Jump to content
Sign in to follow this  
Newby

Hotel room investment: a good idea ?

Recommended Posts

Dr, and everybody else, I am planning to buy a room in this hotel: http://mbisalesltd.com/heritage-hotel/

 

I would get the leasehold (for 125 years), a contractually guaranteed yearly income of about 10% of the purchase price, and a "safe exit", i.e. the developer will buy me the flat for 125% of the purchase price. So it seems a safe investment to me.

 

But there is usually a bad name about buying hotel rooms, so I am a bit wary.

 

The argument I usually hear is that there is no way to sell the room, if you want to. But in this case the owner promises to buy back the room.

 

The owner, Mbi, owns the freehold of the property.

 

What do you think? Should I stay away, or should I give it a go? The investment is GBP35,000 (HK$405,000) so it's not the end of the world, but of course I don't want to lose money.

 

Thanks!

Share this post


Link to post
Share on other sites

Sounds like it is "guaranteed".

You need to analyze carefully the quality of the guarantor.

Be careful.

If it sounds to good to be true, chances are... It is !

Share this post


Link to post
Share on other sites

I've looked at a number of investments which come with guaranteed income over the years. Pretty much all of them came with issues, including:

 

1. the guaranteed income has to come from somewhere - often developers jack the sale price up to fund the guarantee

2. the guaranteed income is usually gross income (not net income) - expenses will eat into that and those expenses will increase every year

3. the last time I looked at hotel rooms, the investor had to pay to replace furniture, redecorate etc every few years - there wasn't a whole lot of income left after these costs were taken into account

4. (as Dr Bubb pointed out) you are taking credit risk on the person providing the guarantee

5. 10% income without gearing in a ZIRP world and high property markets is huge - I'm not sure why anyone would be selling something with that kind of yield?

6. liquidity is often an issue - in this case you have a buy back which is deals with this issue.

Share this post


Link to post
Share on other sites

Good comments, TI

 

I am looking at an investment with an 11% guaranteed pre-tax return that looks pretty watertight.

It is in USD and has property also backing it up.

 

I might like to discuss it with you sometime, and see if you can see any major flaws.

Share this post


Link to post
Share on other sites

Thank you very much. Yes, if it's too good to be true, it's probably not true, but I can't find what is wrong with this investment. Unless, of course, it's very elaborated scam. And I did google "Mbi scam" and I didn't find anything.

 

The hotel is featured here: http://www.bbc.com/news/uk-wales-north-west-wales-31112095 and here: http://www.northwalespioneer.co.uk/news/144050/rooms-for-the-blind-retained-at-llandudno-hotel.aspx

 

Mbi is a business that exists for 4-5 years, and is mainly involved in care home building, but it also has a couple of hotels and student hostels. Its age means that it hasn't yet bought up any property from its investors (through the guaranteed exit strategy). I know that developers make 20% or so profits on their investments, so what they promise is feasible. Yet, it is an incredibly good offer for the average Joe like me. Too good to be real?

 

TI, thank you very much. I go through your points. It seems that they have reviewed all the criticisms made to guaranteed returns investments, and addressed them all. Though so far I have only spoken with the agent, and I still have to check if everything he told me will also be included in the contract.

 

1. the guaranteed income has to come from somewhere - often developers jack the sale price up to fund the guarantee

 

Absolutely, but GBP40,000 (actually I will be paying 35,000, and have a slightly lower yearly income for 10 years, the ROI would be 205% or so over 10 years) for a hotel room doesn't look like that more expensive. And actually if they buy back the property at 125% the declared value of the flat (the declared value is 60,000), so I will get 75,000. So whether they jacked up the price or not, isn't really such a big concern.

 

2. the guaranteed income is usually gross income (not net income) - expenses will eat into that and those expenses will increase every year

 

They said that this is net. No extra charges.

 

3. the last time I looked at hotel rooms, the investor had to pay to replace furniture, redecorate etc every few years - there wasn't a whole lot of income left after these costs were taken into account

 

Actually I didn't ask about this, and they didn't mention this. I will ask them. Thank you.

 

4. (as Dr Bubb pointed out) you are taking credit risk on the person providing the guarantee

 

The hotel is owned (freehold) by Mbi Heritage (which is a subsidiary of Mbi). They leasehold the room to me for 125 years. So Mbi Heritage are the ones guaranteeing the yearly income and the buyback at the end of the 10 years. If they fail to pay the rent or buy back the flat I guess I can sue them and we (the owners of the flat) can get the freehold and sell it (though of course it would be a huge mess to do so). I guess the risk is that the freehold is worth less than the buyback price? This may be possible, but I am unlikely to lose everything, and by the time Mbi is supposed to buy back my property (after 10 years) I would have more or less earned my initial investment (35,000) through the yearly income.

 

5. 10% income without gearing in a ZIRP world and high property markets is huge - I'm not sure why anyone would be selling something with that kind of yield?

 

Absolutely. Unless they reckon that within the next 10 years bank interest rates will go up considerably. But yes, it's almost too good to be true, right?

 

6. liquidity is often an issue - in this case you have a buy back which is deals with this issue.

 

Yes, I can't see the scam here!

Share this post


Link to post
Share on other sites

Good comments, TI

 

I am looking at an investment with an 11% guaranteed pre-tax return that looks pretty watertight.

It is in USD and has property also backing it up.

 

I might like to discuss it with you sometime, and see if you can see any major flaws.

 

Would you like to share your investment insight with us?

Share this post


Link to post
Share on other sites

I'd be careful.

Why would this company be willing to pay investors 10%.

If they are credit worthy they can finance through a bank at about 2% over base rate. If they deal with a bank for financing they don't have the headache of dealing with a load of investors, just the annual loan review with their bank if all is going well.

In short this seems a complicated way of raising funds for a credit worthy company who have a freehold(?) Asset.

If they can't raise the funds through a bank the risk your taking on will be higher than I'd be happy with.

Share this post


Link to post
Share on other sites

 

Would you like to share your investment insight with us?

 

I have bought one such property in July 2015

I invested about US$75,000, and starting from November, I will be receiving $700 per month for 3 years

 

That's guaranteed, and Pre-Income-tax - after maintenance, property tax and management fees,etc

 

$700 x 12 = $ 8,400 / $75,000 = 11.2% pre-tax

 

As far as exit goes, I have a buyback option - so I can sell it back at what I paid.

 

For the moment, I expect to hold it, since Zillow's estimated value has risen from $75k to $93,000.

Share this post


Link to post
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
Sign in to follow this  

×