Condo Hotels Still Hot, but are Risky Investments
Sept. 24, 2006. The condo-hotel boom is still going strong, although it creates special risks for investors. The USA TODAY reports on the reopening of the Plaza Hotel as a condo –hotel after a $350 million renovation.
The article by Noelle Knox points out that this is part of a wide-spread trend in prime destinations, “The Plaza's conversion to a condo-hotel spotlights a real estate phenomenon that is creating new opportunities and risks for people in search of vacation homes. There are nearly 250 condo-hotel projects underway nationwide, representing almost 10% of all hotel rooms in the works, according to Smith Travel Research. Most of the condo-hotels are being built or converted in destination cities, such as Las Vegas, Miami, San Diego and Chicago.�
We agree that the appeal of having you own residence in a famous hotel is great for some wealthy owners. You get room service, maids and other luxuries of hotel living (but also the cost of hotel living). Hotel management cares for the property when you're away. Hopefully, the rental income, which is shared roughly 50-50 with the hotel operator (depending on the contract), can help cover your mortgage, taxes and association fees.
However, the disadvantages are great. You have to reserve your own room well in advance. The restrictions on the amount of time you can use your room vary from city, state and country. The hotel management furnishes all rooms the same.
The contracts and risks are too numerous to describe here. The Securities and Exchange Commission bars developers from marketing condo-hotels to buyers as investments. As a result, the developer can't give out projected occupancy or room rates to potential buyers. It is very difficult for buyers to estimate rental income from the property. If vacancy rates are high, guess who winds up paying the tab.
The problem I have with this kind of investment is this. The hotel management company is generally going to do well if the property is a prime one. You can be sure that the contracts are written to insure that the management does all right in bad times as well as good. The property owner, on the other hand is stuck. If management is sub par, or if there is a high vacancy rate, the owner of an individual unit has no recourse but to try to sell out, usually at a steeply discounted price.
For a much more detailed article on the risks of condo-hotel ownership, check out the article, Condo Hotel World A Boom or A Bomb, by David Arthur Walters.
