Looking for a low cost real estate investment route? Buying a hotel room may be just the ticket.
While many property investors consider the possibility of purchasing a hotel outright, far fewer think about investing in individual hotel rooms instead. Yet, perhaps they should. With demand for hotels in the UK soaring, this can provide a profitable yet affordable way of starting or expanding one’s portfolio.
Here, we look at the pros and cons of hotel room investment to help you decide whether this could be a worthwhile next step, as well as outlining how exactly you can actually go about investing in hotel rooms.
Hotel room investment guide
What we like about hotel room investment
- A low entry point: Because you only purchase a room, and not an entire property, hotel room investment is naturally a lot more affordable than other forms of real estate investment. This lower entry point makes it a lot more accessible to those on lower budgets or investors who want more diversified portfolios.
- A stable income stream: Hotel room investments can provide a stable and predictable income stream, especially if the hotel is located in a popular tourist destination or business hub.
- High yields: Because hotel rooms are rented out on a short term basis, they typically achieve higher average rents than a typical buy-to-let. Many receive yields of 8%-plus, which is significantly more than the buy-to-let average of 4.98% in England and Wales.
- No stamp duty: Hotel room investments are considered commercial property investments, meaning that they’re exempt from stamp duty if the property is worth less than £150,000. This can again bolster the affordability and profitability of such ventures.
- A passive investment: Unlike traditional real estate investments, hotel rooms often come with professional management, including the handling of day-to-day operations, maintenance, and guest services. This can relieve investors of the hands-on responsibilities associated with property management.
- Personal use allowance: When investors buy a hotel room, they gain the option of staying there during trips away, with most hotels allowing owners to make use of their room for up to two weeks in any given year.
Hotel room investment: areas of consideration
- Limited mortgage options: There are very few mortgages tailored towards hotel room investments, meaning purchases are typically cash-only. This can prohibit some investors from buying a hotel room in the first place, while it may also pose problems when it comes to selling the property. That said, some rooms do come with a buy back option at least.
- Cyclical sensitivity: The hotel industry is highly sensitive to economic cycles in which travel and tourism declines, affecting hotel occupancy rates and revenue. This cyclical nature can lead to fluctuations in the return on investment. In extreme cases, as we’ve seen with the COVID-19 pandemic and various natural disasters, an investor’s revenue stream may be cut off almost entirely.
- Limited capital growth: Any profits made from hotel room investments almost exclusively come from rental yields, with little potential for capital appreciation.
- Management fees: While professional management services can be a godsend for investors, it does come at a cost. Management companies typically charge for their services as a percentage of a hotel room’s revenue, eating into investor profits.
- High competition: The hospitality industry is highly competitive, and new entrants or changes in the local market can affect occupancy rates and pricing. This can put pressure on profit margins and make it challenging for an individual hotel to stand out.
The verdict: are hotel rooms a good investment?
Quite simply, the answer is that it depends. Before taking the plunge, it’s a good idea to follow the steps below:
- Take into consideration your risk tolerance: Hotel room investment comes with unique risks, so it’s important to work out whether you’re willing to take these on.
- Perform market research: Conduct extensive market research to see how hotels fare in the region you’re considering. Is there a high demand for tourists, and does this appear sustainable?
- Decide upon an exit strategy: Work out how you’ll exit the investment later down the line. Offloading hotel rooms can be tricky, so consider your options in a selling scenario.
How can I start investing in hotel rooms?
Beginning your hotel room investment journey involves many steps, from choosing the right location and unearthing the perfect property, to performing due diligence and actually purchasing the hotel room. This is a tricky process for even the most seasoned of investors, which is why Alesco is here to help.
Using our two decades’ worth of experience, range of market insights, and expert property investment know-how, Alesco can help you build a profitable hotel room portfolio right away. Not only do we have an exclusive portfolio of hotel rooms you can access, but we will assist you with aspects like performing due diligence and the purchase process, leaving no stone unturned in helping you to achieve significant rental yields.
Get in touch with us for more information or to make an inquiry.
Written by: Ben Whitaker
Experienced professional working in the real estate investments sector. Assisting and advising clients on the acquisition of property across a range of asset classes, with view to achieving robust return on investment.