by Mr. Cheap

I came across the idea of “Condotels” (also know as hotel-condos or Condo Hotels) a couple of years ago when a man was advertising them on craigslist Toronto. More recently a real estate club that I’m on their mailing list sent out a solicitation for people to invest in a Muskoka condo hotel and I thought it might be an interesting topic for those who haven’t heard of them.

Certainly distinct from timeshares, the idea behind condotels is that a group of investors each buy one or more rooms in a hotel under development (much as how pre-construction condos are sold). A corporation operates the hotel, and will maintain the facilities and your unit in it. You have the choice of staying in your room when you want (say it’s in a city you regularly visit) and having the hotel rent it out when you’re not there. Rooms are rented out in rotation, so owners should do well or poorly based on how the hotels does as a whole. From the guests’ perspective they can’t even tell that it’s different from a traditional hotel.

Two years ago when I was talking to the gentleman trying to sell them on craigslist he was singing their praises. After talking to him and being assured it was a spectacular way to make a lot of money (a good way to get rid of Mr. Cheap is to offer him a free lunch) I didn’t bother going on the site visit and forgot about it. A similar “very positive” overview of the concept can be read at this interview with Joel Green (who runs a brokerage specializing in condo hotels).

The obvious counter-argument is that if there was a ton of easy money to be made, someone with deep pockets would just build the hotel themselves (or buy all the units). Clearly the fact that a sales staff is needed to market and advertise the units tells us this isn’t the risk free way to easy money they try to imply it is.

The potential pitfalls in this concept is that you share quite a bit of the revenue with the hotel corporation (at some sites it’s 50%) and you’re required to pay very large Homeowner’s association fees to maintain the hotel and your room in peak condition (it’s a hotel, so they can’t let it get as shabby as many condos get).

Forbes published “A Room Of Your Own” which considers condotels good second homes but bad investments. In it they point out that the numbers needed to evaluate them as investments aren’t provided, and that a miscalculation (like occupancy rate) can dramatically adjust your return. They also point out a glut of resales that could saturate the market (and this was in 2006, I shudder to think what the situation is like today) and do the math showing it’s a better way to lose money than make it after all fees are totaled.

The Wall Street Journal answers a letter providing “Tips on Buying a Condotel As a Rental Residence” which also quotes Mr. Green and provides some suggestions on how to evaluate the potential of an pre-construction condotel.

Although the Wall Street Journal cites Florida as one of the markets where condotels have performed well, the South Florida Business Journal offers an article titled Condo-hotels seen as poor investments. They depressingly quote a National Association of Condo Hotel Owners (NACHO) report that says “We maintain that owning a condo-hotel unit will most likely require injection of capital periodically”. If the national association is saying that they’ll cost you money instead of making you money, I’m not sure if it would be wise to view them as an investment: consider it a consumer purchase if you still want one.

None of these articles provide well grounded information about the resale value of condo hotels, so it’s POSSIBLE that there’s money to be made by running them at a loss then making money on the appreciation (hmm, why does that sound like a familiar strategy?). I wouldn’t be comfortable betting on this personally.

Have you every bought or considered purchasing a condotel?  Have you ever been to a sales presentation for one?  What did you think?

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