Buy to let hotels rooms – an ideal investment in a slow market?

For most people, investing in property right now would be the equivalent of investing in ocean liners during a ride on the Titanic. Perhaps unsurprisingly where investors are considering putting money into property, they’re looking for both security and a bargain. With many fleeing increasingly shaky traditional property investments, alternative property investments – like buy to let hotel rooms - are increasingly worthy of consideration.

Options for property investors

For most property investors there have traditionally been two options – buy to let and adding capital value through renovation. While renters continue to rent, rising mortgage rates and difficulty accessing finance for new purchases has made the buy to let market an increasingly difficult nut to crack.

For renovators, falling house prices do create opportunities, but no one is sure when, or if, house price growth will return to its pre-crash speed. That, combined with a soft sellers’ market, makes this kind of property investment a long-term game more suitable to investors with piles of unspent cash.

So if you’re one of those potential investors looking for both security and a good deal what are your options and could buying a hotel room be an answer?

Hotel rooms - an investment in property AND tourism

Despite the economic woes, tourism has so far remained fairly robust. This can partially be explained by the growing trend for people to holiday in their home country – keeping demand for hotel rooms relatively solid in locations that attract both overseas and domestic tourists.

On that basis, overseas, holiday-friendly property can often provide a solid return over and above what would be expected in the domestic market. Of course, it has its drawbacks as well. Property booms are often most acute in holiday hot spots – leading to massive investment and frequently, over development. When things cool off, as they have right now, that leaves a glut of holiday homes. Again, good news for investors with plenty of liquid capital in search of a bargain, but not so good for those hoping to generate income from holiday lets.

So where’s the middle ground?

Buy to let hotel rooms seem to tick all the right boxes. Simply put, hotel developers offer individual investors the chance to buy hotel rooms. Investors who buy hotel rooms benefit from the capital appreciation in tourist hot spots (with a much reduced initial investment), regular income from rooms let and, rather nicely, the opportunity to have the room for personal use for a fixed number of days throughout the year. For investors not worried about personal use, you can even buy hotel rooms via your SIPP (Self Invested Personal Pension) allowing tax fee capital growth and earnings

Aside from the obvious benefit of having someone else looking after everything from maintenance to marketing, the current appeal to investors is the offset risk achieved by earning across the success of the entire hotel – not just their individual room. Whereas an individual holiday let could easily lie empty for half the year, buying a hotel room can deliver returns of 10% or more at even  a modest occupancy of just 50%. For example, Bali Kuta, a recent 4 star hotel development in Bali offered by specialist UK firm Owner Invest, offered 13%+ return on investment at just 50% occupancy.

The downsides of buying hotel rooms

So what are the downsides? Like any other property investment picking the right development in the right location is key. Choose a poor quality hotel in a declining holiday location and the benefits of buying hotel rooms are no better than buying a flat or villa. With that in mind, the biggest driver of the market is reputation.

By choosing a quality developer - and a management team with experience and a proven track record in running hotels - smart investors can avoid many of the pitfalls and risks associated with ‘going it alone’. To that end, investors considering buy to let hotel rooms tend to seek out high-end developments (4 and 5* hotels) in equally high-end, stable tourist destinations.

Certainly no property investment is without its risks but for those investors in search of a ‘hands off’ opportunity that affords a lower level of individual exposure, buying a hotel room might be worth some serious consideration.

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