With the recent upswing in the economy, vacation travel has picked up across the country. In popular coastal regions, as well as big cities, a new form of vacation home is growing in demand.
Condo hotels, also known as the condotel, can be found in booming vacation destinations like Miami, Orlando, New York City, Las Vegas, Aspen, and Chicago. These unique units are the industry’s hot new segment, and many five-star resorts in Dubai offer this purchase option. You can also find them in Mexico and the Caribbean.
Let’s address some of the frequently asked questions about this popular new segment of the vacation market.
What is a Condotel?
Condotels go beyond the typical condominium vacation unit.
At their core, they are a unit inside a hotel, typically a skyrise – and are operated by luxury companies like the Four Seasons or Le Meridan. The condos are sold to individual investors for the owner’s use throughout the year.
However, when the owner is not using the unit, they have the option of partnering with a rental agency. The rental revenue can help to defray their expenses. Essentially, separately owned condos become part of a hotel’s inventory through a rental program.
Typically, the condotel is desirable in resort locations, where owners can use the home only part-time and rent it out to vacationers when not in use.
High rises with ocean views or city views are the most popular types. An example of one such is this high rise condo hotel in Miami, FL. Ski resorts are another popular destination.
These properties are attractive to buyers because they are turn-key and well-managed when in a hotel’s rental pool.
Amenities offered to transient renters might include dining, fitness centers, daily housekeeping, valet parking, and concierge services.
Who Owns the Condotel Room?
The investor who purchased the unit owns the condo. This individual retains all ownership and rights to the condominium. They are allowed to stay in their unit any time they want—as long as it falls within the rental agreement they draw up with the agency.
The contract specifies which days are blacked out, and the procedure for changing blackout days. But owners should inquire about specific bylaws for the condominium and check for restrictions on their occupancy.
It also outlines how the revenue is split between the partners and their responsibilities.
The rental agency can rent out the unit for the remainder of the time. They take care of all booking arrangements on behalf of the hotel they are aligned with.
Most buyers find the process of renting out the condo unit on their own to be laborious so working with a rental agency makes the process smoother. Using a rental agency means the rental is handled professionally, the unit is well-maintained, and the company takes care of the marketing.
Who Pays for What?
The condo unit owner is typically responsible for the following:
- The purchase
- Fees including HOA’s (home owner’s association fees will typically include security features and upkeep to the outside of the building, such as weatherproofing a unit along the oceanic coast)
The rental agency is generally responsible for the following:
- Daily hotel amenities including maintenance and housekeeping
- Marketing expenses
- The cost of running a customer service desk in the lobby of the condotel building
- Bookkeeping, operational, and administrative expenses
Other expenses are negotiable, including furnishing the unit and major repairs. It is common for a reserve to be kept between both parties to cover significant expenses that arise.
The revenue generated by the rental unit is usually split 50/50 between owner and agency, though this is negotiable depending on various factors surrounding the agreement. Typically, the more favorable the split, the more financial responsibility you have toward upkeep.
What Is a Condotel Investment?
When considering an investment in a condotel, you’re pursuing the opportunity to make money over time through the short-term rental of your unit.
Does a condotel make a good investment? The consensus is that they are more of a lifestyle investment. They should be viewed as a vacation home or second home due to the fluctuating real estate and vacation market. If the economy takes a downturn, a condotel might suffer in bookings and revenue. Also, consider costs like association fees when looking at this as an investment.
How Much Rental Income Can Be Made?
Developers and rental brands will not always guarantee owners their units will be rented out when not in use. If they do make a guarantee it is for a short period of time such as two to five years. There is one condo-hotel in the UK that guarantees a 10% return for 15 years.
However, several factors can increase the likelihood of making rental income off your unit.
- Desirable travel destination
- Solid amenities package
- Good management of the unit
- Revenue split agreement
- Competition in the area
Recent revenue reports for condotel units in Hawaii showed an annual net cash flow of roughly $10,000 for a studio, and close to $30,000 for a 1-bedroom. However, other units experienced a negative cash flow. Purchasing a condotel with a branded company like the Four Seasons rather than an unknown rental company can help to increase occupancy.
Making revenue by renting out the unit is typically considered a bonus to owning a second home. Bonuses are a good thing…grab bonus points by applying for one of the best travel credit cards (Marriott Credit Card by Chase), transfer to airline mileage and book a trip!
What Is a Condotel Loan?
As the popularity of the condotel has skyrocketed, they’ve become increasingly accepted. It is easier than ever to secure financing for these units, and they function as any other vacation home—though usually with added amenities.
These loan options are fashioned to work with the slightly higher risk associated with condotels. This means they carry higher interest rates and down payment requirements than your average mortgage. However, they are often flexible and work with fixed or adjustable rates, and foreign buyers are welcome.
Condotels are a fast-growing vacation home market, and most units sell out before the construction of the building is even completed. These units tend to start off at their best price and availability in the pre-construction phase and the price increases quickly as they near the sellout point. Unit prices can range anywhere along the financial spectrum depending on location and amenities offered.
Condotels are an excellent solution for people who want to own a condo in a resort area but don’t want to leave the unit vacant when they aren’t using it. They are also an excellent solution for owners who don’t want to deal with the hassle of renting the unit themselves.
But do your homework and consider using a broker who specializes in condotels before buying one. A broker can make the difference between making an investment that is problematic and one that you can enjoy, generate rental revenue from and sell for a profit.
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