Condotels

by Mr. Cheap

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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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{ 7 comments… read them below or add one }

1 guinness416

I’ve never heard of them (or it hasn’t sunk in) but I’m tempted to buy one in that swanky Trump building currently all over your site :)

2 Four Pillars

Guinness, I haven’t heard of them either.

Cheap – I like your point that any “investment” that needs a sales team – probably isn’t. Same sort of deal as time shares.

3 nobleea

condotels are a great deal..for the developer and operator. the ‘investor’ takes on all the risk, and then pays the hotel operator to ‘maintain’ their property.

i think some reputable hotel brands have gotten on this bandwagon. and why not? they essentially get a hotel with little to no money down. they have to share some of the revenue, but it’s probably no more than what a mortgage would be on a billion dollar hotel.

4 Thicken My Wallet

What most people miss is that these units are taxed as commercial properties and not residential properties for property tax purposes in some cities and, in municipalities where the property tax base is downloaded to businesses, this could be a huge difference in taxes.

1 King Street has not done well in Toronto according to most people I know.

I tend not to like them because they take the disadvantage of a condo as an investment (you have no control over the expense side) and magnify it.

5 Canadian Capitalist

You should mention the point that Thicken raises in his comment. These units tend to sell at residential prices but taxed at commercial rates. There was a lot of sob stories in the press about this.

6 Ray

I have never heard of it until now, the concept sounds interesting. I dont think I have a problem with it having a sales force, pretty much everything does now days (mutual funds, stock brokers, real estate agents etc.). It’s probably worth taking a closer look at.

7 Caetano

Interesting article – here’s another scenario (mine):
-young professional working in the downtown core, looking for a place that has a high walkability factor and cheap to buy – primary residence.
-a cool hip building where your friends would all want to visit.
-not really looking as it as an investment. If I make back what Ive paid initially, I would be happy.

In this case, would it make sense to consider a condotel? Or are there other downfalls?

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