Hotel Condo????

[pk92108]

I assume from my brief reading of posts on this board that there is essentially no good real estate investment in San Diego these days…

One thing I was thinking about is if any real estate investment makes sense, is to be somehow levered to the hotel market which is very good in the sense that rooms rates have been increasing and occupancy is high…

Does anyone have any input into the hotel condo market, essentially the Hard Rock and the Diegan (Setai) which will be completed downtown???? Obviously they take a 50% cut, but boutique room rates are close to $300/night…But I suspect the other fees such as high mortgage rates, HOA and prop taxes would make this kind of investment not so great……

Any input?? I have some cash but can’t seem to be comfortable with any kind of real estate investment in San Diego now.

[oxfordrick]

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!”

[oxfordrick]

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!”

[justdoitstewart]

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.

[justdoitstewart]

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.

[Coronita]

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.

[Coronita]

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.

[pk92108]

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

[pk92108]

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

[Coronita]

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. 

[Coronita]

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. 

[Coronita]

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.

 

Condo hotels a bad idea?

 

[Coronita]

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.

 

Condo hotels a bad idea?

 

[pk92108]

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……

[pk92108]

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……

[Author]

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