Hotel Room Investments: are they worth it?
Although it can be lucrative to invest into individual hotel rooms, there are also some downsides. While they can deliver steady returns and have a low entry threshold, they also hide complex legal structures and unreliable liquidity. Not to mention, they need to be managed by a hotel operator. Tranio.com explains the details.
By the middle of the 20th century,
At first, the investment structure looks simple: the investor establishes a legal entity (firm) and opens a special purpose fund in the name of the company. All financial transactions relative to the hotel units are then channelled through this account, from purchase to returns on investment. The managers of these global
The investor and the hotel operator can share their profits in two ways: either the contract specifies revenue that is independent of the profits derived by the management company or the investor earns proceeds at a variable rate determined by the hotel’s success.
Investing in units (i.e. several rooms) should be differentiated from buying the entire hotel, which would require the services of a management company or force the investor to register and start his own management company.
Advantages of investing into hotel rooms
Hotel rooms do not require much capital and investors tend to choose
Investors entering into a contract with a fixed rate of return do not assume any risks pertaining to the management of the hotel: if the shower breaks or the customer isn’t happy with the service, it’s not the investor’s problem. That’s why it’s always a good choice to buy a room in a popular hotel managed by an international brand with
Hotel rooms earn steady returns. While the revenue may vary depending on the property and location, the investor can expect about 4% at a fixed rate
Finally, the hotel room can also be reserved for personal use: many investors and management companies agree on a timeframe during which the investor can enjoy his purchase, usually several weeks a year.
Hotel rooms are a profitable and alternative option for investors looking to diversify their portfolio but who don’t want to put down a lot of capital. However, there are some pitfalls.
Risks when investing into hotel rooms
For foreign investors, hotel room units fall under the jurisdiction
While the investor is free from the woes of managing his hotel room, he is also subjected to the marketing policy of the company: if the hotel changes strategy or fails to maintain high standards, it may lose in popularity.
Before buying a room or unit, it’s very important to know the market and its prerequisites for success, because even if there is a fixed minimum monthly return, the hotel business is not immune to market contingencies. For example, following 9/11, US investment companies turned to more modest hotels in the province (Halifax, Glasgow, Gloucester), shunning the globe’s hottest properties (New York City, London, Paris).
Seasonality should also to be taken into consideration. There is nothing much happening in holiday hotels during
However it’s hard to find rooms and units for sale
Foreign firms who sell hotel rooms target buyers from abroad. For them, the most profitable option is an investment leveraged or supported
Leveraged investments yield higher returns but the risks are also higher. Not to mention that a private investor, especially
To crown it all, an investor dreaming of nights in their hotel room might be sorely disappointed to learn that it will benefit neither his account nor the hotel management, particularly during the high season.
Challenges facing investors depend on the location of the hotel property. In Germany, for instance, procedures ruling property rights are complex, while in Australia or the UK, investors will have to battle with strict requirements just to obtain a loan.
|low entry threshold||risk on return
for variable rate investments
by an operator
|steady returns||limited control
over hotel operations
|own room for recreation
or business purposes
|low asset liquidity|
According to the 2014 Serviced Apartments Summit in London, the market for hotel rooms has been showing noticeable growth over the past three years – and there is a reason they chose Britain’s capital to host it. Savills reports that London has the lowest number of hotel rooms per 1,000 business visitors. While competing global hubs like New York City and Hong Kong weigh in at 5.7 and 5.3 respectively, London is ranked at a low 1.6 making competition on the market tough and investment potential high.
Interested buyers should also note that returns on hotel rooms depend on the visitor flow. The industry is strongly challenged by fluctuating prices on rental housing and the growing segment of online services which simplify
Recommended chains that sell rooms are Mandarin Oriental, Holiday Inn and Condo.
Recommendations to potential investors:
- Know your market: study the industry where you want to invest.
- Know what’s out there: explore the opportunities to leverage your investments for better returns.
- Know your contract — get a full translation of the contract and read it.
- Know your target segment —
3 and 4-starhotels are more popular than luxury 5-starsuites.
- Think differently — guesthouses outside the centre can be just as profitable as hotels in the capital.
- Prioritise: property in the UK and France have an excellent reputation for reliable investment.
Ivan Chepizhko, Tranio.com
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