Invest in hotel projects for income?

UPDATE: 
I was chatting online with another reader on this matter. Frankly, if I were after passive income by investing in hotel rooms, I would rather invest in a hospitality Trust and there are plenty of options here in Singapore alone.

For anyone who is considering buying hotel rooms as investments for passive income, ask how well do you understand this investment product?

"The rule of thumb is that a hotel room must earn $1 per night for every $1,000 it costs to buy the unit. That means if it costs $125,000, then the room has to rent for $125 per night, on average, and be occupied 60% to 70% of the time. Examine the hotels in the area, as well as the average vacancy rates, along with average room rates. Only then can you get a true picture of whether or not you’ll earn money on rental revenue." Romana King

"...vast majority of people don’t know the full facts. They are sold on a made up ‘projected’ cash flow and a glossy brochure. That is nowhere near the due diligence that should be done on a specialised investment strategy like this." Brett Alegre-Wood
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A reader wrote to me about investing in a hotel project in Phuket recently. This was my reply:

Hi R,

I have a friend who bought into a similar program offered by a hotel group in Phuket.

There are actually plenty of risks in such investments and you have to be one with rather deep pockets. I cannot remember the full discussion I had with my friend but here are a few points off the top of my head:

1. Concentration risk. It is one property.

2. Prospects. You have to question why the developer does not want to take a bank loan or a syndicate of loans to fund the project? If it is lucrative, they should do it. Or is it more lucrative selling rooms in the project to private investors?

3. Management risk. If the project does poorly and the management is not getting paid adequately because of this, could they simply walk out?

4. Is a guaranteed 5% return adequate compensation? I am inclined to think not.
(In fact, could it be a case of "taking back our own money"? Investor could be paying an inflated price for the hotel room to get the guaranteed yearly return for X number of years.)

If you wish to invest in Phuket properties, have you looked at condominiums and apartments? For the same amount of money, if I remember correctly, you could get a bigger property and in pretty good locations too.

Best wishes,
AK

THB 1.0M = S$40,000.

There are many investment opportunities out there. Some are legitimate while some are not. Those which are legitimate, we want to ensure that we would be adequately compensated for the risks that we are being asked to undertake.

For sure, I am not an expert when it comes to investing in properties and hotel projects in Phuket. I was just voicing my concerns.

Related post:
Returns of 15% per year invested.

"Many of the hotel room investment options are fractional ownership. Fractional ownership no matter what the marketers say is Timeshare reborn. You only own a fraction of the property exactly like a timeshare. We all know what happen with the timeshare market and if you do a quick Google search, it will show you how millions of pounds were lost by investors. For me this is a deal breaker if you are offered a fractional ownership investment don’t walk away, run!"
Source: 
http://rmpproperty.com/2013/03/why-we-wont-sell-hotel-room-investments/

"An investor who only wants to be known as Mr Wang bought two units at Ibis Lymm. He had heard about the investment from a friend who had purchased two rooms at Ibis Knutsford and then went on to buy a unit at Ibis Lymm as well. The $400,000 that Wang invested in the hotel rooms had been savings put aside for his retirement and his children’s university education. “And we need the money,” he sighs. “It’s been a burden.”

"Another investor, Mr Fu, who bought two rooms at Ibis Lymm, agrees. “A lot of us had sleepless nights,” he admits. “And so, we have been communicating with each other.” The amount invested, $400,000, may not sound like a lot, but it’s not a small sum either. “We have to answer to our families,” Fu says. “We thought we could get a brighter future, but it has turned out to be something opposite.”

"Mr Koh believes he was most likely the last investor from Singapore to participate in the Ibis Lymm scheme. The whole experience has made him more vigilant, and since then, he has begun to scrutinise property advertisements, especially those offering high guaranteed returns."
Source:
http://www.theedgeproperty.com.sg/