Are hotel condo investments a good idea ? I`d say NO

[Thomas Beyer]

I started my real estate investment career in rental pooled condos, buying four; two of which I still own to this day.



Around the same time in the mid- to late 90's I also started looking into hotel condo projects, which on paper can offer higher cash-flow.



I stayed at the 1 King West hotel on (guess what) 1 King West @ Younge in Toronto in November, reminding me of this hotel condo investment heavily advertised about 8 or so years ago.



I decided to not buy any hotel condo, not 1 King West, nor any of the many Trump hotel projects, nor in Canmore where I used to live, nor in Whistler where they were marketed heavily in the 2004-2007 real estate boom.



Why ?



Most condo hotel projects are a risky
investment as occupancy levels, room rates, vacancies and especially expenses are very hard to
predict. They allow the individual investor almost no control over
these 4 important variables. At least in a normal condo project
you can force the board out and turn around an asset with new
management, if needed. This is usually impossible in a hotel investment
project, as the hotel management can decide in their sole discretion to increase salaries, alter management fees or renovate the lobby, the pool or the elevators at any time and levy a portion to the condo owners. In fact the main reason for selling time-share or hotel condos in the first place is the right to defray operating costs to other owners while keeping the lucrative low risk high monthly management fee, be it Hilton or Trump or Sheraton or any 3rd party.



In addition to unpredictable and fluctuating revenue, the following expenses are far higher than other real estate investment projects:

• Property taxes are usually far higher, up to four-fold as hotel condos are classified as commercial as opposed to residential in most cities
• Financing is also far tougher, and far more expensive, to get on these condos, often double a residential rate dipping deeply into your cash-flow
  Management fees can be as high as 30-55% of collected revenue, whereas in an apartment building it is 4-6% or in a single townhouse or house 10-12% only
  Vacancies are usually far higher - as a 15-20% vacant hotel is considered well run, and even 35% to 40% is not unheard of - rather rare for apartment buildings or single houses

This lawsuit against Trump tower in Toronto linked below is ludicrous in my opinion
as the financial disclosure documents probably indicated that nothing is
guaranteed, neither rent nor vacancies nor expenses, and people now want out as condo prices in Toronto,
specifically in this project, have dropped compared to their purchase
price.



Better investments exist, with lower expenses, taxes and mortgage rates, with more consistent income and equity upside, namely whole hotels, REITs, apartment buildings, rental pooled condos, townhouses or small single family houses - especially in growth markets with diversified economic activities and strong in-migration & low taxes.



In my opinion: stay away from any hotel condo project - unless you can buy the whole hotel, or if you can buy all cash with no mortgage and have reasons to use the condo hotel room yourself frequently on business (say 100+ days a year)

Trump Tower Toronto buyers say they were suckered into deals
http://news.nationalpost.com/news/c...-deals-by-an-investment-scheme-and-conspiracy



Your experiences in hotel condo projects ?



The good, the bad, the ugly ?

 

[housingrental]

A timely topic Thomas!



Does anyone have a list of projects in Canada that have been considered a success (profitable operations and/or capital appreciation) ?



What kind of returns were realized?



What portion of the market is this vs ones that have not done well?

 

[TorontoPM]

"This lawsuit against Trump tower in Toronto linked below is ludicrous"



Except it's real (and expensive) to the people involved.



It's called "real life".

 

[RedlineBrett]

The more levels of management you have in any investment the tougher it is to see a strong return. The same management entities that make investments like the Trump project seem low maintenance and 'hands off' also reduce from the returns the investor can expect to achieve through escalating management fees.



Look at the path of the money from the actual consumer of the product (tenant or hotel guest) to you, as the investor.



In the context of what all of us know, here is my 'first pass' at the levels of management complexity available in real estate. Would love comments from the group on this.



