Six factors that underpin high yield investment in hotel rooms
An investment in a hotel room is an affordable strategy to produce high and stable income. This strategy is growing in popularity among investors in the UK − not surprising given the many benefits you get when you invest in hotel rooms.
In this article, you’ll learn about six of the key factors that determine the value and performance of your hotel room investment.
Hotel rooms are a different type of property investment
Before I discuss how to make the best hotel room investment, I want to explore one myth. When you invest in a hotel room, you’re investing in way more than a piece of property. You may have your name on the land registry, but you’re also investing in a business in one of the UK’s fastest-growing sectors. This is one of the reasons we’ve become so bullish about the potential of hotel rooms, and one element that makes hotel room investment so appealing.
When you understand this dynamic of hotel room investment, you’ll see that the factors that underpin the income and capital growth potential of any hotel room cross over between how to value an investment property and how to value a business.
If you assess the opportunity with the following six factors in mind, there should be no reason why your investment doesn’t produce the high yield income and capital growth it promises.
A hotel in Timbuktu might be a five star, luxurious mansion. It could benefit from incredible management, dedicated staff, and a global marketing plan. None of this should distract from the fact that it’s in a niche location. Now I’ve nothing against Timbuktu as a place – I’ve not yet been there – but it’s hardly on the well-beaten track.
Different locations attract various types of guests. A hotel in Timbuktu will provide accommodation to those who have a burning desire to visit Timbuktu. A city centre hotel is probably not going to attract too many golfers, while a rural hotel might be perfect for those on a weekend fishing trip. I’m sure you get the idea.
A 2012 survey by Market Metrix, which surveyed 40,000 travellers around the world, found that location is the biggest single factor in hotel choice. When investing in hotel rooms, location is one of the most important factors for success.
For the best appeal, look for hotels that are near transport links, local attractions, and with good access to local business areas. Such a hotel location is likely to have the widest appeal: ideal for holidaymakers and business travellers.
2. Facilities and features
When travelling, people select their hotel destinations on several factors. The majority of hotel guests today use their hotel as a base from which to explore local surroundings or to travel to work. For many people, therefore, the hotel’s amenities and facilities are less important than in-room facilities.
Swimming pools, gymnasiums and games rooms are facilities most commonly associated with tourist hotels in large resorts: they appeal to a niche market. Don’t underestimate the all-around appeal of an in-house restaurant and bar, on-site parking, Wi-Fi, and the reputation of the hotel for its customer service – repeat business is encouraged by excellent customer care, and repeat business leads to higher yielding hotel rooms.
Tourists are one of the largest sectors of users of hotels. International tourists especially will be attracted to hotels that benefit from being near to attractions, cultural events, and places of interest. Ask yourself if the location of the hotel is attractive to tourists, and if the surrounding area is a destination for holidaymakers. As part of your area research, find out if there are policies in place to increase tourism in the local area.
4. Business travellers
As the economy evolves, so too are the travelling patterns of business travellers. Motels were the most common overnight destination for travelling salespeople as they moved from one city to another.
Today, business travellers are more likely to be freelancers or company executives visiting other business locations, clients, or attending conventions, conferences, and trade events. Hotels that are near to or offer easy access to business areas and convention centres will be more likely to attract a steady stream of business travellers. These travellers will also be more likely to require facilities such as Wi-Fi, in-house restaurants, and room services including food, mini-bars, and laundry.
5. Local economy
An investment in hotel rooms is an investment in the economy. The ebbs and flows of hotel occupancy move with economic fortunes. It is why you should examine the local economy.
Where regions are about to benefit from large scale infrastructure development, the local economy is likely to go through a period of associated economic growth.
If a new national convention centre is being developed, or a large multinational company is relocating to an area, the need for hotel rooms is likely to increase.
Look to invest in hotels that will benefit from investment in the local economy, whether by businesses, local authorities, and/or regional and national government.
6. Hotel management
I’ve saved the most important factor in hotel room investment success until last: Never underestimate the importance of hotel management.
Hotel room investment offers the potential for great income and capital growth. Like any investment, success depends on how well the business is run. Poor management can destroy even the best hotel in the best location.
Invest in a hotel that benefits from an experienced management team. Examine its track record, and how well its previous hotels have performed. Look at its online capability to see how advanced its marketing ability is – almost all hotel rooms are booked online today. A top-class management company will ensure that the hotel benefits from higher-than-average repeat bookings as the hotel’s reputation increases. Today that reputation can be found online. Don’t take my word for the importance of reputation and the effect it has on a hotel’s business. According to TripAdvisor:
- 93% of hotel guests find reviews important
- 53% wouldn’t book a hotel without reading a positive guest opinion
Experienced, forward-looking, and customer-focused management will increase the value of the hotel and business, leading to an increase in the value of your investment.
Research is the key to your investment success
An investment in hotel rooms is certainly a ‘set and forget’ investment strategy: you buy, let the management company run their business, and receive a healthy return on your investment from day one. However, your success depends on buying into the right hotels. To do this, you’ll need to do your due diligence and research.
We have a huge and growing resource of investment research and due diligence reports, which is available to you. When compiling our research, we use our unique hotspots algorithm that covers 108 data points across 324 areas: you can be assured that our research identifies the best locations for investment.
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