Hotels Are Good Investments for Property Investment Beginners and First-Time Buyers
Hotel investments are a specialist property investment strategy that falls under the commercial property sector. They are slightly different from the traditional buy-to-let property investments because they aren’t exactly ‘residential’. As a result, hotel investments do not attract stamp duty requirements, making them attractive to investors looking to expand their portfolio. Instead, a hotel will count on a constant turnover of short-term guests (tenants) to maintain cash flow each month. Since the rates for a single night in a hotel are higher than residential rates for the same amount of time, investors will be making good returns with high yields.
If you are a first-time buyer:
As a first-time buyer, it can be daunting going through the process of investing a lot of money into a property that you don’t completely own. It will help to do your own research on the topic to learn about finance for these types of investment, who the management company is and what tourism is like in that area. You can then come to a decision on the investment – ultimately, like all property investments, it will be the location of the property and your budget that will be the deciding factors. However, this guide can help you to understand the main points about hotel property investments and whether this type of investment opportunity is for you.
If you are a beginner in hotel investments:
You may already have a residential investment property in your portfolio, but perhaps you are looking for an alternative property investment to spread your risks if the property market changes. A hotel investment is great for diversification, so let’s look at the differences between hotel investments and more traditional property investments and understand the benefits available.
Do Your Due Diligence on a Hotel Room Investment
If you know someone in the hotel industry and you want to be an investor, you should do your own research to make sure that the numbers line up with the opportunity. Many investors rush into a purchase and don’t assess the entire investment process, resulting in a bad investment and missed returns.
If you are getting your hotel investment through a property agency, you should ask them how they decide on which properties to offer and which developers to work with. The important thing is to work with a company whose aims and goals are in line with your own. For most property investors the key factors are the long-term viability of the investment, the short-term rental returns and the exit strategy. To establish that an investment has potential you can ask questions along the lines of;
- What makes the area perfect for hotel investment?
- What makes the hotel perfect for the target clientele?
- Does the area benefit from forecasts of growth and the property fundamentals to support a long-term investment?
- Are the hotel management/operating companies experienced and incentivised?
A good property agent will research the location, look at the hotel’s business plans, and consider the amount of competition there is on behalf of their clients. Most hotel room investments have an annual net yield of around 8% of the purchase price. The net yield is calculated after a small percentage of income is taken off the top (for the hotel’s maintenance and operation as well as staff pay) of the hotel earnings (gross yield). As an investor, a good hotel investment will give you high rental yields of 8%.
Reasons Why Hotel Investments Are Great for Beginner Investors
The reason why hotel investments are great for beginners is that it is one of the best property investment strategies for income. Beginners in property investment are often income investors, who are looking to build their own capital, often in order to reinvest. More experienced property investors look to build and diversify their portfolio instead of choosing the investment with the highest yield percentage.
An important question to ask yourself as a beginner in investing is, “what do I want from an income investment?”. Some people will want to use the money for their children and others will want the lifestyle that comes with owning multiple properties. Whatever you decide to do with the money, you need to remember that there is no such thing as a riskless investment. In a lot of cases though, the higher the risk, the greater the reward. This usually means the more money you invest, the better value you will be receiving (and the higher the returns). But don’t be fooled into going way above your budget, you may end up in debt which no investment can quickly fix. As long as you know exactly what you are getting and when you are going to get it, you should have a profitable investment on your hands.
There are three basic reasons why hotel investments are perfect for investors. These three fundamentals can apply to any type of property investment, however for a hotel beginner, you should start thinking about these three things.
- Will I get my fair return on cash?
A hotel room can give you a cash-flow positive property investment that beats inflation. As long as the returns you make are more than inflation, your money will still have value. You will be able to earn your money back and more over the years. Hotel room property investments start from around £60,000 and with a net yield of 8%, investors will receive nearly £5000 in residual income every year. In terms of returns that will recoup 50% of your entire investment in just six years!
- Low risk to your capital investment
Hotel room investments are generally low-risk investments, primarily down to the low entry price and minimal, if any, running costs. As mentioned there is no stamp duty on these properties and any maintenance and running costs are deducted from the gross yield, leaving the investor with the net yield as profit.
