Condo-Hotels

[taffy19 Gold Contributor Find all posts View Profile Close taffy19]

Do condo-hotels make good investments?

http://www.bankrate.com/dls/news/rea...20060504a2.asp

This is an interesting article to read. The advantage is that the builder and investor split the appreciation, if there is any but it still has lots of limitations outlined in "The rental deal" unless you decide to never rent it out at all but that would be a very expensive ownership. It all depends how good the economy will stay in the future but hotels are shifting the risk of building new ones to individual owner/investors.

In good times owners may do better than with timeshare ownership but in bad times, you are still having very high expenses. Much more than with a regular condo, I believe. Forced sales will come on the market again for someone else to pick up a deal.

Some other interesting articles too below the story.

[BocaBum99 Super Moderator Find all posts View Profile Close BocaBum99]

Condo-hotels don't make good investment properties. They do make relatively affordable second-home options in some very expensive locales

That's a ton of risk and upfront capital to stay in one location for a few weeks per year.

As the guy said, he doesn't know of ANY of these condo-hotel projects whose rental program covers owners costs.

Capital appreciation is the only possibility for a decent return. Even that is dubious at best, especially now that the real estate boom has taken a pause.

Condo-hotels will over time be valued like hotels. And, their fate will be inextricably linked to the market for hotel properties.

For investment purposes, a person is much better off buying a condo or single family home in a vacation destination and putting it for rent via a company like ResortQuest. This is because you can keep your costs low and therefore achieve a profit at a low rental price. And, if you want to sell it later, it will be valued like residential real estate as long as your property is in a residential neighborhood.

[taffy19 Gold Contributor Find all posts View Profile Close taffy19]

Boca, I know that one of the TUGgers has a complete different view from you. He also stated recently that condo-hotels may pose competition to timeshare resorts as he believes that the baby boomers want to own several condo-hotels around the country. Most people do not even own timeshares, so I doubt this very much. The majority of people stay at hotels or may rent a condo or a vacation home.

I had no idea what condo-hotels go for until I looked it up and the starting price for the Kauai Beach Resort of $249,000 is certainly not for the ocean front condos. They would be much higher yet. They are beautiful properties in the best locations but they will be for rent too and there will be competition between the condo-hotel owners if too many become available just like with timeshare rentals now. JMHO.

All second home real estate investments in tourist areas are risky because it is pure speculation if prices will keep going higher and if it will rent in leaner time periods too. We have had some very good years recently but can it continue, like you are asking too? I doubt it. If the economy really turns bad, these investments may be dumped, especially if it becomes hard to make the high mortgage payments on them and they are not renting well either as one had hoped for.

On the other hand, people who buy a timeshare for use or exchanging and for pure enjoyment rather than an investment, may have a lot less to worry about. If you buy a re-sale like many people do here, then the economy will hardly affect you at all. You may skip a year or two of flying to a far away destination but you will still vacation close to home. The maintenance fees on a timeshare won't kill you.

In my opinion, timeshares will be sold to a lot more people than condo-hotels to a few well to do baby boomers. It's going to be interesting to follow this market too. I wonder sometimes if Perry is selling condo-hotels now as he bought one himself and obviously believes in the concept. I have read all his posts about this subject. I value his knowledge about timesharing too.

It sure would be nice to own a piece of paradise but Hawaii, as it used to be, is changing rapidly with all the building that is going on there right now. Kihei is one of the fastest growing cities in Maui but is more for the local people as it is not a tourist area like Kaanapali Beach is or Wailea with the beautiful hotels.

Believe it or not but they have traffic jams in Maui and it takes two hours to go from Kihei to Mama's Fish House what used to take only 3/4 of an hour before. We have been going to Maui since 1983 and see a big difference in the 20 plus years. The roads are inadequate to say the least.

While I am writing this, I am listening to one of my favorite CDs of Israel Kamakawiwo'ole "Facing future" and it makes you ponder even more what the future holds. What a rich culture and history Hawaii has but sad to realize that many Hawaiians, born and raised here, can no longer afford owning their own home unless it was passed down from generation to generation. It is also sad to see the beautiful native treelined beaches disappearing and hill sides getting dotted with whole new communities. We were shocked to see a row of ugly windmills at the top of the ridge of one of the most beautiful mountain ranges but they need more electricity for so many people.

Pretty soon it may be more advantageous to stay at home and watch a beautiful movie of Hawaii the way it used to be and forget about going there if the building boom keeps continuing. Maui will be ruined for everyone.

[BocaBum99 Super Moderator Find all posts View Profile Close BocaBum99]

Emmy,

I know that Perry is a fan of condo-hotels. That's what makes a market. Someone needs to sell in order for someone else to buy. I don't want to say that they are bad, just risky. And, I believe there are better investments.

I don't like condo-hotels because I believe the return is dubious, but the costs are real. You tie up a lot of capital and carry a negative cash flow for several years hoping that capital appreciation makes up the difference. It is true that real estate values will go up over time. But, if you buy too high, it could take 20 years to make a decent return. To capture the maximum real estate appreciation, you need to buy at the right price in a distressed market. Perry probably bought his condo hotel near the peak of the Florida real estate market. I recall roughly when he bought it. I predict his return will be very modest when he sells.

The Florida real estate market is in a downturn. He is using Zillow probably to assess the value of his investment. I've used it in the past to value my own house and when the market turns down, Zillow over estimates the value of your home. Mine is over valued by about 10-15% or more.

Perry's underlying thesis is that condo hotels are valued like residential real estate and will therefore appreciate like it over time. Whereas timeshares don't. In addition, since there is already a built in rental program, it's hassle free income, right? The cost of that income is very high with extraordinarily high maintenance fees and unfavorable rental splits. You didn't think you would get something for nothing, did you?

I claim that owning a condo hotel is taking on the risk of running a hotel unit of one room. You have all the costs of maintaining it like a hotel. The real estate bubble took people's eyes off that ball and that will change over time. When the ecomony turns down, condo hotels will take a steeper drop than residential real estate since it's valuation and returns will in part be based on hotel based rental income. At this very moment, hotel rates are at their cyclical high. So, within the next couple of years, that will change and the valuation of condo hotels will absolutely be impacted.

All real estate profit is made when you purchase, not when you sell. Given that the majority of the timeshare market is in distress given the poor state of the resale market, it is far easier to make money is timeshares than in condo hotels.

With a timeshare, I can generate a positive cash flow in 1 or 2 months by renting it. And, I can flip it for a 50-100% return on capital very easily when I buy at the right price for a marketable timeshare. Sure, the dollar amounts are low. So, you simply make it up in volume.

In addition, for a relatively small investment of around $10-20k, I can show an owner how to have free vacations. You can't do that with a condo hotel.