Hotel Room Investments – buying a room as an investment?

Hotel room investmentIf like us, you’ve received brochures of luxurious hotels with water fountains at the front and crystal blue infinity pools overlooking the sun drenched beach, then the idea that creates in the mind is one of opulence and desire. However, these two descriptive terms are part of the reasons why the regular investor should give the concept of hotel room investments a wide berth. To be frank, you should not be in property investment for showmanship or vanity. If you are, whether that is consciously or subconsciously, then we can’t say we’d shed a tear if you do experience a financial tumble. It has to be about numbers – pure and simple.

Investing in hotel rooms allows you to own a portion of the hotel on leasehold basis i.e. a room or a suite. The concept is not new and has been around since the 1990’s. It shouldn’t be confused with being a timeshare, but admittedly, it isn’t far off the idea in some cases.

We have sold hotel room investments in the past, but very much like student pod investments, we no longer offer such pre-packaged investment types due to a number of reasons.

Nevertheless, if you wanted to make a hotel investment how do you go about doing it?

The basics of hotel room investments

It is in fact a very simple idea to grasp. Investing in a hotel is as simple as investing in a commercial or a residential property. You can buy a hotel room on a long term lease from the developer and then sub lease it back to them or their partner operator. In fact, a strong basis of your purchase may be to take solace in the fact that the operator is a strong and experienced management company.

As with commercial properties, it is possible to arrange leases of up to 15 years with most developments offering up to 10 years at a certain agreed rental income for the first two to three years. This will ensure that you get paid the rent whether or not the room remains occupied. The hassle of course will be minimum as the management company ensures the running and maintenance of the room or suite. Very much like timeshares, you may be able to use the room for a pre-agreed period but this does vary from development to development.

Why invest in a hotel?

Hotel investment is an armchair type investment in that it is all managed for you, in theory, and it should just be a matter of the owner of the room being deposited with the ‘rent’ at the end of the month or quarter. Upon the expiry of the guaranteed rental scheme for the first couple of years, then it becomes more of an elastic partnership i.e. should the occupancy rates be high then the rental return on the hotel investment is greater with net yields as high as 6% to 10%.

Since hotels are developed in prime locations, there is no worry about the value of the property decreasing drastically. However, how does this affect you when it comes to selling on the unit should you wish to do so? Whilst the location may be an attractive feature, can you capitalise on any growth that residential properties may have experienced in the area? Not necessarily so. It is incumbent on the developers to demonstrate to the next buyer that the value of the asset has increased based on a commercial assumption.

Decent rents from hotel room investments?

All in all, the hotel suite investment promises a decent return on investment assuming it has the right operating company behind it. The hotel room investment is managed by a management company, leaving you to enjoy the fruits of their labour and your money. The hotel acts as managing agency, and you are left hassle free.

Furthermore, if you buy a hotel the hotel investments can be used in Self Invested Personal Pensions and other pension schemes. This is not something we specialise in, but we can refer you to the right people should you need specific information.

However, it’s not all plain sailing. Such collective investment schemes have been up for scrutiny in the past with failed schemes in Birmingham and Manchester. British based investors have also lost huge amounts of money in the infamous North Dakota hotel investment scam.

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