Insight – what are the pros and cons of investing in hotel rooms?

It’s one of the more niche forms of property investment, but is investing in a hotel room a worthwhile pursuit?

Here, the team at One Touch Property Investment outline the potential advantages and disadvantages of this type of investment as the UK braces itself for a second staycation boom.

What are the pros and cons?

Before considering a hotel room investment, individuals should weigh up the benefits and drawbacks. Like many property investment sectors in the UK, hotel rooms come with their own specific appeal that might work for some investors, but not for others.

Benefits of buying a hotel room for investment

Lower entry point

Hotel room investments are exactly that – rooms. Therefore, they are much cheaper than a typical buy-to-let as the property itself is much smaller. Hotel rooms typically start from around £50,000, depending on the location of the hotel and the size of the room.

The lower entry point makes property investment accessible to those on a limited budget or those who wish to invest smaller amounts in different property sectors or investment types.

It is a cash-only purchase, though.

Classed as commercial property – no stamp duty

Hotel room investments are classed as commercial property and are therefore exempt from stamp duty charges if the property is under £150,000.

This can make hotel rooms a convenient choice for those wanting to invest in property on a limited budget, or those who feel like additional taxes bump up the price and ultimately affect the overall profitability of their investment.

Achieve higher yields than buy-to-let

Hotel rooms are often occupied on a short-term basis, and this means they usually achieve higher average rents than a typical buy-to-let.

If investors have conducted their due diligence with regards to location and the room achieves good occupancy levels, it is not uncommon to receive yields of 8%-plus.

Personal use allowance

Many hotel developments offer investors complimentary stays – usually in the room they have bought. Individuals can make use of the room they purchased for free for typically up to two weeks. The benefit of free stays could appeal to investors who have an affinity to the area or to overseas investors planning a holiday.

Fully-managed

Usually, a management company is appointed who takes care of the day-to-day running of the whole hotel. This includes ensuring the rooms are in good working order and organising guest bookings.

The fact that a management company maintains the hotel means that there is no requirement for investors to get involved. This allows investors the flexibility to be more discerning on where they invest, as they are not limited to a certain neighbourhood.

Investors can choose to buy in locations that offer better yields, whether that be in a different part of the country or overseas. 

Flexibility with buy-back options

Some hotel room investments offer a buy-back option after a certain number of years. This means that investors can sell their hotel room back to the developer, often at a slightly uplifted price. This offers investors some freedom in the ability to sell, as they are not dependent on another buyer. 

Drawbacks of buying a hotel room for investment

Lack of mortgage options

As we have mentioned previously, hotel rooms are classified as commercial property. Many mortgage companies do not have products tailored towards this kind of investment, especially on such a small scale as a hotel room. This means that hotel room investments are usually cash-only, which could shut some investors out if they only have enough cash for a deposit.

The lack of mortgage availability also means it could be more difficult to sell the unit on in future, as investors will have to rely on a buyer having the full cash amount.

Unpredictable occupancy rates

As we have seen with the coronavirus pandemic, the travel industry is sensitive to disruption. According to research by VisitBritain, hotel occupancy in spring 2020 when lockdown restrictions were at their peak stood at 22% in April and 23% in May, whereas in 2019 the average occupancy rate for both months was 79%.

The negative effects of lockdown on the tourism industry may extend way into 2021 as the government restricts travel to and from certain countries.

Economic crises also impact the hospitality sector. According to PwC, the UK economy contracted by 0.5% in Q3 of 2008, and hotel occupancy levels fell by 4.1% in September alone of that year.

The economic environment and travel are closely linked, as when people have less disposable income, they are less likely to book trips away and this affects hotel occupancy rates.

Similarly, as hotels compete for fewer customers, they are likely to lower prices which affects the revenue each room achieves.

Poor occupancy rates will have an overall effect on the rental yield a hotel room investment can achieve, and at times the sector can be particularly volatile.

Little to no capital growth

Although some hotel room investments come with a buy-back option, there is a possibility of little to no capital growth. Due to their cash-only and specific nature, there is a limited market for hotel room investments.

The yields outside of the contracted period can be more unpredictable and unless the hotel is in a coveted location with plenty of tourism, there may be less appetite from others to invest.

Management fees

Although investors may enjoy the convenience of having a management company at hand to run their investment, it does come at a cost. Management companies charge a fee, often as a percentage of revenue, and investors would have to keep this in mind when calculating a net yield as these fees will eat into the profitability of the investment.

“Hotel rooms can be an accessible route for investors looking to achieve good rental yields,” Arran Kerkvliet of One Touch Property says. “If a prime location is chosen in an area that receives high levels of tourism, and the hotel offers premium facilities, then investors have a decent possibility of making good returns”.

One Touch Property Investment source UK property investments in all different sectors, ranging from hotel rooms to the more traditional buy-to-let investments.

Using the criteria mentioned in this article, they handpick developments based on the principles of good property sourcing. Contact them today to learn more about the hotel sector and other exclusive investment opportunities.