What makes investing in hotel rooms so appealing?

Own a slice of property and exposure to a booming industry

Hotel room investment isn’t a new concept. In the post-war era especially, wealthy Americans would buy rooms in their favourite European hotels to ensure they were available when holidaying on the continent. Mostly these were the high-end, luxury hotels in Europe’s capitals. The hotel received a lump sum cash injection and was able to sell to other paying guests when the room’s owner wasn’t using it. The owner received income from the room. For the room’s owner, this income effectively paid for their stay in the hotel.

Today in hotel room investment has moved on from this pseudo timeshare arrangement. It’s now more sophisticated, and accessible to a far wider audience of investors. It’s not only the wealthy that can invest in hotel rooms. People like you and I are getting in on the ground floor and benefitting from life-changing income paid by high yield hotel investment opportunities.

In this article, I examine why a decision to invest in hotels could be the opportunity you’ve been searching for. I also look at four of the options available to investors in hotel rooms, and how they benefit you.

What is hotel room investment?

Most people have at least considered running a B&B or small hotel as a way to earn a more than decent income. More people are travelling today than ever before, whether for business or pleasure, and they all need somewhere to stay.

What stops most of us in our tracks is the huge outlay needed to open a hotel. And a one-bed hotel isn’t an option – or is it?

Hotel room investment gives you the opportunity to buy into a high yielding industry at a fraction of the cost of owning an entire hotel.

The hotel management runs the hotel, doing all the stuff you don’t want to get involved with, like changing sheets, cleaning rooms, cooking and serving breakfasts, and, most importantly, advertising, marketing, and taking bookings.

For their time and effort, the management takes some of the profit from the room. For your investment, you take the remainder of the profit. Your investment in a hotel room might just be the perfect choice for passive income, and it gives you exposure to both property and the hotel and leisure industry – set to be one of the most consistent and highest growth sectors in the coming decades.

An investment in a rapidly growing industry

Research conducted by BDO concludes that the hotel industry in the UK has been growing strongly in recent years and is set to continue to do so. Occupancy rates are at record levels, and room yields have increased for five years running.

Unlike other industries that see massive fluctuations in fortunes in London and the other UK regions, the demand for hotel rooms is consistent nationwide. In fact, though the 83% occupancy rates of London hotels is higher than the regions’ occupancy rates of 76%, the growth in yield per room produced by regional hotels is outstripping London. An investment in a hotel room now is an investment in a booming industry which is forecast to continue to grow.

An easy-to-understand investment

As an investment strategy, owning a hotel room couldn’t be easier:

  • Do your research and select a popular destination.
  • Select a hotel that offers the benefit of location and good management.
  • Buy the hotel room.
  • Receive income from your investment (usually around 8%).
  • Retain the opportunity to sell the hotel room, should you wish.

The key to success when investing in hotel rooms is investing with the right management team in place. If you’re a fan of fly-on-the-wall documentaries, you might remember ‘The Hotel’. This series followed the fortunes of The Grosvenor Hotel in Torquay, run by owner Mark Jenkins. It is not the type of hotel management you want for your investment (though it does make for jaw-dropping ‘entertainment’)!

Look for a team that has a solid track record in the hotel business, who are good people managers, and have a sensible, challenging, but achievable strategy for growth.

Advantages of investing in hotel rooms

Apart from the low cost of entry – around £65,000 is a good starting point to aim for if you’re a first-time investor – investing in hotel rooms provides you with some of advantages. This include:

  • A high yield from day one: invest this month and start receiving income next month.
  • Hassle free: you sit back, relax, and bank your income while the hotel management team market, manage, and maintain.
  • You own the room, and your name will be on the land registry register as an owner.

Making a return: your options

When you invest in hotel rooms, there are several ways in which returns might be paid to you. It is one of the key differences between a buy-to-let residential investment and a hotel room. In many ways the investment strategy is similar: you buy property, rent it out, and receive an income and potential capital growth.

With a hotel room investment, you buy the hotel room and effectively rent out to a stream of short-term tenants instead of a single long-term tenant − but you don’t do any of the donkey work. The structure of the deal will determine what type of return you make.

Personal use

This is how hotel room investment first started, as I described above. In effect, it’s a kind of timeshare arrangement. You buy the room and are guaranteed a set amount of days every year when you can use it. You might be charged a nominal fee at a fraction of the regular room rate. The rest of the year, the hotel lets the room to other paying guests.

By letting to you at the reduced rate, the hotel loses revenue. For this reason, most deals like this allow you to reduce the number of days you use the room in exchange for a portion of the extra income the hotel earns from other paying guests.

Shared profits

Most investors in hotel rooms benefit by sharing the income from the hotel room with the hotel management. This incentivises management to push other income generating facilities at the hotel. Often all the profits are pooled together and shared out equally among investors, in a similar way to how a company would pay dividends on shares. It ensures that no single room generates more profits than another.

Guaranteed income

This type of return provides the investor with a known and fixed income on their investment. The management team are incentivised to get the room let in order to generate excess profits for the management company.

This type of return produces a stable, high yield for a fixed period. The investor benefits from knowing how much income the investment will generate, though foregoes participation in any extra profit that the hotel management team can produce through sales of other services and products at the hotel.

Often this type of return is combined with a guaranteed capital growth at the end of a fixed period.

Guaranteed capital growth

Some hotel room investments also offer guaranteed returns on the capital invested. In such a scheme, the investor buys the room and will be guaranteed a fixed price to sell the room back to the hotel management team after a fixed period.

For the investor, this gives the certainty of capital return (and capital growth). The hotel management team benefit from the capital injection that allows them to expand their business faster.

Flexibility for long-term financial planning

An investment in a hotel room is a low-cost alternative to traditional buy-to-let property investment. It offers a hassle-free, high yield investment that is particularly attractive to income seekers. With flexible options for the type of return, investors can choose to take a greater risk in return for potentially greater returns should the hotel capitalise fully on all its available amenities.

On the other hand, the certainty of high and stable income from a guaranteed income investment will be particularly beneficial to investors who want the certainty of income. When combined with a guarantee of capital growth, investors could benefit from a steady stream of high income with the additional benefit of an element of protection against inflation. At the end of a fixed period of investment, the investor can simply rinse and repeat.

You’d be hard-pressed to find another investment that offers diversified exposure to property and a fast growing economic sector, while simultaneously offering above average income and guarantees of capital growth.

For more information about current investment opportunities, or to discuss whether an investment in hotel rooms would be beneficial to you in your individual circumstances, contact our team today on +44 (0)207 923 6100. Our mission is to help you achieve your financial goals with strategic property investment.

Live with passion,

Brett Alegre-Wood

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