Suite Deals:
Investing in Hotel Rooms
By Elizabeth Esfahani
(Reprinted from
Business 2.0)
Ever since Tony Kim flipped his "Starter
Home" for an $80,000 profit six months after
buying it, he's been on a perpetual hunt for new ways
to milk the real estate market. He scored in the past
five years with condos in Southern California and
South Korea. Now he's chasing an intriguing new play:
buying up individual hotel rooms.
A new way
to play real estate
At first it might seem that Kim needs
to call room service for a little reality soup. But
in this time of real estate bubbliness, Kim and a
growing number of others are discovering that the
peculiar practice of investing in hotel rooms--"condo
hotels," as they're known in the business--can
provide potentially lucrative opportunities outside
the froth-filled traditional housing market.
Over the past two years, Kim, a 43-year-old
owner of beauty supply stores who lives in Omaha,
Neb., has paid about $671,000 in out-of-pocket down
payments for eight hotel rooms that are now valued
at an estimated $6.7 million--about 40 percent more
than their purchase prices.
The ability to buy ownership stakes
in hotel rooms has been around for years. It's only
recently become a popular way to finance new construction--and
that's created investment opportunities. (A wealth
of information can be found at www.condohotelcenter.com.)
Buyers find it appealing because initial
capital outlays tend to be modest, since you can invest
early in yet-to-be-built hotels. Moreover, unlike
with traditional condos or vacation homes, there's
no upkeep for the finished room. In addition to being
able to stay in their rooms whenever they want, buyers
can make money by leasing out the units to others.
Most hotel operators run services
that will match rooms with customers and send a healthy
fee to the room owner. James Dubois, a condo hotel
investor in London, says he made a solid 6.7 percent
return in the past year on his $410,000 purchase of
a room by renting it out through the building's developer,
GuestInvest.
The payoff
The larger payoff can come by investing
in rooms in hot locations and hoping they rise in
value--Kim's specialty.
In 2003 he put down a $10,000 deposit
to reserve a small condo hotel room overlooking Lake
Michigan in Chicago's Trump International Hotel &
Tower. Over the next year, he put down an additional
$79,000, or 15 percent of the nominal purchase price
of $517,000. When the hotel building is completed,
scheduled for 2007, he'll take out a mortgage.
Today, based on the value of comparable
units, Kim's Chicago studio is worth about $1 million.
"The beauty of condo hotels is there's no mortgage
to pay until it's done," Kim explains. "You
get in early and sit on it while it appreciates."
Since that first foray, Kim has bought
two more condo hotel rooms in Chicago, four in Las
Vegas, and one in Toronto. The asking prices for his
eight rooms totaled about $4.7 million.
Though all the rooms are still under
construction, the units today are worth an estimated
$2 million more than Kim paid. Ultimately, Kim expects
to sell some of the units to lock in the appreciation
while retaining others for cash flow.
Joel Greene, president of Condo Hotel
Center, says the big bet is that condo hotel rooms
can be resold to affluent buyers looking for prestigious,
no-hassle second or even third residences. Of course,
investing in condo hotels does carry risks, especially
given the long lag time (often four years or more)
between the initial investment and the completion
of a property.
Ford advises would-be investors not
only to obey the cardinal axiom of all real estate
investing--location times three--but to home in on
properties run by highly acclaimed hoteliers. That
will at least minimize the chance that investments
will go south. And even if they do, at least the investor
won't end up on the street.
"It's a calculated risk,"
Kim says. "But even if the worst-case scenario
happens, I still have eight great hotel rooms to stay
in."
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