Due diligence tips for hotel investment
Investment opportunities that offer sparkling income and golden capital growth are few and far between in a world where low-interest rates and negative bond yields dominate the fixed income market. So, when a property investor hears about a property investment opportunity that pays an 8% yield and guarantees 15% capital growth after five years, it’s easy to be either overcautious and miss the boat, or jump in without doing proper due diligence.
Hotel room investments are possibly the best income investments available today and are becoming increasingly popular with income-seeking property investors who have been continually targeted by tighter UK property tax rules. With mortgage interest tax relief being sliced in half and then some for higher rate taxpayers, a hassle-free hotel room investment that isn’t plagued by continually moving tax goalposts is a godsend.
To reap the generous rewards of an investment in a hotel room, you’ll need to avoid the common mistakes that investors make. In this article, you’ll discover the six hotel investment errors that could crash a hotel room investment, and how to avoid them.
1. Thinking the investment opportunity will be a quick win
An investment into hotel rooms is essentially an investment for income. If you invest in a hotel room thinking that you’ll be able to sell it for a massive profit in a few months, you’ll probably lose money. Hotel rooms are fixed term investments. If you invested in a fixed term cash savings account and wanted access to your money early, you’d be penalised by exit charges. Expect similar if you purchase a hotel room investment with a five-year term and then want to sell after 12 months.
2. Thinking that a buyer will be easy to find
Although hotel room investment is a growing market, it’s not yet a liquid market. If you think a buyer will be easy to find at the end of your fixed term, you could be disappointed. That’s why we’d always advise buying only hotel rooms where the operating team or hotel management guarantee a buy-back after a stated period.
To protect the value of your investment capital, look for hotel room investments with a buy-back guarantee that offers a contracted capital gain.
3. Thinking that location doesn’t matter
An investment into a hotel room is an investment into property and business. Don’t think only of the current business in the hotel, but consider its prospects, too. Think ‘property fundamentals’, and you’ll be on the right track. Ask if the location is good for tourists or business visitors, and consider what investment there is planned in the area to support the hotel’s target market going forward.
4. Thinking that ‘open a hotel and the people will come’
Different hotels are targeted at different audiences. If you’re investing in a business hotel, then make sure that it’s in an area where the business is thriving. Relying on a single business sector or company to supply all the clientele is a strategy for loss, too. Companies can up sticks and move. Whole industries can be affected by the economic climate – a few years ago, the east coast of Scotland was awash with oil industry personnel, all taking up rooms in local hotels. With the crash in the oil price, those hotels have been hit hard.
5. Thinking that the competition doesn’t matter
An investment in a hotel room is an investment in a business. If there is too much competition nearby, of the same quality and at the same price point, hotel management might find it difficult to hit its targets. On the other hand, if there is no competition it could indicate no call for the type of hotel in which you’re investing, or lead to management becoming complacent and missing market opportunities.
6. Thinking that the hotel is the whole investment
When you invest in a hotel room, don’t get caught out by thinking that the type of hotel and the existence of a large target audience will make it successful. The hospitality business is a people business. The hotel management and operator are what drives business success in this sector. Invest only in hotels that benefit from experienced hotel management and operations teams. Check their reputation and track record.
Make sure, too, that the operator has an incentive to increase hotel performance, revenues, and profits. The more successful the hotel is, the more they get paid. That type of incentive will ensure that your investment is in the hands of people who care and are willing to go the extra mile.
Do your hotel room investment due diligence
The mistakes that I’ve outlined above are made because investors rush in without doing their due diligence. As with any property investment opportunity, it’s important that you do your research and ensure that the opportunity and the numbers stack up. When we offer hotel room investment opportunities, we only do so when we’re as satisfied as we can be that:
- The area is perfect for hotel investment
- The hotel is perfect for the target clientele
- The area benefits from forecasts of growth and the property fundamentals to support long-term investment
- The hotel management and operating teams are both experienced and incentivised
We look at the hotel management’s business plans, research location, and note the competition. It could be weeks before we decide that an opportunity is worthy to be offered to our clients. When we show you a hotel room investment that offers 8% annual income and guaranteed capital gain of 15% after five years, you can be sure that it’s ripe for investment.
If you want to boost your income and take advantage of perhaps the best investment opportunities in the market today, contact our team today on +44 (0)207 923 6100 and ask about hotel room investment. You could be a phone call away from inflation-busting income and capital growth.
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