Hotel rooms remain a popular investment opportunity. You buy a hotel room, it's let out and you and the hotel share profits. As part of your due diligence, ask these questions...

What Are The Numbers?

The concept is a simple one. You buy a hotel room, usually in a hotel in a big city or leisure location, in the UK or overseas, for anything from £60,000 to £150,000+. The hotel markets, lets and manages the room (cleaning etc) and you then share in the revenue from it (or, more often in practice, a share in all of the rooms divided by the number of owners) with the hotel; usually a 50-50 split or similar.

Over time, the room may appreciate in value - although, as a relatively new concept, this is largely unproven at this stage. Most investors look at this as a straight income play so you need a sufficient return to cover what may be relatively little capital appreciation at present. You can, at present, expect to receive a net yield of between 6 and 12 per cent a year. If you are investing before the hotel is built you need to consider where that 6 to 12 per cent is coming from; are you over-paying and getting your own money back, for example? When looking at projections where returns post-guarantee period are expected to be much the same as during the guarantee period, do look closely at the numbers with, as ever, your professional advisers.

Start by looking at who is running the hotel and who else is involved. The involvement of a major chain has to be a big plus rather than a single owner set-up and from all sorts of angles; experience, marketing ability, existing client base etc. If there are well-known companies running the attached spa, golf course etc, all the better.

Who's The Market?

'Location, location, location' is as important with a hotel as it is with a property that you're buying to let. You need a constant flow of guests which is why most hotels offering these deals are located in busy business and/or leisure locations; cities such as London and York.

They need to be accessible, close to airports and motorways as appropriate, and have in-house, on-site and nearby facilities expected by business travellers and holidaymakers; health and fitness spa, golf course etc.

Ideally, you want to see a deal which goes beyond having one single income stream - just business people staying over for an on-site conference, for example. The hotel may cater for business and leisure guests visiting for a variety of reasons; a stopover on the way to an airport; a short break to see the sights; a golfing weekend; attendance at a wedding, conference, exhibition or other event (preferably) at the hotel. When visiting to do your due diligence, assess competing hotels locally as well. Will people stay here - or there?

What's The Occupancy?

This is the key figure when it comes to working out your profit potential. As a rough and ready rule, a hotel will operate at a reasonable profit if it is has an occupancy rate of about 60 per cent or 70 per cent (i.e. six or seven rooms out of 10 will be occupied at any given time).

You need to get spreadsheets from the hotel to see what the predicted occupancy rate is. As is often said in financial circles, bear in mind that past performance is no guarantee of future performance - a hotel that has focused mainly on short leisure breaks in the past may do less well during the credit crunch when these may become less popular.

It is a good idea to re-work the figures you are given with various other occupancy rates; 50 per cent, 40 per cent and so on to see if the numbers still add up at these lower rates. If you are using the room yourself for so many nights a year (often part of the deal), take that usage into account as well.

What's The Yield?

The basic definition of yield is that it's the money you make expressed as a percentage of the investment; so, if you make £10,000 a year from a £100,000 investment, your yield in simple terms is 10 per cent (i.e. £10,000 is 10 per cent of £100,000).

Of course, the reality is that if you have borrowed money to invest then the yield will be based on the money you have left after borrowing repayments have been met expressed as a percentage of the actual amount of money you put in. For comparison purposes, the basic yield is used by most people.

Clearly, you'll know what you'll be putting in. The variable is the occupancy rate, of course. You'll know what your share of the revenue is but check; where is the, say, 50-50 split made? Do you get 50 per cent of net profit after costs and the hotel's guaranteed sum of money are taken? Look closely at guaranteed yields up in double figures to make sure you are not overpaying at the outset to finance these.

Iain Maitland www.ukpropertyalerts.co.uk

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