You may have heard people talking about the possibility of buying hotel rooms as an investment, and you may be curious about how it works and whether or not it’s worth the money. Unfortunately, there’s no magic bullet to telling you whether or not this type of investment is right for you; it all depends on your long-term goals and how much time and effort you want to invest in the process. Before you make any decisions, though, read this guide on what to know before you buy a hotel room for investment purposes so that you can make informed choices that take your personal preferences into account.
Affordability
Know that buying hotel rooms for investment is more expensive than investing in other types of real estate. The major draw of hotel investments is the potential steady returns and the potential to increase values as more people stay at hotels over time. Your ROI will depend on what kind of market you live in. Some regions, like Asia, are reporting annual gains of 7-8% while others, like France and Switzerland, are seeing decreases. If you want an easier option with less risk, try investing in something else besides hotel rooms–like commercial or residential real estate.
Solid markets
To start, the US hotel industry is set to grow at 2.2% annually until 2020 which is less than the historical average. To make sure your investment goes smoothly, research what markets are underserved by hotels and how tourist traffic in these regions could change in the future. For example, Midwestern destinations tend to be more popular during the summer months while southern states see a higher influx of visitors during colder months. Investing in neglected areas also comes with lower risks because tourists are drawn by bargains that are often found when tourism rates are low.
Copperthwaite Hotel Group’s stock has increased by over 15% since they began investing in hotels and starting up new franchises.
Some analysts believe this may be due to their ability to pinpoint undervalued markets or diversify their portfolio; others feel it’s due to an overall rise in demand for stocks. Regardless, Copperthwaite Hotel Group has seen success investing in real estate across all industries – there’s no reason why you can’t too!
Value
Hotel rooms can provide excellent value and upside potential. However, it’s important to know the risks of this type of investment before jumping in. These include operational risks (inherent in any business), higher tax liability as your earnings will be taxable, and capital requirements. Make sure you have the stomach for it.
Why hotels?
Hotels offer investors access to what is arguably the most profitable space in the world: real estate. Hotels are limited in how many rooms they can build, but this allows them to continually increase prices and make higher profits than other sectors of the economy such as groceries or cars. In the United States, for example, hotels show about ten times more profitability than other industries and less variability than others. Moreover, hotels are also correlated with low correlation risk – this means that if one sector goes down, it is likely that another will go up so there is minimal correlation risk between different markets.
The second reason is that hotels are actually fairly recession-proof. The rates hotels charge tend to go up as people get paid more, and so even in economic downturns, hotel profits remain relatively high. This is particularly true of luxury hotels, which rely on discretionary spending rather than on business trips or long-term stays.
Finally, we also like them because they are highly measurable – you can tell exactly how much revenue you are making per room per night, and it is usually quite clear whether a rate is too high or too low.
Location, location, location…
Now, you may be wondering why in the world would you need to know anything about location when buying a hotel room. Well, the location of the hotel is not only important from a convenience standpoint, but it also affects what kind of return on investment you will receive.
Before purchasing any type of investment property – including an investment property such as a hotel room – it’s imperative that investors determine what kind of ROI they’re getting.
Target Market
If you’re considering investing in hotel rooms as an investment strategy, then it’s important to think about what your goals are. If you want rental income, then stick with long-term hotels and make sure that they’re located near city centers with high concentrations of tourists. If you want returns on capital investment, then invest in luxury hotels. Luxury hotels tend to generate a higher revenue than mid-range hotels. But before making any decisions about what type of hotel is best for you and your situation, do your research! Check out similar markets and compare occupancy rates over time to make sure that there’s demand for these types of properties in the area.
Best Times To Buy
- Hotels and vacation homes are often at their cheapest when supply is outstripped by demand, like in January or on the days right before Christmas. If you can afford it, these are great times to buy since they usually come with the best rates. And since there’s no risk of overbooking (and you’ll likely be the only customer) while still enjoying all the benefits of not having to clean up after yourself, it’s a pretty sweet deal.
- Rental prices are also low during winter, so that could be another time to snatch up some rooms if you’re looking for something a little more long-term.
- One more option: think about buying a room from an owner who wants to downsize but doesn’t want to sell the entire property outright – this way they get some money upfront and help pay off any mortgage debt while you get an investment that grows as your own cash flow increases.