Hotel room investment can give you a regular passive income together with an exit strategy that can deliver a lump sum profit when you decide to sell up. As an investor you can enjoy the regular, passive rental income along with the lump-sum profit on exit without having to do any work at all – these are truly hands-free investments! As the investor, all you need to do is write the cheque and then sit back and collect your assured returns as everything is fully-managed on your behalf.
This article will go over the basics of a hotel room investment as well as the advantages that come with such a specialist investment. With the readily available advice in the market place and research at your fingertips, the risk is minimal. We will also go over how to mitigate common risks that come with a hotel property investment to give you an all-around guide to this property investment sector.
N.B. This post was updated in September 2019
Hotel Investment - Why Investors Are Turning To Hotel Room Investment
Hotel room investments are a great way to turn your savings into a steady income whilst retaining and even growing your original capital. They make great investments because they can give you an average yield of around 8% each year. If you invest £100,000 into a hotel room investment, you can expect to receive an annual income of £8,000 from rent which is over £650 each month!
Compared to other forms of investment such as a FTSE 100 shares portfolio (4%), cash deposit accounts (1%) and 10-year gilts (0.95%) a hotel property investment offers a much better return than any asset class outside of property investment.
In terms of high annual yield, a hotel property investment can give you great returns on your savings compared to other assets.
In comparison to other types of property investment, a hotel investment also offers higher returns despite the lower entry price. With a regular buy-to-let investment, depending on the area, the NET yields will only be around 7% or less in 2019, and generally the further down south you go the lower the yields due to expensive overheads. This brings us to another advantage of buying hotel rooms for investment – there are no ongoing or hidden costs – once you have purchased the unit you will not be asked to make any further payments and the assured returns are NET returns which means that no deductions will be made from this income.
Furthermore, unlike a regular buy-to-let where the property market is a big factor in the profits you can make, a hotel investment doesn’t rely on the trends in the UK housing market. A hotel room investment is classed as a commercial property transaction rather than residential and so this means that there is the added advantage of being exempt from stamp duty tax.
Best Property Investment of 2019
Buying hotel rooms for investment is great for both you, the investor, and the hotel owners because they offer the hotel investor a high-yielding rental income, whilst at the same time giving the owner of the hotel more capital to run their business. The money that gets invested in the hotel will go towards the refurbishment, repairs, maintenance and other essentials, which will also benefit the guests because the standards will be higher.
Your returns will come through rental income. This is the money that comes from guests ‘renting’ your room for their holiday. A hotel investment follows the same principles as a buy-to-let in that you buy a room in a development to let to tenants, and you make a percentage back each year from the tenant staying in your room.
hotel investment property does not need to be managed by investors because the hotel continues to be run by the hotel staff, owners and management company. The repairs and maintenance will also be covered by the hotel. Essentially, as the investor, you will not be responsible for dealing with guests, making repairs, collecting ‘rent’, or advertising for guests. This hassle-free source of income is the perfect opportunity to get the most out of your money instead of having it sitting in a bank where interest rates are low.
Hotel investments are also fairly long-term. In 2019 the best hotel room investments will offer a 5 year rental assurance at around 10% NET. However the investment can last for 10 years or longer as the investor legally owns the room (purchases should come with a title deed), which means investors can continue to receive a rental income of around 10% or more of the purchase price until they decide to sell it on.
The very best hotel investment opportunities will also offer an exit strategy, generally in the form of an assured buy-back option of 110% after 5 years.
This provides a built-in exit strategy with assured capital appreciation should an investor want to free up cash.
What Are The Advantages Of Buy-To-Let Hotel Rooms Investment?
Low cash and no mortgage requirements – A hotel investment has a low entry price compared to a regular buy-to-let property investment. Most investors who do invest in a residential buy-to-let will either need deep pockets or a mortgage to fund the majority of the investment. According to Nationwide’s House Price Index the average UK house price in August 2019 was £216,096. A hotel investment starts at £60,000 which obviously represents a massive difference in required capital. Many hotel property investors will be able to fund their investment from cash savings already in their pockets. This type of investment cannot be made using a mortgage due to square-footage, however, loans or other kinds of financing are acceptable.
No admin required – A hotel property investment is very straightforward because there aren’t any admin or maintenance requirements. As the investor, you buy a room which is registered to you at the land registry. You receive income from the room every three-months for at least 5 years.
Hotel room investments also don’t have the complicated tax relief rules or associated cost deductions to calculate – as already noted, as a commercial property hotel investments are exempt from stamp duty.
