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What's wrong with buying a hotel with a long lease in place?

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  1. #1

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    What's wrong with buying a hotel with a long lease in place?

    I came across a few hotels on sale with a long (10-20-30 years) lease in place. The return on investment is high (7% or so) and is adjusted for inflation yearly or every two years. I can see potential problems with 1) the hotel losing money, and the managers just leaving, and 2) the managers not taking care of the building starting a few years before the lease expires, which would require extensive refurbishment.

    However, over the time of the lease the price of the building would keep increasing, and after 20 years or so you have a building that is worth double as much.

    Does anybody have any insights into this business sector?


  2. #2

    Can't you get nearly 7% on rental property... Involves A LOT less work (and stress) than owning a hotel.

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  3. #3

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    Quote Originally Posted by Kowloon Goon:
    Can't you get nearly 7% on rental property... Involves A LOT less work (and stress) than owning a hotel.
    Where and how can you get 7% on a rental? Please do tell!

  4. #4

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    Quote Originally Posted by Elegiaque:
    Where and how can you get 7% on a rental? Please do tell!
    AirBnB?
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  5. #5

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    Quote Originally Posted by shri:
    AirBnB?
    Where?!

  6. #6

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    Are you buying the building and renting out to the hotel? From your post it reads as you want to run a hotel. What country are you talking about?

    Last edited by Drunken Master; 05-05-2019 at 12:51 PM.

  7. #7

    A 7% ROI with inflation adjustment is a very attractive investment proposition ... but it's better than a lot of corporate bonds (which do not get inflation adjustment) and reasonable quality residential/commercial/industrial properties in Hong Kong (which may or may not adjust for inflation over the long term). So I'm assuming the high ROI implies some degree of risk.

    Hotels cover a wide range of territory - everything from large scale six star hotels in resorts and business centres to outfits resembling boarding houses with a solitary part time receptionist.

    Since the question is about owning a property which is leased to a hotel operator (i.e. you would not be operating the hotel), I'd suggesting looking at the fundamentals of the local property market as a first step. As an example, there is a regular supply of hotels/Ryokans on offer in Japan with what look like attractive yields but given the country's demographics and vacancy rates, they have no interest for me. I also have an acquaintance with an interest in a hotel in a third or fourth tier city in China - oversupply from new builds is killing their business.

    I found this which might be a helpful starting point for your due diligence - you're not operating the hotel but you need to have confidence in the people who are: https://www.vestahospitality.com/pdf...1473312060.pdf


  8. #8

    As a follow up, there are several hotels and hotel related shares/trusts listed on the HKEX. Two of them offer trailing yields of more than 6% which will be tax free and hassle free to HK residents. I have not looked into either but note in passing that in spite of Hong Kong experiencing a boom in tourist numbers over the last few years, neither has been able to grow their dividend levels.

    Industry Details - Hotels & Resorts - Services


  9. #9

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    7% yield for a hotel or overseas property may sound attractive but in fact it is not. It's probably a scam or some middle man arranging the 7% while in fact earning a lot more.

    Also, you haven't mentioned the location you are looking at.

    One person asked where can you get higher rental returns. The answer is the USA. You can buy a home with a tenant in place. Typical returns are 12-15% before taxes and insurance. If you do Airbnb your returns will be even higher yet you'd be responsible for more cleaning, maintenance, furnitures and utilities.

    Further the appreciation on property is expected at more than 10% per year. Any companies advertising US properties for sale typically have their own management company who gets an ongoing cut of your rental and further sells the property at higher than market rates. For example in Detroit you can buy property for free or cheap (US $1000) if you renovate the home (you have 6 months to complete the renovation or the city takes back your land). They spend 10-20k on fixing it up then pitch it to you for sale at 60-100k with a tenant. In fact selling property in Detroit is extremely difficult and depends which corner your home is on. Some areas are hot, some are not. Having the local knowledge is key.

    Last edited by MandM!; 05-05-2019 at 06:07 PM.

  10. #10
    Quote Originally Posted by MandM!:
    . Typical returns are 12-15% before taxes and insurance.
    Just to confirm... I get a lot more than 7% on my US property.
    MandM! likes this.

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