Friday, November 2, 2012

Hotel Room Investment

I sold Ho Bee recently and earned some profits as news and layout of Metropolis was publicized and featured by the local media. Previously, I bought more Ho Bee post ABSD announcement (Additional Buyer Stamp Duty), so the price locked in was relatively "under-valued" against revised NAV (net asset value)

Back to properties - today, I will like to touch base upon the idea of "buy and lease out a hotel room". Ignore the details below if you prefer hospitality REIT.

Please do your due diligence - this article is for reference only

OVERSEAS HOTEL ROOM INVESTMENT (INCLUDES SERVIED APARTMENTS)

Picture the concept - invest in a fully-furnished hotel room overseas, so that you actually own it and you turn over to a Professional Operator (i.e. Property Manager/Developer) for a medium to long term to manage it. In return, they pay you a monthly rental income

Here are the benefits given to you, as an investor:

1. The property/hotel operator offers guranteed returns, as much as 6% annualized yield for the first 4 to 6 years

2. You might be thinking of your next travel gateaway because there is free stay given for x limited of days/weeks

3. To make it attractive, some firms will offer free 2 years maintenance

4. The property/hotel operator will indicate that the chance of zero occupancy for that hotel is rare, so there will be medium to high chance for your room to be leased out

5. You are the proud owner of a well known hotel room/serviced apartment

Such hotels and serviced apartments for investments are common in Australia, New Zealand, Malaysia, Thailand, Philippines, Britian and America.

Let's look at the considerations:

1. The hotel should sit on a prime site that is near to transport, food & attractions as demand is stronger. Therefore, your room leased out can command a higher rental fee and thus provide you with healthy monthly cash flow

2. After first few years of "guaranteed yield", you might need to re-negotiate with the Hotel/Property Operator for a new "sales & lease agreement". Hence, you need to anticipate, after the lock in yield period, will the property climate of the local market weak or growing which is one of the few reasons where the Operator may discuss terms favorable to them.

3. Expenses such as stamp duty, legal and title registration fees, applies. It is no different from residential or commercial unit. You will also need to pay monthly upkeep (i.e. hotel expenses) - it is deductible from the total revene.

4. Till date, a check with local banks in Singapore does not offer loans on hotel room investment. Usually, you need to find the banks where the property is based. For example, if the hotel is located in Australia, Westpac could offer financing to Singapore investors.

5. Property investment outside Singapore cannot be funded by CPF savings.

6. Check if the Professional Operator is an established player and has good track records/well experienced in such transactions

7. Read the fine print of the agreement and find out in details the expense breakdown. For example, housekeeping are charged to investors at a huge percentage, despite the Operator getting a large cut of the profits

8. Rental return rate is dependable on occupancy rates, so it fluctuates from month to month, unless there is a guranteed fixed return (i.e. most operators will provide such incentives to you). Good thing is, rarely there is zero occupancy for hotels or serviced apartments

9. Investors should note that the market for the sale of hotel rooms is less developed and therefore they may find it LONGER to sell off their investment. When this happens, you will incur monthly upkeep expenses and opportunity costs. What you get is probably monthly rental income only. Do your calculation and assess if your initial outlay + maintenance will be more than your returns for a specified time period

Personally, I find the guranteed yield attractive for a certain period of time. However, I have to study the risks involved. Overall, the nature of the investment and returns should match my profile and objective. For instance, if I am looking to sell my properties 10 years from the date of purchase, I am not sure if my hotel room can be sold to another potential buyer since some local markets are less developed. Plus, the longer I wait, the more monthly expenses incurred (i.e. rooms are well maintained). Not to mention my cashflow is tied down and not possible to release for other attractive opportunities (unless I am wealthy :)).

Nonetheless, it's good to know that such property investments are available.

6 comments:

  1. I totally agree with this post and looked into a hotel room investment myself. The key though is that you must work with a good sized and reputable company. Don't bother with little boutique hotels either - too risky.
    alternative investments

    ReplyDelete
  2. Hi Bill

    I agree that the company background, profile and credibility is highly important. On the investment side, the question is, after the period of "guranteed yield", what happen next?

    My understanding is that for some markets, the liquidity for hotel room buy/sell is low.

    ReplyDelete
  3. Interesting concept.

    Is there any marketplace where you can buy and sell hotel investments?

    ReplyDelete
    Replies
    1. Hi Aaron

      I am not sure there is a dedicated marketplace but you can try property auctions (get to know your property agents and be on their mailing list) or if not, speak to industry professionals to get more referrals. What I do know is you need to get a licensed agent to help you buy/sell the hotel rooms.

      Hope this works.

      Delete
  4. Hotel Room investment is like a business plan. You buy the space and hire a operator to oversee the operations. Its a cash cow operations. Typical yield is > 9% for the hotel to be viable.

    As in all real estate, hotels appreciate over time, especially if its a good yielding units.

    In analysing hotel deals it would be worthwhile to do a study of the demand and occupancy and if you could live with worst case scenario. I analyse it to be 30% occupancy rate. You should break even. Your average should hit 70%.

    Realistically, your target resell audience are investors and they too look at yields. If the yields are good, why not invest in hotel room units.

    ReplyDelete
  5. Do everything to get our business at the right track. Make sure that we are heading towards our goal. Our real estate business should not have any problem that should occur specially at the start of it.

    Real Estate Investing

    ReplyDelete

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