What is a Condotel?
A condotel is a condominium building, usually a high-rise, located in a major city or in a famous resort with an important affluence of tourists that is operated as a luxury hotel, having a front desk, cleaning services and other hotel amenities.
Normally you purchase it already furnished. Being a condominium building, each unit is privately owned but owners can rent their condo if they choose to. When owners don’t use them their unit as a vacation apartment, the condominium can be rented as a regular hotel suite.
This interesting hybrid is also known as a condo hotel, a hotel-condo, an apart hotel or a Condotel, but as you know “a rose by any other name would smell as sweet”, the name is not so important, the concept is.
Origin of Condotels
The first wave of condotels were conversions of hotels built in the 1950’s in Miami Beach, conversions were performed in the early 1980’s. It was a flourishing real estate business in the area until 1986, when the taxation legislation changed. Under the new tax code buyers could not use condo hotels as a tax shelter any longer. The interest of buyers dropped dramatically until late 1990’s.
The modern history of condotels is once again linked to Miami. Around year 2000, the owner of Mutiny, an apartment building located in Coconut Grove, FL converted his property into condominiums and sold its units as condotels, being able to increase units price a couple of times before the entire building was sold out. His tremendous success lured other developers to follow his example and his business model.
The new condo hotels are now bigger, usually have kitchens, extra bathrooms and lots of amenities. A higher price tag is also common for condotels, since they are luxury units in prime locations. Known franchises, such as Marriott, Ritz-Carlton, Hilton, Starwood, Westin, and many others, are associated with condotels management. Sometime when you book a room in a 5 stars hotel like this you don’t realize that in fact you are renting from John Doe and let’s say Ritz-Carlton is just the management company.
PROs and CONs FOR CONDOTELS
As for anything in this world, you have PROs and CONs to condotel ownership
• You have the best from both worlds, you own a condo in a highly attractive location and someone else is taking care of it, when you use the unit and when you don’t.
• You do not have the worries related to vacation rentals ownership such as maintaining the property, marketing the property or finding renters in the off season.
• While in vacation you don’t have any worry in the world, you just enjoy your own piece of paradise in one of the suites of a luxury hotel that you also owe.
• You can have important revenues generated from rental income. This revenue can cover the expenses generated by the loan you have contracted to purchase the unit and/or the maintenance costs.
• Like for every condo situated in a great location the equity should increase over time. The sales value of a condo unit rises with inflation, the building’s amenities, and the condo’s prestige and location.
• No up-front management fees.
Just like in any other business, condotels also have their downsides, the biggest of which being stagnancy of income during idle seasons
• You cannot decide on the spur of the moment to take a break and go to your vacation house, sorry vacation condo, since it might be rented. Vacation should be planned and announced in advance. Usually, the property’s management will require up to 60 days prior notice to guarantee your room is available for you. But you can call and ask if your unit would be free next weekend and if there is no booking, the management company will take your apartment off from the renting list.
• You also have to be prepared for a hotel economic loss due to low occupancy rate, property destruction, etc.
• Sharing the rental revenues with the management company; the property management fees, can be as low as 30 percent or as high as 60 percent.
• Higher maintenance costs for you also have to pay the usual homeowner’s association fees, known as HOAs when you stay in your own unit. This fees will cover different maintenance aspects depending on location. If your condotel is in Aspen, than snow removal from around the hotel will be a major expense. If your unit is in Miami, on the beach front, no shoveling will be needed but probably the exterior of the building should be painted more often due to the damages caused by the salty air.
Popular Locations For Condotels
In the US, the most popular locations for condotels are, as you probably imagined, large tourist cities and famous resorts like Aspen, Chicago, Fort Lauderdale, Hawaiian Islands, Las Vegas, Miami, Myrtle Beach, New York City, Orlando, Florida and the list can go on.
You can also find condotels outside the US. In Costa Rica, Dominican Republic and other Caribbean countries. In the Philippine Islands, Canada, Dubai and in many other exotic destinations you can find exquisite condotels, perfect for investment, for a vacation house or for renting out as a tourist.
How Does a Condotel Work?
Unlike typical condos that are built by real estate developers, condo-hotels are usually developed by hotel and resort companies, such as Four Seasons, Ritz-Carlton, Trump International, Hyatt, Starwood, Hilton, Regent International, Rosewood, Conrad Hotels, Sonesta, and Le Meridien.
