Tips on Buying a Condotel as a Rental Residence

By Jane Hodges

(Reprinted from www.RealEstateJournal.com,
the Wall Street Journal Guide to Property)

Question: Do you have any tips for evaluating a condotel purchase as purely an investment property? The one we are looking at is in a new multi-use redevelopment project in downtown Branson, Mo.

-- Clyde Burnett, Little Rock, Ark.

Clyde: "Condotels," also known as "condo hotels," are typically condominiums in resort or downtown communities. A condotel looks and feels to visitors like a hotel or resort, but in these resorts, individuals have the opportunity to purchase individual units.

Unlike a timeshare, where buyers pay for limited use of a resort, buyers of a condotel own their residence outright and can stay in it, rent it out, or sell it according to their own wishes.

In these communities, in-house management companies rent out the units on behalf of their owners in exchange for a percentage of the rental income. Condotel owners and their renters often have use of the resort's amenities, such as concierge, fitness and spa services.

Whether an owner can use the amenities while a renting guest is staying in the unit depends on the rules of the particular condotel development.

These condos make up a relatively new investment category and account for less than 10% of all vacation homes and investment properties in the U.S., according to the National Association of Realtors.

Owning a condotel differs from buying and managing a condo in several respects, says Joel Greene, president of Condo Hotel Center in Miami, a real-estate agency that specializes in the sale of condo hotels throughout the country.

Unlike typical condos built by multifamily housing developers, condotels are often developed by hotel and resort companies -- such as Starwood Hotels & Resorts Worldwide, Hilton Hotels Corp., The Ritz-Carlton Hotel Company, LLC, and Four Seasons Hotels and Resorts. The price you pay for a unit may be substantially higher than that for a "regular" condo.

For the extra cost, you have access to the services of an in-house management company, which will market and rent your unit out for long or short periods of time (even nightly).

The management company's rental program will charge you a portion of your rental income (typically 50%), and will handle the maintenance of your unit, groundskeeping and the clean-up after your renters leave. It will also oversee guest amenities such as pools, tennis courts and golf courses.

If you bought a "regular" condo and hired an outside management firm to market and lease your unit to renters, there may be less flexibility when it comes to placing your unit in and out of the rental program, and the firm may not market your unit nationally in the way that a large hotel company might, Mr. Greene says.

When looking to invest in a condotel, research the local real-estate market (e.g., are prices on the rise, or has the real-estate market peaked?). Study regional tourist activity and hotel occupancy, since a condotel unit, especially if it is run by a hotel operator, may be marketed like a hotel room.

The location of your unit has the potential of figuring prominently into how profitable an investment it is.

Jerry Yeiter, past president of The National Real Estate Investors Association and president of Yeiter & Co., an accounting firm in Houston, says some investors have had success with condotels in Florida and Arizona because these destinations offer desirable tourist activities and because these buyers purchased at a time when area real-estate prices were appreciating.

Ask yourself whether Branson can attract tourists. I checked with the Branson Lakes Area Chamber of Commerce and Convention and Visitors Bureau, and was told by Jennifer McCullough, public relations director, that Branson, which is in the Ozark Mountains, draws more than seven million tourists a year.

Factoring in visitors who stay in rented vacation condos, the combined hotel and condo occupancy rate in Branson is 62% to 63%, according to the town's chamber of commerce and convention and visitors bureau.

If you buy before a condotel project is fully built, you may be able to purchase your unit at a lower cost, as developers tend to offer the lowest prices pre-construction. You may have to wait until the project is completed, though, before you can rent out your unit. Estimate how much you can fetch per night and how often you need to rent the unit out to bring in enough to cover your mortgage and other expenses.

"It's all about the numbers," Mr. Yeiter says. "You'd have to look at the rules and make sure the property would be suitable for an investor." Some management companies, for example, stipulate how often you must make your place available and even how it should be decorated.