Which investment strategy performs best for a property investor?

Hotel Room Investment – How should you invest in hotel rooms?

When you invest in hotels, there are several ways you can do so. For example, you could buy an entire hotel, run and manage it yourself. That’s hard work, and extremely risky if you have no experience. Most property investors don’t have the experience or expertise to do this, and nor do they have the money to invest in a whole hotel.

To profit from the potential of hotels as property investment opportunities and as businesses in one of the fastest-growing sectors of the UK economy, an investment in a share of a hotel might offer the best option. Here I look at two ways in which you could do this: fractional ownership and individual ownership.

What is fractional ownership?

Fractional ownership is like owning a share of an asset or investment property. It’s the basis of timeshare investments – you own a few weeks in the year, and the rest of the time you don’t get a say in that property.

If you invest in a hotel using a fractional ownership arrangement, you might have joint rights to all the hotel rooms. However, this right will be as part of a larger group, and you probably won’t have your name on the land registry. It reduces the security on your investment.

Considerations of fractional ownership

Fractional ownership is often sold as having benefits such as a better resale value, greater control, and lower risk. These advantages are no more than sales tactics:

  • The hotel is worth what it is – whether you make a fractional investment or an individual hotel room investment, the value is based upon market value. A hotel’s value is based upon the value of the real estate and the value of the business (and that’s dictated by revenues and profits).
  • Fractional ownership could be compared to owning shares in a company. Unless you own the majority, you don’t have any greater control than the next man.
  • The risk to your investment as a fractional owner is certainly no less than as an individual owner. In fact, because your name probably won’t be on any property deeds, if the hotel disintegrates as a hotel you could find it difficult to get back any of your investment.

Other considerations for fractional owners

In a fractional ownership arrangement, you could find yourself with a complex set of conditions in your hotel investment agreement. You’ll need to ask a lot of questions to understand what returns you may make, and how that return is calculated. Your considerations should include:

Cost per square foot – as a fractional owner, you’ll effectively be responsible for the cost of a square footage of the hotel. You’ll need to ‘pay’ a fraction of the hotel running costs – maintenance, cleaning, employees, and so on.

Fractional real estate multiplier – a way of establishing the price of your fractional ownership regarding value against other similar properties. Add all the costs of all fractional ownership shares, and divide by the value of a similar hotel. For example, let’s say that you’re buying a 10% fractional ownership of a hotel for a price of £100,000. A nearby hotel (similar size with similar facilities) is valued at £600,000:

10 x £100,000 = £1,000,000/£600,000 = 1.67

It means the relative cost of your fractional ownership is 1.67 times fair value – what you have to ask yourself is if the fixtures and fittings, marketing, and so on are worth such a premium.

Fractional activities cost if the hotel management decides to increase the hotel’s offering and provide more activities, your fractional ownership will incur a portion of those costs. You may need to consider whether those activities are pay-per-use or provided as part of the hotel booking package – pay-per-use offers better value for the owner.

Relationship with owners – the smaller the fractional owner group, the more likely you are to be drawn into getting involved in the management of the hotel. I’ve seen this in Spain, where Brits emigrate to live on an idyllic, small ‘urbanización’. These have shared facilities (gardens, swimming pools, maintenance, etc.). Before they know it, the new residents get co-opted onto the management committee. Bang goes the idyllic life, as they get drawn into all things management and financial, only to try to protect their interests.

Perhaps the most overlooked disadvantage for fractional owners is the exit strategy – selling your ownership fraction. There may be barriers to resale that are written within the contract. If this is the case, it doesn’t matter what your fraction is worth. There could be marketing, timing, and pricing clauses. Also, reselling a fractional ownership is hard work: remember that your name is not necessarily on the deeds as a registered property owner. I’ve got friends who owned a timeshare (the classic fractional ownership) in Aviemore in Scotland. They’ve recently sold it, after having it on the market for 12 years. That’s right – 12 years.

Individual ownership

Individual ownership is far simpler:

  • Your investment buys you a hotel room. It’s not shared between dozens of investors.
  • Your name is included in the Land Registry as the registered owner.
  • The hotel is managed by a management group.
  • The management group is paid to manage and incentivised to maximise revenues and profits.
  • You’re paid a fixed rate of return for a fixed number of years.
  • Your investment is purchased from you at the end of the investment period, at a pre-set price.

The structure of investment and return is easier to understand, and that means it’s easier to evaluate as an investment. You receive a known income and benefit from a known repurchase price. Your investment is made over a set number of years, which makes it easy to compare to other investments for total return.

Perhaps best of all, you don’t feel the obligation to get involved in the management of the hotel to protect your investment. With the incentives in place, the more revenue the management team produces (and the higher the profits on that revenue), the greater their payment.

If something goes drastically wrong and the hotel goes bust, you own an easily identifiable piece of real estate. There is no complicated fractional ownership calculation to make to unravel your investment and recoup the investment.

When the period of your investment is at an end, your hotel room is repurchased from you as per your hotel room investment agreement. You won’t be left scrambling around for years, out of pocket, as you try to find a buyer.

How do you know that you are an individual owner?

I’ve heard of hotel investment schemes where the property investor believes they’ve bought a hotel room, but in fact, have been duped into fractional ownership. Don’t fall into this trap:

  • Always make sure that you are the titled deed holder
  • Invest in a hotel that has a known and fixed rate of return
  • Have your solicitor check that there is a repurchase agreement in place and that this is legally solid

I’ve been involved in property investment for two decades. Hotel room investment can be a very profitable investment strategy, but I’d never invest in a hotel on a fractional ownership basis. For me, it’s a risk that’s simply not worth the effort. If you’re like me and want to maximise your return while minimising your risk, you’ll invest in hotel rooms and not unqualifiable fractions of hotels.

Find out more

Read our investment guide – Hotel room investment for investors who want yield, or watch my video series introducing hotel room investment as a property investment strategy.

Contact our team on +44 207 923 6100 to discover hotel room investment opportunities that pay an income of 8% per annum and guaranteed capital growth of 15% over five years.

Live with Passion

Brett Alegre-Wood