Any advice about investing in hotels? (specifically Bolton Hotel Wellington)

[dutch_kiwi]

Hi,

I'm new to the forum (and to property investing!). Apologies if this topic has been discussed already but I did a search and couldn't find an existing thread.

Some background info: I'm based overseas and am interested in investing in property in NZ. Through family I heard about an investment opportunity at the Bolton Hotel in Wellington. At first glance this seems (to my untrained eye) to be a pretty good investment which requires minimal hands on involvement (which is a big plus for me). I am curious what the risks and drawbacks are and would appreciate your advice.

The proposition is to buy a 1 bedroom room in the Bolton Hotel. The hotel will then lease it back at 7% and pay all costs. The contract lease terms run for another 10.5 years after which there is 2 X 10 year rights of renewal for the tenant (the hotel).

The main unknown (as I see it) is what the resale value will be.

I've copied the details from the real estate agent below:
_______________________________________________
Price: $260,000 plus GST for one bedroom
$160,000 plus GST for studio

The management company pays the Body Corporate fees, insurance, rates and maintenance.

Returns are NET. Fixed for the period of the lease. Paid monthly in arrears

Returns for one bedroom: 7% $18,200 net per annum + GST

Returns for studio: 7% $11,000 net per annum + GS
Commercial lease terms
Initial term 12 years, from 1 February 2013
2 x right of renewal, 10 years each
Rent 7% net return, all costs paid by tenant
Rent CPI adjusted two yearly
Market review on right of renewal (ratchet clause)
Freehold Strata Title
Proven tenant
New building completed 2005
Owners have special rates to stay.
Wellington CBD location
Earthquake rating 100%
Owners need to be GST registered.

____________

Thanks in advance....!

[Craig Pope Mortgages]

Hello, whilst on the surface these apartments can show a good return, they are harder to finance eg bigger deposits 50% (depending on the lender) and subsequently harder to sell. They are possibly ok if you are cashed up and not borrowing money and need a nice return on retirement assets. Need to check how long the rent is guaranteed for as well.

[Maccachic]

What's the deal with major repairs and maintenance to the building? If it turned out to be leaky / needing earthquake strengthening or whatever crops up next.

[Rosco]

There is a lot of these kind of investments that investors have gone into over the last 10 years. I'm sure there are lots that tick along just fine, but there are also a few where the hotel has gone bust or changed, and suddenly the investment isn't so good.

So I would be trying to find out how secure the tenant is.

Also if interest rates go up to over 7%, then you could be losing money (obviously depending on how much cash you put in)

Is there any potential for capital gain or loss? I don't know the hotel or area, but that is the risk. Most property investment works well because the investment goes up in value. I'm not sure what would happen to this value long term, which would put me of.

Plus when you sell, there is only a certain kind of investor who is interested in this. So that could reduce your sale value, or make it hard to sell.

Overall I like control and land. With your investment you have little control.

Lastly, with lots of these investments, investors lose out in management fees. So just make sure you do get the 7% and that there isn't a chance to be charged management fees out of this.

Ross

[PC]

The units in such schemes are hard to resell.
Perhaps talk to your bank and see how keen they are to lend 80% on them with no other security.
I suspect you will find the grey sharks rather wary.

For that sort of return you could look at share market unit trusts.
Less hassle and easier to escape from.

[artemis]

Could you find out from the agent how many private owners there are. Then maybe track a couple down for a chat. Some ownership information can be obtained from the Wellington CC webmap or by visiting the council. Or the agent may be able to tee up a connection.

Personally I would be wary of an investment property I had basically no control over.

[dutch_kiwi]

thanks for all the advice people! Very useful and appreciated!!

My parents are looking to buy a room and I was also interested. My parents are in their early 60's and don't need financing to buy. So for them it could be a good proposition. I would need to borrow about 60% of the value and it's possible I would need to sell in the next 5 years or so (e.g., if we move back to NZ).

Based on my research and on the advice you've given me I'm leaning towards not buying, and instead looking at a share market unit trust for the time being.

Thanks again...

[Bob Kane]

They've been on the market for many years.
That must tell you something about the asking price.

[Re@der]

Heritage hotel and former Hyatt hotel in Auckland are good examples. Once all guarantees are off rents drop like a stone which means that capital value also drops.
What often happens is that your return is built into the purchase capital cost so you are paying for your own increased return by paying a higher purchase cost up front.

[eri]

i seem to remember heritage didn't even honor their contracts...