- Buying a hotel room can be an excellent investment. A company operates the property. In return, you get a fixed interest rate and a buyback guarantee. Investment can start as low as $50.000.
- Real state investment should be part of any well-diversified investment portfolio, but managing and maintaining a property can be costly and time-consuming. That is where alternative property investments like buying a hotel room come in place. A company operates the room, and you take a share of the profits.
- When buying a hotel room, you might get to use it as well for free. Buy it in a place you like and start saving during your vacations!
In this article, I will explain why buying a hotel room can be an excellent option to complement your investment portfolio.
Having a diversified investment portfolio is one of the keys to reach financial freedom. We all know that. Adding real estate investment to your portfolio might seems challenging, as the cost of buying a house generally requires a mortgage.
The truth is that most people see property investment as buying a house or a flat. In reality, real estate investment means much more than buying houses. There are several other investment options, including mutual funds, individual stocks, bonds, exchange-traded funds (ETFs) and purchasing a hotel room.
You might have your emergency fund allocated to a high-interest savings account. But it is important that you set clear financial goals for retirement savings. If your risk tolerance permits, a portion of your invested capital must be set aside on long term stock market ETF. These two subsets will make your basic investment portfolio.
Knowing how to invest and properly diversity includes more than just a savings account and a couple of ETFs. Define a target date and set aside some capita for real state investment. The intelligent investor starts investing in real estate without taking a mortgage. One option to do that is by buying a hotel room.
Buying a hotel room: investment models
You can buy a hotel room under different investment models. In practical terms, you will own the property, but the hotel administration will operate it.
Hotel operators usually sell units to individual investors as a way o raising capital for construction or renovation. That is why the most common mechanics involve buying the property before it gets constructed or renovated.
Most contracts are fixed-term, meaning that you buy the property with a guarantee of selling it back to the hotel operator after some time. There are, however, permanent contracts where there is no buyback obligation, nor guarantee.
Standard contracts define a fixed payment of about 7 to 8% a year. In the case of buyback contracts, the regular rate is around 3% a year for a commitment of 5 to 10 years.
Finally, most contracts define a certain amount of days or a fixed period of the year where you can use the property at no cost. This kind of arrangement is especially relevant in case you are investing in a touristic condo-hotel.
Making the best out of your investment
There is a wide range of ways to invest when it comes to buying your property inside a hotel. Choosing the right one for you is vital to guarantee the success of the investment.
Firstly, you select the city where you want to invest in. For convenience, you might want to choose something in the same town where you live. On the other hand, if you prefer something at a touristic location, then you might save some money during your vacations buy staying in your new property.
When you have made your homework and you are ready to start investing, consult a financial advisor. Be aware that he might want to divert you to other products where he can charge for brokerage feeds. Hold your ground and focus the discussion on the real estate low capital investments you are looking for. Try to speak to at least three financial advisors so you can x-check information and filter the sales pitch out.
What are the risks
You are about to get 10% a year on returns out of your money. That is more than most mutual fund products. Therefore, expect some risks with it. Remember that the intelligent investor invests with caution. You should diversify your asset allocation in order to decrease volatility, not returns.
Here are some hints, so you are not caught off guard:
Who is the hotel operator, and what is their track record?
You are investing in the property as much as in the company that operates it. Ensure it has a substantial and long-lasting track record. Be especially careful if they have not been into this kind of business for too long.
Location, location, location!
Location if everything for any real estate investment. More so if you are buying your hotel room! Make sure you are investing in a city with good touristic prognostics, and that the neighborhood of your property is safe and stable.
Properties close to hospitals, airports, and touristic attractions usually come with a higher price tag that is worth paying.
Know your competition
Who are your hotel competitors? How well is it ranking against its peers? Do your research and ensure your hotel is competitive.
Understand the contract
Your investment will be as good as the contract lets it. When buying your hotel room, as in any property investment, make sure to understand the contract in full. How are the costs going to be split? Who pays for the taxes, maintenance, and renovation? How is the operator going to guarantee your payments during a lower than an expected season?
Continue reading and learn more about finances:
- Family budget: 6 easy steps to reach financial freedom
- 6 proved steps on how to manage money and unlock financial freedom
- Hope, Predictions and Historical Data: 3 recipes for financial failure
- How to take risks when managing your money? 3 lessons I learned to avoid poor money management
About the author:
Hi, I am Leblon Blue. Mid-thirties senior manager on a large corporation. Happily married for seven years and waiting for my first kid. I have dedicated my past 15 years to build an engineering background and a stable career. After working in Europe, Scandinavia, and Latina America, I am now based in the Persian Gulf, where I manage the performance of a large corporation that operates in the region.
DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation for writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.