Should you invest in Hotel Rooms? That will be the topic of this article.
We will look at some of the disadvantages, as well as potential advantages.
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Table of Contents
Before we get to our main topic for today, which is about investing in hotel rooms, we will discuss some of the terms related to it in a brief manner so that we can have a better understanding of the topic.
What is an investment?
When we acquire an asset/item or allocating resources in order to generate profits from them, the process would be called making an investment.
For instance, when we deposit in a bank seeking to generate profits in the form of interest, then depositing money can be considered as making an investment.
Another example of the most common type of investment is buying stocks. When you buy a company’s stock in order to sell it at a price higher than the price for which you’ve bought it, then it is also considered as an investment.
Some of the primary examples for investments are as follows:
- Bank products
- Real estate
What is a real estate investment?
Buying a real estate property has been one of the best types of investment for many years, which can be both effective and profitable.
Not only that, but it also has been one of the oldest and most popular types of investments as well. Most people might already be familiar with these aspects, yet they might not have an idea of how many types of real estate investments exist.
Each type of real estate investment has its own pros and cons; therefore, we will discuss some of them before we dive into our topic for today, i.e., if you should invest in hotel rooms.
First of all, let us have a look at the categories of a real estate investment before discussing its types.
What are the categories of a real estate investment?
Residential properties include houses, apartments, townhouses, and other structures in which an individual or a family can stay. Most people who want profits on residential properties tend to rent them or lease them on a rental/lease agreement.
Commercial properties mostly comprise office buildings and other relevant infrastructures. People sometimes build these structures and rent them to companies.
Industrial properties include industrial warehouses, storage facilities, and other buildings that are used for industrial purposes. Similar to commercial properties, industrial properties are also built and thereafter rented out to those in need of them.
Retail properties include shopping malls, supermarkets, and other similar stores. Not only would the property owner receive the base rent, sometimes they even get a percentage of profit from sales.
Mixed-use properties are the types of properties that can be used for two or more purposes listed above.
What are the types of real estate investments?
Usually, the most common thought that comes into mind when usually talking about real estate investment is Flipping.
To those of you who might not be familiar with the term, flipping refers to buying an asset or security and selling it within a short period instead of holding on to it for a longer period.
People who opt for flipping in real estate would often buy a property, make some renovations/repairs, and sell it for a higher price.
Sometimes these investors would even predict the rise in prices and sell the properties without even the necessity of any renovations or other changes.
Another type of investment is buying a property and holding it for a certain period of time until the price of the property increases.
By doing so, people will have higher profits as real estate would offer profits that can even beat inflation.
There is another lucrative investment option known as a ‘Real Estate Investment Trust’ or a ‘REIT’, which is more similar to a stock.
When you put your money in a REIT, you are actually buying the shares of the company or organization that actually owns the real estate property, after which you would receive profits in the form of dividends that are the profits obtained by that company.
Sounds complex? Let us make it simpler for you to understand what REITs actually mean. Let us assume you are a person wanting to invest a certain amount of money in REITs.
Now, you just put that money in a REIT of your choice. The company related to that REIT would offer you their shares for the money received from you. That company owns a certain real estate property, let’s say, a property used for a shopping mall.
The profits obtained by the shopping mall or the rent paid by them would be offered to the property owner, which would thereafter be presented to you like dividends, on the basis of what fraction of that company is owned by you.
As the income obtained from the REITs is acquired in the form of dividends, the people who invest in REITs would have to pay capital gains tax (depending on the rules and regulations in the investor’s country).
These are the common types of real estate investments that are known by most people. Now, there is yet another type of real estate investment that is not known by most people.
This new method of real estate investment is nothing but investing in hotel rooms. Yes!!! You have heard it right. Instead of buying a hotel, you could just buy a certain room in a hotel, which would offer you the profits obtained from that specific room.
Let us have a more detailed view on the topic of whether you should invest in hotel rooms and take a look at some of the major advantages as well as disadvantages so that you can conclude whether or not they are ideal for you.