Condo hotel unit owners leverage the name recognition of a leading luxury hotel brand, the advertising, the national affiliations and centralized reservation system and management know how. The owner of a condo hotel unit have a greater potential to earn income and appreciate, than they would from ownership of a traditional vacation home.
Owners have access to all of the luxury amenities and services of the property, ranging from full-service spas and astonishing fitness centers, to 24-hour room service, fine dining restaurants, valet parking and baby-sitting services.
If you choose to place your unit into the rental program, there will be a standardized décor chosen by the developer, usually working with an interior designer. You won’t be allowed to make changes to its furnishings and décor as each unit in the rental program have to look identical, similar to rooms in a hotel.
When owners of condo hotel units are not using their properties, they can place their units in the hotel’s rental program. You should keep in mind that a condo-hotel owner is usually required to put his/her unit in the rental pool for at least 11 months a year. Part of the revenues received from renting out the unit flows through to the condo owners, typically, you’ll get 50% of the rental income earned by your unit, after deducting a 10% Service Fee.
Each condo hotel property has a different rental program from the others. Rooms are rented out in rotation, therefore owners will do well or poorly based on how the hotels does as a whole. The hotel distributes rental income to each unit owner usually on a quarterly basis. From the guests’ perspective they can’t even tell that it’s different from a traditional hotel.
Since you will invest your money, read purchase your unit, when the hotel is under construction you will have to be patient regarding return on investment since revenues will become a possibility only after the project is completely over. This might take 2 – 3 years.
Is a Condotel Right for You?
Analyzing the finance of a condo hotel unit is very difficult because of the challenge of getting full and accurate information about the potential income stream. Prices can range from $200,000 to over $1 million for prime properties. According to a study that evaluated condo-hotels in the Florida state and projected returns over a five-year period from 2006 to 2011 the return rate is usually 1%. Let’s assume that the cost to purchase a condo is $250,000, in order to break even the hotel would need to charge $250 per night for your condo and rent out at least 60% of the time.
If you are wandering exactly how high is the revenue generated by a condo hotel unit you should know that real estate developers are not allowed to give you this information as they would be violating Security Exchange Commission (SEC) rules and regulations. They would be subject to huge fines and penalties if giving you such data. If you receive such data run as fast as you can for you don’t want to associate with crooks.
If this is something you are trying to determine yourself take into consideration that there are various factors that affect revenues, some of them are: the quality of the property, its location, its name and operator, hotel competition and how often the owner uses his unit as opposed to placing it in the rental program. Usually branded condo hotels, have a double-digit growth out performing traditional condos or single family homes found in the same resort market. Of course the major influencer would be the economic situation at the state/country level.
In general, you’re better off buying in an area that has good year round weather therefore consistent occupancy than you are in a ski resort or somewhere with a six-month or even less good weather.
It will be more convenient to choose as management company the same company that owns and manages the building itself, but most of the time you are also allowed to hire an outside company to manage your condotel property if you trust it more.
The management fee covers marketing costs and reservations, the front desk operation, property maintenance and hotel services provided to guests such as concierge, housekeeping, food and beverage. Typically you will not pay any upfront management fees. The most common split of revenue is 40% – 50%, but luxury hotel brands can lower your part to 35% or less. Do not think that this is just a drawback for you. In absolute values you might get more revenue than from a regular hotel where the split is more convenient.
Condominium complexes are considered to be either warrantable condos or non-warrantable condos. A warrantable condominium unit is a condo complex that meets the eligibility for mortgage loans to be sold to Fannie Mae and Freddie Mac.
The requirements of warrantability include features such as:
• Less than 15% of the units are in arrears with their association dues,
• The project, including all common areas, is fully completed and the common areas are insured,
• The HOA has been controlled by the unit owners and not by the developer
• There is no litigation in which the homeowners association (HOA) is named
• Commercial space accounts is 25 percent or less of the total building square footage
• No single entity owns more than 10% of the units in a project, including the developer
Due to these rules imposed by Fannie Mae and Freddie Mac, some property types fall into the non-warrantable category. In this category we can find condotels, time shares, fractional ownership properties, and other projects that require the owners to join an organization.
