Guarantees, benefits and exit strategies of hotel room investment
A couple of days ago, I was asked to explain our hotel room investment schemes and why they perform so well as property investment opportunities. The investor that made the enquiry had five specific questions that he wanted to be answered. They were good questions, too. He wanted to know the sort of detail I’d want to know as a property investor, and what makes me include hotels as some of the best places to invest in property UK.
They were such good questions that I thought I’d put this investment blog together discussing them.
1. How do these hotel room investment schemes work?
Simply put, they are a sale and leaseback schemes. This type of scheme is very common in big business. A search on Google brings up a range of industries and businesses that sell their assets and then lease them back. Holiday cruise operators often sell their ships and then lease them back. Airlines do the same with their aircraft, and large retail chains sell their properties and rent them back.
In a nutshell:
- You buy the hotel room from the hotel owner
- The hotel owner leases the room from you
- You receive a ‘rent’ for the room, at a fixed rate of ‘interest.’
- At the end of the agreed lease period, the owner will buy the hotel room investment from you
2. What’s the exit strategy?
Because you’ve signed a lease agreement, you’ll be locked into the investment for the period of the lease. It is typically five years. If you wanted to sell, you’d need to break the lease agreement, and that would mean legal fees, arrangement fees, and so on and so forth. All these costs would affect the value of your hotel room investment – selling early would probably create a loss of some of your invested capital.
However, this is not too different from most property investment opportunities. If you’re investing in residential property (for example) solely for a capital gain, then costs like stamp duty, estate agent’s fees and legal costs will eat into your potential capital gain in the first few months and years of investment. They could even turn a profitable property investment into a loss maker.
With a hotel room investment scheme, the main objective is income. You shouldn’t expect to be able to sell your hotel property investment before the end of the agreed lease period (say five years). At that time, the hotel owner will buy the hotel room from you at the pre-agreed price.
For example, this hotel room investment offered by Gladfish pays guaranteed 15% capital growth after five years – the hotel owner will pay you 115% of your original investment. It is on top of the 8% income you’ll receive each year.
3. How can you guarantee the income?
One reason I like this type of hotel room investment so much is that you hit the ground running. The hotel is already there; it isn’t waiting to be built. It has a history, a client base that can be marketed to, and rooms that are already booked by guests. That means your income starts being paid the month after your investment is made. The key to maintaining revenue and growing profit is how the hotel is managed: hotel investments like those offered by Gladfish benefit from the best management teams – you can read more about this in our article “Investment guide – What hotel investment structure performs best?”
A great management team will be able to look at a hotel and instinctively know its potential, a little like a great mechanic can listen to an engine and know which cylinder is misfiring (and why).
Of course, the management team will do a little more analysis than a quick ‘once-over’. Once it has completed its initial work, it will know the hotel’s potential to generate income and profits. Taking both the current state of affairs and the revenue potential into account, the owner and management team are then able to confidently set the level of income it can offer hotel room investors.
4. Why is the hotel owner offering this investment?
Many hotels – especially owner managed hotels – have been left underinvested. They’ve been neglected, and the previous owners have spent hotel revenue instead of reinvesting it back into the business. There is nothing wrong with the hotel – it’s in a great location with some fantastic local amenities.
Expansion and taking advantage of market opportunity requires capital. Upgrading rooms, restaurants and facilities to increase revenue doesn’t come cheap. The new owner of the hotel needs your investment as the capital to undertake the upgrades, additions, and modernisations that will lead to increased profits. Increased profits increase the value of the property investment, too.
After the investment period, when they buy back the hotel room, the hotel owner gets the hotel they want without using expensive bank loans that would have dented profits and, therefore, hotel investment property value.
5. Are there any other benefits of these hotel room investments?
Let’s recap some of the benefits of hotel room investments:
- You get a known, regular, and guaranteed income
- The hotel is a going concern, so your income gets paid from the off
- You’ll also receive a known and guaranteed capital gain at the end of your investment term
- Your name is on the land registry – you own this piece of property
There are other advantages and benefits too, including:
- A lower entry point for investors. An investment in a residential investment property is usually way more expensive than investing in a hotel room. For many investors, a cash investment in a hotel room means benefitting from hotel room income in its entirety – with no mortgage to pay.
- If like me, you enjoy simplicity, then the known income and capital gain is a real plus. Budgeting becomes easy, and you’ll know your tax liability in advance.
- Finally, if you buy a residential investment property, you have to own it directly, through a company structure, or in a trust. You can’t own it in a pension vehicle to take advantage of the tax advantages of pension investment. A hotel room investment is considered to be a commercial investment, so that you can put it in a pension wrapper (provided you don’t use the hotel room yourself). Do this, and your income and capital gain will benefit from maximum tax efficiency.
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.
If you have any questions about hotel room investment, contact one of the team on the team on +44 207 923 6100. You never know, maybe your questions will be featured on one of our investment blogs.
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