In this part, we will cover all the information related to hotel room investments such as what they are, how they work, how are they profitable, what are the drawbacks, etc. Let’s look a bit into the hotel sector before we get into those.
A brief look into the hotel industry
The hotel sector is tied to the service, hospitality, and travel and tourism industries. The hotel sector is devoted to lodgings, and the majority of its concepts encompass all types of short-term guest accommodation options, including B&Bs (bed and breakfasts), hostels, inns, and motels.
Due to the adaptability that hotels possess in the context of the travel industry, investors have shown a great deal of interest in purchasing hotels over the past few years.
It is unsurprising that COVID constraints, cleaning necessities, and a lot of individuals unwilling to stay in a room that was previously used by someone else kicked the business hard, especially in 2020. Despite that fact, we’ve been seeing relatively favorable economic changes for 2022 and 2023 investors.
In an article on Globest.com, Joseph Ori, executive managing director of real estate investment firm and advisory services provider Paramount Capital Corp., said “the hotel industry which was decimated in 2020 and 2021 by the Covid pandemic is beginning to turn around with very positive fundamentals and will be the favorite [commercial real estate] investment in 2023.”
Ori also said that numerous hotels were offloaded in 2021 at 60 percent on the dollar amount they had been priced at before the pandemic, and there continue to be discounts available in the industry.
Furthermore, there is a significant backlog in bookings for both business and leisure trips, and due to the fact that hotel stays are typically rented on a night-to-night basis, hotels offer the best hedge against the risk of an increase in general price levels.
Should You Invest in Hotel Rooms: What are hotel room investments?
From what we have discussed earlier in this article, we have seen that you either obtain profits by selling the property (flipping) or you can obtain passive income from the property (REITs).
Now, hotel room investments are one of a kind, which allow you to acquire profits as passive income while having the ability to sell the asset whenever you want (for a better price).
Being a real estate investor, you might get an idea about how beneficial it can be as you will not only be getting passive income, but you will also be having profits when you wish to sell the unit owned by you.
This won’t be requiring any sort of time or effort on the investor’s behalf as all they have to do is make an investment, sit back, and have a nice ride.
Should You Invest in Hotel Rooms: History
The process of making an investment in hotel rooms didn’t start recently. To most people’s surprise, it has been in use for a lot of days.
In the beginning, people used to invest in hotel rooms in other countries or to simply say, used to buy hotel rooms in other countries so that they can have hotel rooms available to them when they are on a vacation in that country.
In most cases, Americans used to buy hotel rooms in other countries (especially European countries) for such purposes.
As days passed by, buying or investing in hotel rooms became more of a traditional way of investment related to real estate investment, which became more lucrative and started to bring more profits to the investors.
Should You Invest in Hotel Rooms: How does it work?
A large hotel property is divided into many individual units. These individual units are nothing but hotel rooms, which would be sold to the investors afterward.
Even after that, the actual asset is still owned by the hotel owner, which means that the individual won’t be owning the actual asset.
This might seem more like a buy-to-let type of investment, but it actually isn’t. investors opting for the buy-to-let type of investments actually have the underlying asset, which can be a drawback when you invest in hotel rooms.
On the bright side, the investor won’t be required to manage or maintain the property as all of that is actually done by the owner of the hotel.
However, there is even a drawback for that as well because if the individual investor does not manage or maintain, it means that they cannot do any sort of promotional activity that will generate profits for them.
Usually, an investor does not get profits in variable form, but instead, they will get profits as a fixed return (about 8% to 12%). The profits (fixed return) may be more or less than that of the approximate value.
However, according to what we know, there are some good advantages as well as some drawbacks for when you invest in hotel rooms.
A hotel room investment can be one of the best types of investment for acquiring steady income and improving the finances with the help of a fully managed property while expecting a better price for the actually invested capital.
Should You Invest in Hotel Rooms: How can you gage a hotel’s performance?
