One of the property newsletters I received was advertising an unusual opportunity the other day. “Earn £32,475 in 5 years from assured returns alone”. The idea with hotel room investment is that you buy a room operated by another company and you receive a fixed percentage in return for a number of years. At the end of the fixed year period, they will buy back the room at a slightly higher price.
I will not mention the name of the hotel, but let’s call it Country Hotel that will be bought by LeisureLand Ltd. Here are the investment highlights:
- Fixed 10% interest per year to the investor
- Room buyback after 5 years at 115% of the initial price
- Room price between £50,000-£100,000
- You’re paid a fixed rate regardless of how your room performs
I was hooked. I mean, this is a totally hands-off investment with higher returns than usual AND the option to brag you own a hotel room 🙂
The Investment Mechanics
What’s the catch? I immediately asked myself, why do LeisureLand Ltd go to the public instead of going to a bank for funding? I mean, 10% per year is quite high for an investment mid-term loan. They should be able to get a cheaper loan from an institution.
When I asked, I was told banks don’t give mortgages for this type of investment which is why they go to the public.
Here’s what’s happening in the public route: LeisureLand Ltd wants to buy the Country Hotel and do a refurb, improve its operations etc. So they need some capital. They either don’t have enough money or they don’t want to purchase the entire hotel outright.
So what they do, is that they agree to buy the freehold of the property and sell the individual rooms to investors for a specific period of time. By that time, they will have improved the hotel, expand its operations (weddings, restaurant etc) and bring a higher income.
It’s kind of investing together with other private investors but under the management of LeisureLand Ltd who will operate the hotel and have a final say on how it will be improved.
The investor is essentially buying a room on a leasehold with everything written properly in the Land Registry. The room belongs to you but you have to lease the room back to LeisureLand Ltd for a given period of time.
Isn’t this how Capitalism work? Using other people’s money.
What are the hotel room investment risks?
You have probably made the same thought: What if things don’t go as planned? How guaranteed can the guaranteed returns be? I believe there are many factors to consider.
The most important one is the investment/management company. LeisureLand Ltd should be profitable and healthy as a company. If they fail, the whole investment will go south.
They should be able to demonstrate that they can operate a hotel, improve it and make a profit. Imagine how hard it would be if the investment fails, and you have to agree with other investors to appoint a new hotel operator and get your money back.
How to assess the hotel management company
Similar to how a credit card company looks at your past credit history before lending you money, we have to do exactly the same.
1) Look at LeisureLand’s past track record. I’d say, if it’s a new company, I’d be very cautious.
Do they have other hotels that they operate. Have they transformed other hotels in a similar way – hotel room investment? In my case, LeisureLand Ltd started operations in 2017 which is not so long ago.
If they have such successful history then this is a good sign. But what are the most recent reviews on TripAdvisor and Booking.com since they took over? Look at the most recent 100 reviews.
In general, I want to see they are active by replying comments to all customers, and especially to low-ratings comments.
This is a good sign. It means they take the time to reply to bad comments and fix their online branding.
2) Another way to assess the hotel owners is to look at the company on Companies House.
Companies house offers a free tool to check companies details, their past annual returns. It’s an eye opener because you can view their actual profits and losses transparently, all online.
3) Who are the people behind the company? A quick Google / Linkedin should tell us what their previous occupation, career expertise. Are they in the sector for years? Such transformation requires a lot of experience and I’d like to see that reflected in their previous investments.
Other risks to consider
Although we can research LeisureLand Ltd all day long, I found there are other things to consider when investing in a hotel buy-to-let. I am talking about external factors that have little to do with how good the hotel operates.
Do people go to hotels lately? What is the average trend in the occupancy rates? I’m sure LeisureLand Ltd will offer a nice brochure covering how popular hotels are in the area, but as always, DO YOUR OWN RESEARCH!
I was surprised to quickly find a great report from the VisitBritain website for occupancy rates per region for different time periods. There are 3,000 hotels participating in the study every year which is a good enough sample.
What’s the trend like comparing to previous years? You can also see other helpful statistics such as average daily room rate (ADR) and RevPAR. RevPAR stands for ‘Revenue per available room’ and is calculated by multiplying a hotel’s average daily room rate by its occupancy rate. Obviously the higher the number the better!
Who will cover my investment if rooms don’t let or the hotel fails?
This is my biggest worry. I may do everything I can to prevent all risks, and suddenly the area gets a bad rep or floods happen. Then who will take the loss?
I asked this question to LeisureLand Ltd and they replied back:
“The protection comes from owning a room and this will be confirmed on the land registry website, the returns are contractually guaranteed by the companies involved in the transaction.”
But what weight does a single room have in an entire hotel? If bad things happen and you want to sell or to take some action against the management’s decision you have to agree with the other investors to go down a common path. However, it’s hard to coordinate this if you don’t know who the other investors are!
To quote one of the people affected by GuestInvest, the company who introduced the concept of buy-to-let hotel rooms:
“As far as our solicitor’s concerned, we own the room,” she says. “Well, you can own something, but if you have no power over it, it is useless.” The only power that room owners are left with is the right to terminate the licence which accords GuestInvest status as the hotel manager. However, the administrators point out that to do so would be “an onerous procedure” as the consent of 80 per cent of room owners is required. Furthermore, the consent of 60 per cent of roomowners would be required to install a new hotel operator.
As you can see, you don’t want to run into such troubles. The fire exit is hard to find. Which is why, again, the quality of the hotel management is so crucial for the investment to succeed.
It reminds me how investing works when picking stocks vs investing in an index fund. An index fund offers you the benefit of reaping the returns from all the companies so you don’t depend on a single company. Even when you pick stocks, you usually pick 20 or 30 of them to have a similar protection.
However, in hotel room investments, I don’t see an option to invest in 20 different hotel rooms for the average investor.
Last but not least, have a look at the current rating of the hotel before the takeover. Is it good medium or bad? It will take twice as much effort to transform a hotel that has already established a bad reputation in town. Medium rating (6.0-8.0 rating) is probably what I’m looking for. A very high rating is also not great, since the new hotel owners will have to meet very high expectations from day 1.
Final verdict: Is hotel room investment right for me?
As you can see, there are plenty of risks that make this investment far from ‘guaranteed’ as the brochures like to claim.
First and foremost, the hotel owners must really know what they’re doing. Apart from that, your job is to find out whether they’re trustworthy and capable which is the hardest part here.
Another obstacle is that in case the investment goes bad, getting your money back will involve a lot of paperwork and potentially coordination with the other room investors.
When things are working, everyone is smiling. It’s not that I’m a pessimist, but when talking about investments I first try to find solutions to the things that can go wrong.
I decided not to proceed with LeisureLand Ltd and the Country Hotel as I find it a risky investment given their lack of track record but I’ll keep an eye in the future. I will continue instead my boring but effective passive investing. Until then, happy investing 😉