1. You own your own principle residence. No tenants to manage and you reap 100% of the rewards

2. Self managed rental portfolio. You own the asset and physically take the rent from the tenants

3. rental portfolio with a property manager. You own the asset, but the manager collects the rent and manages the property and takes a percentage of the gross rents as a result.

4. Money partner in a deal-specific syndicate. Usually better equity deals for the investor, although now in addition to property management there is usually an asset management fee as the overhead for the investment company has to be paid for somehow.

5. Money partner with an expert investor in either 2 or 3 above. Same ownership scenario except now you have to make room for a 'real estate expert' who usually takes around 50%.

6. Own shares in a REIT. The fees that fund managers take on behalf of the banks are often very expensive, and the companies they invest in usually charge their own host of fees as described above,which compounds the effect.



Numbers 4 and 5 are a little tough to place, as every investment company has a different offering, so you need to be a shrewd investor to be able to discern what's the best fit for your portfolio.

 

[Thomas Beyer]

[quote user=RedlineBrett]The more levels of management you have in any investment the tougher it is to see a strong return.




Not necessarily.




Of course you make more money if you put up your own money AND guarantee a personal mortgage AND invest a lot of time for education & knowledge AND invest ongoing time to manage your own asset AND you actually know what you are doing AND the interest rate on the mortgage is very good AND teh location you picked was good AND the asset is impeccably managed on an ongoing basis.




You need to get a return on your time, AND on your expertise, AND on your cash invested, AND on the risk of the mortgage !




If all you do is invest the money someone else will have to make money on their portion of the value chain.










Not everyone is able, or willing, to invest this kind of knowledge and time.







Generally it it very hard to make money in a hotel condo project due to the reasons I outline earlier.




http://business.financialpost.com/2012/12/26/trump-tower-torontos-condo-market

 

[TangoWhiskey]

This is a great post, I've been thinking about rental pooled condos as an exit strategy for multi family complexes. Thomas, have you tried this is an exit? The specific project I was thinking about doing this with is a 20 unit townhouse complex. I've seen League in Victoria selling units in a large C class Hamilton complex as rental pooled condos and I can see real potential if you can pull it off.



Anybody have any experience with rental pool condos as the exit, or thoughts to add on these pros and cons:



Pros: buying wholesale selling retail to a more rational buyer pool

A great way to sell C or B class apts that otherwise are impossible or very difficult to sell other than as a whole complex and therefore there should be a big spread between buy and sell prices.



Cons - cost to condo convert may be onerous

market for rental pooled condos may be very small

marketing costs to find those buyers and get them to bite may be large

complexity of managing all those income streams and cost centers for all the investors



What do people think? Are rental pooled condos at the C or B- level a tough sell to investors? What kinds of condos does one normally see in a rental pooled situation?



Thanks

 

[Thomas Beyer]

[quote user=TangoWhiskey]Pros: buying wholesale selling retail to a more rational buyer pool

A great way to sell C or B class apts that otherwise are impossible or very difficult to sell other than as a whole complex and therefore there should be a big spread between buy and sell prices.



Cons - cost to condo convert may be onerous

market for rental pooled condos may be very small

marketing costs to find those buyers and get them to bite may be large

complexity of managing all those income streams and cost centers for all the investors
Like many things in life, easier said than done. Of course it makes sense to buy by the yard and sell by the foot. However you outline the pro's and con's quite nicely.



We have found that on balance you do not make a lot more money selling as condos once you count teh following costs:

a) reserve fund seeding

b) upgrades to major components to building, such as balconies, parking lot, windows, hallways, roof, boilers, siding, entry ways

c) re-financing fees

d) marketing and sales costs

e) vacancies while upgrading major components and in-suite

f) increased property management fees due to 20+ owners as opposed to one owner

g) legal fees to set up and sell



generally, it works well for large units, 2BR+ that could be sold not only to investors but also to owners, ideally with in-suite W/D and large storage and under ground parking, i.e. condo quality.



We have done two successful conversions and abandoned a few too due to these costs.