Why a hotel room investment will energize your property wealth

Why a hotel room investment will energize your property wealth

Portfolio diversification advice from property investment experts

Investment property experts advise you to diversify your property portfolio. Investing in different locations, for example, helps to protect your property investment from local economic downturns.

Investing in various types of property takes advantage of different growth and income dynamics. It smooths your portfolio performance. By diversifying your property investment portfolio, you should benefit from more stable income and steadier capital growth as it works to create the lifestyle you desire.

The question is, what other types of property would investment property experts recommend?

In this article, we’ll examine how hotel room investment could benefit the property investor seeking to diversify their portfolio. First, a brief reminder how hotel room investment works.

How does hotel room investment work?

You don’t have to be an investment expert to understand this type of property investment. It’s very similar to investing in buy-to-let property. You buy the hotel room, and it gets let out. The hotel management company acts as an investment property manager. It advertises for and finds ‘tenants’ (guests), maintains the property, and collects ‘rent’.

Some of the most successful hotel room investment schemes are found in smaller, independent hotels. The owner employs an experienced and successful hotel management company, who drives the success of the hotel. They offer hotel rooms to investors to raise cash to fund growth.

The hotel management company will be incentivised to perform by the hotel owner. The management company will be paid a fee, as well as a bonus or share of the profits after all costs have been paid.

What return do you get from a hotel room investment?

You could use the room

Some hotel room investment schemes offer free or reduced rate rooms for personal use. The period you’ll be allowed to stay in your room is limited, usually to a couple of weeks per year. However, doing so reduces the profit the hotel makes. And this reduces the return you’ll get.

It’s swings and roundabouts, I guess, but as a property investment expert, I want to maximise my return. I don’t want to be locked into taking a break in a specific hotel in a specific location. If that were my aim, I’d buy a timeshare (and we all know how bad they’ve proved as investments).

You could benefit from guaranteed income

Investment in hotel rooms offers a guaranteed income. You’ll be paid a set amount, based on your original investment. Typically, hotel room investment yields around 8% annually. It’s paid on a monthly basis, from the month after you have made the investment, and for the term of the investment.

You could get guaranteed capital growth

A hotel room investment is a fixed-term investment. The best includes a guarantee of capital returned with a growth element. For example, you might invest in a scheme that offers 8% per annum income, plus the capital growth of 15% after five years.

On a £50,000 investment, your total return would be £20,000 income, £7,500 capital growth, and your original £50,000 returned. That’s a total gross return of 55%, equivalent to an average of 11% per year.

You don’t have the costs of buy-to-let

Hotel costs are paid for by the management company/hotel owner. When you own a buy-to-let investment property, you’ll have mortgage fees, maintenance charges, and property management fees to consider. None of this is applicable when you invest in a hotel room – it’s all part of running the business.

Other benefits of hotel room investment

Professional management of your investment

Hotel room investment is the ultimate hands-off property investment. The management company do all the work, the marketing, maintenance, and money collection. You benefit from having the best professionals manage your hotel room. And it’s in their interest to manage it well because they’re incentivised to increase revenue – so they want every room occupied as often as possible, and at the highest room rate possible.

Tax-efficient property investment

One key difference to usual buy-to-let property investment is that it is considered to be a commercial (business) investment. You are not usually allowed to put residential investment property into a pension scheme. A hotel room investment can be made into a self-invested personal pension (SIPP). Doing so means all growth and income is earned tax-free.

However, if your investment scheme includes personal use, you must pay the market rate for the room. Otherwise, you’ll lose the SIPP tax benefits.

Reduction of exposure to void periods

Because of the guaranteed income of your investment, you’re not exposed to void periods in the same way that you are on your buy-to-let investment property, which might remain empty for a few weeks or months if managed badly.

You don’t rely on the property market

The hotel industry is one of the strongest sectors in the UK economy. It doesn’t move in tandem with the property market. It means it’s a great investment to diversify your property portfolio.

For more information about hotel room investments and the hotel industry, read our investment guide discussing hotel room investment for investors who want yield. Or you might like to watch my video series introducing hotel room investment as a property investment strategy.

For information about our latest, hand-picked hotel room investment opportunities, contact one of our team today on +44 (0)207 923 6100. Guaranteed income and capital growth could be a phone call or email away.

Live with passion

Brett Alegre-Wood

About the Author

Brett has over 20 years experience in all facets of property, he owns various companies centred around property and is the driving force behind the education and training at Gladfish. His companies have sold over £850 million in UK and London property and he manages over 1200 properties through his estate agency chain. Today he shares his time between UK, Australia and Singapore. He is married to Arlene and together they have 4 kids.

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