High yield, immediate income, and more
If you want to create a steady stream of valuable income from your savings, or perhaps from a tax-free lump sum from your pension, an investment in a hotel room could produce the income you never realised was possible in this low-interest rate environment.
Hotel rooms produce an average gross investment yield of around 8%. Compare that to the 4% on share dividends, around 1% of cash deposit accounts, and less than 1% in 10-year gilts, and you get some idea of the income advantage of investing in hotel rooms. To put this into perspective, look at the table below, which shows the annual income you’d receive on a £100,000 investment in each of these assets:
|Asset||Approximate yield||Approximate annual income||Approximate monthly income|
|FTSE 100 Shares Portfolio||4%||£4,000||
You might have a wedge saved in premium bonds. If you have, you should heed the words of Martin Lewis. He says that while the average yield is published as 1.25%, because of the way they work – like a raffle draw – “You're likely to get quite a lot less than 1.25%, and there’s a negligible chance of winning a million.”
When it comes to investing for high yield, you can see that to invest in hotel rooms is an excellent opportunity for your savings, pension lump sum, or money parked in premium bonds. However, the yield isn’t the only benefit available to investors.
In this article, I look at a few of the other benefits available to you as an investor in high yielding hotel rooms.
1. Low cash requirements for investment
Investing in hotel rooms is often compared to investing in buy-to-let property. You buy a form of real estate and receive income from tenants (or guests, in the case of hotels).
However, the initial cost of a buy-to-let property is out of the reach of most people. For most investors that do take the plunge into buy-to-let investment, a mortgage is required to fund the majority of the purchase price.
According to the Nationwide House Price Index, the average house price in the UK in August 2016 was £206,145. Hotel room investment starts at around £60,000 – that’s less than the deposit you’d need to make a decent buy-to-let investment.
2. No mortgage required
The lower cost of entry means that there is no mortgage required. Many investors fund their purchase of a hotel room from existing cash savings, or from the lump sum portion of their pension.
With no mortgage required, you can be more flexible with your investment. You won’t be reliant on the bank’s valuation of your investment property, nor will you be subject to the possibility of changing lending rules.
While you won’t benefit from the leverage that a mortgage gives you (making money on other people’s money), a rise in interest rates or a decrease in tax relief on buy-to-let mortgages will not have an unavoidable and unforeseen detrimental effect on your cash flow projections.
3. Very little administration required
An investment into hotel rooms is one of the most straightforward investments you can make. You buy the room, which becomes a property registered to you on the land registry, and you receive the income on it. There are no complicated tax reliefs or cost deductions to calculate. Your tax return is a breeze, and investment review is easy. You could even stay in your hotel room to make sure it’s the investment you believe it to be!
4. Fast results
There is no waiting around for your investment to mature. No hanging about as you drum your fingers in anticipation of a dividend announcement. Invest this month and your income start flowing from next month.
5. Certainty of income
Your investment income could be based upon the profit made by the hotel management company, but most investors take advantage of hotel room deals that offer a guaranteed yield. This provides a certainty of high income that is not available on most other investments. If you invest in shares and the company’s profits fall, for example, the likelihood is that it will cut the amount of dividend income it pays you. If you invest in a hotel room with a guaranteed return, you’ll receive that income regardless.
With guaranteed income, you can plan your finances better and get on with your life without worrying about a jolt to your cash flow.
6. Immediate ‘set and forget’ investment
The hotel management company takes care of all the day-to-day issues of running your hotel room. It advertises and markets the hotel, is responsible for all maintenance and repair work, collecting hotel room charges, and upselling its other amenities and facilities. You sit back and relax while benefiting from passive income: perhaps the ultimate set and forget investment.
7. Diversification of your property portfolio
Hotel room investment is a strategy that enables diversification across business types, property types, and geographies with ease. The lower level of investment entry means it’s easier to buy in two or three or more hotels in different areas, should you wish. It also enables you to spread your risk from residential buy-to-let investment into a commercial property investment.
8. Balancing your portfolio and maintaining cash flow through the property cycle
One of the difficulties faced by property investors is the potential disruption to cash flow and capital growth through the property market cycle. A buy-to-let property could suffer several months of void periods. Hotel rooms have a constant turnover of short-term tenants (guests), which helps to maintain your cash flow.
If you invest in a hotel room with a guaranteed investment yield, your cash flow will not be disrupted. If you’ve used your hotel room investment as a tool to diversify, the cash flow it produces could be the income you need to maintain your property portfolio through a difficult market period.
Of course, if you haven’t invested to diversify then the income produced is yours to use for other purposes. You could save it and build up your cash pot, invest it in other investment opportunities, use for day-to-day living, or perhaps use to fund your annual holiday, pay children’s school fees, or any number of other financial needs.
9. Protection of your capital
The value of hotel property is not dependent on the property market: it is dependent upon how well the hotel is managed, and how well its rooms perform.
Hotel management teams with a good track record and experience in the industry often offer rooms for investment as a strategy to provide faster business growth. The best hotel management companies are more inclined to offer guarantees of capital growth over a set period to their investors. They can do this because their experience tells them that their business model works, and will increase the value of the hotel.
Guarantees of capital growth are provided by setting up the purchase contract with an option for you to sell the room back to the hotel management company at a known price and a known date in the future. The result is that you benefit from guaranteed capital growth of your investment and protection against the damaging effects of inflation.
10. You can invest in hotel rooms in a pension
One of the drawbacks levelled at a buy-to-let property is that you can’t benefit from the investment in a pension wrapper. If you want to invest for the long term and benefit from an investment in a pension wrapper – which offers you tax-free capital growth and income within the fund – the residential buy-to-let property isn’t an option.
Because hotel rooms are considered to be commercial investments, you can put them in a self-invested personal pension (SIPP). This creates a level of tax efficiency unavailable on buy-to-let properties.
If you do invest in hotel rooms via your SIPP, be aware that you won’t be able to use your hotel room yourself, and the income and capital gain produced must stay in the SIPP until you convert to pension income (when it may be taxed).
Isn’t it time you checked into hotel room investment?
As you can see, there are multiple benefits of investing in hotel rooms. If you want immediate income from a high yielding investment, it’s likely that investment into a hotel room could produce the income you desire. However, as with all types of investment, you should always undertake research and due diligence before investing.
Live with passion,