Let us compare rental properties VS hotel room investments
Credits: The Balance
More and more people are getting started in real estate investing and are looking to properties as a way of diversifying their investments and securing cash flow for the future. But there are many types of rental investment so let us compare the traditional rental property investment with a new type of rental investment called Hotel room investment, or holiday resort investment.
1) The Benefits of Rental Properties
Rental properties can round out an investment portfolio and create an ongoing income stream. Several major factors have made this a popular investment option:
- Many people are dissatisfied with the meager returns provided by their savings accounts and investments such as certificates of deposit, causing many people to take a closer look at rental property investing.
- Several years of record-low interest rates have made people wary of future inflation, which drives them away from the bond market. As an alternative, people invest in commodities like real estate, which contains perceived inflation-protection.
- Many want to diversify their investments, which means moving away from solely investing in the equities/stock market.
If you want to get into rental property investing, you need to learn how to evaluate whether or not a potential rental property is a good investment. The following two formulas will help.
The Cap Rate
First, calculate the capitalization rate, or “cap” rate, on your intended investment. This is the profit you can make from net income generated by the property, or the rate of return you’d make on a house if you bought it with cash.
The cap rate is the net income divided by the asset cost. For example:
- You buy a home for $400,000.
- It rents for $1,500 per month.
- Your expenses (taxes, insurance, management, repairs, maintenance) average out to $500 per month. (Remember, this does not include the principal and interest payments on your mortgage, but it does include the escrowed sum for taxes and insurance.)
- Your property’s net operating income is $1,000 per month or $12,000 per year.
- Your cap rate is $12,000 / $400,000 = 0.03, or 3%.
Whether 3% makes a good return on your investment is up to you to decide. If you can find higher-quality tenants in a nicer neighborhood, then 6% could be a great return. If you’re getting 3% for a shaky neighborhood with lots of risks, then this return might not be worthwhile.
The One Percent Rule
This is a general rule of thumb that people use when evaluating a rental property. If the gross monthly rent (before expenses) equals at least 1% of the purchase price, then look further into the investment. If it doesn’t, they’ll skip over it.
Keep in mind that 3% or even 6% doesn’t mean as much if that interest is non-compounding. To give your returns the same benefit and the same chance of growth as money in the stock market, you’ll need to reinvest 100% of the proceeds so your returns can compound upon themselves.
2) The Benefits of Hotel Room Investment & Investing in Holiday Resorts
Source: Hotel Management
Hotel room investment is surely becoming the best new strategy for rental investors looking for a secure cashflow & guaranteed capital gains. The hotel industry is booming. The total retail value of the global hotel industry is set to cross USD 500 Billion in 2018. The total revenue of the hotel industry in the USA alone should touch $200 Billion in 2018. In the UK, It’s worth over £40bn annually, with around 45,000 hotels and over 730,000 hotel rooms.
Tourism added £121.bn to the UK’s economy in 2014 and is expected to grow at an annual average rate of 3.8% by 2025. Tourists will need somewhere to stay, so it’s safe to say the industry will be thriving for the foreseeable future.
One of the main selling points of hotel room investments for many investors is the low entry point. A typical opportunity usually starts from around $100,000 USD. It can be more affordable than a buy-to-let property, and you don’t need a mortgage to pay for your investment. Great news if you have bad credit, or would struggle to get a mortgage.
Know what type of hotel room investment you need
Professionally managed Midscale hotels and resorts in growing tourism hubs can be a steady source of income, as they are almost always in demand. This implies that its revenue remains stable throughout. “However, the luxury hotel market is usually affected by economic downturns. As such, mid-scale is a more secure hotel investment as compared to the other types”
Know how much you can afford to invest in a hotel room
“A hotel room investment can start as low as $70,000 USD. Also due to the easy payment plans available, one does not usually require loans or mortgages.”
Guaranteed return on investment
Hotel room investments come paired with a guaranteed return on investment. Hotels & resort companies usually offer up to 30% of their hotel rooms to individual investors. This means they would need an occupancy rate of 27% and over to cover returns of up to 10%p.a.
The investor owns the outcome
Owning the outcome means one knows exactly what the investment property will deliver/return during the investment term. This is very important & comforting for investors who like to plan ahead their life.
Know your tax options in your target real estate investment destination.
Real estate and investment taxation options vary greatly across borders. Be sure you know what you’ll have to pay back. “Tax efficiency is a major benefit when it comes to investing in hotels. Since hotels are ranked in the same category as commercial properties, there are many tax-efficient opportunities available which mean additional returns on your investment.”
Know your exit plan
“You can opt for a buy-back that is guaranteed, as long as your investment is over a certain period of time. With this arrangement, you will sell the property at a profit, on top of the returns you will have made during the entire period.”
Follow the link to learn more about investing in hotel rooms