Condotels – Good or Bad Investment?

A few months ago Mr. Cheap at Four Pillars discussed the concept of Condotels, back then it was a new concept to me and sounded interesting so I decided to do some digging. After some initial research I found that the general censuses was that condotels do not make a good investment and therefore stopped further research. Recently a friend of mine was approached regarding condotels by a real estate agent so he asked what my opinion was on this concept.

condotels

What Are Condotels?

A condotel is a mix of a condominium and a hotel. Unlike hotels, where a corporation owns the whole hotel, in condotels each unit is sold separately similar to a condo. Condotels have hotel-like amenities and services – unlike the conventional condominiums.  The condotel units can be placed on a rental program with the management who can rent the units out for short or long-term rentals. The rent is split between management and the owner in the range of 40%-60% in favour of the owner, but can often be as high as 50%-50%.

Condotels are popular in high tourist areas such as Florida and Dubai, however they are increasingly becoming available in other areas as well.

Advantages:

  • Hassle free “landlord”- you do not have to be worried about anything since management will take care of everything.
  • Good vacation home – can be used for your personal vacation, saves you accommodation costs.
  • Potential for capital appreciation- if the condotel is chosen carefully you can take advantage of appreciation of value.

Disadvantages

  • High maintenance fees – usually around $1-$2/sq feet and according to Forbes Magazine it can be as high as $10/year/sq feet.
  • Price correlated with tourist activities and not so much with real estate market.
  • Occupancy Rate not always good – There is no guarantee in terms of your occupancy.
  • Tax issues- Condotels are taxed at commercial rates generally, which can be higher.
  • Other Fees – Besides the maintenance fee and rent split there are other fees that one must take into account (maid service fee, insurance etc.)

Conclusion

Although an interesting concept I find condotels a bad investment generally, the costs are too high with minimal capital appreciation opportunities. This might be a good vacation purchase for personal use but if the primary purpose is to generate income through rental than the investors may be better served by other opportunities.

What are your thoughts on condotels? Have looked into one? Know anyone who owns/owned one?

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Comments

  1. says

    I have to agree – it doesn’t seem like a great investment. If you have the money, why not invest in something that’s more likely to have solid gains? This seems more risky, has a lot of hidden costs, and depends on a lot of factors.

    I have seen these in Las Vegas, where I presume occupancy is high (along with price). I would be surprised to see occuapncy be very high in other areas of the country.

  2. says

    I always thought that these were just classified as strata units? I am a commercial real estate appraiser and my partner deals with these types of units all the time in hotels. He just refers to then as strata units and there market price is determined from direct comparable sales. Maybe Condotel is just not used in the Canadian market.

  3. Denny says

    They are a good investment if you rent them out to locals by the week – any other arrangement, and they are total losers…The condo fees will eat you up if they are not frequently rented…Sometimes in order to do that, the front desk will have to rent them at a reduced nightly rate – a rate that is too low, the owner and the house loses money…Buy one to live in, or rent it by the week to locals..the only way you can get a good return on investment..And rent it yourself, don’t go through the front desk if you don’t have to – check the bylaws..

  4. Mike says

    I’ve owned a few condotels and have had mixed reviews. There are definitely unique advantages and disadvantages to a condotel, some of which are noted by the author of this blog. For me, the key to success is to be sure a) the management company is reputable, b) that you don’t overpay for these (currently there are numerous in foreclosure so do your research), and c) be sure that the HOA fees or assessment fees are being drawn from the revenues PRIOR to disbursement. I’m involved in a community currently that does not do that and the HOA is in trouble due to failed investors bailing on their properties and keeping the funds being generated. Horrible news for the remaining investors who did their homework and have the assets to sustain a down market.

    They’re not for everyone but there is definitely large upside potential if done right. Good luck!

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