Do Condo Hotels Make Good Investments?
Heard all the chatter about condo hotels? Does the concept sound like it might be right for you? If buying a vacation home is in your plans, and you plan to use it only about two to four weeks per year, a condo hotel could be just what you're looking for. Before you buy, however, be sure you understand the benefits and potential risks.
While you may think condo hotels are investment tools, developers are only permitted to sell them as real estate, according to Securities Exchange Commission regulations. Buyers should focus less on potential returns and more on the benefits of owning a luxury home that comes complete with four-star or higher hotel services and is located in a vacation destination that you'll enjoy visiting again and again.
Rent Revenue Offsets Ownership Costs
One of the key benefits of owning a condo hotel unit versus a traditional condo or single-family house as a vacation home is that you'll have an opportunity to place it in the hotel's rental program whenever you're not in residence, and you'll get to share in the revenue it generates. However, cash flow should not be the main reason to buy.
To be most realistic in your expectations, think of the revenue generated by your condo hotel unit program as helping to offset the costs and mortgage of owning a vacation home. If you end up with an additional annual return (likely to be under 10%), consider it a bonus.
Buy in Pre-construction Phase to Maximize Appreciation
If investment is your prime motive for purchasing a condo hotel, then appreciation is a better focus than average annual return.
Like any real estate, you can make a tidy profit if you buy at the right time, in the right location. In the case of a condo hotel unit, the right time is usually in early pre-construction stages. That's when you have the best chance of realizing a significant profit from appreciation in value when you eventually sell.
As the condo hotel is being built, developers typically implement price increases at various stages of the selling process. You're essentially buying tomorrow's property at today's price. Plus, while the property is being built, real estate in general is likely to appreciate. The result is that when you do finally close, you'll have instant equity.
Of course, your actual profit depends on the general market conditions, interest rates and area competition.
Can Condo Hotels Be Flipped?
If you place a deposit on a condo hotel unit in the pre-construction phase, can you sell your contract to another buyer without ever having to close? While flipping was common a few years ago, today most condo hotel developers discourage this practice.
They usually do not allow investors to sell before closing on their unit and clearly state this item in their contracts. They don't want speculators buying their project and falsely inflating the prices. More to the point, they don't want to compete with these investors to sell their remaining units.
The Bottom Line
If you buy a quality property in a good location, you could end up with not only a great vacation home, one that you'll enjoy for years, but also a real estate investment that generates some annual income to offset the costs of ownership and appreciates with time resulting in a profit when you sell.