Should you invest in hotel rooms?
Property investment is a long-term asset which has outperformed all other asset classes in the UK. Residential investment property is the best asset for inflation-beating wealth, and if you combine the benefits of leveraging in property investment, the potential upside is colossal.
But what if you don’t want to remain invested for the long term? And what if you’re worried about the possibility of a property market collapse?
While I don’t think the UK property market is going to fall back anytime soon (demand is just too high, and supply too weak), I can understand reticence from beginner investors to get involved. Especially with all the political uncertainty, we’re witnessing, and especially if you want to be sure that you’ll have a certain amount of cash available for a specific event in the future.
If this sounds like you, then you might want to consider hotel room investment. You could earn a set amount of (very attractive) income while protecting your capital and guaranteeing some growth. If this is the type of investment you want to benefit from, this article describes what hotel room investment is, and the six major benefits it offers to property investors.
What is hotel room investment?
As a property investment, when you buy a hotel room it’s like investing in a buy-to-let property with lots of very short-term tenants. It’s easy to do, too. You simply buy the hotel roo, and let the hotel management company fill it with guests and maintain it. The management team collect the room fees, and distributes some of this to you. They also do all the advertising, booking, cleaning and repair work. You sit back, relax, and receive a monthly income for all your effort!
How much can you earn?
There are two ways in which your investment money earns when you make a property investment into a hotel room:
- Income, which is paid monthly and is around a return of 7% or 8% annually. It is guaranteed.
- At the end of the investment term (usually five years) the hotel management team repurchase your room, at a price that includes some capital growth. It could be around 15% on a five-year investment.
The caveat here is that if you want to sell your hotel room before the expiration date of the investment, you probably won’t get back what you originally paid.
What are the advantages of hotel room investment for property investors?
There are seven massive benefits of using hotel rooms as pseudo property investments. These are:
1. A low initial outlay
Whereas you need to invest a large amount to own one residential investment property, the cost of entry is much lower when you invest in hotel rooms. While a hotel room investment is a cash purchase (you don’t fund with a mortgage), for the price of a typical buy-to-let deposit, you could own a hotel room.
2. No-hassle investment with a higher yield
The income you receive from a hotel room investment is passive. The management company do all the things that a landlord would normally do. They market the property, take bookings, collect ‘rent’, conduct exit checks, and keep the room clean and well maintained. You suffer none of these worries. It means that the, say, 8% yield on your money is net – there are no extra costs to pay. Hence, the income yield on your investment could be higher than on buy-to-let property.
3. Lower negative effect of void periods
When the hotel room is offered for sale, the management company has already accounted for periods when the room remains empty. It will also be incentivised to fill it, probably by bonus payments from the hotel owner. So, the higher the room occupancy, the higher its profits.
4. High guaranteed income
All this adds up to higher income paid on your investment capital, and the income is guaranteed. What could you do with the extra income, over the paltry amount your cash is earning while it’s sat in the bank, languishing? How about an annual holiday to Disneyland for you, your spouse, and your children? All bought and paid for by your hotel room?
5. Guaranteed capital growth
Proving you keep your hotel room through to the maturity date of the investment, you’ll also benefit from guaranteed capital growth. Typically, this will be around 15% for a five-year fixed term hotel room investment. That’s a handy hedge against inflation.
6. A readymade buyer
As part of the contract, the guarantee of capital growth is provided by the hotel management company. They don’t want to sell their rooms on a permanent basis, but simply to provide the shorter-term funds to finance growth. So, when you sign the investment contract, you will commit to selling the hotel room back to the hotel management company/owner.
You have a ready-made buyer, who will pay more for your investment than you paid for it. No worries, no waiting, and your capital return when you expected.
7. You can put it in a pension
Directly held residential property investments cannot be held in a pension, but hotel room investments are viewed differently. Even though you’ll receive a deed title when you invest, a hotel room is considered a commercial investment. As such, you can put it into a self-invested personal pension. If you do this, all income and growth will be made tax free. Of course, this would mean that you’d forego that annual holiday to Disneyland – on the flipside, your pension pot will be growing very nicely for when you want to retire.
If you want to benefit from a hassle-free, high-yielding investment with guaranteed capital growth, contact one of our team today on +44 (0)207 923 6100.
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