A guide to investing in hotels - Commercial Property Investment | Research Centre
An investment into a hotel room is often seen as another form of a buy-to-let investment, with numerous very short-term tenants throughout the year. The general consensus of a hotel room investment would be that an investor purchases a hotel room, and the hotel then let the room out to hotel guests, generating rental returns for the hotel room owner.
Property investors see investing into hotel rooms as a great alternative investment opportunity that brings diversity into their portfolio as well as providing returns that can be better than mainstream property investments.
An attractive aspect of hotel room investing is that hotel rooms require a lower initial investment than other types of investment, and given the current climate, more and more investors are reluctant to invest larger amounts into one property.
As well as being able to generate higher returns than other commercial property investments, hotel rooms are often managed mainly by the hotel, providing investors with a hands-off investment that will require minimal work and expenses going forward, particularly with the typical stamp duty surcharge for investments not applying to hotel room investments.
Niche assets such as hotel rooms have become increasingly popular over recent years, with higher returns and the chance to diversify a portfolio two of the main reasons as to why this type of investment is such a hit. According to Savills, there were £8.1 billion of hotel room transactions in 2015, representing a significant increase from £6.1 billion in the previous year.
The way in which a hotel room investment works is to firstly determine whether the investment will include having full ownership or fractional ownership of the room. After deciding upon a hotel and agreeing to buy a unit, a deposit will be paid by the investor and the room is taken off of the market. As is the same with buying another property such as a house, contracts are created, reviewed and then exchanged for the investor to take ownership of the hotel room. After completing the buying process, the room will then be subleased back to the hotel for guests to occupy it, generating the rental income.
The option to take fractional ownership of a unit within a hotel provides investors with a lot of the same benefits as having full ownership, scaled down compared to the share that the investor has in the ownership of the room. The returns generated by the room and the benefits associated with ownership of it are proportionally similar to full ownership of the.
A hotel may seek to sell a room or a selection of rooms rather than keep ownership of them, mainly when the hotel are looking to fund the development process or to recoup some of their initial outlay for the development. Therefore, many rooms can be purchased off-plan, which brings obvious risks that aren’t associated with hotels that have already been built before the time of your purchase.
One issue that may be of concern to investors is the resale of the hotel room as the concept of buying a fraction or the entire hotel suite is quite new, even to seasoned investors. As their rise to prominence has only been recent and more focused on new developments rather than existing hotels, investors may have reservations about purchasing this type of investment.
With this in mind, many developers include a 100% guaranteed buy back scheme which usually applies a number of years into the investment and which gives investors the confidence and assurance that they have a clear exit strategy, should they want to cash in on their investment.
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