Rewards Vs. Potential Risks.

Should You Invest in a Condo Hotel?

For anyone considering the purchase of a vacation home, condo hotels are a viable option certainly worthy of consideration. However, it’s important for the buyer to have a good understanding of the condo hotel concept and the rewards versus potential risks before jumping in with both feet.

REWARDS OF CONDO HOTEL OWNERSHIP

Quality properties. Most condo hotels are exceptional properties. They have four- or five-star amenities like world-class spas, fitness centers, gourmet restaurants and business centers. They may also provide an expanded array of hotel services such as valet, concierge, security and 24-hour room service.

Prime locations. Most condo hotels are built on prime, highly desirable property in fantastic vacation destinations. For example, the majority of condo hotels located in South Florida and in the Caribbean are either right on the ocean or within a few blocks of the beach. Condo hotels in Orlando are built close to the area's theme parks. West Coast condo hotels are often built near popular ski slopes. Condo hotels in Las Vegas are built on or near the Las Vegas Strip.

Rent revenue offsets costs. Condo hotel unit owners can receive revenue from participating in the condo hotel's rental program, helping to defray their ownership expenses and possibly resulting in a small annual return.

Hassle-free ownership. Finally, condo hotel ownership is 100% problem-free. Property maintenance, upkeep, operation of the amenities and guest service issues are all handled by the management company.

POTENTIAL RISKS OF CONDO HOTEL OWNERSHIP

All investments have inherent risks, regardless of whether they’re stocks, bonds, gold, commodities or real estate. Here are just a few potential, albeit unlikely, risks that could affect a condo hotel.

Possible risk #1. Sales of most condo hotel projects on the market today begin in early pre-construction stages, often before ground has even been broken. Some condo hotel projects, just like any other real estate, don't go forward for any number of reasons from difficulty getting financing to partner problems, etc. In those isolated cases, your money is returned, but you may have lost out on interest or missed other opportunities while your money was tied up.

Possible risk #2. You could buy a project during pre-construction and see the value soar before it gets built, but if the market dips as happens in any investment cycle from time to time, the flip side is that you may have to wait until the market comes back to get the big appreciation you were anticipating.

Possible risk #3. Acts of nature or construction issues could delay your project's completion date, tying up your money for longer than you'd expect.

Possible risk #4. After committing to a purchase and putting up non-refundable monies, you could have a change of plans. If you don't close on your unit, you'll lose those deposits.

Possible risk #5. Once construction is complete and the property is operational, your condo hotel unit could generate less revenue than you anticipated. Perhaps new competition has come into the market and had an effect on your condo hotel's occupancy rate or area tourism as a whole is down.

The bottom line is that lower occupancy rates and lower room rates mean less rent revenue generated by your unit. This is a real world problem that all developers know they may have to face, so they do their research before they embark on a project to ensure that their property has a good chance of succeeding.

Additionally, buyers are cautioned not to base their decision to purchase on rent revenue projections. In fact, developers simply won’t provide projections, as per SEC regulations which govern the sale of these types of property. A condo hotel should be seen as a vacation home, first and foremost, not an investment that will generate an annual return.

So, is a condo hotel right for you? You need to consider your personal goals and financial situation to determine if the potential benefits outweigh the possible risks.