The 4 things to know when investing in hotel rooms

Considering investing in a hotel room? It sounds like a great deal—rather than buying a whole property or forming a JV to own a hotel outright, potential investors can buy a room in an upcoming development and collect a percentage of the income generated by that room’s rentals. And that’s it. If everything goes right, it’s a win-win proposition: The project is funded by numerous individual investors and those investors make a tidy income without the mess of partnerships or management responsibilities. (The hotel management company handles the daily operations of the property.) The initial expense can be much lower than buying a full hotel, but the rewards—over the long-term—can be very positive. 

Of course, things can go wrong. The investor’s profits depend on the hotel’s RevPAR, and if that drops, so does the return on the investment. And any number of factors can affect RevPAR: Sporting events, economic downturns, terrorism fears and natural disasters can all affect profitability—sometimes positively, and sometimes less-so. Even something as simple as the management company’s contract expiring could affect revenue: If the new management company isn’t as good as the previous one, guest satisfaction can decline—along with the profits. 

UK-based FJP Investment has some good advice for investors considering buying a hotel room. 

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1. Know what kind of asset you want, and consider aiming high.

While midscale hotels can be a steady source of income, they can struggle in economic downturns. “However, the luxury hotel market is rarely affected by economic downturns. This implies that its revenue remains stable throughout. As such, it is a more secure hotel investment as compared to the budget two- and three-star hotels.”

2. Know how much you can afford to invest.

“A full hotel room investment can cost you as low as £15,000. You do not require loans or mortgages.”

3. Know your tax options in your target destination.

Real estate and investment taxation options vary greatly across state lines and national borders. Be sure you know what you’ll have to pay back. “Tax efficiency is a major benefit when it comes to investing in hotels. Since hotels are ranked in the same category as commercial properties, there are many tax-efficient opportunities available which means additional returns on your investment.”

4. Know your exit plan.

“You can opt for a buy-back that is usually guaranteed, as long as your investment is over a certain period of time. With this arrangement, you will sell the property at a profit, on top of the returns you will have made during the entire period.”

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