Buy & Hold Condotel units
Real Estate Investor · Denver, CO · Member since 2013 · 24 posts · 0 votes
I've recently come across a deal for 2 units in a condotel complex. I was wondering if all of my BP friends could give their opinions about these types of ventures. To me, it seems like an interesting niche. The main renters are traveling professionals who typically stay shorter periods (I.E. 1-3 month leases).
I can see the obvious cons, but I was hoping you guys could maybe fill me in on the not so obvious ones. Also, what are some of the upsides that I might be missing.
Lastly, I am trying to come up with some creative ways to finance this deal. The seller seems motivated, but I wouldn't say she is very motivated. Would it make more sense to try to buy subject to current financing even though the owner will be selling for a profit? Is it possible to work out a deal where the buyer can owner finance the profit to the seller overtime?
Questions, thoughts, criticisms?
Pretty familiar with Condotels. IMO they are not good investments from a cash flow perspective. They are nice to have to enjoy the location on vacation but that is about it. Your cash flow might carry the property but not too much profit above that.
Financing for these types of units is very hard to find post crash. You might have some local Denver banks humoring the deal.
The problem is, the revenue is still based on the operator selling the room like in a hotel. These places generally do not have 100% occupancy. I would think they are closer to 62% occupancy on a monthly basis and subject to seasonal use, depending on the hotel flag.
The flag of the property, or hotel brand, was not mentioned. This matters. Some of the private flags have lousy central reservation systems further reducing occupancy percents. Additionally, having a Hilton flag or similar will be costly to you as a profit share.
Typically the deed restrictions in these types of units is very intense. The owner is responsible to purchase specific beds, chairs, desks, TV's, etc. Again, this is a hotel, so they want the rooms to be homogeneous. Not all are like that but most. Not many corners to cut to lessen capital costs.
When underwriting the past cash flow, you have to really take time to understand high occupancy months. Was there an event in town, will the event return next year, etc. Again, it is primarily a hotel room that you own and some events reoccur and some move locations.
The other property amenities matter as well, just like any hotel. Pool, food & beverage and location. You are competing with other hotels in your area. Many are likely the big boys who do this well full time.
Typically as an owner, you do not have any say so in the daily rate the operator charges for your room. Which also makes cash flow projection difficult. It's not impossible, but you need to get to the bottom of your average daily rates and properly add those into your model with the occupancy. Both of these numbers vary from day to day, month to month and year to year.
Special assessments can be pretty high. In the event you are flagged with a national brand, the property will have to maintain the franchise requirements for the property. Typically they do not capitalize this from a P&L since the revenue is distributed to the owners. So, they have to assess the owners when capital improvements need to be made. In the HOA documents, they will have the R&M budget. You will want to understand what that is and covers. Most of the time it is just general maintenance, so if an elevator goes down or the HVAC system needs an overhaul, you as an owner will split the bill with the other owners.
As I said, these assets are good as a second home type of thing but a poor investment asset. As an owner you will periodically have to re-capitalize the asset and without any control of expenses or cost of goods. The revenue is based on the occupancy and the daily rate which you don't have any control over. You have to share the revenue with the operator, so when looking at the cash flow, get your scissors out and cut the "pie in the sky" number down a couple times. Getting the proper material to do proper due diligence is hard usually.
BTW, this is not just my opinion, the National Association of Condo Hotel Owners (NACHO) also believes these can be bad investments but good second homes.
Where are these located? We looked at a lot of them in Hawaii and I just can't see how they would be a good cashflow investment...maybe a speculative play for appreciation and second home. Many of them have land leases plus high hoas so there's much control you lack. To me it seems more like a write-off/loss for a high income earner who isn't real estate savvy. But, maybe I'm missing something.
Hey Tiffany. Thanks for your reply.
The units are in S. Denver. Let me break down the numbers:
Gross Rent: $2,735
HOAs: $300
Mortgage: $900
Estimated Monthly expenses: $400
NET: $1,135
Now the expenses are what the seller have told me and also from what I have dug up by asking other landlords in the complex. As far as I know, there are no land leases, but I'll need to be 100% sure about that, so I'll ask.
Pretty familiar with Condotels. IMO they are not good investments from a cash flow perspective. They are nice to have to enjoy the location on vacation but that is about it. Your cash flow might carry the property but not too much profit above that.
Financing for these types of units is very hard to find post crash. You might have some local Denver banks humoring the deal.
The problem is, the revenue is still based on the operator selling the room like in a hotel. These places generally do not have 100% occupancy. I would think they are closer to 62% occupancy on a monthly basis and subject to seasonal use, depending on the hotel flag.
The flag of the property, or hotel brand, was not mentioned. This matters. Some of the private flags have lousy central reservation systems further reducing occupancy percents. Additionally, having a Hilton flag or similar will be costly to you as a profit share.
Typically the deed restrictions in these types of units is very intense. The owner is responsible to purchase specific beds, chairs, desks, TV's, etc. Again, this is a hotel, so they want the rooms to be homogeneous. Not all are like that but most. Not many corners to cut to lessen capital costs.
When underwriting the past cash flow, you have to really take time to understand high occupancy months. Was there an event in town, will the event return next year, etc. Again, it is primarily a hotel room that you own and some events reoccur and some move locations.
The other property amenities matter as well, just like any hotel. Pool, food & beverage and location. You are competing with other hotels in your area. Many are likely the big boys who do this well full time.
