Buying hotel rooms: condo hotel investing

I found this article on Yahoo Finance about condo hotel investing. Some of the advantages are said to be:

1. Initial capital outlays tend to be modest, since you can invest early in yet-to-be-built hotels. For example:

In 2003 he put down a $10,000 deposit to reserve a small condo hotel room overlooking Lake Michigan in Chicago’s Trump International Hotel & Tower. Over the next year, he put down an additional $79,000, or 15 percent of the nominal purchase price of $517,000. When the hotel building is completed, scheduled for 2007, he’ll take out a mortgage.

Today, based on the value of comparable units, Kim’s Chicago studio is worth about $1 million. “The beauty of condo hotels is there’s no mortgage to pay until it’s done,” Kim explains. “You get in early and sit on it while it appreciates.”

2. There’s no upkeep for the finished room.

3. Owners can stay in their rooms whenever they want.

4. Owners can make money by leasing out the units to others.

The major risk comes from the following, for which buying properties run by highly acclaimed hoteliers is the best defense:

1. Four years or more may pass between the initial investment and the completion of a property.

However, Business Week shows us a less one-sided picture of condo hotels. Where the Elizabeth Esfahani article on Yahoo Finance says that owners get a healthy percentage when the room is rented out, Business Week tells us that it’s more like 50%. And just like a regular condo, there will be maintenance fees. And you may have to pay when you do decide to stay; these are called housekeeping fees and might be 30.00/day or more.

“Most of these deals are not priced in a way that they’ll provide an immediate return on investment,” says James Butler, a real estate attorney in Los Angeles. “You’re buying a lifestyle and a long-term capital gain.”

If owning a room in a condo hotel is supposed to be a cheaper way of owning a vacation home (since the unit might bring in some cash when you’re not using it), the most important thing is to find a good location. It has to be somewhere you and other people want to vacation.

Some major hotel operators still harbor doubts about the concept, fearing that the money pouring in from individual investors is causing projects to be launched that would not be built otherwise. Hilton Hotels has a handful of condo-hotel projects, mostly under its Conrad luxury brand, but the company is treading with care.

“We’re very selective,” says Matthew Hart, Hilton’s president. “You have to be very careful that the project is viable as a hotel.”

Already, some condo-hotel projects in the red-hot Las Vegas market have been scuttled. “Make sure the developer has a track record in the business and is not just looking to make a quick buck,” advises John Burnett, president of Kor Hotel Group, which is building a $175 million condo hotel in Anguilla.

So here we have an “investment” that doesn’t generate income. You actually have a better chance of generating income by investing in a commercial hotel property rather than a resort. Since resorts see seasonal demand, they are unlikely to keep your unit booked year-round. However, if you plan to spend a lot of time at the vacation spot, 30.00/day is better than 300.00/day (assuming your investment is gaining value, rather than losing value).

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