San Diego Housing Bubble News and Analysis

I live down by the Hard Rock - they used to have a sign saying "first phase sold out in 9 hours!" My prediction is ......... final phase will take nine years!"

I got a buddy that bought a few units (against my advice). He says it's sold out. I'm an investment R.E. Broker and not a big fan of condo hotels though.

I got a lot to say about condo-hotels, as my wife and I explored buying a few in Orlando...Unfortunately, I'm too busy right now to give my full study of them...

Suffice to say, imho it makes more sense if you buy one because you want a vacation home to use some of the time, but what to recoop some of the costs by renting it out when your not there...But as an investment, I things are much more complicated than traditional homes/condos. Suffice to say, you have to deal with everything you normally have to deal with in a rental, plus on top of that deal with hotel occupancy rates, hotel management fees, management rental fees, short term insurance issues, etc. In short, it's probably not something you want to do as a first investment property.

Also, one big drawback for most condo-hotels. You cannot occupy it as permanent residence. IE: you cannot live in it 365 days a year. Translation: when you sell it, the only people buying it are either vacation home owners or "investors".

I would treat these 1 step above a timeshare, which advantages over a timeshare. But not an "investment".

Also, something you want to keep in mind about condo-hotel. Getting a loan for a condo-hotel is along the line of getting a loan for a commerical property versus residential. Also ,getting insurance for short term tenants is quite different from a long term rental. Many insurance companies don't want to insure short term rental, because it's a larger liability.

thanks for the great info...i will probably pass....

pk92108,

One advice, is that I think you owe it to yourself to find out about it either way. I mean, even though we didn't buy, going through the numbers and talking to different people did give us a clue into parts of how a hotel business works. It's really interesting. We just couldn't get the numbers to line up to give us a compeling reason to buy it only as an investment property. (We don't like florida, so we would never go there on a vacation).

The basic premise of how a condo-hotel works is that you own a room/suite in a hotel, but a management company runs all the collective rooms as a hotel, splitting the profits with each owner. Ok, well sort of. I'll get to that later.

The sales pitch as an investment is that because it is part of a hotel, you can rent the room out at a high hotel/room daily price. The price depends on how many stars the hotel is,amenities, etc similar to the price differential you see in a normal hotel. Sounds complicated to rent out your own room? The sales pitch will tell you don't worry, a management company will take care of that for you.

The thing that was a challenge for us was the condo-hotels have huge fees. There is the management fee, which is like an HOA fee. On top of that, if you want to rent your room/suite out, you typically must go through the management company running the hotel. They charge a percentage of the room rate. So for example, if they rent out your unit for $100/night at 10%, they collect $10 per night. On top of that, you have to share the costs that are common to running the hotel. So, this would be stuff like paying for maintanence on elevators, pools, common areas, free continental breakfasts that the hotel offers as a perk, hotel franchise fees, etc.

Now the other thing is that while techically, the management company is suppose to round-robin renting out all available rooms, there's no guarentee your room will be fairly rented out. In the ideal world, a hotel has 100% occupancy throughout the entire year. Unfortunately, that's not the case, so let's say more realistically the hotel has a 70% occupancy rate. Ideally, the 30% of the non-occupancy should be equally distributed to all rooms such that on average everyone has the same occupancy rate. Unfortunately, it doesn't always work that way. If you have a less desireable unit, people might not like your room as much as someone on the top floor, and hence your unit may be rented less than others. There's nothing about sharing "revenue". If your unit happens to rent less than others, the that's your problem. BUT, on the other side, you have to share the cost of the common things regardless of how your unit does. See why I said the revenue isn't always "equal"?

Also, I briefly mentioned about occupany rate. It's very important that you know how occupied that hotel will get. The price you can rent out will be largely set based on the hotel's "star" rating. IE: you generally can't ask the management company to rent your room out at whatever price you want. They must follow their guidelines. So the thing that will largely determine your profit or losses is the hotel's occupancy rate. We ran some numbers at a few units, and the numbers where such that in certain hotels you would break even at 75% occupancy, be slightly cash flow positive at close to 79%, etc, and that's assuming your cost estimates where correct. The problem is that it's really hard to predict what a hotel's occupancy rate will be if the hotel is new. And if the hotel is old, well it depends on lot of things such as the hotel franchise, And in general it depends on the dynamics of the tourism business where the hotel resides.

There are a couple of other minor things that is worth considering, that are less of issues. One is insurance. You can't get a traditional insurance policy on these condol-tels because they will be predominantly occupied by short term renters. Hence, insurance companies are less inclined to insure you because it poses a greater liability (IE more people can potentially sue you). Also, getting financing for something like this is more along the line of getting commerical financing. Also, should the time come for you to sell, they only people that are buying would be (1) people wanting a vacation home or (2) people who think it will make a good investment property. The issue with this is that if you can't make it to work as an investment, the person next in line won't either, because they really isn't anything he/she could do to make things more investment grade, except buying it at a lower price than what you paid for. and Also, you can't ever sell it to someone looking for a primary home because you aren't allowed to live there permanently.

Hence, why I draw some similarities to timeshares. The best deals from timeshares are buying them from others who just want to get out.

So in all, while it might be possible to actually be cash flow positive, we felt there were just to many variables that we didn't have control over to buy one as an investment. And if you take a step back. A hotel really should be owned and run by one entity to take advantage of all the economies of scale. By selling each unit to individuals and still centralizing management, I don't see how that would be better than one large entity with economies of scale.

If on the other hand, you wanted to buy a vacation home, but also wanted to recoop some of the cost, a condo-tel might make sense for you. But again, don't count on making money from it. Just like don't count on a timeshare allowing you to make money.

