Why Are So Many People Purchasing A Hotel Investment Property?
A hotel property 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.
Buy-To-Let Hotel Rooms, Good Or Bad?
Hotel rooms 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 can be around 7% or less, and generally the further down south you go the lower the yields due to expensive overheads. This brings us to another advantage of hotel property investments – 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 property 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.
The Basics Of Hotel Property Investing
Hotel rooms are great as an investment for both you the investor and the hotel owners because they offer you a high-yielding rental income and they also give 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 investments don’t need to be managed by you because they are managed by the hotel staff, owners and management company. The repairs and maintenance will also be covered by the hotel. Essentially, you as the investor won’t be responsible for dealing with guests, making repairs, collecting ‘rent’, or advertising for guests. This hands-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. The investment can last for up to 10 years, which means you will keep getting an assured rental income of around 8% of your purchase price until you decide to sell it on. Most hotel investments will have a buy-back option of 110% after 5 years and up to 125% after 10 years. This provides an exit strategy with assured capital appreciation should an investor want to free up cash.
What Are The Advantages Of Hotel Investments?
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 2016 was £206,145. A hotel investment starts at £60,000 which is obviously a massive difference. 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, 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 5 – 10 years. Hotel property investments don’t have the complicated tax relief rules or associated cost deductions to calculate – as already noted, as a commercial property they 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, easy and hands-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 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 property market, which means they have different demands. So, if you are experiencing void rental periods with residential properties, having a hotel on your portfolio can give you the income you need.
The Risks Of Hotel Investments – How To Avoid Them
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 10 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.
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. 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.
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.
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