You may think owning a slice of a hotels monthly profit would require lots of money and effort, but in this article we explore the idea of hotel room investment and how to make a monthly income while letting someone else do all the managing
The current residential buy-to-let market is full of challenges ranging from stamp duty tax hikes, to tighter profit margins and changing mortgage rules
A hotel room investment could offer you a simpler alternative to all this mayhem, and you might even be surprised to learn you can invest from £80,000 and get up to 10% back per year
Sound interesting? Let’s take a closer look…
What exactly is a hotel room investment?
Normally investing in a hotel would be off the cards to most
Why? It would involve buying an entire property, putting in a significant amount of money (or finding equity partners) and then employing a hotel operator (or managing it yourself)
Doesn’t sound very appealing as a ‘hands off’ investment, does it?
On the other hand owning an individual hotel room can open the door to:
- A low entry property investment
- Security of ownership with a title deed
- Predictable and regular income
- An easy way to diversify
All without the hassle of handling any bookings, advertising rooms or changing a single bed sheet!
Plus as hotel rooms fall under commercial property, there are potential hidden tax advantages too…
For rooms under £150,000 there’s no stamp duty tax to pay. You can also invest using a pension wrapper like a SIPP or SSAS if you have one.
Some hotels even offer perks like free usage every year, so you could potentially get a few free holidays too.
How does a hotel room investment work?
You can invest in a room two ways: off-plan or into a functional hotel that’s seeking to raise money for expansion through room sales.
Unlike buying shares in ‘Hilton’, one of the advantages investors get with hotel room investments is physically owning them.
Just like buying an apartment, the investor usually gets a leasehold which is registered at the UK land registry office.
The room is then leased back to the hotel operator for a monthly or quarterly rent, ideal for regular income seekers.
Most hotel operators also offer assured rent, offering more predictability and better control for planning finances.
What about management? The hotel operator often takes care of it
They handle the bookings, servicing, catering, and everything else.
Each month they take a cut of the profit and then pay the rest to investors.
And the exit?
Most hotel room investments offer a ‘buy back’ option after a certain duration of ownership which is usually between 5 and 10 years
This allows the investor to exit with an uplift in the price, and the operator can reclaim the profits back for the hotel.
However it’s important to note that any ‘buy back guarantee’ is only ever as good as the strength of the company behind it, which we’ll touch on a bit later in the article.
Is now a good time to invest in hotel rooms?
According to Knight Frank, Investors ploughed over £5 billion into the hotel sector in 2017, which is a 35% increase from the previous year.
Why the surge? This is largely down to the strong boost in tourism and overseas investment seen from the weaker pound
However according to PwC’s latest hotel forecast, hotel occupancy rates have actually been climbing since 2011.
In fact, the average occupancy rate now sits at 76% – perhaps why hotel room investment is so popular with pension funds and institutional investors?
Overall, despite higher labour costs and the challenges of Brexit, it appears the outlook remains positive for the UK hotel sector.
What are the potential risks with a hotel room investment?
1) Off plan or operational hotel?
One potential risk to an investor when buying a hotel room is whether they invest off plan or into an existing hotel.
Ivory Stone only look for operational hotels that are producing income, but buying off plan can still be a good way to own a hotel room.
Like any off-plan purchase, it’s important to check out the management company and the track history of the owners thoroughly first.
For instance, are they actually experienced in running hotels or is it their first time?
What about planning permission? How are investors protected if there were delays in the construction?
2) Limited resale market
Although investment companies and pension funds have been snapping up hotels there is still a limited secondary market to sell hotel rooms
This means if an investor wanted to exit earlier it might take longer to find a buyer. Although if you were getting 8% per year, would you really be in any rush to sell?
3) Location and demand
No business is immune to fluctuations in the market.
Although a hotel may offer a guarantee on the rent and promise a buy back, it’s still important to make sure the figures are realistic and check there is sufficient demand.
The type of hotel plays an important role too.
For example, holiday hotels tend to make the majority of their profit during peak season, and can be quiet during off-season.
If there was a change in tourism to a specific area or country, this could have an effect on the hotel income and profit to investors.
On the other side of the coin, hotels that provide business facilities may be more consistent all year round.
Additionally, budget hotels can be more resilient in a financial downturn as was seen in the UK.
How does a hotel room investment fit in with your portfolio?
Bought carefully, a hotel room investment can give the safety of a tangible property asset and a predictable monthly income.
There are of course risks like anything in life, but for the right investor a hotel room could offer numerous advantages over buy-to-let
If you’d like to learn more about hotel room investment then why not book a consultation? We’d be happy to answer your questions and provide details on projects that you can study in your own time
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