Hotel room investment… the new timeshare scam…
Hey guys,
I want to sound the warning siren about the new type of investment that seems to being missold in Asia and the Middle East more and more. Its being sold as a totally hands off investment vehicle where the yields are high and the risks are low.
Whilst it might appear as a new and exciting investment those within the industry have seen this leopard before in a few versions.
An evolution of Timeshare
The first which many of you may know is timeshare, where you buy a share in an asset and you get to use it a couple of weeks a year and when that failed they set up exchanges so you could exchange your week for some other equally unfortunate investor (well if you could call them investors, I see them more as victims.) These investments rather than being an investment just worked out to be an expensive holiday as management charges spiralled out of control as the buildings got older.
One other point about this sometimes they will call it Fractional Ownership, this is where you will own a fraction of the asset rather than just a room. It suffers from all the
Guest Invest
Just type ‘Guest Invest’ into google.co.uk and you’ll see where hotel room investing started and ended in the UK. The model that consistently proved not to work a number of times in the UK and that’s why they are selling it in Asia, its got a bad name in the UK.
Room to Invest Hotels
This is another company which claimed to be a leading provider of Hotel Room accommodation that went into liquidation. Not a good
http://www.thisismoney.co.uk/money/mortgageshome/article-1595603/Buy-to-let-hotel-rooms-a-wise-move.html
http://www.lovemoney.com/blogs/scams-and-rip-offs/scams/11543/you-could-lose-your-shirt-in-this-hotel-venture
Do you really know what you’re getting into…
I would argue that the vast majority of people don’t know the full facts upfront and it isn’t until well after they have paid substantial money do they realise the risks, problems, and true costs involved. Does the client really know the investment I would say not. They are sold on a made up ‘projected’ cash flow and a glossy brochure. This is nowhere near the Due Diligence that should be done on a specialised investment strategy and asset like this.
Leverage is the most important concept of wealth creation… Errr not with hotels…
Lending is nearly impossible because the banks have already been burnt so they are staying away.
Even if the developer offers to finance the hotel room investment, the person who wants to buy the property (if you can find someone to buy a second hand hotel room) may have problems (if they can at all) and this massive hassle is likely to put people off.
A classic example is Park Plaza Hotel, at Westminister in South London, you would think this was an ideal area, right near Waterloo station but alas I personally had 3 of my clients unable to get mortgages and the sole lender that would look at it ended up lending 50% of a 10% down-valuation. Goodness knows how many other unfortunate victims fell foul of this development. Now I am sure that this wasn’t in the marketing brochure.
http://www.thisismoney.co.uk/money/mortgageshome/article-1595603/Buy-to-let-hotel-rooms-a-wise-move.html
Pestana Hotel at Chelsea Bridge Wharf initially looked into raising capital as hotel rooms but upon realising how poor the mortgages available to clients were they decided against the misadventure.
How much are they really worth?
In a lot of cases investors don’t even get the comfort of having a comparable valuation to see if they are buying at a fair market value or not. Even when they do offer a valuation they are being deceived by it, its done under commercial terms but most investors have no ideas how this works, they use a residential framework which is totally incorrect.
What happens when investors wants to remortgage…
Well you can forget that, its not going to be possible you just need to sit and wait as your money is all but fixed in this investment, just like a deposit in a bank but you will struggle to ever withdraw the money. This investment is largely a wait for your cheque every month to pay what little, if any mortgage you have but forget about utilising the additional capital to build your portfolio larger.
What happens when it’s old…
A hotel commands the best rent when it is new but make sure you check if the management company allowed for upgrading continuously and if so who pays for this, it must be clear because if the management are updating regularly then this cost will have to be bourn by someone and with competition it probably won’t be the guest who pays, its likely to be the investor.
On the other hand if they don’t upgrade the hotel will soon become old and run down and the yield will dry up.
Is the area really that attractive?
Your investment is at the beck and call of the area, if it drops noone wants to use accommodation there.
It’s not yours to manage…
You are also beholden to the management company, if they are good then great, if they are bad it could be horrible, but you cannot take control back, you cannot influence the management.
Don’t rely on the brand backing you up…
Even with a brand such as Holiday Inn, Hilton or many of these well known brands they have great venues and crap ones, profitable ones and loss making ones. Just because the brand makes profit doesn’t mean you will. Remember that they are going to take their money first before you see any.
Now try selling it… The secondary market for Hotel rooms…
Try to buy a hotel room second hand, there is simply no secondary market, people buys these new not second hand.
The Exit strategy with a specialised investment like this is not clear and it certainly isn’t easy when you’re in another country.
Try going to a normal estate agent and they will either say we don’t do them, we don’t specialise in them and therefore it’s going to take an undefined period to sell. Even if you find and estate agent to sell it for you, what are they going to charge you?
How much is the salesman really making?
The company initially selling these will say they help you with the finance, and many will say when you want to resell but most of these companies haven’t been selling them for long and they haven’t had to sell old hotel rooms no matter how good the investment has been.
Add to this they make much more money from selling a new property (somewhere between 10% and 30% of the value. There is absolutely no incentive to sell yours unless you’re going to pay this type of commission.
Is it your Core Strategy or just a fling on the side…
Ask yourself “Who is buying the investment?” Are you someone who has a successful portfolio already and this is an addition to it or is this investment going to become your core strategy. This would not normally be a beginners core strategy, it should reserved for experienced investors with specialist knowledge of the asset and relationships in place for lending, and a proven track record.
For the more advanced investors you have to ask yourself if you really know the rules of the game? The problem you face is that actually this strategy is very new so noone really knows the long-term patterns, resale values, continued rental returns. It becomes more guess, hope and gambling than good solid fundamentals.
Finally… Honestly ask yourself if you can answer and address with certainty all of the above points raised, if you honestly have the time to manage if it isn’t what it says, if you can trust the salesperson, the company backing him and the developer, if can afford to gamble on a strategy that has proven to rob investors of their precious capital repeatedly.