Real Estate Insight

Condo vs. Condotel

One of the fastest growing segments in real estate has been in vacation and resort type properties. There are many reasons given for the growing interest, but condotels are very different from a condominium and it’s important that buyers know what these differences are.

Nothing New

While it’s quite possible you’ve just recently heard of condotels, they have been around for a long time. Favorable market conditions and changes in investment policies of building owners spawned a large increase of condotel conversions and offerings to the public. As real estate prices sky-rocketed in the mid 2000’s, buyers looked to condotels which were generally half the price of an average size condominium. These buyers were also lured by the potential profits that were pitched by developers selling these units. While the potential is there, buyers need to know what they’re getting into and do their homework.

What’s the Difference?

A condotel can be zoned for both condo and hotel use. This means an owner can use the unit for either long term or short term use. While a residential condominium typically has zoning ordinances that require a minimum 30 day rental term if the owner will be renting it out, condotel owners are allowed to rent it out on a daily basis like a hotel room. In a condotel, there is a hotel operation and the lobby of the building will resemble a hotel. There is a “pool” of rooms that make up the hotel. A management company is hired to run the hotel pool. Owners of individual units can elect to put their unit into the hotel pool. Once in the hotel pool, the owner turns over control of the unit to the management company which in turn will rent it as a hotel room and pay the owner an agreed upon amount. That agreed upon amount varies depending on the management company.

Benefits of Condotels

Vacation rentals get higher rents compared to long term rentals. Short term rates can be triple the amount of long term rates. But the difference can be deceiving. While it is true that short term rates are much higher compared to long term rates, vacation rentals also have a much higher vacancy rate. An owner of a long term rental may get $1500 a month in rent with a one year lease. This same unit could get $150 a day as a vacation rental. If rented for 30 days, the rent for the month would be $4500. What many potential buyers overlook is the vacancy factor. The long term rental will have zero vacancy in 12 months; the vacation rental could easily experience a 40% or higher vacancy over that same period of time. Another reason for the growing popularity of condotels is the typically lower entry price level. Although much smaller than their condominium counterpart, buyers can get into the real estate game for much less. But there are some catches. Condotels usually don’t have a full kitchen and commonly only have a “wet bar” and they seldom come with parking. Another thing to consider is financing. Most lenders won’t make loans on condotels and the few that do will require large down payments sometimes as much as 35%.

Professional Management

Condotel owners can choose to put their units into professionally managed hotel pools. These management companies are chosen because of their track record to successfully run hotel operations. Vacation rentals are tricky to manage. By placing a unit into a hotel pool, owners don’t have to worry about renting it out, checking in and out tenants which could be daily, they don’t have to advertise, and they get paid regardless of any vacancy. The downside to placing a unit into the hotel pool is the management fee is pretty high; commonly half of the gross rents collected. Owners also give up control of the unit. Many buyers like condotels because they want to enjoy the use of it for a small portion of the year and can rent it out the rest of the time. A unit in a hotel pool might not allow for the occasional use of it by the owner.

Do Your Homework

Condotels can be the perfect investment and has many attractive features for the right investor. But be warned, for every satisfied condotel owner, there’s an owner that will tell you otherwise. The difference is as simple as asking the right questions before you buy. So many people get wrapped up in the hype and frenzy of new condotel offerings and fail to question or ask questions.

What to Ask

• What is the track record of the management company?
• What are the income projections based on? Know the difference between “Rack Rate” and “Net Rental Revenue”.
• What are the vacancy rates based on? What’s the average “room nights” per month? If the building has a current hotel operation, are the vacancy rates based on historical data and if so, is that same management company staying on after the building’s sales are done?
• Read and understand the Rental Management Agreement you will be bound by if you put the unit into the hotel pool.
• Ask how the Room Rotation is done.
• If there are amenities not yet built but are promised, question the time given for those amenities to be completed.
• Control your emotions and don’t get caught in the hype.
• What are the restrictions for personal use?
• What costs and plans are there to renovate each unit and replace furnishings?

Condotels in general are attractive to investors because of the high rents they can generate. But you need to know as much about them as you can. Each condotel has small unique differences. Don’t assume that if one project has a certain feature or benefit that all will have the same. While not for everyone, condotels can be a perfect fit for many. Just be sure to do your homework.

Good luck and happy house hunting!

Elliot Lau