Why hotel room investments could become the number one choice for fixed income investors
Finding decent investment income today is difficult. With the cost of living rising daily, most income-generating assets fail to live up to their promise. The income from shares, bonds and cash accounts are falling woefully short of inflation. In this article, we discuss the advantages and disadvantages of income-paying investments. You will also discover why hotel room investment is gaining in popularity with retirees and those with a modest lump sum to invest.
Why buy fixed income investments?
Investors use fixed income investments for a variety of reasons. For example, investors may want:
- To diversify their portfolio away from risky stock market investments – especially when global stock markets are at record highs
- To protect them against an economic downturn
- Stability of capital and a steady income stream
Fixed income securities provide investors with these advantages.
Protecting your investment capital
If you don’t like risk, or you are nearing retirement or recently retired, fixed income investments could be particularly appealing to you. They tend to be less volatile than stock market investments, so you’re less likely to suffer a big loss in the short term.
One of the basic principles of a fixed income investment is that they are fixed term investments, which guarantee your invested cash. Your invested capital will be returned when the investment matures.
Of course, the guarantee is only as good as the company backing it. For example, if you own a fixed term corporate bond and the company goes bust, you could find yourself towards the back of a long line of creditors (though you’d be in front of ordinary shareholders).
Government bonds are considered among the least risky of fixed income assets. However, you pay the price for this ‘risklessness’ – they also pay among the lowest interest rates. As I’m writing this, the current yield on a 10-year gilt (UK government bond) is just 1.19%. For an investment of £100,000, you’ll receive a paltry £1,190 in income per year.
Providing a steady income stream
Now that I’ve mentioned income let’s look at this in a little more detail.
The second big advantage of investing in fixed income assets is that they provide a steady and stable income stream. You invest your money, and the issuer pays you a fixed rate at regular intervals throughout investment. For an investor who needs a known amount of income every month, this type of investment is ideal.
As you’ve seen, government bonds tend to pay a low level of income. No real surprise there – governments like to take money in, not pay it out.
But what about corporate bonds? When companies need to borrow, they can go to a bank or approach investors. Asking investors for the money needed is usually a cheaper way to finance growth plans. The average UK corporate bond yield is around 2.5%. Better than government bonds, but still nothing to write home about. Your capital is protected at maturity (providing the company doesn’t go bust), but you won’t benefit from an increase in the value of your investment.
Some corporate bonds pay very high yields. These are known as ‘junk bonds’ because the company issuing the bond is considered less able to guarantee the capital you invest. You are more likely to lose your money, so fingers crossed the company doesn’t go up in smoke.
The effects of inflation
When you invest in a fixed income asset, you should also consider how inflation might affect your standard of living.
Let’s say you have invested in a 5-year fixed income asset that pays £430 per month in income. It is enough to pay your utility bills, council tax and food costs every month. After five years you will still be receiving the same amount of income, and yet your costs have increased. If inflation runs at an average of 2.5%, you’ll need an extra £65 per month in income when your investment matures to cover these regular bills.
Most fixed income assets only offer capital protection. They don’t pay out more than the capital you invested when they mature. If you want to rollover your investment to produce a higher income, you’ll need to increase the risk you are taking with your money.
And then there are hotel room investments
A hotel room investment is a fixed term, fixed income asset, with a crucial difference to most other fixed income assets. Not only is your capital protected, but you will benefit from a guaranteed rate of capital growth, too. When the investment matures, you can rollover into an asset with the same risk and increase your income.
Here’s a comparison between typical gilts, corporate bonds, and hotel room investments:
|Asset||Gilts||Corporate Bond||Hotel Room Investment|
|Annual Income Yield||1.19%||2.5%||8%|
|Average Monthly Income||£65||£135||£433|
|Pay-out at Maturity
|Monthly Income if Rolled over||£65||£135||£498|
A hotel room investment provides you with:
- A high fixed income
- A known and guaranteed amount of capital growth at maturity
- The opportunity to reinvest a higher capital amount to protect against inflation
Great for retirees looking to maximise their tax-free cash lump sum, and, with such a low level of entry, an exceptional asset to provide outstanding income from a modest amount of capital.
How can you benefit from the advantages of hotel room investment?
The trick when making any investment is to invest in the best opportunities. Buy in places where people want to visit (for business and leisure). Make sure you invest in a hotel run by an experienced management team with a great track record.
It’s not surprising that many of our property investment clients are also investing in hotel rooms in the UK. They benefit from high fixed income and guaranteed capital growth while diversifying their portfolio. We’ve identified some of the best hotel room investment opportunities in the country. Hotels in ideal locations and run by exceptional management teams, and now making our clients’ investment goals a reality.
If you would like to know how you could join the growing number of investors reaping the benefits of hotel room investment, contact one of the Gladfish team today on +44 (0)207 923 6100.
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