Condotels: Investment Potential & Risks - A Comprehensive Overview

A few months ago, Condotels was a new concept to me and sounded interesting, so I decided to do some digging. After some initial research, I found that the general consensus was that condotels do not make a good investment and, therefore, stopped further research.
Recently, a friend of mine was approached regarding condotels by a real estate agent, so he asked what my opinion was on this concept.

What Is a Condotel?

A condotel is a mix of a condominium and a hotel. Unlike hotels, where a corporation owns the whole hotel, in condotels, each unit is sold separately, similar to a condo. Condotels have hotel-like amenities and services – unlike the conventional condominiums.
The condotel units can be placed on a rental program with management, which can rent the units out for short-term or long-term rentals. The rent is split between management and the owner in the range of 40%-60% in favor of the owner but can often be as high as 50%-50%.
Condotels are popular in high tourist areas such as Florida and Dubai, however they are increasingly becoming available in other areas as well.

Advantages of a Condotel

• Hassle-free “landlord” – You do not have to worry about anything since management will take care of everything.
• Good vacation home – can be used for your personal vacation, saving you accommodation costs.
• Potential for capital appreciation – if the condotel is chosen carefully, you can take advantage of appreciation of value.

Disadvantages of a Condotel

• High maintenance fees – usually around $1-$2/sq feet and according to Forbes Magazine it can be as high as $10/year/sq feet.
• Price correlated with tourist activities and not so much with the real estate market.
• The occupancy rate is not always good. There is no guarantee in terms of your occupancy.
• Tax issues – Condotels are generally taxed at commercial rates, which can be higher.
• Other Fees – Besides the maintenance fee and rent split, there are other fees that one must take into account (maid service fee, insurance, etc.)

Conclusion

Although an interesting concept I find condotels a bad investment generally, the costs are too high with minimal capital appreciation opportunities. This might be a good vacation purchase for personal use, but if the primary purpose is to generate income through rental, then the investors may be better served by other opportunities.
What are your thoughts on condotels? Have you looked into one? Know anyone who ownsone?

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Ramis Jamali, CFA

Ray is a personal finance enthusiast based in Toronto, who has been involved in the investment industry for a while now. Ray has completed several industry courses (Full life insurance, IFIC, Canadian Securities Course, Conduct Practice Handbook and Wealth Management Essentials) as well as the Chartered Financial Analyst, CFA program. He has a Specialized Honors degree in Psychology and is very interested in people’s behaviours and thought process.

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