attract the tax advantages that go with that;
- Some schemes for new hotels offer rental guarantees during the start up period;
- Some schemes offer developer finance and staged payments.
Why not invest in hotel rooms?
Hotel room investments can be more complex than some of the advertising material suggests. Firstly, obtaining a mortgage to finance a hotel room investment is not likely to be easy. Mortgage companies aren’t throwing their money around like they used to and buy-to-let mortgages are pretty thin on the ground. Add to this the fact that your room is part of a larger entity and the major lenders are going to be asking themselves how they collect their security if you default on the debt.
Another thing worth bearing in mind is that hotels make a significant proportion of their profits on bar and food sales. In all hotel investment schemes it is the hotel company that keeps these profits. So, if a hotel decides to lower room rates to increase occupancy, you will not see any of the associated profits of the increased occupancy, but you will receive a lower return on your investment.
Be careful with the small print. With hotel room investments it is the hotel that will manage the room. Most hotel room investment schemes will make a hefty service charge for this and it is essential that you figure this charge in when you are making any calculations as to the suitability of this investment.
A cautionary tale
GuestInvest, a company dealing in hotel room investments in London, led the way with hotel room investments in the UK in 2003, offering investors the opportunity to invest in some luxury properties in the capital and guaranteeing yields of 8%+. After several high profile projects involving some prestigious London establishments GuestInvest went into administration in 2008 at some cost to its 60-80 investors. The reasons given were cost overruns, delays to main developments and the financial situation of HBOS at the time (HBOS was its debt provider and equity joint venture partner).
Owner Hotel of Hull was another big player in the hotel room investment business. Basing their business model on Trump’s original idea they opened a 27 room hotel in Hull in April 2008, selling most of the rooms within weeks of putting them on the market. The company went into administration a year later citing significant trading losses as the reason. During its short spell in business Owner Hotel was plagued by rumours of staff and investors not getting paid.
The reason for telling these stories is that, particularly in this time of property doldrums and financial uncertainty, hotel room investment may not be all it’s made out to be. Although it should always be the case, with hotel room investments more than ever, do your research, read the small print, talk to an advisor and, best of all, talk to an actual real life investor who has made money and is happy with his/her investment.
Hotel room investment deals
The hotel investment market used to be a buoyant one; then came the dark financial days of 2007 through to 2012 and beyond. Investors now think twice about where their money is going and who is managing it so backing large well established companies like Holiday Inn or Jones Lang LaSalle is a good move. Look at the track record of their other developments prior to boom times. Who designed their building? What does TripAdvisor.com say about other developments they have been involved in? Who designed the golf course and where does it rank in the world? Are you investing in prime property in well-trafficked cities, near well-trafficked airports and in growing economies? What are the occupancy rates of the current hotels in the area? Is demand high and supply short?
Don’t go investing in areas you don’t know well and aim for quality locations where additional hotel bed supply will not be easily achieved.