Condotel Investments: Not Always a Smart Idea
Even with record room rates, owning your piece of the condo-hotel business might not be so profitable, experts are saying. Yet thousands of investors have yet to figure that out.
Take the case of Abe Levitz. According to the Miami Herald, the 24-year-old real estate investor bought two rooms for $510,000 each at a South Beach condo/hotel with plenty of substance as well as cachet. But will that be enough to cover the investment?
“The project did pencil out pretty well,” said Levitz of the new hotel, set to open its doors this fall. “Even at 30 percent vacancy — which is actually the worst possible scenario — it will still cash flow.”
Only time will tell whether Levitz was wise to put such stock in his hotel, but some analysts say that kind of optimism about profits in condotels — where buyers rent their units for a share of the rental revenue — is not only common but misplaced.
“I think there’s going to be a lot of disappointed buyers. They seem very exuberant,” said Mark Lunt, a hospitality analyst for Ernst & Young.
Lunt warns that condo-hotel buyers shouldn’t think revenue from the units they buy will cover a Florida mortgage, particularly with current prices.
A new study goes further and predicts most South Florida real estate projects of this nature won’t even cover maintenance fees, property taxes or other costs.
The report, issued by the National Association of Condo Hotel Owners (NACHO), projects returns for typical condo-hotel units in Fort Lauderdale, Miami, Miami Beach and Coral Gables. Assuming owners keep 35-40 percent of the rent (the standard share) they would pay between $500-15,000 a year to cover expenses.
That assumes they paid cash for their units, too. There’s the small matter of Florida home mortgage payments and interest fees, which would be extra.
“Our analysis is South Florida has tipped the scales,” in terms of oversupply,” said Dante Alexander, the association’s president.
On top of insurance, Florida mortgage payments and property taxes, Alexander believes a flood of new luxury hotels will keep rates too low to make the units profitable. In fact, the study cites the small hotel market of Coral Gables as the lone location where condo-hotel buyers could expect returns (of a modest 1-2 percent) on their units.
More than three dozen condotel projects are underway across South Florida, from Fort Lauderdale to Key West. Buyers are signing sales contracts at a time of record rates and revenues for hotels.
LOOKING FOR THAT VACATION HOME?
Builders insist that most condo-hotel buyers are in it for a vacation home, not an investment. Developers are marketing their projects as a hybrid: own a piece of real estate in a popular resort area, but enjoy the amenities and convenience that comes with a top-notch hotel. Rental revenue is just a bonus.
“I don’t think we have any buyers coing here to the Saxony with a pencil in hand trying to figure out what their return is going to be on their units,” said Leonard O’Donnell, president of Crimson Capital.
Levitz says he’s willing to absorb a loss on rent as long as his real estate value increases, a strategy that experts say is common among condo-hotel buyers. Still, predicting price appreciation is tough because the current condo-hotel model took off too recently.
While a string of condotel projects opened in the ’80s, they were generally modeled after a standard condominium with a front desk and not full-fledged hotels.
Not everyone is struggling. Scott Bennett, a lawyer from Miami Beach, sometimes has visiting friends stay in his condo-hotel unit at the Sonesta in Coconut Grove, but he sees it primarily as an investment. He paid $143,000 for the 15th-floor condo two years ago. Today, he says, his Florida mortgage costs and other expenses are null.
“By the end of the year, it pretty much pays for itself. That’s the mortgage and everything,” he said.
GUESSING ON REVENUE
Examples like Bennett’s encourage would-be buyers of condo-hotel projects, but they’re largely left to guess at the revenue their units will generate.
Don’t take the seller’s word for it, either. Federal security law bars real estate developers from passing on the projected hotel guest rate to condo-hotel buyers. Real estate agents can lose their licenses if they talk to you about how much income you’re going to generate, as a matter of fact.
With hotels unable to provide their rate projections, staffers often urge buyers to do their own research on nearby hotels. But that’s not exactly easy, as virtually no hotels release year-end financial data, and rates quoted at the front desk fluctuate day to day — even hour by hour.
Given the prime location and the promise of experienced managers, plus a team of celebrity designers recruited to decorate, Levitz predicts an average daily rate of $581. That’s certainly optimistic, but he believes he’ll get it. Given the size of the Florida mortgage loan payments he’ll have to make, he’d better have faith.
