Condo hotels are enjoying tremendous popularity in South Florida. They are by far the hottest real estate commodity on the market today. Perhaps you’re considering buying one yourself. Whether you plan to use it as a second home, vacation home or strictly as an investment, there are some pitfalls you’ll want to avoid when choosing a condo hotel unit.
Condo hotel units are not cheap. They range in price from $500,000 to $2,000,000 plus. You’ll want to be sure that the unit you select is a good investment in that a) brings in rent revenue when you’re not using it, b) appreciates over time, and c) is marketable so that when you’re ready to sell, you’ll be able to find a willing buyer.
Here are some factors to consider when analyzing a condo hotel unit:
- Earnings potential: What is the unit’s projected earnings potential? That is, how much rent revenue per year can this property generate? One needs to be realistic and not overly optimistic. And unfortunately, because of SEC (Securities and Exchange Commission) regulations, the developer is unable to provide these revenue projections. If the property is a conversion from an existing hotel, it may be useful to look at its earning history as an indicator of future potential.
- Projected expenses: What are the property’s projected expenses each year?
- Capital expenditures provisions: What is management’s plan for capital expenditures over the next one to five years?
- Maintenance and repair allocation: What percent of gross income should you allocate for maintenance and repair? Does that amount allow you a favorable profit?
- Break-even points: Taking into account all potential earnings and anticipated expenses, what is the property’s break-even point?
- Reserve replacement program: What is the property’s reserve replacement program and how might that affect the value of your unit?
- Supply and demand dynamics: The hotel industry depends upon travel. Is the unit you’re considering in a popular destination? Is demand high now and is it expected to stay that way? Finally, how does the current supply, including other condo hotels and straight hotels, match that demand?
- Unique factors: Is there anything about the property you’re considering that makes it unique or particularly attractive both to travelers and to investors?
- Significant trends: Are there any significant business trends at this time that might affect the success of your unit?
- Management company evaluation: Examine the background of the management company. Are they a proven entity?
- Historical record of operation: Review the hotel’s historical record of operation. Is there any reason to think its future operation might be different?
- Hotel marketing: How does the management company plan to market the property? Also, does it have a central reservations system in place?
Obviously, these questions will take some major investigating on your part. However, getting accurate answers is key to ultimately ensuring that your investment in a condo hotel unit is a sound one.
Another alternative is for you to contact a qualified condo hotel real estate broker who is familiar with the area and the properties you’re considering. He or she should be able to provide you with a complete property analysis to assist you in making your decision.