The Truth About Room Investments: Off-limits

On my journey towards my home, I’m doing more searching online and one of those search sessions resulted in having a talk with an “investment advisor” of a realtor specialized in hotel investments. I will start by kicking in an open door: I didn’t take the offer.

Notwithstanding the outcome, the information I received was interesting, and I was open to the idea. At least I could educate myself about it. My reasoning is, the more I know about this business, the less they can screw me over. Or at least not as easy. So, why is buying a hotel room like your dream holiday falling into the water?

Investing in hotel rooms could be an interesting way to diversify your investments as it has the potential to give a net return of 3.5% – 4%, but I realize it’s not for everyone, including me.

Hotels financing their latest project through investors is nothing new think Wyndham, Marriott, Hilton, etc. Their preferred partners are institutions but they (sometimes) look at retail investors. Just do a quick google search for “hotel room investment” or the likes and you’ll get various options.

Most hotel rooms are in the price bracket of €100,000 to €165,000 with exceptions such as “president” or “VIP” suits getting closer to €200,000. This looks cheap but there are a few things you need to take into account and these reasons are why I’ll not bother with it (yet).

The problem I’ve found, and what the slick “investment agent” didn’t tell me, was that they work with hereditary tenure or ground lease. I would own the bricks and mortar, but not the land it’s built on! That’s why the rooms are relatively cheap. You only pay a part. The most important part of real estate is not yours. Instead, you owe the owner of the land rent for its usage. On top of that, more often than not, and it was the case for my contact, the rent gets indexed. This makes it very unclear how much your actual income will be per year.

Another important factor that has an impact on profitability and predictability is the cyclical nature of the hotel industry. In periods of economic prosperity, people can spend a bit more on holidays and more often than not their overnight stay. However, when the economy turns sour. Luxury (trips) are the first things that get cut or at least postponed. Business travel can counter this, but even they have to cut costs in difficult times. This results in a lower occupancy rate and in turn lower profits.

As mentioned above, not only does your investment depends on the inflation (see the first point), in most cases, it depends on the occupancy rate of the hotel. If the hotel manager doesn’t know the tricks of the trade occupancy can remain lower the entire year. In hotel (room) investment it’s not so much about the specific room you buy, but the average performance of the entire hotel. From what I understood from the “investment advisor” at least his company pays out roughly 90% of the profits.

These profits come from the rooms minus the personnel costs, management fees,  taxes, sales costs, public utilities, meal costs, maintenance, and heating. to increase the profits of a hotel (like the one the sales guy talked about), business lounges or conference rooms and the bar/restaurant.

Does this mean, it’s never an option? Well no, some realtors do try their best to be transparent and honest and offer a clear plan for investors. This comes at a higher investment cost since you will own (part of) the land itself as well. When you own the land and the hotel room itself you put the rooms at the disposal of the hotel manager via usufruct.
Though even then, the question remains if the hotel can reach a solid and consistent occupancy rate and thus generate enough income.

Sources:

• Chen, Chiang-Ming & Chang, Kuo-Liang. (2012). Effect of price instability on hotel profitability. Tourism Economics, 18. 1351-1360. 10.5367/te.2012.0180. Retrieved from https://www.researchgate.net/publication/272271396_Effect_of_price_instability_on_hotel_profitability