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SEC laws dictate that condo hotel developers cannot and should
not sell their product based on cash flow and income that the
property produces. This consumer protection, although well
intended has created a void in the consumer's ability to judge
whether a condo hotel is an investment or a 'consumption' real
estate purchase. Condo hotels should produce income, as any
hotel room would, but there are many factors that create a
successful hotel and the income should not be the sole reason
for a purchase. Here is just one way to analyze a condo hotel's
potential income:
The Math: Consumer Since most people don't use a second home
more than 30 days per year; a cottage or a condo hotel unit is
likely vacant for 330 days/yr. IF we Assume a hotel runs a 65%
occupancy = 214 of potential rentable days. IF the Average Daily
Rate (ADR) is $175/night = $37,537 year in potential gross
revenue. ($175x214=$37,537)
Many condo hotel Rental Management Agreements (RMA) pay a 41-60%
split with hotel management. Assuming this, your income could be
$1,370/mo before your expenses of Debt Service, Taxes,
Insurance, Dues. At current market rates, $1370/mo supports
roughly a $250,000 loan (before taxes, dues, insurance).
Numerous assumptions have been made in this example. Hotels
traditionally have seasons, and regularly require maintenance
and improvement.
With Condo Hotel you are purchasing Real Estate, NOT Revenue.
Tax Benefits, Potential Appreciation, and Hassle Free Use are
other benefits of this form of real estate ownership, but every
purchaser should consult their financial advisors.
About the author:
Bob Waun, CEO of Vacation Finance, www.vacation-finance.com was
a VP at Paramount Bank, and while at Wells Fargo, Bob innovated
lending for Condo Hotel projects. He holds a Master's degree in
finance/economics and BBA in finance from Walsh College and a MI
Real Estate Broker's License. He has personally lent over $600+
million in residential loans, and over seen operations lending
$1+billion.
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