Hotel Investments: A plan built on bell boys, mini bars and buy-to-let bonanzas

Would you fork out up to £370,000 for a room in a hotel? As a buy-to-let investment, the proposition has more going for it than you might think.

A £35m hotel near Paddington station is due to open early next year and a buy-to-let company called GuestInvest is offering investors the chance to buy one of the 170 rooms for between £265,000 and £370,000.

Under the company's Nest scheme, the room will be let to tourists and business users on your behalf and you will receive half of the income - the average cost of a room is £119 a night. A 6 per cent return is guaranteed in the first 12 months from opening, and you can also stay in the room free of charge for up to 52 nights a year - though this will, of course, mean you make less money.

After this, your overall returns will depend on occupancy and room rates and the anticipated capital growth in the value of the room (as part of the hotel).

GuestInvest launched the UK's first hotel buy-to-let in Notting Hill in 2004; 20 rooms starting from £235,000 sold within weeks. Those investors have since seen a 6.5 per cent annual return, says GuestInvest's founder, Johnny Sandelson. Those selling up, he adds, made a 10 per cent profit.

Melanie Bien of broker Savills Private Finance says hotel plans compare well with traditional buy-to-let. "One advantage is staying in a swish hotel room for part of the year. Another is no hassle: finding guests is managed for you, along with room upkeep and maintenance."

Hotel buy-to-let has also attracted interest from self-invested personal pension (Sipp) savers, many of whom were disappointed by the Chancellor's U-turn on residential property last December.

Hotel rooms are classified as commercial property and so qualify for Sipps - provided you don't stay in the room yourself.

For any investor, a constant stream of guests is critical. In the first eight months of 2005, occupancy rates for London hotels stood at 79 per cent.

While Mr Sandelson insists he "knows how to keep our hotels full", others advise caution. "The 6 per cent yield projection looks attractive but this assumes continued high occupancy. Investors need to decide if this is realistic as a higher or lower rate will affect the yield," warns Justin Modray of independent financial adviser (IFA) Bestinvest.

He is also concerned that hotel service charges could eat into rental returns. "[With Nest] these are capped at £500 per annum for the first seven years, but could really bite thereafter," he says.

"For a hotel to keep attracting customers and command a healthy nightly rate, it will require periodic refurbishment."

Nick Gardner from broker Chase de Vere Mortgage Management comments: "Unless you are keen to expand into the hotel industry, residential investments still provide good [rental] yields and offer far more potential for capital growth."

He adds: "In an economic slowdown or recession, hotels are likely to be hit very badly, while demand for residential accommodation tends to rise because people are too nervous, or can't afford, to buy."

Also, getting a mortgage on hotel buy-to-lets isn't easy. Most lenders view it as too risky, says Ms Bien. "If a borrower defaults on the payments and the lender has to repossess, it may struggle to sell [the room] on; these investments are relatively new and there's no proven demand."

Christian Arno bought a room at Guesthouse West in Paddington to let to clients and colleagues. The 27-year-old runs a translation business and says: "I have many people coming from abroad who need to stay in London, so owning a room makes sense financially. Occupancy levels tend to average 70 per cent and the returns are good."