Typically as an owner, you do not have any say so in the daily rate the operator charges for your room. Which also makes cash flow projection difficult. It's not impossible, but you need to get to the bottom of your average daily rates and properly add those into your model with the occupancy. Both of these numbers vary from day to day, month to month and year to year.
Special assessments can be pretty high. In the event you are flagged with a national brand, the property will have to maintain the franchise requirements for the property. Typically they do not capitalize this from a P&L since the revenue is distributed to the owners. So, they have to assess the owners when capital improvements need to be made. In the HOA documents, they will have the R&M budget. You will want to understand what that is and covers. Most of the time it is just general maintenance, so if an elevator goes down or the HVAC system needs an overhaul, you as an owner will split the bill with the other owners.
As I said, these assets are good as a second home type of thing but a poor investment asset. As an owner you will periodically have to re-capitalize the asset and without any control of expenses or cost of goods. The revenue is based on the occupancy and the daily rate which you don't have any control over. You have to share the revenue with the operator, so when looking at the cash flow, get your scissors out and cut the "pie in the sky" number down a couple times. Getting the proper material to do proper due diligence is hard usually.
BTW, this is not just my opinion, the National Association of Condo Hotel Owners (NACHO) also believes these can be bad investments but good second homes.
What everyone else said.
I know some people who have a few of these types of units and they have been a drain on their funds. It reminds me of those real estate gurus that try to sell you their books and there are ever increasing levels of purchases to get that next level of knowledge to make your first deal.
One year they need you to update something to be on the A list and the next year is the same thing. Then another operator will buy the operation and require you to replace the 2 year old kitchen that you haven't even paid off. Yes, that stainless steel top of the line oven that has seen 5 days of use now has to go.
From what you are describing, these units are more likely to be just
condos, not condotels. Condos give you better cash flow.
Condotels have poor cash flow. They operate like hotels, such as Trump LV. Typically, the management is very expensive (40%-50%)
plus service fee etc. I own some. The only reason that I was buying is that the the price drop was very steep due to new regulations after the market crash. They were priced far below the construction cost and the appreciation potential was huge. I noticed that in an
extreme case, a flipper already made over 180% for a unit he bought in 2010. If you have bought a year ago, you probably already have had very good profit. Of course, investors eventually
will sell except keeping some of the best as their vacation homes.
It is 100% off-hand investment. You only need to set up automatic payment and withdrawal options of a bank account, and file some tax forms.
Thanks for all of the responses!
I may have misled some of you. I called them condotels because essentially, that is what they are; however, they operate more like condos. The only difference is that it comes fully furnished with kitchenware and all. It appeals to the traveling executive not the long term leasor.
As far as what I've been told, there are not management fees or land contracts. I will definitely bring all of these concerns to the table, but I am pretty sure they function more like condos. Sorry for the confusion!
I am going to have to agree to disagree on the property type. The short term nature of the lease along with the nature of the target tenant screams lodger-proprietor relationship not landlord tenant relationship. I can understand the statement, seems like it operates like a condo, but for you who? You the owner? Of course it does, that is how it is supposed to operate by design.
That said, look to the nature of the 'renter' if you will.
1. Is the renter precluded from "exclusive ownership"? Can they change the lock on their door and more their property into the unit?
NO = Lodger / YES = Tenant
2. Are room services such as fresh towels and linens and other such services provided?
NO = Lodger / YES = Tenant
3. Can the renter be moved to another room on property per the management or operator or via the request of the lodger?
YES = Lodger / NO = Tenant
4. Is a formal lease agreement executed by the renter or is the lease terms a function of a registration card or similar?
YES = Lodger / NO = Tenant
5. Is a deposit required for the renter to take possession of the unit?
NO = Lodger / YES = Tenant
6. Will the renter use the unit address as their primary address or do they list another primary address?
NO = Lodger / YES = Tenant
7. Does the deed owner have Exclusive Ownership and right to enter the property at will or is it restricted use?
RESTRICTED USE = Lodger / FREE USE = Tenant
That is not meant to be some exhaustive list nor meant to be the legal definition by which each state will view transient guests versus tenants. However it is a pretty easy set of question for you to get some answers to and certainly ending up with a majority of Lodger answers might mean you have a Lodger-Proprietor relationship not a Landlord-Tenant relationship.
There are many different operational and managerial structures to the Condotel asset class as a whole. It is sort of an undefined and is certainly a new idea.
In regards to there being some great upside to Condotel with market price. I would also have to disagree with that. Many of the units built prior to the crash had simply crazy, crazy selling prices. I have seen units sell for $650 per square foot. In fact, during the crazy Condotel years, there was a lot of arguments going on about whether the investment was truly real estate in nature or a form of security due to the ownership restrictions and the reliance on another's management capacity for cash flow. The value increase or decrease of a Condotel is really based on the properties P&L which your unit is but one of many. This is because the property is really a hotel, the ownership of the rooms is split amongst many investors. As an owner of a unit, you can not do much if not anything to increase the value of the unit. The value is mainly derived from the utility of the unit and in that sense all the units on the property will float on the same line.
I hope it all works well for you what ever type of unit it is. Point is, do not call a "cat" a "dog" just because it barked.
Thanks for the advice. I can safely say that the answers to those questions in this circumstance lean more on the landlord tenant side.