2

There is an opportunity to invest in a condo hotel in my area which is very frequently visited by tourists.

This opportunity is on a hotel that each room is sold like a condo, and you can either use the room as a condo or rented as a hotel room. The HOA is 315 and the utilities are 55 per month. HOA includes all amenities of the hotel.

Now the issue is that the property management company for the hotel is very expensive. Basically a 60/40 split. 60 of each night's rent for you, and 40 for the property management company. From your 60 you have to pay all expenses, cleaning, maintenance, credits, HOA, utilities, etc. Under this property management the room hardly makes any money.

So doing the business with them is not really an option. If you decide to manage the property yourself, will you have any chance? For example listing the property in home away or any other website.

  • 3
    The difference between break-even and a great deal may be the difference between a 60 and 70% occupancy rate. How can we know what fill rate you'll have or how much effort it will take to rent without being part of the management deal? What is the cost? What is the typical daily rental? Too many details are missing. – JTP - Apologise to Monica Aug 15 '13 at 3:38
7

I agree with Joe Taxpayer that a lot of details are missing to really evaluate it as an investment... for context, I own a few investment properties including a 'small' 10+ unit apartment complex.

My answer might be more than you really want/need, (it kind of turned into Real Estate Investing 101), but to be fair you're really asking 3 different questions here: your headline asks "how effective are Condo/Hotel developments as investments?" An answer to that is... sometimes, very. These are a way for you-the investor-to get higher rents per sq. ft. as an owner, and for the hotel to limit its risks and access additional development funding. By your description, it sounds like this particular company is taking a substantial cut of rents. I don't know this property segment specifically, but I can give you my insight for longer-term apartment rentals... the numbers are the same at heart.

The other two questions you're implying are "How effective is THIS condo/hotel development?" and "Should you buy into it?" If you have the funds and the financial wherewithal to honestly consider this, then I am sure that you don't need your hand held for the investment pros/cons warnings of the last question.

But let me give you some of my insight as far as the way to evaluate an investment property, and a few other questions you might ask yourself before you make the decision to buy or perhaps to invest somewhere else.

The finance side of real estate can be simple, or complicated. It sounds like you have a good start evaluating it, but here's what I would do:


Start with figuring out how much revenue you will actually 'see':

Gross Potential Income: 365 days x Average Rent for the Room = GPI

(minus) Vacancy... you'll have to figure this out... you'll actually do the math as (Vacancy Rate %) x GPI

(equals) Effective Potential Income = EPI


Then find out how much you will actually pocket at the end of the day as operating income:

Take EPI

(minus) Operating expenses

... Utilities

... Maintenace

... HOA

... Marketing if you do this yourself

(minus) Management Expenses

... 40% of EPI

... any other 'fees' they may charge if you manage it yourself.

... Extra tax help?

(minus) Debt Service

... Mortgage payment

... include Insurances (property, PMI, etc)

== Net Operating Income (NOI)


Now NOI (minus) Taxes

== Net Income


Net Income (add back) Depreciation (add back) sometimes Mortgage Interest

== After-tax Cash Flows


There are two "quickie" numbers real estate investors can spout off. One is the NOI, the other is the Cap Rate.

In order to answer "How effective is THIS development?" you'll have to run the numbers yourself and decide. The NOI will be based on any assumptions you choose to make for vacancy rates, actual revenue from hotel room bookings, etc. But it will show you how much you should bring in before taxes each year. If you divide the NOI by the asking price of your unit (and then multiply by 100), you'll get the "Cap Rate". This is a rough estimate of the rate of return you can expect for your unit... if you buy in.

If you come back and say "well I found out it has a XX% cap rate", we won't really be qualified to help you out. Well established mega investment properties (think shopping centers, office buildings, etc.) can be as low as 3-5 cap rates, and as high as 10-12. The more risky the property, the higher your return should be. But if it's something you like, and the chance to make a 6% return feels right, then that's your choice. Or if you have something like a 15% cap rate... that's not necessarily outstanding given the level of risk (uncertain vacancies) involved in a hotel.

Some other questions you should ask yourself include:

  • How much competition is there in the area for short-term lodging? This could drive vacancies up or down... and rents up or down as well

  • How 'liquid' will the property (room) be as an asset? If you can just break even on operating expense, then it might still make sense as an investment if you think that it might appreciate in value AND you would be able to sell the unit to someone else.

  • How much experience does this property management company have... (a) in general, (b) running hotels, and (c) running these kinds of condo-hotel combination projects? I would be especially interested in what exactly you're getting in return for paying them 40% of every booking.

  • Seasonality? This will play into Joe Taxpayer's question about Vacancy Rates. Your profile says you're from TX... which hints that you probably aren't looking at a condo on ski slopes or anything, but if you're looking at something that's a spring break-esque destination, then you might still have a great run of high o during March/April/May/June, but be nearly empty during October/November/December.

I hope that helps. There is plenty of room to make a more "exact" model of what your cash flows might look like, but that will be based on assumptions and research you're probably not making at this time.

|improve this answer|||||
  • Thanks... I can tell with your questions that you know plenty about the topic, too--I just had the time to write it all down :) – THEAO Aug 15 '13 at 15:38

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.