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Why investing in boutique hotels is not for everyone

Investors often ask for our help in finding a 10–30 rooms hotel managed by an established operator under a long-term contract abroad. However, they do not plan on relocating and participating in the management of the hotel but want to receive a guaranteed income.

Finding such a property is impossible for two reasons:

  • Major hotel operators only manage hotels with at least 100 rooms. Organising the whole range of hotel services (transfers, round-the-clock reception, room cleaning, breakfasts, gym, restaurant, laundry) requires a team. A significant part of the income will be spent on paying employees. In the case of boutique hotels, the income will be small in absolute terms (usually not more than €20,000 per month), for which reason major operators find managing such properties unprofitable.
  • Hiring a manager is too expensive for boutique hotels. In the best-case scenario, the manager will be a well-paid professional who will receive the most part of the revenue, at the worst, a fraud. Hiring a manager should only be considered for hotels with more than 50 rooms.

Example 1:

In 2013, a Russian entrepreneur purchased a 10-room boutique hotel with a restaurant at an Austrian Alpine resort. He had his main business in Russia. The investor believed that the hotel would be managed autonomously and be a source of passive income. However, he faced certain difficulties:

  • There was no way to save the manager's salary. The employee had to have an Austrian work permit, which increased labour costs.
  • The Czech couple he hired to manage the hotel did a good job but did not have a good understanding of the restaurant business, which has its own particularities. The non-operating hotel restaurant reduced the total yield.
  • The hotel was located at a winter Alpine resort, so it was difficult to attract guests during summer. To be profitable, there had to be agreements with tour operators and festival organisers.
  • With an investment of €1.5 million and an occupancy rate of 65–70%, the absolute return amounted to only €120,000 per annum before expenses — less than the investor expected.

The owner spent a lot of time, money and effort on the hotel, and went through three managers before deciding to sell the property. However, he didn't manage to find a buyer for over a year. Young Austrians are increasingly losing interest in running such businesses, and international investors are realising that there is no way to manage a hotel remotely. If the investor has managed the hotel himself, he could have approximately doubled his returns.

Tranio does not recommend investing in boutique hotels abroad if only you are not considering relocation. Such properties are only profitable if owners personally manage it and dedicate all their time to doing so, contacting regulatory authorities and tour operators, and optimising taxes.

What type of foreign property should buyers invest in?

If a buyer wants to make money on tourist property but is unable to personally manage it, Tranio recommends serviced apartments that lease on a monthly or daily basis. The minimum budget recommended for such apartments is €100,000. They can be purchased separately or in packages.

The main advantage of serviced apartments is in their management. They offer a limited range of services (typically only cleaning), and therefore require less human resources to be managed. The business will remain low-risk and profitable even if the management company only handles one single apartment.

As a result, the investor puts money into the same strategy with the same target audience that when buying a boutique hotel but does not need to focus on management and gets a good yield rate: 5-7% per annum after tax and expenses.

Example 2:

Tranio's clients, a couple from the Baltics, wanted to buy tourist property in the Austrian Alps. As their busy schedule did not allow them to personally manage the property, they bought an apartment as part of a pooled investment project that used a property management company to lease the apartment for short terms.

The management company fee (20–30%) was deducted from the total rental income and the net profit was divided among the investors proportionally to their share of investment. The investors only had to familiarise themselves with the management company's income and expense statements, which were sent quarterly.

What property type to choose?

Purchasing criteria Hotels managed
by a major
operator
Mini-hotels Serviced apartments

Up to €5 million

Located abroad

Passive income with a management company

Not the main business but an extra source of income

Tranio’s managers offer advice on buying real estate overseas
Anna Boyarchukova
Anna Boyarchukova
Real Estate Expert Tranio overseas
+44 20 3608 1267
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