The whole process of entering the hotel investment sector as well as the duration of the investment and the exit is simple, straight-forward and hassle-free. You even have the option of staying in the hotel room at a discounted rate if you wanted to!
Fast results – A hotel investment is also fast. As soon as you pay the full price of the property, you will start to see the money come in from the rental yield. Unlike other investments where the property may need refurbishing, a hotel investment is usually ready to go as soon as the offer comes to market.
Diversifying your portfolio – You can diversify your portfolio with a hotel room investment. Many investors will focus on residential buy-to-lets and possibly student properties, however, a hotel investment can be a good way to balance your portfolio so that your eggs aren’t all in one basket. Diversification allows you to spread your risks should sectors in the property market experience volatility.
The hotel industry is also independent of the wider residential property market,so, if you are experiencing void rental periods with residential properties, having a hotel on your portfolio can give you the income you need.
Furthermore with the political and environmental changes currently underway in the UK, the domestic leisure and tourism industry has been growing and is forecast to continue to do so;
RevPAR (Revenue Per Available Room) and ADR (Average Daily Rate) is expected to grow during 2019 and despite the Brexit uncertainty, the UK already beat their 2020 tourism target of 40 million annual inbound visits, with 40.9 inbound visits in 2018.
Hotel Room Investment – How To Avoid the Risks
Not a quick win (very little capital appreciation) – Hotel property investments are generally suited to long-term investors, which is why they have assured rent for up to 5 years. Traditional buy-to-lets will have rental income as well as capital appreciation to make profits from, but hotel room investments aren’t known for their capital appreciation, although an investment with an assured buy-back will give you a reasonable level of capital appreciation - probably more than a residential property in the current market.
The location (it does matter) – The location of your hotel investment is very important because it needs to be in an area where visitors are willing to stay in a hotel. There should also be a thriving tourist attraction near the hotel to attract guests to the area in the first place. Hotel investments are investments in a property and also in a business, so you need to think about the ‘customers’ as well as the demand in the area of the hotel.
The hotel also needs to be advertised to attract people to stay there. This will be up to the hotel management/owner, so you need to do your research and be sure the owners and management company are people you want to do business with.
There will be competition – Many people disregard the possible competition that they may be facing if they pick a hotel property in a certain area. Similar to residential buy-to-lets in London and even Manchester, the competition is becoming fiercer because the supply of properties for tenants to rent is over-saturated in some areas. As a result, tenants have so much choice, they may not even see your property as an option.
For buy-to-lets, the competition will affect the rental yields over time, but hotel rates generally stay steady and are more affected by predictable seasonal changes rather than the whims of the property market. However there are hotels that market heavily to the local area as well as tourists and these hotels that are busy all-year round are the ones you really want to be investing in! They will only change depending on the season (rates will be higher during the months where more people are going on holiday).
On the other hand, if there is no competition you may need to ask yourself if there is really a demand for the type of hotel you are thinking of investing in and whether you will get your returns. Again, doing your research and getting good advice will help you avoid costly mistakes – at Sterling Woodrow, we do all the research up-front and only offer properties to our clients that have high assured yields and are underwritten by reputable development companies with a history of delivering for investors. In fact we have now moved into the leisure and hospitality sector and are buying hotels for investment purposes thus cutting out the middle-man and offering our investors industry-leading investments on the very best terms available in 2019.
The track record of hotel management – Although the location and appearance of the hotel is important, the experience of the guests should be just as important to any investor. If the guests that stay at the hotel aren’t satisfied with their stay, will not return and are likely to leave bad reviews meaning future guests will be put off from staying at the hotel. For this reason, it is important that you research the hotel management company and do your own due diligence to find the perfect hotel investment.
Every investment needs to be assessed on its own merits and cross-referenced with your own circumstances to ascertain how suitable an investment is for you. As far as hotel investments are concerned, they are considered to be a low-risk/high-reward property investment because of the low-entry price, zero management costs and high NET yields, not to mention being stamp duty exempt. As an investor, a hotel property would make a great addition to your property portfolio, adding diversity and security from tax changes and rental market dips.
At Sterling Woodrow, we pride ourselves on helping new property investors get a solid start in the market and are happy to speak to you about your long-term goals and ambitions in property investment.
We also work with experienced investors to help them increase the value and profitability of their portfolios.
To book your complimentary property investment consultation with one of our senior portfolio managers simply click the button below and complete the short form and we will call you back at the appropriate time.