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Condo Hotel Rates of Return, Developers Give Limited Information

Question

Why is it so difficult to get information on rates of return when you invest in a condo hotel?

Joel's Response


You may not wish to hear my answer to this, but developers are not permitted to sell their properties in any way, shape or form that smells of them selling the "investment." All they can do is offer the "real estate" and the "lifestyle."

These are guidelines set by the Securities and Exchange Commission (SEC), and developers have too much at stake to risk problems in marketing their properties. Therefore, most of them will not provide buyers any information about expected rates of return, nor expected occupancies or rental rates upon opening their projects.

In fact, some organizations won't even allow their salespeople to answer the simple question, "What is the rental split if I buy a unit and I place it into the rental program?".

In the cases of a conversion property, however, the developer can provide you with a rental history that includes past occupancy rates and rental prices. You then need to pick up the ball and do the forecasting yourself. I know that the math is very important to those people who are buying a condo hotel primarily as an investment, so I do wish I could offer precise numbers. Instead, here's what I tell buyers.

Assuming that you buy a unit in a property that has a good location, with full amenities, and a well known franchise with a strong reservation system, you can expect the unit's rental revenue to cover the cost of your monthly maintenance, real estate taxes and all, or at least most of your debt service, and possibly, give you a single digit return above that.

From my experience and from everything that I have seen, read and heard about condo hotels, the returns that can be expected are in the range of 2%-7% per annum.

But if you could get just a 2%-3% return on investment, plus 16% appreciation, which has been typical of the South Florida market, for example, for the past five years and counting, now the condo hotel concept sounds more appealing.

Remember, it's hassle-free ownership. You're the landlord without any of the "landlordly" responsibilities. Now the condo hotel concept sounds more appealing.

Finally, here's the best part. You get a couple of weeks a year in which you are not paying $500 a night to have access to a luxurious five-star vacation home in a premium location. Total all these plusses up, and you might be looking at a legitimate 20% return, before factoring in any tax advantages. If this still does not sound like a sufficient return, then condo hotels are not right for you.

The above question was submitted via e-mail by a visitor to www.condohotelcenter.com. The answer was prepared by Joel Greene, a licensed real estate broker with Condo Hotel Center which specializes in the sale of condo hotel units and fractional ownerships in private residence clubs.

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