Also, what I found surprising was that a lot of people buying condo-tels in florida were folks from california who didn't yet own a primary home. When I asked them why they were spending money on a condo-tel in florida but not on their own primary residence, they said because they couldn't afford a primary home.

I found this to be quite strage. Because, i think it was pretty obvious that a condo-tel wasn't going to make that much money if at all. If you're already going to lose money on something, you might as well buy your own home overpriced, and find a few roommates to recoop some of the cost of owning. At least in the end, you get to live where your paying. But that's just me. 

Forgot to mention, there are a few articles on this subject as well. I'll include them here.

One thing, you definitely should get in writing all the fees, costs, and etc. There's a fee/cost for just about everything.

http://www.urbnlivn.com/2006/12/13/condo...

Thanks fat_lazy......That was very informative and your handle is certainly a misnomer!!...

I actually have a condo-hotel in a ski resort that I bought 5 years ago that has positive cash flow with 25% down that I am happy with.....So I am not foreign to the concept but at 440K for a studio making any kind of positive cash flow would need an average room rate of around 300/night (realistic for a 5 star hotel) but I would also need maybe 80% occupancy, which I think is a bit of a stretch...

You can't get all the fees in advance, because of compliance/regulatory issues that prevent them from discussing the exact nature of the management split (don't ask me why)..It was the same way with my other place.....

I am still on the fence but will probably pass......

That was some really good info about the condo-tels.

The reason that the developers are making a condo hotel, rather than doing it themselves is because loans for hotels are very hard to get. There were tons of problems for the lenders after 9/11.

So, if I didn't know anything else but that.....I would choose to pass. Why do I want to take on the risk that lenders for the entire project are afraid to take on?

Plus there are so many variables that the developers can't discuss with you because it is "not an investment". Of course, everyone is buying it as an investment.

That's my take. If I could get one of those at half off after it didn't work for the first guy....then maybe...after I could look at the hard numbers for both income and expenses.

Buy a condo at the Hard Rock and as an owner you are limited to 24 days of usage per year. or one weekend per month. when available. Better off buying 4 red weeks in a timeshare and using the weeks anytime you want and anywhere around the world. I think 12 weekends a year in the Gaslamp will get old after a while. The first phase sell-out was for the cachet of saying I own a piece of the Hard Rock. Albeit, a very small piece........ for 1/2 million $. No thanks. Porkman

pk92108,

That was exactly the problem i was running into as well. a 400k condo-tel in Orlando came out to be about $300/night at around 79% occupancy. I just didn't see that happening consistently. Perhaps in orlando, it sort of can make sense because you have disneyworld...BUT, what I'm trying to figure out is what is so special about the Hard Rock in San Diego in downtown. Personally, if I'm going to splurge on a room and board in san diego, I'd stay closer to the beach.

Please explain this to me.

While perusing the net on the resurrection of a condo/hotel concept for downtown San Diego, I briefly searched for a background check on the principle developer for the "Setai" San Diego, Steve Rebeil. (I put "Setai" in quotes as this well-respected group is suing to disassociate itself, even its name, from Mr. Rebeil.) My brief search found a Federal conviction for tax fraud for which he served 5 months in prison in 2005, multiple suits from prior development partners (all of which Mr. Rebeil apparently lost), action to the Nevada contractors board after he allegedly stiffed 77 (!) subcontractors, disqualification by the Nevada Gaming Board from holding a casino license due to ethical questions (way back in 1997), and an active lawsuit from his ex-girlfriend to collect court-ordered child support.

I understand that such people exist in the world. My question is who would even consider entering into any contract with this man? And who would even think of entering into an on-going joint venture of hotel ownership/management with such a person?

If the information on the web is even close to accurate, this condo/hotel project (should I call it the Setai, or the San Diegan, or something else) must be the absolute zenith of the real estate hype/bubble/con.

Does anyone have first-hand knowledge of the project and or Mr. Rebeil?

I went to dinner at the Hardrock the other night... Got to see a room... wow! somebody knew what the hell they were doing... very impressive.

I called the next day to try and buy one... I was told they were sold out. I didn't take no for an answer and tried to get on a waiting list, told them I could close in a couple days with cash (I could and I was 90% serious)... no luck.

Oxfordrick... I guess you need a new crystal ball... first development I have heard of that won't take cash when they are not sold out.

Found out an owner nets 43% of the room rate. Not sure if that will cover a 400k 30yr fixed mortgage, but very close.

When the conventions come to town, the best parties will be at the HardRock, and everyone will want to change hotels.

(I sure am getting turned off from the FEW overly pessimistic, probably don't have a pot to piss, chip on their shoulder wannabe homeowners on this site. Not that you are one Oxfordrick, but you do need a new crystal ball)

La Jolla Renter

Found out an owner nets 43% of the room rate. Not sure if that will cover a 400k 30yr fixed mortgage, but very close.

That's ridiculous low percentage of the room rate. Some of the condo-hotel's i saw was charging 25% room rate, and even so it was till hard to get the numbers to match. Keep in mind that in addition to just the room rate fee, there are probably HOA/management fees that are considerably higher than any fees you would see in a residential attached home.

Do the math yourself. Find out home much room rates are, how much management fee is, how much of the hotel costs they want you to put up, how much the fees are to rent the room out, how much insurance will be if you can find it, and how much a commercial loan will be. BTW, I'm pretty sure you won't be able to get a conventional fixed rate mortgage..Because again this isn't a residential property.You'll be looking at commercial property financing.