Real estate investors have a variety of options when choosing what types of properties to purchase. Condo hotels are one of the many choices and are making a comeback. Are they really a good investment choice, or is it just a trend?
In general, condo hotels are great investments if they’re in a popular vacation area. These properties have the potential to generate enough revenue to cover their costs, and then some. However, it’s important to understand the pros and cons of condo hotels before purchasing one.
We’ve put together a guide to help you determine if condo hotels are a good fit for your real estate portfolio. Keep reading to learn more about what designates a condo hotel, how it’s financed, and what’s good and bad about owning one.
What is a Condo Hotel?
A condo hotel, or condotel, is a unit within a larger property that operates as a hotel or resort. Many condotels are in high-end resorts, located in cities that are known for tourism. In particular, these types of properties can be found in places like Florida, California, and Las Vegas.
Condo hotels are not always this way, however. They are sometimes just a single, studio-type room, inside what appears to be a normal hotel operation. In fact, you’ve likely stayed in a condo hotel at some point if you travel for recreation.
This type of property was first created in the 1990’s, as an alternative to time-share properties. The condo hotel has a ton more benefits than time shares, mainly because the owner can turn a profit on the property. With a time-share, it’s typically the owner of the entire building who makes the money, while a condotel allows the owner of each individual unit to make money.
How Does a Condo Hotel Work?
Every property is different, but all condo hotels operate in a similar fashion. The owner of the unit has the ability to use the unit for a certain amount of time each year. When the owner is not using it, they can add it to the hotel’s inventory to be rented on a nightly basis.
Condo hotel owners split their revenue with the property (hotel) management company. Each deal is different, but many of them can be as high as a 50/50 split. In return for 50% of the rental revenue, the management company takes care of renting, marketing, cleaning, etc.
Are Condo Hotels Profitable?
Condotels can be profitable when the economy is good and people are traveling on a regular basis. Since the vast majority of these properties are in tourist-rich areas, it comes as no surprise that their profitability is often based on the health of the tourism industry. There are other factors that also affect how much profit your property can produce.
The sales price and mortgage rate can also significantly impact how much money you make on your condo hotel. If you don’t purchase the property at a good price, your mortgage could be much higher than the potential income each month. This could be a means to an end if you keep the property long-term and pay down the mortgage, but it’s something to think about in the beginning.
At the end of the day, buying a condo hotel can be a very profitable venture. You just need to make sure that you’re bringing in more money than you’re spending. It sounds like simple math, but there are several external factors that could affect your success, including those we just talked about.
What are the Benefits of a Condo Hotel?
Generally speaking, condo hotels have a ton of benefits for both their owners and their management companies. They are revenue-producing properties with minimal management responsibilities on the part of the owner. They also tend to be in highly sought-after areas, which make them easy to resell.
Most condo hotels are resort-style properties that offer a host of amenities such as swimming pools, spas, and restaurants. Some are 5-star properties, while others are more simple. Regardless of the amenities offered, the majority of condo hotels are well-kept and attractive.
Since the hotel management company depends on the rental income from these units, they take pride in keeping them clean and presentable. Many operate under major brand names such as Marriott, Four Seasons, and Hilton. This branding power can bring major benefits to investor-owners who want to maximize profits from their property.
Condo hotels managed by major brands are often in premium locations that attract hundreds of thousands of visitors annually. Places like Clearwater Beach, Aspen, and the Las Vegas Strip are excellent choices when considering a condotel as your next purchase. However, be prepared for a premium price tag, as well.
If your pockets aren’t quite deep enough to purchase in a premium property, you’re not completely out of luck. There are plenty of smaller properties available for purchase with the same condo hotel model. These properties may be harder to find, but are worth the search. They tend to be in great locations, as well, and depend on tourist activity to pay the bills.
Purchasing a condo hotel that is already operational is basically like buying a business. You’re buying a property with an existing revenue stream that has the potential to pay for itself. Different properties will produce different amounts of revenue, so you should ask for the financial history before making a purchase.
If you’re purchasing a condo hotel as a vacation property for yourself, you may be more interested in finding a location that you enjoy visiting than the potential revenue streams it could generate. Conversely, if you’re purchasing the property for the sole purpose of earning some passive income, then look for the property that will generate the most money, regardless of where it is. Either way, having a revenue stream is a major benefit of condo hotels.
