Hotel rooms as an investment are a relatively new concept, in the last twenty years or so opportunities have arisen for investors to add this investment type to their portfolios. The concept originated in the US and now hotel investment options are available around the world.
How does hotel investment work?
Investing in a unit in a hotel is just like a Buy to Let investment, you buy the unit and "let" it out to paying guests. The hotel acts as a management company by overseeing the process for the investor.
The most successful models to date have been where the hotel itself has employed larger, well established hotel management firms with substantial track histories, and well forged connections in the travel business.
Although there are similarities to Buy to Let properties there are subtle differences between the two types, there are also operational differences between hotels and their particular investment process.
What are the options open to investors?
Different hotels will offer different options to investors such as payment terms and personal usage. Some of these differences are:
Guaranteed rental options:
Some investments offer a guaranteed rental scheme which means that they can provide investors with a secure income for a certain amount of the investment period, in some cases it can be up to 20 years.
Some investments offer personal use of the room by investors, usually it is limited to a set amount of days in a year. Some companies have allowed investors 52 days a year and only charging a nominal fee of $10, for a room that would cost a paying guest $170 per night. If you do the maths then it works out that the hotel could lose up to $8,840 per year. By decreasing the number of nights the investor is allocated the use of the room this will maximise the hotels income therefore maximising rental returns for the investor. The ultimate investment strategy is to let the room out all year round without taking advantage of the personal use allowance.
Split income and split profits:
In most hotel room investments the income made from the unit is split between the investor and the hotel management which provides a financial incentive for the hotel management team to drive income through other facilities they provide within the hotel.
Some hotels pool the income generated from the rooms between investors the aim of this is to ensure that one room will not generate less profit than another room in the same hotel. If the hotel does not share profits in this way then they usually rotate the use of the rooms to ensure that there is no room unused, so that all rooms are generating income for investors.
What are the benefits of hotel room investment?
The managed, turnkey nature of hotel investments allows investors to have a hands off approach to the investment. The hotel company will manage and market the room on behalf of the investor, because it is also in their interest to increase revenue. The investor benefits from industry professionals managing and marketing the hotel unit for them.
A benefit to UK investors is that hotel room investment is considered as commercial and not residential so it is possible to place the investment in a Self Invested Personal Pension (SIPP), which allows for tax free capital growth and earnings. If the investor chooses to place their investment in a SIPP then they are unable to use the hotel room themselves unless they pay a market rate for use of the room, otherwise they would face investigation from the Inland Revenue and Customs. (US: Traditional retirement savings, IRA's, Roth's and 401K's)
Investors are less exposed to long term vacancy as they would be in a traditional Buy to Let property investment which can lie empty for months at a time.
On average the yields generated from hotel room investments are higher than traditional Buy to Let investments. Gross yields of up to 12% per annum are attainable compared to average gross yields from traditional Buy to Lets of around 5% per annum.
Non reliance on the overall property market.
The income stream is placed on the yield from income to enhance the underlying value of the hotel building. By investing in a quality development that will have features and facilities that are attractive to guests then the chances of attaining a higher yield are increased.
The financial success of hotels has historically followed economic market conditions. So as the economic climate improves, so too should the hotel industry.
What aspects will affect the success of a hotel investment?
Location is an important factor in the success of the hotel; it will need to attract domestic and overseas visitors and the development will need to be close to transport links, as well as local attractions.
Different locations will attract different types of guests to the hotel, and will provide different facilities. In the case of a city centre hotel the location will be more of a pull for guests as they are unlikely to be able to offer larger facilities such as a golf course. A more rural location, however, will be more likely to provide facilities to increase the profit available and by appealing to a different kind of guest.
Features of the hotel that will increase the success of investments are experienced hotel management companies with good customer service, facilities such as pools, spas, golf courses etc. and a good marketing team either in the hotel or hired by the hotel. High quality standards and customer care will increase re-visits and therefore yield from the investment.
Possibly the most important factor to look for in the hotel management company is its media presence. So many hotel rooms are booked online now it is vital the management company has a hefty online connection through the major travel booking engines and aggregators. Ensuring that a first rate management team is running the hotel will increase the amount of visitors and the reputation of the hotel.
Another aspect to affect the success of the hotel is tourism. Attractions in the locality of the hotel will affect occupancy rates; investors should research the local tourism and the efforts in increasing tourism to the surrounding area. In the case of city centre hotels near conference facilities (Central London, UK, or Cannes, France) provided the hotel is within easy reach of the facilities, bookings can be expected to be consistent without so much reliance on tourism.
Traditionally hotel income and occupancy rates follow the ebb and flow of the economy so, as the economic climate improves, the hotel industry will follow. By investing in Buy to Let hotel rooms, investors will be looking to the future. When choosing hotel rooms as an investment the investor will need to remain aware that in most cases, hotel room investments really should be viewed as a long term hold to reap the best returns. Find out more about hotel room investment.
- Wednesday 07 July 2010