The changes in the residential buy-to-let sector have caused some property investors to switch their allegiance to commercial property. While many of the same investment principles apply here as apply in the residential area, there are some differences investors need to understand. Here are four of them.
You are effectively investing in a company not buying a property
Although your investment funds will be connected to a hotel “unit”, which technically makes you the owner of a tangible asset, the reality of the situation is that the unit only has value because of the staff and facilities provided by the management company which runs the hotel. Therefore investing in hotel rooms arguably has more in common with investing in the stock market than with standard residential buy-to-let property investment.
They are completely hands-off investments
In the residential world you can, in theory, manage your investment yourself if you wish, although even in the residential world, it can make a lot of sense to use agents. Hotel rooms, however, are completely hands-off investments. The management company takes care of everything for you.
You are offered a guaranteed return
A hotel-management company will typically offer a guaranteed return for a fixed period. The key point to understand here is that they will only be able to make good on that offer if they are still in business, which is why it is crucial that potential investors undertake thorough due diligence before parting with their cash. Basically you will want to take a very close look at the financial health of the company, especially its level of debt, in order to determine how likely it is that the firm will remain solvent for as long as necessary.
NB: If a firm does go bankrupt you will still, technically, own your unit but, as has already been explained, your unit in itself is worth nothing, it needs the support of the management company in order to generate a return. This means that if the management company ceases to exist, you will simply have your name added to its list of creditors to be paid back if there are funds available.
You should expect to exit your investment by selling your unit back to the original vendor.
As has been previously mentioned, the value of a hotel unit is in the guaranteed income it offers. If you wish to exit your hotel room investment, you are almost certainly going to want to avoid providing guarantees of income to your buyer and hence, you really have nothing of value to offer them. Instead, you will typically sell your unit back to the original vendor and they will resell it to someone else with a guarantee of income. Because of this, it makes sense to ensure not only that your vendor has a buy-back scheme but that this scheme is guaranteed (after a certain period) rather than discretionary. Even with a guarantee, however, the reality is that you will only be able to sell your unit back to the vendor if the vendor has the financial wherewithal to purchase it, which is yet another reason why it is vital to undertake due diligence before making a purchase.