Thoughts on condotels?

[Grigory]

Had a very interesting conversation with an older investor the other day. The guy started out as an engineer, then started building his own rental empire with condotels: a mix of hotels and condos.

Investopedia explains it better than I could:

A condominium project that is operated as a hotel with a registration desk, cleaning service and more. The units are individually owned. Unit owners also have the option to place their unit in the hotels rental program where it is rented out like any other hotel room.

(More details from that site.)

According to him, he needs to do some extensive research before investing (age of the buildings, how much the HOA has in reserves in case of emergency, etc), but afterward the management takes care of all the upkeep and occupancy and splits the profit with him. The biggest risk is an insolvent HOA, which could set the investors back a few years before everything gets sorted out in court. (Which is why he stressed the importance of prior research.)

He used one of his condotels as an example: bought it here in Florida for $70K in 2009, worth $120K now, and it nets $5,600 a year in profit after all the fees, taxes, etc. (In other words, a very stable 8% net ROI.)

Has anybody here had any experience with these condotels? Any thoughts, advice, warnings?

[Letj]

Don't buy it!!! Those numbers are bogus and I suspect he is trying to sell you something. It is the worst investment ever! I bought a brand new one 7 years ago at $200K; it's now worth $80K.  The problem is that the HOA fees are extremely high, the hotel operator takes 50% of the revenue (before expenses) and there are no viable buyers except cash since financing is difficult to come by for condohotels. They are notoriously bad investments. I bought mine to flip but the market turned before I even closed. Unless you get the condohotel unit for dirt cheap, you will be up a creek without a paddle. You will need documented proof of what a similar unit will generate and expect to receive 50% of that since the typical hotel operator takes 50% of the revenue.  Also keep in mind that they will constantly hit you up for improvement because the hotel operator wants to make more and more money so they will give you special assessment for new elevator, additional pools, new furnishings, new state of the technology, etc.

[Grigory]

Interesting... What about buying a basic one, with fewer bells and whistles (and state-of-the-art expenses), just to generate passive income?

[Letj]

You can find much better returns in regular rentals with much more upside. Stay away from condo hotels and for that matter condos due to no control over HOA.

[penguin456]

I would also warn to stay away. There were some great deals to be had at the height of the housing crisis but they have been cleared by now.