How cool would it be to own a hotel? More so than a rental house or commercial storefront, it’s a glitzy asset that just screams prestige … especially if the hotel in question is an upscale five-star crown jewel in the hands of a Blue-Chip brand-name management company.
For most investors, though, buying a hotel is out of reach. Investors with shallow pockets typically had four choices to buy exposure to lucrative luxury hotel revenue:
- Pool money into a syndicated or crowdfunded acquisition.
- Buy shares in a hotel-focused REIT.
- Buy stock in a management company like IHG or Red Lion.
- Buy the hotel outright—usually reserved for the very wealthy.
But what if you didn’t have to buy the whole hotel? What if you could just buy one hotel room and own it individually, like a condominium in a larger building?
Is such a thing even possible? Can you invest in a single hotel room in a resort or inn? The short answer is yes. In the real estate industry, these are known as condo hotels.
Condo hotel rooms boast higher occupancy rates and greater monthly returns than regular condominiums. Click here for 5 reasons why you should invest in hotel rooms instead of condos.
How Buying a Hotel Room Works
Hotel managers and developers all over the world sell condo hotel rooms to individual investors or groups.
Some condo hotels are new developments. Investors buy rooms at the market rate and usually bear no exposure to costs until the hotel opens, at which point the room might be worth much more than it was when it was just a picture on a blueprint. Condo hotel owners may sell rooms to help finance the completion of the project with no debt service payments, since they owe the owners no revenue until the hotel opens.
Other condo hotels sell rooms in completed hotels, possibly to finance renovations or future projects.
Condo hotel agreements may have a minimum holding period requirement that owners have to abide by, or incur early-sale penalties.
We don't charge any penalties, or have any hidden additional costs after you buy your hotel room. You are entitled to sell your property at any time you wish to do so.
Some condo hotel agreements include a buyback clause, entitling the management company to buy back the room at the end of the holding period at an agreed-upon price. This can be a great way for investors to reduce their risk and lock in a predictable return.
Other condo hotel agreements allow the investor to resell the room at any time. Reselling the room on the open market at a larger profit may depend on the existence of a market of wealthy buyers who want a prestigious second home.
Usually, the condo hotel has management in place, possibly a major brand tasked with filling the rooms and maintaining or increasing the hotel’s Revenue Per Available Room (RevPAR). Each room owner is entitled to a share of the profits realized by the operation of the hotel.
The management company is in charge of marketing, maintenance, guest relations, and operations. The room owners’ only job is to watch the revenue roll in.
Hotel room owners usually have the option to book their own room, often with first right of refusal on available nights. The condo hotel may even have allowances for room owners to manage their own investment, renting the room themselves like a long-term condo property or a short-term rental like an AirBnB or VRBO.
However, other condo hotels require room owners to subject their ownership interest to the contract hotel manager. This is often the more profitable and less risky option anyway, especially if the management company is reputable and offers a “guaranteed return” or buyback option.
We guarantee to buy back your hotel room for more than the original price, as long as you hold your investment for at least 3 years.
Plus, we guarantee your monthly income for 99 years, starting January 1, 2021. Even before the hotel opens its doors to guests! Based on our historical performance and market outlook, we project 11.94% yearly return on investment for our hotel rooms.
Advantages of Buying a Hotel Room as an Investment
Low Barrier of Entry
Whereas other commercial real assets may start in the multi million-dollar price range, hotel rooms typically range from $200,000 to $2,000,000. This is much more in the price range of average investors, and financing may be available. Some hotel rooms can be bought for much less, and financing may be available.
You can invest in Ruebush Hospitality Group properties in Batumi starting with as little as $30,000 for a hotel room.
Access to Upscale Property
Investors who can’t afford a luxury house or condo may be able to afford a luxury hotel room. The luxury hotel market has proven over time to be more resistant to recessions than mid-market or budget hotels.
With professional management on the job, hotel rooms represent an opportunity for true “mailbox money,” a turnkey, management-free real estate investment.
Potential Tax Advantages
Tax implications of hotel room investment vary based on the country or state where the asset is located, as well as the country or state of residence or incorporation for the buyer. However, commercial real estate often enjoys privileged tax treatment compared to residential real estate—and buying hotel rooms is one of the least expensive ways to buy commercial real estate.
Risks of Buying a Hotel Room as an Investment
Risk of Loss
If the hotel fails, either due to a decline in RevPAR or a construction project that stalls, the management company may not be able to fulfill its return or buyback guarantees. In the event of catastrophic failure, any deposits or down payments may be lost as well.
The most important part of the buyer’s due diligence in buying a hotel room is to scrutinize the management company. What is their track record? Are their other hotels successful? What is the RevPAR of other hotels they have under management? Do they complete their build projects? Do they have cash and access to credit?
Lack of Control
Whereas other commercial real estate assets afford the investor the opportunity to pick their management team and make critical management decisions themselves, buyers of hotel rooms cede a lot of control in the management of the asset to the management company.
Again, investors must do their due diligence on the management company. Replacing a management company is possible, but it often requires difficult and cumbersome consensus-building among the room owners.
Ruebush Hospitality Group is currently developing six luxury hotel properties in Batumi, Georgia, named by Forbes Magazine as one of the “Best European Cities to Invest In for 2020” and recipient of a World Award as “Europe’s Leading Emerging Tourist Destination.”