Any return to buying a condo-hotel unit? part 1

Our dream project to buy a condo-hotel unit

Since this is a really complex subject, we intend to write more articles to help you realize if your situation fits in this type of investment, if so what would be the best way for you to proceed to minimize as possible the risk of losing your money. This is really not a one size fit all type of investment.

There are so many projects today on the market that it is possible for you to find a project that fits you as long as you are willing to perhaps compromise. We mean by that you certainly have a general idea of what would be your dream unit and the type of Resort you already see yourself in. Keep in mind that it might be possible in selecting an alternative property with a little less of what you are dreaming of, to find something that reflects more your personal financial at the present time. Don’t lose your leverage privilege; tell to yourself that any seller is prepared to compromise also to sell his unit.

Generally speaking …

Before anticipating any return on investment anyone who is motivated in buying a condo-hotel unit should start doing some serious homework’s on his own financial situation; because Generally speaking, condo-hotel purchases could a very risky investment. Because you can’t predict future prices, it’s hard to say whether condo-hotels behave like other real estate investments in terms of appreciation. You need to understand that you do not control anything except the inside walls of your unit. If it is only 2 percent, that’s not a great investment.

If you already started to search you probably noticed that there are so many types of projects on the market these days that it is really easy to get lost with their specific legal terms.

Defining the most common type of properties

A condo hotel property could be defined as follow: separately-owned condominium units are intended to be made part of the hotel’s inventory through a rental program. The rental revenues are shared with the Management Company and owners who usually pay no upfront fees for management, which includes the marketing and reservation of the units. The monthly fees for units in the rental pool include FF&E (Furniture, Fixtures, and Equipment) reserve and resort fee(s). Although the revenue splits between the owners of the units and the Management Company do vary from project to project, most condo hotels and specially branded hotels have their specific charts. It could be 50-50 or 60-40 or any other ratios of their own.

What am I investing in?

Condo hotel properties are usually large, high-rise, luxury four-or five-star hotels. They are operated by the biggest names in the hospitality industry like Four Seasons, Ritz-Carlton, Sonesta, Hyatt, Starwood, Hilton, Clarion, Regent International, Rosewood, Conrad Hotels, and Le Meridien as well as many International hotels. Many other independent properties could be added to this summary list. Generally, these types of properties are strategically located in resort economies or popular urban destinations, which allow for high nightly rates and consistent year-round occupancy. Rental income from hotel guests is at the mercy of travel patterns and may decline. Condo-hotels units are deeded real estate and can be bought and sold like other forms of real estate. I know it could seem contradictory but you are investing in a hotel room (brick and mortar) and it could also be considered as an investment.

To add to the difficulties here is a note: analyzing the economics of a condo hotel unit is extremely difficult because of the challenge of getting accurate information about the potential income stream. Developers uniformly do not provide important data or estimates for room rates or occupancy levels for fear of coming under U.S. Securities and Exchange Commission (SEC) regulations on investments, as opposed to real estate regulations.

We can hear you thinking

At this point, I am hearing you thinking! It is comforting to deal with these well-known brand, well I am not so sure about that, they will certainly not steal your money this is guaranteed, but make sure you understand all the little details of what you are signing because they are not there to offer you any gift, even seasoned investors are helped by their attorneys and accountants and other specialists in the matters.

Potential legal conflicts

The U.S. Government and the Canadian Government are very strict about the type of advertising that can be used vis-a-vis any condo hotel projects. Some condo projects have advertised themselves as real estate investments, but since the value of these condos as a real estate investment is not entirely clear the U.S. Government and their Canadian counterpart currently disallows the use of this term when advertising condo-hotels

The next party to become involved in our transaction is, The Homeowner association their services as well as their fees: owners of condo-hotel units are required to pay homeowner’s association fees, commonly referred to as HOAs. The fee and services can vary a great deal. Factors causing a fluctuation are the hotel’s star rating and operation level, and its physical location. A property located on the ocean, for example, can experience coastal weather on a regular basis, which in turn can increase the need for more regular maintenance to the exterior of the building. Along those same lines, a property located in a ski resort must weather powerful winter storms and must also deal with snow removal services.

Exceptions aside, many of the fees and services found in HOAs are fixed and fluctuate very little from project to project. Services such as these usually include general unit utilities, common area utilities, individual room, and building reserves, grounds maintenance, exercise area use fees, security, pest control, mechanical repair costs, safety alarm systems, parking area maintenance, pool area maintenance, and owner management and administrative services. Items related to hotel guest impact are generally not included in the HOA fees, these would include housekeeping services and costs related to hotel staffing and operation.

So this why before taking a final decision it is important to analyze and understand the implication of such an investment, it is serious stuff as you can see.

In the next article, we will go a little more in detail about analyzing if it seems to be a good deal to buy a condo-hotel unit if yes what I should concentrate on to get my dream project to convert into reality.

In conclusion, please feel free to leave a comment telling us if this article have been helpful to you.

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