What Are Hotel Room Investments And Why Are They Profitable?
Hotel room investments are one of the UK’s most profitable property investment sectors and one that is continuing to grow in popularity among a wide range of property investors, from first-time investors looking to get a quick start in the market, to more experienced investors looking to diversify their portfolio.
One of the main reasons why the hotel room investment sector is growing in popularity is because it offers a low-risk/high-return alternative to regular buy-to-lets. As well as good returns the hotel investment sector offers a hassle-free, fully-managed investment which doesn’t require any managing or input from the investor.
Hotel room investments do not require a property investment expert to figure out – these investments have the same fundamentals as a buy-to-lets. Essentially with a hotel investment, you are purchasing a hotel room and putting it up for let. Hotels experience a continuous stream of short-term tenants who are willing to pay high rates for the high standard of accommodation and facilities within the hotel. The management company of the hotel will advertise the hotel and find guests (tenants) to stay in the hotel room. They will also be there to maintain the property and collect ‘rent’. Although the guests are short-term tenants, they still have to pay for their stay and this is where your ‘rental income’ will come from when you invest in a hotel room property.
What Makes Hotel Investments Different To Other Strategies?
Unlike regular buy-to-lets, where the landlords want to find long-term tenants who are willing to cope with the uncertain rental market price increases, hotels are geared towards tourists who stay for the short-term but are willing to pay the one-time hotel rates during their holiday or business trip.
Many investors hold back on residential buy-to-lets because they don’t know if they’ll be able to find tenants, but there will always be a demand for hotel rooms, especially in places where the tourism is booming. Many people experience this when they go to book a hotel room last minute, and there are none available for the dates they want.
Smaller, more independent hotels are some of the most successful property investment schemes. The owner of the hotel will commission a professional management company with a great track record to ensure the success of the hotel.
You may be wondering, “if hotels are so successful, why do they need private investors to buy rooms?”
The answer is simple – it is a business. Hotel owners will offer buy to let hotel rooms to investors to raise finance and build capital. That is why hotel investments usually come with a buy-back option, where investors have the option to sell the room back to the hotel owner for a fixed percentage above the original purchase price after a number of years, thus assuring capital appreciation as well as regular rental income, as hotels eventually want to regain control over their assets.
Hotels are expected to do well throughout 2018
The Brexit ambiguity has left investors questioning whether UK hotel room investments are worthwhile, however, it has been reported that regional hotels are expected to do very well in 2018. A report published by PwC stated that while London may suffer from oversupply and inward business travel may dip, regional hotels are likely to benefit from the weaker pound which will encourage overseas visitors. In particular, areas such as Liverpool, Manchester, Cardiff, Birmingham, Glasgow and Edinburgh will be the best locations in the UK. Overall the hotel sector was forecast to experience a record 77% occupancy rate across the regions and remain there. Occupancy, revenues and rates are expected to increase because more Brits will choose to go on holiday in the UK and overseas visitors will also increase.
Hotel room investments allow property investors to boost income and protect capital with assured capital growth. This means that this can be a secure long-term investment for up to 10 years, allowing you to receive a rental income as well as some capital growth when a decision is made to exit the investment.
Hotel Room Investments Can Diversify Your Portfolio
Like a number of other alternative property investments, hotel room investments are exempt from stamp duty as a result, there has been a lot more focus from investors on the commercial sector. Conversely, the increase in Stamp Duty along with decreases in tax relief has made regular buy-to-lets unattractive and less profitable, encouraging investors to look into diversifying their portfolio with other property investments so their income is not compromised. Leaving all your eggs in one basket can be risky because if the market or property legislation changes, your entire portfolio will suffer if it’s not diversified. So it makes sense to join the increased numbers of income and growth-hungry investors by investing in a hotel room.
Hotel room investments are such a good way to diversify your portfolio because they allow investment across property types, business types and geographical locations with ease. Hotel investments have a low entry level compared to other investment properties, so with this cheaper entry price, it is possible to buy two or three different rooms for the same cost as a single residential buy-to-let, increasing your returns significantly. If you want to spread your risks from residential buy-to-let to commercial property, then a hotel investment is the way to go.
Experts in property investment will also recommend that you diversify your property portfolio by investing in different locations to avoid the effects of local economic downturns and protect your property investments. Not only does investing in different types of property take advantage of different growth and income dynamics, but switching around the location of your investments can also smooth your portfolio’s performance.
Increase Your Property Wealth With A Hotel Property Investment
Hotel property investments have shown themselves to be quite resilient to changes surrounding the EU Referendum. Savills reported an increase in the amount of hotel investment deals completed in the market. The report highlighted 220 completed deals in 2016 compared to just 195 completed deals in 2015.
The numbers of private investors making hotel room investments experienced a dramatic rise of 152% and hotel room investments by property companies increased by 65% too! This high rise in numbers from both private and company investors is further proof that there is a growing demand in the hotel investment sector.
With a hotel investment, you can expect to receive a net rental yield of 8%. A monthly income of 8% per annum will give you the chance to raise capital to reinvest into your portfolio or save for your retirement.
For a fairly low entry price, this high net yield will give you a great return on investment over a period of 5 or 10 years, at which points investors have the option of activating the buy-back clauses contained in the contract, which can be up to 120% of the original purchase price. Whatever your goals may be, with both rental returns and capital appreciation assured a hotel investment can fulfil them in a way few other investments can.
Hotels Can Boost Investment Profits In The Long Term
Due to hotel investments being low-entry in terms of price and also being fully-managed, there aren’t the same risks as with a regular buy-to-let or HMO. For example, the maintenance, management and repair fees won’t be coming out of your income but will be paid out of the gross yield, thus maintaining your 8% NET yield.
Here are some ways a hotel investment can boost your profits:
Low entry – You can expect a hotel room investment to go for around £80,000. There are some hotel investments that are even cheaper at £60,000 and others that are more expensive at £100,000.
Fully managed – You won’t need to manage the hotel room or try to fill it, so if you haven’t yet got the skills or experience to manage a property, this hassle-free investment is right for you. There are no management fees coming out of your 8% NET annual return. The hotel management company will be incentivised to perform by the hotel owner, so they will be paid out of their profits.
Stamp duty exempt – Residential buy-to-let owners and investors have been affected by the increased stamp duty of 3%, which has taken its toll on the investor’s profits. Commercial properties such as hotels are not required to pay stamp duty tax costs.
Unaffected by the wider property market – Unlike residential property investments, you won’t have to rely on the property market performing well to get your returns. The UK hotel industry is one of the strongest sectors in the UK economy and doesn’t move with the mass residential property market.
Diversify your portfolio – This is a point to follow the last one. Because hotel property investment means you don’t have to rely on the property market’s volatile changes, it is a great investment to choose for diversifying and keeping your portfolio profitable.
No further admin/management fees after purchase – After you purchase the property through a property consultancy agency, the admin and management fees are usually included in the price, so no further payments will be taken from your account. After the investment period of 5 – 10 years you can get your initial capital back plus assured capital gains by activating the buy-back clause. Your NET income each year will remain at 8% and may even increase over time.