Investing In Buy to Let Hotel Rooms, Apart-Hotel Rooms via a SIPP/ Pension
Hotel room property investments may be purchased within a pension/ SIPP, directly or through a SIPP syndicate. They offer an interesting, and potentially more profitable alternative to an annuity purchase upon retirement.
Some Great Reasons to Invest in Hotel Rooms :
Hands-off property investment - fully managed by the hotel operator- Relatively low risk investment, due to the booming hotel sector
- High yields of between 6% to 10% plus achievable
- Some hotels are well known brands and command higher prices/ lower yields, others are less well known brands but offered on higher yields
- Some schemes come with rental guarantees during the hotel start-up period
- Some hotels have been operating for years or even decades and are now available to purchase on a room by room basis
- Intensive rentals typically produce much higher income per month than traditional longer lets on buy to let
- Finance is available of up to 70% loan to value or better in a SIPP syndicate
- Most schemes can be purchased by SIPP/ pension investors as a qualifying property investment
- Some schemes come with developer finance or easy stage payments
- City-Centre, Regional Towns, Holiday Resorts - UK or Overseas, you choose !
Buying Hotel Rooms within a SIPP / Pension is specifically permitted as a property investment, unlike direct residential property investment. Due to their income generation characteristics it is well worth considering the use of Hotel Rooms in pension planning for higher net worth clients, either as an immediate income generator or as a deferred income generating investment for future pension planning.
At retirement, the decision as to how best to draw retirement income from a pension fund is an important one.
Upon retirement, the pension investor usually has to use all or part of their pension fund to buy an annuity, which is irrevocable and subject to annuity rates dependent upon factors such as age, interest rates and any additional benefits such as indexation. In general terms, annuity rates are higher the older a person is because future life expectancy is lower.
An alternative for pension investors who do not wish to purchase an annuity and prefer to keep their funds invested in retirement, living off the income generated by these investments, is ‘income drawdown’. This facility can be continued to age 75, following which an annuity can be purchased or transferred to an ‘Alternatively Secured Pension’ (ASP), which means that the pension fund can remain invested, providing an income for the retiree. The level of income that can be drawn under an income drawdown situation can be varied, and is subject to a maximum income allowance that is calculated using tables prepared by the Government Actuaries Department.
Hotel room property investment is a fully managed, hands off, high-yield, modest-risk asset class that is an ideal income drawdown investment. Hotel rooms are widely regarded as a superb turnkey investment product that are fully managed for the investor and require very little involvement. Please also read our general article on buy-to-let hotel room investments.
A Hotel Room Investment vs Annuity Example :
Let us assume today is the 60th birthday of a male with a pension fund valued at £200,000 and they would like to retire.
Figures taken from www.moneyfacts.co.uk suggest that on 17th July 2008, these are the best annuity rates that he could achieve for his £200,000 investment, assuming that the annuity is level (non-increasing) and without any guarantees or spouses benefits:
Canada Life |
£13,364 pa (6.68%) |
L&G |
£13,260 pa (6.63%) |
NU |
£13,254 pa (6.63%) |
Prudential |
£13,140 pa (6.57%) |
Standard Life |
£13,104 pa (6.55%) |
AEGON |
£12,992 pa (6.5%) |
Average |
£13,186 pa (6.59%) |
Should the investor decide to take the income drawdown route, the maximum income that may be drawn is 120% of the pension that could have been purchased, calculated using Government Actuary rates. In the above example, the maximum allowable annual income is £13,400.
Assuming that hotel room investment is the vehicle of choice to generate drawdown income, how does this compare to traditional annuity purchase?
Revenues from the buy-to-let hotel rooms are typically shared 40% to 50% by the investor and 60% to 50% by the management company/operator. All food and beverage income is typically retained by the operator. Due to the room income being shared so equitably, the hotel operator is well motivated to maximise room revenues, rental returns and occupancy rates and hence benefit the investor.
Based upon conservative occupancy figures, the room illustrated above is yielding a higher income than the purchased annuity, it is also able to benefit from room rental rate inflation unlike the fixed income annuity, as well as benefiting from any underlying capital growth and the flexibility to divest and vary income at a later point. Of course, an annuity could have been purchased to provide increasing income in line with inflation but the starting income would have been substantially lower than that indicated in the annuity table above. what can be seen is that the annuity level of income could be generated by a hotel room investment immediately whilst also benefiting from income and capital growth.