Investors in hotels need to keep a close eye on the performance of their properties to ensure that they are profitable. In order to accomplish this goal, you will need to place your attention on a number of key performance indicators (KPIs). When utilizing these performance measures, it is much simpler to recognize problems and provide assistance to hotel managers in modifying aspects of the business.
The average daily rate (ADR), which calculates the average income for every paid occupied room over the course of a specified time period, is an excellent illustration of a hotel performance measure. Other examples include something called revenue per available room, or RevPAR for short. You can apply this metric by dividing your aggregate room revenue by the aggregate number of rooms available in your establishment.
A comparable metric is the gross operating profit per available room, which is computed in the same manner but takes into account all sources of revenue instead of just room revenue alone.
So, how will these hotel rooms gain our profits?
We are already familiar with the fact that hotels offer rooms to short-term tenants and collect rent and other charges from them.
These hotels usually manage and maintain everything related to these rooms other than just collecting the money. This money collected from those short-term tenants (rental income) is the profit obtained by the hotels.
This income obtained by the hotels is offered to the people who make an investment in the hotel rooms in the form of profits.
Should You Invest in Hotel Rooms: How it is compared with other real estate investments?
We’ve already stated that investment in hotel rooms is one of the best types of investments related to real estate.
The average returns offered on investments in hotel rooms range between 8% to 12% approximately, which is 10% on average.
These 10% returns mean that if you invest an amount of $10,000 in a hotel room, you would usually get $1,000 a year, which is quite advantageous.
Additionally, these 10% returns are actually higher than stocks (4% on average), deposit accounts (≤1%), etc.
When it comes to the traditional buy-to-let type of investments, there is no guarantee that there will always be a demand for tenants. However, that’s not the case for hotel rooms, as there will be demand for hotel rooms throughout the year.
In general, even most of you might have experienced problems in finding hotel rooms during the last minute, especially during holiday seasons.
This makes us see why investing in hotel rooms will always be an effective form of investment. Along with that, most hotel owners and promoters come up with lucrative schemes that seem attractive to the tenants who seek hotel rooms.
If you plan to invest in hotel rooms, it is considered a good choice to invest in smaller independent hotels as those are most likely to be filled fast instead of investing in large hotels.
Should You Invest in Hotel Rooms: Why do hotels need money from private investors?
Some of you might be wondering right now that if hotels are successful according to what we’ve said, yet what is the necessity for them to sell their individual rooms to private investors?
It is nothing but a business and here’s why we say that. When a hotel allows you to buy a room as an investor, they simply raise money for finance or to build capital.
This is one of the important reasons why these investments come with a buy-back option. This means the investor is able to sell back the room to the hotel owner for a price higher than the price invested.
For this, the individual investor would be required to wait for a certain period of time. Upon completion of that time, a fixed return would be presented along with the original price that has been invested.
Other than that, even if you invest in hotel rooms and it fails to bring profits, you would still have a room in a hotel.
Should You Invest in Hotel Rooms: How can you find the actual worth of a hotel room while investing?
Anyhow, the value of a hotel room you own depends entirely on what you can get from putting guests in it.
So, what if the hotel doesn’t want to let your guests in? They own the entire property and can actually do it…
Therefore, when buying a property, whether it is for your own use or as an investment, you don’t go and pay whatever the amount asked by the estate agent.
The estate agent generally works for the seller or the scheme promoter. Hence, you hire a valuer on your behalf to check that the house is worth the price they are asking for.
In the same way, when someone offers you a hotel room for a fixed price, you shouldn’t hastily invest in it without hiring a valuer who works for you.
Instead of the promoter who is selling it to you, it is better to consult and work with a valuer to check that the price is reasonable as well as profitable.
The possibility of a secondary market for investments in individual hotel rooms (without the involvement of the promoter of the scheme) is very drastic.
Think like somebody else… why would you actually want to buy an individual unit in a hotel from a person instead of the actual promoter of the scheme?
That too, there won’t be any guarantee for fixed returns in contrast to the returns offered by the promoter of the scheme.
