Torbay council is hiring a Paignton hotel for a year in a pilot project to provide temporary accommodation for homeless people.
The Linton Hotel will provide rooms and cooking facilities for up to 10 homeless families.
The council claims the scheme should save about £80,000 a year because it is more efficient than ad hoc booking of bed and breakfasts.
If the project is successful, more hotels could be used for the homeless.
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Nobody noticed that the hotel was full of homeless people
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The hotel's owners first took in the homeless on a bed and breakfast basis last year and found it was an eye opening experience.
Co-owner Diane Goodall-Healey, said: "I was very surprised at the sort of people that came through the door.
"They weren't alcoholics or drop-outs. They were just genuine people that had become homeless through no fault of their own.
"They were very clean, looked after rooms and we never had any problems at all.
"Nobody noticed that the hotel was full of homeless people."
Residents, who are housed on the top two floors of the hotel, have the use of a communal kitchen.
Paul Lucas from the council said the idea was to improve the standard of accommodation, as well as save money.
He said: "If somebody is in bed and breakfast then what they are getting is effectively a bedroom and that's far from suitable for families with children.
"Our aim here is to get somewhere between that sort of accommodation and a flat.
"It is designed to give them some independence of living and a degree of permanence."
Figures indicating the level of homelessness in Devon are due out on Monday.
Last time they showed a marked increase in the county.