The presence of any of the above mentioned characteristics instantly characterizes the building as “non-warrantable”, preventing building owners from securing conventional mortgage financing on today’s mortgage guidelines.
If you are planning to make an investment, the first thing you should check is related to the building’s warrantability. You can find a detailed guide that can help you navigate the condo financing maze here.
Please note that Fannie Mae classifies condotel projects as not eligible see Selling Guide Part XII: Projects Standards: Chapter 1, General Projects Eligibility: Section 102: Ineligible Projects, Announcement 06-12 July 20, 2006 Amends these Guides: Selling Condominium or Cooperative Hotels.
One of the first things you should find out is whether the condominium project is a warrantable condo or non-warrantable condo project. Your mortgage loan originator should provide you with a condominium questionnaire that should be filled in and signed by the condominium homeowners association. In case it proves to be unwarrantable then you cannot use a conventional loan.
The fact that the condotels are unwarrantable doesn’t mean you cannot find a mortgage loan available on the market to fund such real estate properties.
You are left with 2 options to buy a condo that is not warrantable:
• Buy the condotel with cash.
• Buy the condotel with a portfolio loan. You can find portfolio loans with small banks or credit unions. These are what some would call “common sense” loans. Portfolio loans provide the opportunity for borrowers including condo projects to get financed. With a portfolio loan, the lender that initially wrote the loan is going to keep it as part of their investment portfolio.
Contrary to the belief of some, there is nothing riskier about portfolio loans. As most portfolio lenders are small, privately owned community banks they are more flexible when establishing the terms for a portfolio loan.
Thankfully, there are mortgage portfolio programs available for condotels and non-warrantables; you just have to know where to look. You can find options for 3, 5 and 7 years ARMs with a little bit higher than usual origination cost. Terms and conditions depend on a lot of your credit score, type of occupancy (primary residency, second home, or investment property) and of course on the down payment you are able to put. Depending on these items the total cost of your mortgage loan for the dream condotel will vary.
Sizable Down Payment
Just like for any other type of home loan, a condotel loan also requires that the buyer puts down payment towards the purchase of the property. The amount required depends on various factors, however you should expect to pay a minimum down payment of 20% and even higher. By putting down more of your own money will decrease the total cost of the loan.
Slightly Higher Interest Rate
Generally interest rates for any type of loan are based on individual financial circumstances and also on the current state of the market. However lenders look at everything from a risk basis first, therefore interest rates for a condotel unit are a little bit higher when compared to a traditional mortgage for a second home loan. In addition as condotels have historically higher default rates than houses, lenders will charge more, either in the form of a fee, that is usually .75% of the loan amount, or they will ask for a higher interest rate. A portfolio loan could cost you a 0.25 point more in interest fees.
For example if you are interested in ADVANCIAL’S CONDO/CONDOTEL/CO-OP PROGRAM you will find the following details:
• Provisions for this second home. The building must be located in a resort or vacation area. Short-term rental income cannot be taken into consideration for qualification purposes but is allowed.
• Reserve Requirements. Three months liquid reserve for all properties owned (retirement assets cannot be included) plus a total of 12 months per property. For this second criteria you can include up to 50% of retirement accounts.
• Non-Owner Occupied (NOO) Availability. Allowed up to 60% of LTV (Loan to Value)
• LTV (Loan to Value). Standard LTVs as presented by the company. Some exceptions might exist.
• LTV Reduction. The LTV reduction for condotels is of 5 percent.
• Maximum loan size. $3,000,000
• Component Requirements. Efficiency or studio condos are not included in the program. Minimum unit square footage is 500. A full size kitchen and a separate bedroom are mandatory.
• Document Requirements. Own Condominium Questionnaire completed that qualify after the underwriting is performed.
• Lending Availability. All 50 states.
• Work Visa/Expatriate/Immigrant Eligibility. Permitted. See specific loan program for these categories for extensive info.
• Co-op. Priced as Non-Warrantable Condo. Co-op title insurance required
If you are considering buying a condo-hotel unit, you should do your homework carefully. Investigate comparable properties, analyze the average and predicted vacancy rates, as well as the average room rates. Compare all of these factors, as well as management fees from different famous brands to get an accurate picture of whether or not you’ll make a profit. This way you can decide if the premium you pay for this type of investment is worth it.
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