Buy to let hotels - advice from Lettingfocus.com

Is it sensible to invest in rooms in buy to let hotels asks David Lawrenson

Buy to let expert David Lawrenson of www.lettingfocus.com looks at the new phenomenon of buy-to-let hotels and asks whether they are good value for money.

In April 2004, property developer Guestinvest, part of the Design Hotel Group, launched a scheme allowing people to buy a room in a 20 room hotel on a 999-year long lease and rent it out, hopefully for a profit.

The hotel was called “Guesthouse West”, situated in Westbourne Grove, Notting Hill in west London.

The scheme went well with the rooms sold out within about two months.

The idea seems to be catching on. Another scheme nearing completion now is being built by Galliard Homes and is just opposite the House of Commons on the south side of Westminster Bridge. The rooms in this fourteen storey hotel will also come on a 999-year long lease.

Prices in the Westminster Bridge scheme will go to well over £1m for a penthouse apartment suite and the property should be completed by 2010 and comes with a guaranteed rental return for 5 years – i.e. until 2015.

But are buy to let hotels a good investment?

On the surface it all looks good. With the Paddington Guestinvest scheme, you also get a room that you can use for fifty two nights a year. For the rest of the time it is let to hotel guests and the income is split half and half between the investor and the firm.

The original plan was to charge an average of about £120 per night of which you would get half - i.e. £60.

There is also an annual maintenance charge of £500. So, if the room cost £250,000 and is let for 273 nights (75% of the year) this would be a net income of 6.3%.
Of course, the rates have all gone up hugely since, but you can see the principle.

Guestinvest say that the investors in the Notting Hill Scheme have earned an income of 6.5% a year after charges so occupancy must have been around the 77% mark.

Obviously this looks pretty good when compared with a more standard buy-to-let in London where 5% net return on total capital would be seen as a good return, especially at the high end of the market.

Not only that, but with the hotel scheme you wouldn’t have the hassle of day to day management either – a factor which is always considerable where you have up-market tenants paying premium rents and expecting a premium service for it.

In terms of capital growth Guestinvest say that the few investors who have sold on the Notting Hill Scheme in the early day made a 10% gain on their original investment with people who have held on making considerably more.

Void Periods in buy to let hotel rooms

One of the keys to success as with any property investment is whether the rooms can be let out successfully. And instead of talking “void periods” as you would with a normal buy-to-let, you would need to think more like hoteliers and talk about “occupancy rates” instead.

If you “flex” the occupancy rates rate a bit, you’ll see that if occupancy drops to 60% (or 219 nights), the net income falls to 5%. At 50% occupancy it is 4.2%.

Given that at the moment, London occupancy rates are around 75 to 80%, the income looks achievable and sustainable in the event of low occupancy.

In addition, if investors used the hotel for private use they could save a lot of money if they stayed for all their private 52 night allocation.

Whether occupancy and hence income levels are sustainable depends very much on the global economy.

The London hotel market, just like all up-market rentals such as serviced apartments and top level buy-to lets, are driven more by changes in the global economy than say other types of buy-to-let. Prices of up market property and rents can sometimes be hit first by any global downturn but are usually the first out of any recession too.

There are other considerations effecting occupancy. Shocks like terrorist incidents are likely to be targeted in the bigger cities, especially the capital and will have an undoubted impact on people’s willingness to visit.

And of course, as with any buy-to-let investment, there is the issue about supply - too many other hotels in the area and the income will be bound to go down. So potential investors should check out how many other hotels are planned in the area.

Investors should also look at the type of rooms on offer. At the Westminster Bridge development many rooms have kitchen facilities so are suitable for longer term guests who may stay for a few weeks or even a few months.

Competition from Serviced Apartments

This means that in terms of competition, this kind of buy-to-let hotel is up against both the privately owned and let “serviced apartments” (in which guests can expect a daily maid service, clean towels and the like) as well as the upper end of the conventional buy-to-let market.

For both new schemes you have to buy off-plan, so as with any off-plan investment you have to imagine the hotel from the architect’s drawings and take a leap of faith into the future.

Mortgage Loans for Buy to Let Hotel Rooms

In terms of finance, you may have to get a commercial type of loan and pay a higher interest rate than you would on a more traditional buy-to-let property. You’ll be liable for stamp duty land tax on purchases.

The legal and long term tax, especially capital gains tax consequences of these types of investment should also be looked at carefully though investors should note that some of these investments are Sippable (providing certain conditions are met)

It must be said that there is a bit of scepticism from the hotel industry. For example, TRI Hospitality Consulting in a survey of hoteliers 35% said they saw these hotels as a “short term gimmick likely to result in legal disputes.”

In summary, investors should take a look at these alternatives to traditional buy to let but should proceed with caution.

About David Lawrenson and Lettingfocus.com

If you need more advice on buy to let hotels or buy to let investments in general please ask me.

I’m David Lawrenson from property investment mentors www.lettingfocus.com

I’m the author of the buy to let book “Successful Property Letting - How to Make Money in Buy to Let” which has been the UK’s top selling property title for the last 3 years. Buy the new edition here:

It is fully up to date with all the recent changes to tenancy deposit schemes, HMOs, licensing, capital gains taxes and it has new sections on buying below market value.

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Lawrenson and Lettingfocus.com – Freelance Writer, Speaker and Consultant

I'm also an independent expert on the UK property market and a well known property investment blogger. I contribute to newspapers and a host of property websites as a freelance writer.

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BUY TO LET HOTELS – ADVICE FROM LETTINGFOCUS.COM