The retiring individual still has the option of purchasing an annuity at a later date, when annuity rates might be more favourable. If the underlying value of the pension fund has also increased, then a higher pension may ultimately be purchased than secured at outset.
Another big consideration for those approaching retirement is how their pension fund is treated on death. Unless an annuity has a guaranteed period, or a partners pension is requested at the time of investment, (which will reduce the amount paid out by the annuity), the annuity will die with the investor whereas the hotel room can be passed on, albeit potentially on a penalty rate of tax. This may not be a problem as the beneficiary may choose to pay some of the tax using other pension cash assets and also take out a pension loan. The hotel room income could then pay off the loan for the new beneficiary leaving them again with a debt free, income generating pension asset.
Should the investor opt for income drawdown, then the surviving spouse or dependent has three options:
- take a lump sum subject to tax
- continue income withdrawal
- purchase an annuity
Any hotels that Assetz for Investors sources or develops are fully operated and managed by established, branded hotel management companies. There are generally no ongoing maintenance, refurbishment or furniture renewal costs for the investor and these are normally absorbed by the hotel management company under the terms of the lease.
Hotel Rooms As A Deferred-Income Pension Investment :
Hotel rooms could be treated as a deferred income generator for pension planning purposes where they are purchased with debt or with a stage payment plan. In this way, income from the investment would be deferred as it would be used to repay any debt or make stage payments to the developer and it is only when this liability is cleared that the investor or their pension would receive the income directly. This is why the property can be seen as a deferred income investment.
Due to the high level of income generated, these types of investments could be used for late stage pension planning by a higher net worth investor within say 10 years of retirement looking for a high level of income per £1 invested in their pension.
Example Purchase For a SIPP/ Pension Investor:
To purchase a hotel room property, either an existing or a new SIPP/ pension may be set up (from just £250 via an Assetz SIPP provider with nil set up/transfer costs and low management and investment fees). The pension may already hold cash or the investor may make a pension contribution and receive a tax top-up from the HMRC.
- Typical example of an apartment at £60,000
- Pension can borrow 50% of net assets of the pension so maximum loan is £20,000 and the pension needs to contain £40,000 cash
- To achieve the £40,000 SIPP cash balance, an upper rate 40% tax payer would need to contribute as little as £24,000 after tax rebates.
- The apartment is purchased using the £40,000 cash and £20,000 loan
- Assuming a 10% yield pa (£6,000) this would repay the loan in just over 3 years and after that the pension would receive the full income for further investment or for draw down in retirement
- In summary, a net pension contribution of around £24k could produce an income of £6k per year into the pension (25% of the original investment per year)
- Utilising a SIPP syndicate would permit much greater level of borrowing/loan to value and would permit a smaller investment versus the income generated, at the expense of the income being generated in a greater number of years time.
As a result of the above example, it can be seen that £24,000 net (£40,000 gross) investment within a pension could produce an income in three years time of around £6,000 per annum inflating with room income growth. By comparison the same £40,000 gross invested by the pension at say 7% growth pa over three years would be worth £49,000 in three years time and for the same 60 year old male purchasing an annuity in the example above this would produce a level (non-inflation linked) income of around £3,230 pa., meaning the hotel investment is yielding around 100% more than the annuity purchase, is able to be passed on to other beneficiaries upon death and also has the potential for income growth rather than being fixed.
The Use Of SIPP / Pension Syndicates :
A SIPP syndicate can be formed to give substantial extra benefits for the pension investor, provided the HMRC rules are complied with. These benefits include much greater diversification for the investor by country, hotel and individual room exposure by way of investing in a larger portfolio shared between many investors. A SIPP syndicate can also lower the entry cost for the investor due to the purchase costs being shared between different pensions - this could permit for example investment in more expensive but very high-quality hotel rooms with high end brands and operators.
In addition, a SIPP syndicate can permit the purchase of hotel rooms with residential aspects such as kitchens and will even permit, subject to the correct rules being followed, the purchase of more traditional residential property such as luxury villas in the grounds of hotels managed by the resort operator - something that would be forbidden as an individual purchase for a SIPP investor.
Assetz specialises in the origination of SIPP syndicates.
Please seek the advice of an IFA for illustrations to suit your circumstances.
Please also read our general article on buy-to-let hotel room investments.