Provided an investor does their initial research on the location and the future prospects then these investments can provide an ongoing income long into the future.
There are of course other risks that are out of your control – such as events in the wider economy. However, the interesting thing about property investments in the UK is that they are considered to be reasonably stable because it is a market where sale prices have generally increased significantly despite other sectors of the economy floundering. Even during the Global Financial Crisis, the average UK house price fell by less than 20%, whilst the stock market fell by almost 50%. Indeed, “the performance of property shares and property over five years also comfortably exceeded the performance of the FTSE and gilts” – https://www.bpf.org.uk/sites/default/files/resources/PIA-Property-Data-Report-2017.PDF
Property prices will go up as well as down, but investing smartly in a low-risk sector such as hotel investments can protect you against the worst of the falls. If you do your own research on measuring risks, you can put strategies in place to reduce the risks and maintain the rewards.
- A ‘Hands-Free’ set and forget
We have spoken about location as being a prime factor in the success of any property investment and if we are looking for an ideal location for a hotel investment then it is unlikely to be on our doorstep or even within reasonable travelling distance. This means that you need an investment that is fully-managed on your behalf as you won’t want to spend hours a day worrying about the investment, especially if you are not able to travel there yourself to check up on the property. The concept of ‘set and forget’ means that you can buy hotel room investment as an asset and let it work for you hands-free. Fortunately, all hotel investments will be managed for you by a management company to ensure the business runs smoothly, so even if you don’t have experience managing a property you can invest in a hotel as no experience is required. The more important thing to think about is who the management company is. Do they have a successful track record, and can they be trusted to deliver?
One of the most expensive things you can do is hire an inexpensive amateur.
Here is a guideline for the perfect ‘set and forget’ hotel room investment:
- Purchase the hotel room from the owner and own the room for a pre-set period (usually up to 10 years)
- In return for purchasing, you receive a fixed rental income throughout the entire investment period (generally about 8% net annually).
- Your initial investment capital is returned with a guaranteed amount of capital gain (this can be through a buy-back option which could look something like 110% after 5 years for or 125% after 10 years).
During the period of investment, you should receive an 8% net annual income which will be paid quarterly. After the investment period, you will also have assured capital growth at the 5-year mark.
The Exit Strategy of A Hotel Investment
Hotel investments have a low barrier to entry as a result of the low asking price and the fact that they are fully-managed on the investors’ behalf. Compared to buy-to-lets and HMO conversions the whole hotel investment process is quicker, easier and has fewer requirements.
The exit strategy for any investment should be planned out, or at least thought about before you begin the investment so you know exactly what you are getting in to and how to get out of it. Although hotel room investments are lucrative and hands-free, there will be a point in the future where you want to sell the property on.
But why would an investor want to exit from such a great hands-free investment that is providing regular returns?
There are actually a few reasons why an investor may decide to exit their investment. Whilst we can do our research and due diligence before making an investment such as this, one thing we cannot do is see exactly how the future will actually unfold, so unforeseen events can occur and an exit strategy will protect you against these and other events.
- The location and trends do not meet your predictions (the hotel may not be attracting enough guests and the location may be the problem)
- New competition in the area (over the years more hotels may open, and the business may dip)
- Poor management of the property (the management may not be doing a good job of running the establishment guests)
- Personal reasons – investors may need to cash in some assets for lifestyle, investment or economic reasons.
The exit of a hotel will be made easy for you if you choose a good property agency to work with. A good property agent will initially source investment opportunities that are easy for the investor to make the simplest property investment for maximum reward.
If we review the numbers mentioned as a good guide in this article it is easy to see that investments such as these really do provide a good return with minimal hassle or risk.
Let’s say you invest £60000 in a hotel room at 8% net with a 110% buy-back option after 5 years – for the five years, you own the investment you will receive £4800 each year which comes to £24,000 in rental income over the period.
Then you exercise the buy-back option and receive £66,000 for the property upon sale – that gives you £90,000 over 5 years on an initial investment of £60000. When put in those terms it is easy to see why the hotel room investment sector has been one of the best performing asset classes in recent years! Summary 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.