Should You Invest in Hotel Rooms: Does it offer diversification to your investment portfolio?
Investing in hotel rooms will definitely diversify your investment portfolio, if your investment portfolio consists of traditional investment opportunities.
Not only would it diversify your traditional investments, it will also diversify your real estate opportunities.
If you are thinking that your investment portfolio will get diversified in terms of the type of investments, you are thinking wrong.
Your investment portfolio will be diversified in a geographical manner as well (when opting for investing in hotel rooms located in foreign countries).
Should You Invest in Hotel Rooms: The Pros and Cons
Having discussed most of the important aspects related to investing in hotel rooms, we will now move on to the advantages as well as the disadvantages involved with it.
First of all, we will discuss the major advantages related to investing in hotel rooms.
- To invest in hotel rooms will diversify your investment portfolio.
- The returns that you get for when you invest in hotel rooms are subsequently more (8%to 12%) when compared to other forms of traditional investments.
- Unlike other buy-to-let types of investments, you won’t be required to manage/maintain the property by yourself as the hotel owner would take care of everything.
- If you consider the place to be an ideal option for vacation (where you are investing), you will also have the benefit of staying in that place for free of cost (when it comes to renting a hotel room).
- People who won’t be able to afford to make the necessary investment for buying a hotel can opt for investing in that specific hotel’s room.
- Along with the fixed returns offered in the investment, people would also have the benefit of the buy-back option made available from the promoter of the investment scheme.
- The promotion process of the hotel rooms would also be done by the hotel management itself, therefore you won’t be required to worry about that aspect as well.
- If the hotel is located in one of the famous locations in that specific area, there is no need to worry about the demand for the hotel rooms in that specific area.
- In most cases, hotel rooms would always have a demand as there won’t be a shortage for the people who want to rent a hotel room.
- During holidays and summer vacations, you will definitely be able to get a lot of money by investing in hotel rooms as people would generally travel a lot during those times and usually require a hotel room to stay.
- If you invest in a big hotel room, the reputation is enough and there won’t be an additional necessity of promoting the room in that very hotel.
- If you invest in a small hotel room, then you must know that most people can’t afford large hotel rooms and would generally prefer to stay in a hotel with reasonable rates.
Having discussed the advantages of investing in hotel rooms, we will now discuss the drawbacks of investing in them.
- One of the major disadvantages of investing in hotel rooms is that people won’t be able to resell them to other people as the third party buying from them won’t have the guarantee that is offered by the promoter of the scheme.
- Usually, when a person opts for a buy-to-let type of investment, they can do something about increasing the demand. However, in this case, they would have to rely on the hotel management or promoter of the scheme.
- Even the hotel room would be available to the person who is investing in them, those rooms would basically have a certain limit stating how many days an investor can stay in that specific room.
- People who are in the jurisdictions that have heavy taxes imposed on people would have to pay a lot in the form of taxes for the amount that they are receiving in the form of profits from these types of investments.
- While investing in hotel rooms, you would have to hire a valuer so that you make sure you are not paying more than what is a reasonable rate.
- Holiday seasons and vacations are quite beneficial, yet we should also consider the fact that the other days might be that beneficial.
- As we discussed that both large hotels and small hotels have their own advantages, we should also take into consideration that they have their own set of disadvantages.
- Large hotels might not be affordable for most people, while small hotels might not have enough reputation to get a lot of tenants.
Should You Invest in Hotel Rooms: Final Verdict
By considering all the benefits and drawbacks of investing in hotel rooms, we want to say that to invest in hotel rooms comes with a unique set of pros and cons.
Yes, they are good for the people to get more returns, diversify their portfolio, have a hotel room available during their vacation, etc.,
Yet, we must also consider the disadvantages that we won’t be acquiring the underlying asset, the ability to gain more demand won’t rely on us, and we should also pay a lot of taxes (if not located in the particular area).
Based on these features, you might be able to get an idea of whether to invest in hotel rooms would be beneficial to you or not.
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