If you truly want to earn some passive income, this is an excellent option. Unlike other rental properties, a condo hotel is usually 100% hassle free for the owner. You’ll have to pay an HOA fee and some other maintenance/management fees, but the property will be taken care of for you. That’s just part of the deal.
With long-term and short-term rentals such as houses and condos, the marketing, renting, cleaning, and maintenance often fall on the owner to do. Of course, you can hire a management company to do all of that for you, but you may wind up paying more than you would have by just purchasing a condotel.
What are the Drawbacks of a Condo Hotel?
Condo hotels can be frustrating properties because they are reliant on the health of the economy for survival. Natural disasters, economic issues, and global pandemics can all have a major effect on how much revenue this type of property can generate. They also may not appreciate in the same way that other real estate investments have the potential to do.
Condo Hotels Rely on the Economy
Due to the resort-style nature of condo hotels, most of them are reliant upon the health of the economy. If your condo hotel is in an area that is known for tourism, you can expect it to take a hit when the economy dips. History shows that people travel less when the economy takes a down turn, which is reflected in most businesses within the tourism industry.
The economy is affected by a variety of uncontrollable factors, including politics, wars, treaties, and more. Foreign affairs can affect the number of travelers coming from overseas. Natural disasters can hinder people from visiting the specific area where your property is located. Global pandemics can bring the world’s economy to a screeching halt. You just never know!
Residence Restrictions on Condotels
Most property management companies who operate condo hotels will place restrictions on how many nights per year an owner can occupy the property. They depend on the revenue share from each unit and will therefore only allow the owner to stay there for a limited amount of time. As an investor, you need to know how often you can use it before making the purchase.
If your key objective with the property is to make money, you may not be concerned about this metric. In this case, you should focus more on the average occupancy rates of the hotel over time. However, if you plan to use the property as a vacation home on a regular basis, the residence restriction becomes a lot more important as a metric for whether or not you should purchase it.
One of the benefits of owning a condo hotel is the lack of management that you’ll have to do. One of the major drawbacks is how much revenue you have to give up in exchange for that luxury. Many properties have a revenue split as high as 50/50 for the management company and the owner.
This should be another factor on your list of items to think about before purchasing a property. Sometimes, this will still be a pretty sweet deal. On the flip side, it could eat away the majority of the additionally money that you could’ve generated.
Re-Sale of Condo Hotels
The re-sale value should always be a consideration when purchasing a property. Whether it’s a first home, second home, or investment property, you should always consider the current and previous comps, as well as what the market is projected to do in that area. With a condo hotel, this projection can be much more difficult.
Since condotels don’t act the way other properties do, it can be really difficult to determine whether they will gain value or not. In many case, they don’t. The larger property in which the unit is located generally holds its value due to the prime location and robust tourism. As a result, condo hotel owners should not expect a major return when the resell the property.
Financing for Condo Hotels
We will dig into this in greater detail in the next section, but this is a drawback for most people. Securing a loan for a condo hotel can be extremely challenging due to the nature of the property and the potential risk involved. For this reason, many first-time investors go for a traditional rental property instead.
What Type of Financing is Available for a Condo Hotel?
From a mortgage broker’s perspective, condo hotels are considered to be much riskier than first homes. For this reason, financing is harder to find and is more stringent. You can get a mortgage for a condo hotel, but you’ll pay a larger down payment and your lender will require great credit scores and an income high enough to cover both your first and second mortgage.
When financing a condo hotel, most lenders will require at least 20% down, if not more. Unlike traditional second-home purchases, lenders will not factor the potential rental income into your financing. This means you’ll need to qualify with the right debt-to-income ratio, without considering the potential revenue from the property into the equation.
In short, getting financing for a condo hotel can be really tricky. Potential buyers are often rejected for financing on this type of property due to the classification of the condotel as non-warrantable. This means that the minimum requirements for mortgages set forth by Fannie Mae or Freddie Mac are not met. If this happens, the lender will not be able to sell the mortgage and will therefore not underwrite it.
Some people consider condo hotels to be more of a lifestyle purchase than an actual investment. That’s because many investors choose to purchase them in areas where they like to vacation. While this isn’t a bad strategy, it’s not the only strategy.
Real estate investing comes in many forms, and the condo hotel is just one of the many options available to you. If you’re just getting started, you may find it challenging to get financing for a property like this. They are extremely unique and can be a challenge to get your hands on. But if you do, if could be really profitable for you.