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Condo Hotels: are they a good deal?
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A recent caller to Michael Finney’s consumer show on San Francisco’s KGO Radio recently asked about condo hotels, and whether they are a good investment.
To answer the question, we first need to be clear on what we are discussing when we use the term “Condo Hotel”.
An article in January’s issue of Los Angeles Lawyer describes several variations on the theme. It could be a condo development, where some of the units are owner occupied and others are available for rent by transient hotel guests, but all can take advantage of the services available, whether room service, or concierge, etc. The owner-occupied units are not available as rentals.
In others, LA Lawyer continues, the condos are purchased primarily as investments or vacation homes, and the units are available for rent during some or all of the year.
The developer, or management company operates the hotel type amenities, including the front desk, bell hops and other activities one may expect at a resort. The condo owner may contract with the management company to handle rentals, could handle the rentals on his or her own, or could hire another company to handle the rentals. In fact, the management company cannot mandate that they be the sole rental agent.
The reality is they make it so attractive that many do engage the management company to handle rentals.
They generally advertise in appropriate media, offer rental specials, and all the other incentives that a traditional hospitality company may offer to attract guests. In exchange, they will split the revenue with the condo owner. This could vary from 70/30 in favor of the owner, to a 50/50 split.
Can an owner get a good return on investment with this arrangement? Too many variables to answer conclusively, and market conditions could make the answer very different from one year to the next; even from one month to the next.
Obviously, whether you make money or not will depend on how much the condo cost, how much you put down, what the monthly mortgage payment will be. That will tell you how much money is going out.
How much money comes in is determined by many factors, including the nightly rental, how often it is available for rent and how much of a cut the management company/rental agent takes.
Then there’s potential appreciation and capital gains. More about that later.
For Part II click here
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